Lee Hysan Estate Co. Ltd. v. Sky Heart Ltd.

1995, No. A8239

H E A D N O T E

Restrictive covenants - "similar" covenants affecting other land in vicinity owned by covenantee - releases made by covenantee - whether relevant to determination of existence of building scheme

Restrictive covenants - building scheme - traditional requirements set out in Elliston v. Reacher - whether common vendor requirement satisfied where the land affected is first sold in bulk to a single purchaser who on-sold individual lots to sub-purchasers

Laying out of the estate in lots - whether inference permissible - whether sufficient evidence to support inference

Covenants designed to achieve uniformity in the design of the buildings as well as uniformity of user - whether intention to enhance value of the land

Section 41(2) of the Conveyancing and Property Ordinance Cap.219 - whether applicable to a building scheme - legislative intent - effect

Enforceability of restrictive covenants - change in the character of the neighbourhood as a defence - meaning of "neighbourhood" - whether changes outside the scheme area may be taken into account - the proper test

In the Supreme Court of Hong Kong

High Court

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J U D G M E N T

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I. INTRODUCTION

1. This action was commenced by the Plaintiff Lee Hysan Estate Co. Ltd. ("LHE") on 15 August 1995 against the Defendant Sky Heart Limited for a permanent injunction to restrain the Defendant from acting in breach of covenants affecting land registered in the Land Office as Inland Lot 29, Section Q ("Section Q"), and from destroying, interfering or otherwise affecting LHE's right of way over the Defendant's property and damages.

2. As appears from Appendix A, Section Q is an island of land in Causeway Bay bounded by Kai Chiu Road, Lee Garden Road, Pak Sha Road, and Yun Ping Road. The total area is approximately 25,450 sq ft. Altogether sixteen European type dwelling houses of a uniform design have been erected on Section Q : eight fronting Kai Chiu Road, and the remaining eight fronting Pak Sha Road, with a scavenging lane of 10 ft in width running from Lee Garden Road to Yun Ping Road ("the scavenging lane"), bisecting Section Q.

3. The Defendant which is a related company of Lee Kum Kee Properties Limited ("LKK") is the registered owner of Nos.6 and 8 Kai Chiu Road ("the Defendant's property") being two of the 16 houses erected on Section Q in 1954 and which form subsection 8 of Section Q. The present action has been precipitated by the Defendant's intention to demolish the Defendant's property and to erect, in their place, a commercial building of 23 storeys to be known as Lee Kum Kee Group Centre. LHE is the original covenantee of the covenants which are the subject matter of this action and is also the owner of the 1st floor of No.10 Kai Chiu Road ("No.10") which adjoins the Defendant's property.

II. THE FACTS

IL29 is a large area of land. It appears to include much of the area bounded by Percival Street, Leighton Road, Yun Ping Road and Hennessy Road. At some point IL29 became vested in LHE which still owns sections of it. Although the Defendant has produced a memorial of an Assignment dated 17 January 1924 entered into by LHE as purchaser, that does not appear to be the root of LHE's title to the whole of IL29 since that Assignment did not in terms affect IL29 other than the remaining portion. Be that as it may, it is not disputed that as at 21 December 1953, LHE was the owner of Section Q.

A. The Pang Sang Agreement

4. On 21 December 1953, LHE entered into an agreement with Pang Sang ("the Pang Sang Agreement") whereby LHE agreed to sell and Pang Sang to purchase land which was "intended to be registered in the Land Office as Section Q of Inland Lot No.29". Completion was to be on 14 April 1954 or, at the option of LHE, on 14 May 1954. The Pang Sang Agreement provided, inter alia, as follows :

"6. On payment of the balance of the purchase price at the time and in manner aforesaid the [LHE] and all other necessary parties (if any) shall execute to the Purchaser or his nominees or nominee or sub-purchasers or sub-purchaser a proper Assignment of the said premises.

14. The Purchaser will enter into a covenant with [LHE] to build erect keep and maintain on the premises intended to be assigned domestic European style dwelling houses of a uniform design to be completed within 18 months from the date hereof of cement concrete with steel windows teakwood flooring and servants stairs besides the main stairs for the houses and to keep the minimum frontage of each house not less than 23 (twenty three) feet facing Kai Chiu Road and Pak Sha Road respectively but such houses to be without balconies or verandah facing on the said Kai Chiu Road and Pak Sha Road with the general specifications and in conformity with the levels to be supplied by [LHE] the plans of such dwelling houses to be first submitted to and approved by [LHE] whose approval shall not be unreasonably withheld.

15. The Purchaser will not erect on the said premises any other buildings than domestic buildings of European type as provided in Clause 14 hereof but the Purchaser may use the ground floor of such Buildings for business purposes but subject to the stipulations contained in Paragraph 16 hereof.

16. The Purchaser will also enter into a covenant with [LHE] so as to bind his assigns and so that such covenants will run with the land that the premises shall not be used during the terms of the Crown Lease for any other purpose than that of private dwelling houses but subject to Paragraph 15 hereof and that there shall not be done or suffered on the land or any part thereof or in any building erected thereon anything which shall be a nuisance to [LHE] and its assigns or the occupiers of the land adjacent thereto or in the neighbourhood and that the premises shall not be used for a business of the following type, namely brickyard, stone-quarry factory cinema offensive and noisesome and noxious trades cabarets studios or any other similar purposes and the Purchaser will permit [LHE] or owner or owners of the adjacent premises to make connections to the drains on either side of the adjoining premises.

17. The Purchaser shall enter into a further covenant that he will prepare at his own cost and expense upon the completion of the buildings to be erected footpaths and or pavements adjoining and abutting the said premises in Kai Chiu Road, Pak Sha Road, Yun Ping Road and Lee Garden Road and that he will meet the costs for the formation and surfacing of half of the width of the roads called Kai Chiu Road, Pak Sha Road, Yun Ping Road and Lee Garden Road as are shown on the said Plan which abut on the premises and also from time to time to maintain the same to the satisfaction of the Public Works Department and Urban Council. [LHE] agrees to grant a right of way for the Purchaser and all persons authorised by him to pass and repass along upon and over the roads now known as Kai Chiu Road and Pak Sha Road until such roads are surrendered to the Government of Hong Kong.

18. ... on the signing of this contract and on payment of the said deposits the Purchaser shall be at liberty to enter the said premises intended to be assigned and thereon at his own cost and expense build erect and construct such dwelling houses as are mentioned in Clause 14. hereof but so that such entry and building erection and construction shall not constitute possession of the premises."

5. Sometime between 21 December 1953 and 26 April 1954, the land which was the subject matter of the Pang Sang Agreement was registered at the Land Office as Section Q of IL29.

B. Sub-sales of portions of Section Q

6. On the same day as the Pang Sang Agreement, the purchaser Pang Sang entered into four sub-sale agreements relating to portions of land "intended" to be registered as subsections 1, 2, 3 and 4 of Section Q. Pang Sang entered into six further sub-sale agreements on 24 December 1953, 13, 29 and 30 January 1954 and 1 February 1954, relating to portions of Section Q "intended" to be registered in the Land Office as subsections 10, 6, 9, 5 and 7 and Remaining Portion of Section Q respectively. Then on 23 February 1954, Pang Sang entered into a sub-sale agreement relating to what was "intended" to be registered as subsection 8 of Section Q being the land upon which Nos.6 and 8 Kai Chiu Road were erected. So within a period of approximately 2 months, all the subsections of Section Q had been sold by Pang Sang. Although the sub-sale agreements themselves are no longer available, they are referred to and described in the recitals to assignments subsequently executed relating to the subsections and referred to below.

7. The position and layout (including dimensions) of the various subsections of Section Q appear from the common plan by reference to which those assignments were executed. That plan is reproduced at Appendix B.

8. On 26 April 1954, ten assignments relating respectively to subsections 1, 2, 3, 4, 5, 6, 7, 8, 10, and RP of Section Q were executed by LHE as vendor, Pang Sang as confirmor or first confirmor in cases where there had been more than one sub-sale (viz. subsections 2, 4, 5, 7 and 10 respectively). On 13 May 1954, the remaining subsection, namely subsection 9, was also assigned, with LHE as vendor and Pang Sang as first confirmor. I shall refer to all eleven assignments as "the Assignments".

C. Development of Section Q

9. Files relating to the houses erected on Section Q kept by and still in the possession of the Building Authority were produced pursuant to a subpoena duces tecum. Documents extracted from these files which form the agreed bundle of documents from the Building Authority include several documents and plans which were inserted after the hearing at the instigation of the court and with the consent of the parties. The following analysis of events takes into account the written submissions dated 20, 24 and 28 January 1997 from the parties relating to these additional documents.

10. The documents and plans available reveal that well before 9 February 1954, Wong Cho Tong ("the architect") had been engaged as the authorised architect for the building works. This must be so as by 9 February 1954 the architect was in a position to submit detailed building plans to the Building Authority. There is a covering letter dated 9 February 1954 from the architect to the Building Authority referring to a schedule "A" (being a notice of intention to commence or resume any building works required under the Buildings Ordinance) submitted on behalf of the owner Pang Sang for 16 houses (eight facing Kai Chiu Road ("the Kai Chiu Road houses") and eight facing Pak Sha Road) and enclosing two plans for the Kai Chiu Road houses for the Building Authority's approval. The letter further stated that plans for the remaining eight houses on Pak Sha Road would be submitted at a later date. Two days later on 11 February, the plans submitted for the Kai Chiu Road houses and the schedule "A" were returned by the Building Authority for amendment. It is apparent from the Building Authority's response that a schedule "A" had to be confined to houses shown on the plan(s) accompanying it and could not relate to houses not shown thereon.

11. On 3 March 1954, the architect sent two letters to the Building Authority : one was in response to the Building Authority's letter of 11 February, resubmitting "plan and schedule "A" duly amended" for Kai Chiu Road houses; the other submitted plans and a schedule "A" for "proposed seven new houses" at Pak Sha Road ("the Pak Sha Road houses"). The letter went on to say that the plan for the corner house at Pak Sha Road and Yun Ping Road ("the corner house") would be submitted with a separate schedule "A" later. The schedule "As" of 3 March were served by the architect as the authorised person in relation to the building works on behalf of the owner Pang Sang.

12. There are plans relating to the Kai Chiu Road houses and the Pak Sha Road houses with a legend to the effect that they were prepared in February 1954. Each bears the architect's written annotation "amended and returned 2/3/54". It is reasonable to assume that these were the plans that accompanied the schedule "As" referred to in the covering letters of 3 March because they all bear the Building Ordinance Office's "received" stamp of 3 March 1954 although in relation to the Pak Sha Road houses there does not appear to have been an earlier submission; the covering letter is consistent with it being a first submission. In any event, these plans (for both the Kai Chiu Road houses and the Pak Sha Road houses) were approved by the Building Authority on 12 March 1954. They are detailed building plans for 15 out of the 16 houses on Section Q and show, inter alia, the layout, design and dimensions of each house.

13. As regards the corner house to be erected on Section Q, the schedule "A" relating to it is dated 27 April 1954. The covering letter referred to a "plan" submitted with the letter although that plan is no longer available.

14. In respect of the development generally, amended plans were submitted on various occasions and approved. The houses were erected and in due course schedule "Ks" (certificates with regard to compliance with the Buildings Ordinance) were issued :

Date	Subsection	Address
27.4.55	2 and 4	14 and 16 Kai Chiu Road
30.4.55	RP	2 and 4 Kai Chiu Road
18.5.55	8	6 and 8 Kai Chiu Road
18.5.55	6	10 and 12 Kai Chiu Road
24.5.55	3	13 Pak Sha Road
24.5.55	1	15 Pak Sha Road
25.6.55	5	11 Pak Sha Road
25.6.55	7	9 Pak Sha Road
7.10.55	10	1 and 3 Pak Sha Road
19.12.55	9	5 and 7 Pak Sha Road

15. As built, the Kai Chiu Road houses have five storeys (including the ground floor) whereas the Pak Sha Road houses (including the corner house) have six storeys. The houses are of a uniform design with interlocking staircases with the properties adjoining on either side and in the case of the end houses with the adjoining property.

D. The Assignments

16. It is to be noted that the Assignments have the following common features :

(i) All recited the registration of Section Q at the Land Office, the Pang Sang Agreement and the fact that no assignment had been executed;

(ii) Pang Sang was a party as confirmor and in cases where there had been more than one sub-sale as first confirmor;

(iii) All were made by reference to a common plan (i.e. Appendix B) prepared by Wong Cho Tong in April 1954 showing Section Q and its various subsections (with dimensions) including a system of interlocking staircases between the houses to be erected;

(iv) All were with the benefit of certain rights of way for owners and occupiers of the assigned premises and persons authorised by them :

(a) over Kai Chiu Road and Pak Sha Road which were still vested in the Vendor;

(b) over such parts of the scavenging lane as did not form part of the premises assigned;

(c) over the common staircase or staircases (as the case may be) shared with the adjoining building(s);

(v) All assignments were subject to certain rights of way :

(a) in favour of the owners and occupiers of other portions of Section Q and persons authorised by them over that part of the scavenging lane at the back of the building which forms part of the assigned premises;

(b) in favour of the owners and occupiers of the premises adjoining the assigned premises over the staircase(s) and landing(s) to be erected on that part of the common staircase(s) with the adjoining building(s).

(vi) All contained identical covenants by the Purchasers in favour of the Vendor "with intent to bind all persons in whom the premises thereby assigned should for the time being be vested" but not so as to be personally liable after parting with the premises assigned.

17. So far as the covenants are concerned, they are identical to those contained in the Pang Sang Agreement save that in relation to the subsection assigned, the number of European style dwelling houses to be erected is specified : for the larger subsections namely, subsections 6, 8, 9, 10 and RP of Section Q, two European style dwelling houses rather than one were to be built and the words "with the adjoining buildings" were added to the requirement that the houses be of a uniform design which was in the Pang Sang Agreement. The additional words were plainly necessary to give effect to the covenant in the Pang Sang Agreement that the entire development is to be "of a uniform design". A requirement that the houses on the subsection assigned be "of a uniform design" without the additional words would serve little purpose when what was being conveyed by each of the Assignments was only large enough to accommodate one or at most two houses. In each case the building covenant ran for a period of 18 months from 21 December 1953, the date of the Pang Sang Agreement.

18. The main characteristics of the covenants may be summarised as follows. First, they ensured that the houses to be built on the whole of Section Q were European style dwelling houses "of a uniform design with the adjoining buildings". Second, these were to be of a certain quality through construction specifications. Third, LHE had control over the development through general specifications and levels which LHE (rather than anyone else) was to supply. Plans had to be first submitted and approved by LHE. The only limitation over LHE's overall control was that its approval should not be unreasonably withheld. Fourth, user was restricted : it was to be for residential use but subject to a general anti-nuisance covenant, business user was permitted for the ground floor of the buildings. Fifth, the general anti-nuisance covenant contained an express prohibition of certain uses namely, "brickyard, stone-quarry factory, cinema, offensive and noisome and noxious trades, cabarets, studios or any other similar purpose". Sixth, they ensured that a footpath along Kai Chiu Road and Pak Sha Road would be prepared and half of the width of those roads formed, surfaced and maintained to a satisfaction of the authorities at the expense of the purchasers. Finally, LHE or the owners of adjoining premises on either side were entitled to make connections to the drains.

19. As to the rights of way, as owner of No.10, LHE and persons authorised by it have a right of way over the Defendant's part of the common staircase and landings erected on Nos.8 and 10 Kai Chiu Road and that portion of the scavenging lane that forms part of the Defendant's property. The system of interlocking staircases is apparent from the common assignment plan which is at Appendix B.

E. Conveyancing transactions relating to other Sections

20. It is necessary to digress and interpose into the narrative certain conveyancing transactions relating principally to Sections O and K of IL29 as the Defendant's central submission regarding the enforceability of the restrictive covenants is based on them. I will also briefly refer to transactions concerning Section H and Section I which the Defendant did not wish to abandon totally although little reliance was eventually placed on them.

(1) Section O

21. Prior to September 1953, LHE was the owner of, inter alia, Section O of IL29. On 14 September 1953 three months before the Pang Sang Agreement, it entered into an agreement with Li Chi Ho for the sale to Li of an area of land of approximately 12,200 sq ft situated at the Kai Chiu Road end of Yun Ping Road with frontages on Yun Ping Road, Kai Chiu Road and Jardine's Crescent. This land comprised Section O of IL29 and part of IL457 and corresponds to 40 to 54 Yun Ping Road. As appears from Appendix A, it occupies the tip of a T-shaped block bounded by Yun Ping Road, Pennington Street and Jardine's Crescent. On 15 January 1954, LHE as vendor executed four assignments as Li had meanwhile sub-sold the land to four sub-purchasers. In each case, Li Chi Ho joined as confirmor. The first of the four assignments affected Section I(1) of IL457 (i.e. 40 Yun Ping Road). The other three affected (a) subsection 1 of Section O and Section I(2) of IL457 (i.e. 42 Yun Ping Road); (b) subsection 2 of Section O and Section I(3) of IL457 (i.e. 44 and 46 Yun Ping Road); (c) the Remaining Portion of Section O and the Remaining Portion of Section I of IL457 (i.e. 48 to 54 Yun Ping Road). Fortune Centre stands on 44, 46 and 48 Yun Ping Road, being land comprised in (b) and part of (c). For convenience, I shall refer to the land which was the subject of the sale to Li Chi Ho (namely 40 to 54 Yun Ping Road) as "Section O" although strictly speaking it includes part of Section I of IL457.

22. The four assignments contained covenants "to build European style dwelling houses". Construction specifications, minimum frontage requirements, prohibition of balconies or verandahs fronting the street, overall control by LHE through providing general specifications and levels of plans and prior approval, user restrictions and an anti-nuisance covenant were in terms identical to those contained in the Pang Sang Agreement and the Assignments.

23. By a Deed of Release and Variation dated 29 September 1992 ("the 1992 Release"), LHE, at the request of Jodwell and Supreme Sunning, the owners of the land upon which Fortune Centre now stands, in consideration of $3 million, agreed to release Jodwell and Supreme Sunning and the land corresponding to 44, 46 and 48 Yun Ping Road, (viz. subsection 2 of Section O, part of the Remaining Portion of Section O, namely Section B of subsection 3 of Section O as well as portions of Section I of IL457) from the covenant affecting those properties. Jodwell and Supreme Sunning entered into new covenants with LHE which covenants were to be binding on them personally and not to run or bind with or bind the properties, inter alia, to redevelop by building a high-class building for non-residential use and expend not less than $42 million thereon.

(2) Section K

24. Section K of IL29 is the middle portion of a block of land bounded by Yun Ping Road, Hysan Avenue, Sunning Road and Leighton Road. It has a frontage of approximately 148 ft along Sunning Road and 125 ft along Yun Ping Road. Adjoining Section K on the south and situated between Section K and Leighton Road is the building now known as 111 Leighton Road. Adjoining Section K on the north and situated between Hysan Avenue and Section K is what is now known as AIA Plaza.

25. On 7 May 1948, LHE assigned Section K to Wong Kwan Cheng. The covenant which the purchaser entered into with LHE was to build and erect seven European style dwelling houses, each of a minimum value of $120,000. There were construction specifications, minimum frontage requirements and prohibition of balconies or verandahs fronting the street, an anti-nuisance covenant, an obligation to pay for the path and half of the width of the road and to permit connection to drains identical to those in the Section Q covenants. The user restriction was different in as much as it was confined to domestic user, with an express prohibition of user as hotel, boarding house, shop or business premises.

26. By a Deed of Release and Variation dated 17 January 1974 made between LHE and Goodyear Investors Ltd. ("the Goodyear Release"), the original covenants imposed on subsections 5 and 6 of Section K, being Nos.2 and 4 Sunning Road were released so far as necessary to permit the erection of a commercial building in consideration of new covenants given by Goodyear to LHE. By a Deed of Release and Variation dated 25 September 1981 between LHE and Versalty Estate Ltd. ("the Versalty Release"), there was a similar variation relating to subsection 1 of Section K to enable the erection of a commercial building in consideration of $2 million and new covenants given by Versalty to LHE. By a Deed of Release and Variation dated 14 September 1993 ("the 1993 Release") made between LHE, Periwin Development Ltd., Rich Concept Ltd. and subsidiaries of Hysan Development, the original covenants imposed on subsections 1, 5 and 6 of Section K (i.e. No.1 Yun Ping Road and Nos.2 and 4 Sunning Road) together with all further covenants given by Versalty and Goodyear all of which were recited as having been taken for the benefit of AIA Plaza and 111 Leighton Road were released in consideration of $6 million paid to LHE. Periwin and Rich Concept then entered into new covenants by way of further deed of covenants to redevelop the premises into a high-class building. This building was formerly known as Bay Tower.

27. By a Deed of Release and Variation dated 1 August 1990 made between LHE, Earning Time Investment Ltd., subsidiaries of Hysan Development and Saitama Bank Ltd. ("the 1990 Release"), it was recited, inter alia, that the covenants affecting Section K were taken by LHE solely for the benefit of the adjoining properties, namely, what are now AIA Plaza and 111 Leighton Road, owned by wholly-owned subsidiaries of Hysan Development of which LHE was a major shareholder. In consideration of $10 million paid by Earning Time to LHE, the covenants were released. Earning Time also entered into new covenants with the Plaintiff to redevelop the premises at a minimum cost of $100 million and erecting thereon a first-class building for commercial use. There are other provisions of the deed which are not material for present purposes. This deed related not to the whole of Section K but only to subsections 2, 3 and 4 and the remaining portion of Section K upon which Eight Plaza now stands.

(3) Section H (R.P.)

28. This land being 1 Hoi Ping Road was assigned by LHE to Leong Yet Tung on 12 September 1947. The covenant was to build "a European style dwelling house". There was also a user restriction prohibiting use as business premises. By a Deed of Release and Variation dated 24 April 1974, LHE released the then owner and his successors-in-title from the existing covenants to allow the erection of a shop or business premises and to the use of the premises as a shop or for business purposes.

(4) Section I

29. This land, being Nos.6, 8 and 10 Sun Wui Road was assigned by LHE to Siu Chu Wan on 14 December 1947. The assignment imposed covenants identical to those affecting Section H (R.P.). By a Deed of Waiver, Disclaimer and Release of Covenant dated 22 November 1988, LHE at the request of Hakusan Ltd., in consideration of $500,000 agreed to waive, disclaim and release Hakusan from the obligation of performing and observing the covenant imposed by the assignment.

F. Recent events

30. Upon learning of the acquisition of No.8 Kai Chiu Road by the Defendant, on 21 May 1992, LHE wrote to the Defendant reminding it of the restrictive covenants. A meeting took place between representatives of the two parties on 3 June 1992 and LHE was informed that the Defendant's purpose in acquiring No.8 was to use it as a restaurant business and dormitory and that the Defendant had no intention of demolishing the building for redevelopment. No.8 Kai Chiu Road was assigned to the Defendant on 16 June 1992. Mr Sammy Lee, a director of the Defendant, said in evidence that at that time there was no immediate intention to redevelop but as the Defendant was in the restaurant business as well as in real estate development, it was keeping its options open.

31. Two months later, on 19 August 1992, the Defendant, with full knowledge of LHE's position, purchased the ground and first floors of No.6 Kai Chiu Road through a nominee company. This fact was not known to LHE at the time.

32. At a meeting on 14 January 1994, some 6 months later, the Defendant informed LHE that the Defendant intended to develop Nos.6 and 8 Kai Chiu Road together. On 28 March 1994, the various floors comprising No.6 Kai Chiu Road were assigned to the Defendant. The assignment of the ground and first floors by Camjan Ltd. to the Defendant was on a nominee rather than vendor basis.

33. By letter dated 3 May 1994, LKK informed LHE of its plans to carry out the redevelopment immediately. On 31 May 1994, the Defendant's solicitors wrote to LHE to the same effect. On 24 October 1994, the restaurant business at Nos.6 and 8 Kai Chiu Road was closed and a notice was put up regarding the intended redevelopment. On 16 November 1994, LHE sought confirmation from the Defendant that its redevelopment would not constitute a breach of the covenants imposed upon the Defendant's property. On 16 January 1995, the Defendant offered the premises for short term tenancy. On 24 January 1995, the Defendant's solicitors wrote to LHE's solicitors in the following terms :

" We refer to your letter dated 16th November, 1994 upon which we have obtained Leading Counsel's opinion. We would like to inform you of our client's position as follows :-

1. Our client intends to redevelop its property by erecting a multi-storey commercial building with shops on the ground floors. Our client is in the course of doing so.

2. Your client has already disposed of the land for the benefit of which the restrictive covenant was taken. In the circumstances, your client can no longer enforce the restrictive covenant.

3. In any event, no court will enforce the restrictive covenant in the light of the complete change in the character of the neighbourhood. ....."

34. On 6 April 1995, No.10 was assigned to Panford Investments Ltd. in consideration of $9.7 million and on 21 April 1995, LHE acquired it from Panford for $10.1 million. No.10 is subject to an existing tenancy.

The writ in the present proceedings was issued on 15 August 1995 and the Plaintiff's summons of 15 August for interim relief was adjourned upon the Defendant's undertaking not to demolish the Defendant's property until the hearing of that summons or further order and upon the Plaintiff's cross-undertaking as to damages for the Defendant's undertaking.

III. ARE THE COVENANTS ENFORCEABLE?

35. LHE's case is that the restrictive covenants are enforceable by virtue of a building scheme and that the covenants (both positive and restrictive) are enforceable by virtue of s.41 of the Conveyancing and Property Ordinance ("the CPO"). It is accepted that there is neither privity of estate nor of contract between LHE and the Defendant.

A. Building Scheme

36. Does a building scheme exist in relation to Section Q?

37. The classic exposition of a building scheme is to be found in the judgment of Parker J. in Elliston v. Reacher [1908] Ch.374 at 384 where the four requirements for establishing a building scheme are set out :

" ... (1.) that both the plaintiffs and defendants derive title under a common vendor; (2.) that previously to selling the lands to which the plaintiffs and defendants are respectively entitled the vendor laid out his estate, or a defined portion thereof (including the lands purchased by the plaintiffs and defendants respectively), for sale in lots subject to restrictions intended to be imposed on all the lots, and which, though varying in details as to particular lots, are consistent and consistent only with some general scheme of development; (3.) that these restrictions were intended by the common vendor to be and were for the benefit of all the lots intended to be sold, whether or not they were also intended to be and were for the benefit of other land retained by the vendor; and (4.) that both the plaintiffs and the defendants, or their predecessors in title, purchased their lots from the common vendor upon the footing that the restrictions subject to which the purchases were made were to enure for the benefit of the other lots included in the general scheme whether or not they were also to enure for the benefit of other lands retained by the vendors. If these four points be established, I think that the plaintiffs would in equity be entitled to enforce the restrictive covenants entered into by the defendants or their predecessors with the common vendor irrespective of the dates of the respective purchases. I may observe, with reference to the third point, that the vendor's object in imposing the restrictions must in general be gathered from all the circumstances of the case, including in particular the nature of the restrictions. If a general observance of the restrictions is in fact calculated to enhance the values of the several lots offered for sale, it is an easy inference that the vendor intended the restrictions to be for the benefit of all the lots, even though he might retain other land the value of which might be similarly enhanced, for a vendor may naturally be expected to aim at obtaining the highest possible price for his land. Further, if the first three points be established, the fourth point may readily be inferred, provided the purchasers have notice of the facts involved in the three first points; but if the purchaser purchases in ignorance of any material part of those facts, it would be difficult, if not impossible, to establish the fourth point."

38. The authorities since Elliston v. Reacher have shown that restrictive covenants are enforceable even where the four traditional requirements have not been strictly complied with so long as two essential requirements are satisfied. First, the area within which the scheme is operative must be defined. As explained by Cozens Hardy M.R. in Reid v. Bickerstaff [1909] 2 Ch.305 at 319,

"... there must be a defined area within which the scheme is operative. Reciprocity is the foundation of the idea of a scheme. A purchaser of one parcel cannot be subjected to an implied obligation to purchasers of an undefined and unknown area. He must know both the extent of his burden and the extent of his benefit."

39. It is not sufficient that the common vendor has defined the area. For there to be a valid building scheme, the purchasers of all the land within the area of the scheme must also know what that area is. See Emile Elias & Co. Ltd. v. Pine Groves Ltd. [1993] 1 WLR 305 at 310H. Second, there must have been a common intention to impose a scheme of mutually enforceable restrictions in the interest of all the purchasers and their successors. See 16 Halsbury's Laws of England 4th Ed. para.797; Megarry & Wade on The Law of Real Property 5th Ed. p.p.791-2; Preston & Newsom's Restrictive Covenants 8th Ed. para.2-73. In the words of Cross J. in Baxter v. Four Oaks Properties Ltd. [1965] 1 Ch.816 at 825F :

"Where the owner of land deals with it on the footing of imposing restrictive obligations on the use of the various parts of it as and when he sells them off for the common benefit of himself (in so far as he retains any land) and of the various purchasers inter se a court of equity has been prepared to give effect to this common intention notwithstanding any technical difficulties involved."

40. Thus, a building scheme has been held to exist although there was no lotting and the size of the plots were variable (see Baxter v. Four Oaks Properties Ltd.) and where there was no common vendor and no lotting (see Re Dolphin's Conveyance [1970] Ch.654).

LHE submits that a building scheme exists for Section Q because, on the facts, the traditional requirements are satisfied and, in any event, the two essential requirements are satisfied. Before specifically considering whether the traditional requirements and/or the essential requirements are satisfied in this case, I will first address the Defendant's submissions based on Section O and Section K.

(1) The Defendant's case based on Section O and Section K

41. At the forefront of the Defendant's submissions is the contention that they are unenforceable because a building scheme never existed. Heavy reliance was placed on the covenants relating to Section O and Section K of IL29 and releases to which LHE was party. The thrust of the contention is that they show that LHE took the covenants for its personal benefit and not for the benefit of the owners of the subsections for the time being inter se. In sum, the argument runs as follows :

    First, the similarity of the covenants affecting Sections Q, O and K is such that if a building scheme exists for Section Q (which is LHE's case), then by parity of reasoning, a building scheme must also exist for Sections O and K.

Second, it is clear from the various Releases relating to Sections O and K that no such building scheme exists in respect of those sections. This is because had such a scheme existed, the persons entitled to enforce those covenants (namely, the owners of the other portions of the relevant section not the subject of the Releases at the relevant time) would have been parties to the Releases : they were not. Moreover, in the case of Section K, the 1990 and 1993 Releases contain a representation by LHE that the covenants were taken by LHE solely for the benefit of the two properties adjoining Section K, viz. AIA Plaza and 111 Leighton Road.

Third, as there is no building scheme affecting Section O and Section K, and having regard to the similarity of the covenants affecting those sections and Section Q, by parity of reasoning, no building scheme exists for Section Q.

(a) The similarity argument

42. Leading counsel for LHE submitted that whether a building scheme exists for Sections O and K is of no assistance to the present case because it is fallacious to assume that LHE had one uniform approach and one only so that if no building scheme existed for one transaction, none could have existed for the other. To the contrary, Mr Li Q.C. submitted that there are significant differences between Section Q and Sections O and K which reinforce the point that there is no foundation for the Defendant's assumption.

For Section O, the main differences are the following :

(i) The conveyancing documents including the covenants are different :

There are differences in the covenants in as much as there is no provision in the case of Section O that the dwelling houses to be erected are to be "of uniform design with the adjoining buildings". Indeed, in none of the assignments by LHE of other sections in IL29 such as subsection 1 of Section H, the Remaining Portion of Section H, Section I, Section K, subsection 2 of Section O or the Remaining Portion of Section O is there such a requirement of uniformity of design.

The four assignments executed to give effect to the agreement between LHE and Li Chi Ho dated 14 September 1953 were not made by reference to a common plan as was the case with the Assignments of the subsections of Section Q.

Whilst Section Q has a system of interlinking staircases apparent from the common assignment plan, this feature is noticeably absent from the Section O assignments. Although the plans for the assignments of 40 and 42 Yun Ping Road (the first two lots) refer to mutual rights of way over a common staircase and a common staircase is shown on the plan for the pair of houses to be erected by the assignment of 44 and 46 Yun Ping Road (the third lot), no common staircases are provided for in the assignment or plan for staircases between 42 and 44 Yun Ping Road or between 46 and 48 Yun Ping Road. Instead, party walls are shown on the plans. Further, neither the assignment nor plan of the fourth lot provide for the number of houses to be erected on that lot, much less any mutual rights of way over common staircases.

(ii) The configuration of Section Q is very different from that of Section O. Whilst Section Q is a self-contained island of land, Section O is not : rather, as noted above, it is at the tip of a T-shaped plot.

(iii) Section O is considerably smaller, being approximately half the size of Section Q.

43. For Section K, the main differences are the following :

(i) The conveyancing documents including the covenants are different :

The conveyancing transaction was a disposition of the entire lot of seven houses. There is nothing that suggests that sub-sales were contemplated : in fact sub-sales never happened.

Unlike the Section Q covenants, there was no requirement that the houses had to be "of a uniform design" nor did the plans for these houses have to have LHE's prior approval. In particular, there was no provision that general specifications and levels for the houses were to be supplied by LHE.

(ii) This transaction was different in time in as much as it occurred in 1948.

(iii) There is a significant difference in configuration : Section K is not a self-contained parcel. Rather, it is the middle portion of a block.

(iv) Section K involves a much smaller area of land.

44. The similarity argument advanced by the Defendant assumes that where the covenants affecting two or more separate and different parcels of land sold off by the same vendor are "similar", it is permissible to extrapolate from the existence or otherwise of a building scheme affecting one of the parcels, that the same must apply to the other or others. To my mind, such an assumption is unwarranted because whether or not there was an intention that the restrictive covenants should enure to the benefit of the purchasers inter se at the time each parcel was partitioned is a question of fact. As every other question of fact, it is to be gathered "from any circumstances which can throw light upon what the intention was" see per Wills J. in Nottingham Patent Brick and Tile Co. v. Butler (1885) 15 QBD 261, 268 referred to with approval in the Court of Appeal (1886) 16 QBD 778 at 784. The terms of the covenants form but part of the circumstances and plainly the existence of a building scheme cannot be determined by reference to the covenants alone simply because they can be said to be "similar".

45. Moreover, the similarity argument is inherently difficult to apply. How similar is similar? The Defendant's submission illustrates the point : it was made on the basis that the covenants of both Section K and Section O are "similar" to those of Section Q. But as appears from the differences noted above, what at first blush appeared to be similar covenants, on analysis, are not. Differences exist although they are more acute in every respect in the case of Section K. Even in the case of Section O, one cannot say that absence of a requirement that the houses be "of a uniform design" when coupled with other circumstances may not lead to a different result.

46. To conclude, the similarity argument does not rest on a sound basis and I reject that submission for the reasons given. The existence or otherwise of a building scheme for Section O and Section K is not and cannot be determinative of that question for Section Q. In any event, there was no or no sufficient evidence of the relevant circumstances for the court to form any view as to the intention to establish a building scheme for either Section O or Section K. The Defendant's reliance on Section O and Section K in this regard is misplaced.

(b) The Releases

(i) Section O

47. The point the Defendant sought to make was that the owners at the time of the 1992 Release of 40, 42, 50, 52 and 54 Yun Ping Road would have been necessary parties had a building scheme existed for Section O. As they were not parties, it must follow that none exists.

48. Mr Li Q.C. invited attention to the fact that LHE entered into the 1992 Release at the request of the party seeking the release, the covenants were released for good consideration and the parties proceeded on the basis that the party seeking the release was bound by the covenant although the legal basis was not stated. In these circumstances, it was submitted that it does not necessarily follow from the fact that no other parties joined in the release that there is no building scheme in relation to Section O. It must be a matter for the releasee and his advisers rather than LHE to obtain the concurrence of adjoining owners in effecting the release. For example, a view might have been taken by the releasee as to the existence of a building scheme and a judgment was made as to the likelihood of an injunction and the risks involved. In contrast to the releases for Section K, LHE did not enter into any covenant that it had good title to release.

49. In any event, it was submitted (and I agree) that it was not incumbent on LHE to ensure that all necessary parties joined in the Release. In the absence of any such obligation or duty, there is no proper basis for any inference from the non-joinder that no building scheme exists for Section O. In any event, the existence or otherwise of a building scheme for Section O has no bearing on whether one exists in relation to Section Q.

(ii) Section K

50. As appears from the conveyancing history of Section K set out above, its redevelopment occurred in several phases. The first occurred in 1974 with the Goodyear Release and affected only subsections 5 and 6. None of the owners of the other portions of Section K (namely subsections 1, 2, 3, 4 and R.P.) was party to the Goodyear Release. The next phase occurred in 1981 with the Versalty Release and affected only subsection 1 and again none of the owners of the other subsections joined in the Versalty Release. The third phase occurred when the 1990 Release was made which affected subsections 2, 3, 4 and R.P. of Section K. Finally the covenants then affecting subsections 1, 5 and 6 were released by the 1993 Release.

51. The Defendant's contention is the same as that for Section O, that it is to be inferred from the fact that the adjoining owners were not parties to the various releases that Section K did not have a building scheme. For example, the owners of subsections 1, 2, 3, 4 and RP of Section K ought to have been parties to the Goodyear Release but were not. Then based on the similarity argument, it was contended that, mutatis mutandis, there is no such scheme in respect of Section Q.

LHE submitted that when one examines the various releases, in particular the 1990 and 1993 Releases, it is clear that the parties accepted that the covenants were taken for the benefit of the two plots on either side of Section K, namely AIA Plaza and 111 Leighton Road (which do not form part of Section K). LHE gave such a warranty and the owners of the adjoining land which were subsidiaries of Hysan Development joined in the Releases. LHE further covenanted that it had full power to give the releases. All this shows that there is no building scheme affecting Section K. It was suggested that by dint of the similarity argument, a building scheme must have affected Section K but when it suited, LHE was only too willing not to assert the existence of a building scheme. The opportunism attributed to LHE overlooks the fact that if a building scheme did exist for Section K, the Releases could not have prevented the persons entitled to enforce the covenants from taking enforcement proceedings.

52. Having regard to the fact that I have rejected the similarity argument, the fact that no scheme affects Section K has no impact on the question whether there is a scheme affecting Section Q.

(iii) Covenants and releases affecting Sections H(RP) and I

Suffice to say that they are of no assistance in determining the existence or otherwise of a building scheme for Section Q.

(2) The traditional requirements

53. I now turn to consider whether in the present case the traditional requirements as enunciated in Elliston v. Reacher are established on the facts.

(a) Common vendor

54. The Defendants submitted that the common vendor requirement was not satisfied because the purchasers of the various subsections bought their lots from Pang Sang. Vis-à-vis such purchasers, Pang Sang was their vendor. In the cases where there was more than one sub-sale, Pang Sang's sub-purchaser became the vendor. For the purposes of satisfying the requirement of common vendor, was the sale of Section Q to Pang Sang fatal?

55. Leading counsel for LHE submitted that the common vendor requirement could nonetheless be satisfied. In Sobey v. Sainsbury [1912] 2 Ch.513, the land which was held to be subject to a building scheme was first sold in bulk to a building society. It was the business of the building society to sell retail. The defendant's predecessor-in-title did not purchase his lots until after the completion of the building society's own purchase from the vendor. That arrangement did not prevent a building scheme from coming into existence.

56. In my judgment, the present case can be said to be a stronger case than Sobey v. Sainsbury since all the sub-sales took place prior to the completion of the Pang Sang Agreement. LHE was thus party to all the assignments as vendor. As appears from the circumstances discussed in (b) below, sub-sales were plainly envisaged and, in these circumstances, I find that the common vendor requirement is satisfied.

(b) Laying out of the estate in lots

57. As noted above, contemporaneously with the Pang Sang Agreement there were four sub-sales of four subsections by Pang Sang. For the sub-sales to have taken place on the day of the Pang Sang Agreement, a subdivision must already have been in place. This is reinforced by a closer inspection of the plan attached to the original Pang Sang Agreement which is still in LHE's possession : lines dividing Section Q are discernible on this original plan.

58. Under the Pang Sang Agreement, LHE was given control over the houses to be built : LHE rather than Pang Sang was to supply the general specifications and levels relating to such houses and plans had to have its prior approval. The additional Building Authority documents show that detailed building plans for the Kai Chiu Road houses and a schedule "A" for 16 houses altogether were submitted on 9 February 1954 by which date ten out of the eleven subsections had been sub-sold by Pang Sang. Before the plans could have been submitted, various steps (some of which were a direct effect of the covenants) had to have been accomplished, viz. the architect had to be instructed; general specifications and levels had to be obtained from LHE; plans had to be drawn up, presumably to Pang Sang's satisfaction; and LHE's approval to the plans had to be obtained. There was only an interval of 7 weeks between the Pang Sang Agreement and the submission to the Building Authority.

59. The inescapable inference from the time-frame established by the date of the Pang Sang Agreement, the initial four sub-sales and the first submission of detailed building plans to the Building Authority is that a subdivision had taken place prior to or by the time of the Pang Sang Agreement. The sub-sales and the preparation of building plans could not have proceeded without there having been a subdivision right at the outset. There was plainly some general scheme of development and the nature of the restrictions sought to be imposed on the subsections was consistent only with the general scheme.

60. Accordingly, I find that the second requirement is also satisfied.

(c) Restrictions intended for the benefit of the lots

61. For the Defendant, it was submitted that had the building scheme been intended by LHE, one would have expected to see documentary or even oral evidence of such intention. As to documentary evidence, it was suggested that as LHE was the original covenantee, particularly when coupled with the fact that it is a private family company with continuity of management, one would have expected some internal evidence of the intention to create a building scheme such as advertisements, conditions of auctions/tenders/sale by private treaty, correspondence with brokers and/or potential buyers, etc. but LHE has not been able to produce any such internal evidence. Whilst it may accord with what precedent books and model forms might recommend, the absence of such evidence does not necessarily mean that the requisite intention can never be established.

62. During the cross-examination of Chan Sau Lan, the deputy company secretary of LHE who gave evidence on its behalf, the possibility of incomplete discovery was hinted at although up to that point there had been no criticism of or expression of dissatisfaction by the Defendant on discovery matters. In these circumstances, I must proceed on the basis that LHE has complied with its obligations to make full and complete discovery.

63. I attach little significance to the absence of documentary evidence of the kind contemplated by the Defendant. Although there has been continuity of management, LHE is a family company. Generally speaking, the affairs of such companies are conducted on a more informal basis. Adverse inferences can be drawn from the absence of documentary evidence only if there is a valid and legitimate basis for making the assumption that LHE not only kept comprehensive records but also that such records must have been retained over four decades after the event.

64. Insofar as the absence of oral testimony relating to LHE's intentions back in 1953 are concerned, this presupposes that there are members of the family living today who (i) were working for LHE in the latter part of 1953/early 1954; (ii) were involved in this transaction at the time at management level and (iii) have a sufficiently clear recollection of events that happened 43 years ago. There was some suggestion that the present chairman and managing director of Hysan Development Co. who is also a director of LHE would be one such person. But as appears from the biographical details appearing in the Annual Report of Hysan Development, he completed his post-graduate studies only a few months prior to the date of the Pang Sang Agreement. In the circumstances, the absence of oral testimony is of no moment and certainly does not warrant the drawing of any adverse inference.

65. It is permissible to ascertain the vendor's intention from documents and inferences from such documents : see, for example, Elliston v. Reacher (supra) and Baxter v. Four Oaks Properties Ltd. (supra).

66. The covenants were designed to achieve uniformity in the design of the buildings as well as uniformity of user. The user envisaged was primarily residential use with business being allowed on the ground floor subject to the prohibition of certain businesses and an anti-nuisance covenant. Implicit in the notion of uniformity in design is the creation of a sense of order to avoid the possibility of having a collection of incongruous buildings haphazardly arranged or juxtaposed on the site. Similarly, the user restriction was plainly aimed at ensuring that activities not in keeping with the development created could not be conducted. These restrictions together created a local law. Were they calculated to enhance the value of the lots offered for sale? I think the answer must be in the affirmative. In ascertaining the intention, one has to view the circumstances as at the time the restrictions were imposed, i.e. the early 1950s. I have little difficulty in finding that the local law was intended to enhance the value of the lots offered for sale.

67. Moreover, as Lord Esher M.R. observed in the Nottingham Patent Brick case (1886) 16 QBD at 785 :

"If [the vendor] does not reserve any part, that is almost if not quite conclusive (unless there is something contradictory) that the covenants which he takes from the purchasers are intended for the benefit of each purchaser against the other."

68. In the present case, LHE did not retain any land in Section Q. Whilst I do not attach too much significance to this, it is nonetheless a relevant circumstance in ascertaining the intention.

69. The third requirement is thus also satisfied.

(d) Purchasers purchased on the footing that the restrictions were for the benefit of the other lots.

70. Since I have found that the first three requirements are established, the fourth is easily inferred provided the purchasers had notice of the facts involved in these requirements. See Elliston v. Reacher (supra) at 385.

71. Each purchaser would have known the configuration, size and physical location of Section Q. He would also have known the terms of the assignment to him and the plan annexed to the assignment that Section Q was divided into eleven subsections, that there were mutual rights of way over the scavenging lane and the common staircases with adjoining owners; that Pang Sang was merely the confirmor; that the covenants in the assignments were given in favour of LHE. As the Pang Sang Agreement was recited in the assignments, the purchaser must also have known of the provisions of that agreement. In the circumstances, the purchasers cannot but have known that there was a common vendor, namely LHE, that the whole of section Q was affected by the covenants, that it was divided into eleven subsections for sale, that the same covenants were imposed on each of the subsections and that LHE did not retain any land in Section Q. It would also have been apparent to each purchaser from the nature of the covenants that they would benefit the subsections and enhance the value of the land.

72. I therefore conclude that the traditional requirements are established and that a building scheme exists in respect of Section Q.

(3) The two essential requirements

73. As noted above, a building scheme may be established by satisfying only two essential requirements. First, that the area of the scheme be defined is plainly satisfied. There is no question but that the area affected is the whole of Section Q. See Reid v. Bickerstaff (1909) 2 Ch.305 at 319. The second is the common intention that the restrictive covenants be mutually enforceable in the interests of the purchasers and their successors-in-title. This requirement is obviously satisfied as I have found the traditional requirements stipulated inElliston v. Reacher fulfilled.

B. Section 41 of the Conveyancing and Property Ordinance, Cap.219 ("CPO")

74. Where the requirements of s.41(2) of the CPO are satisfied, covenants both positive and restrictive run with the land and are enforceable against the original covenantor and his successors-in-title by the original covenantee and his successors-in-title. So if the requirements are met, the covenants are enforceable by LHE both in its capacity as original covenantee and as successor-in-title of the original covenantee by virtue of its current ownership of No.10.

75. Section 41(2) is in the following terms :

" This section applies to any covenant, whether positive or restrictive in effect -

(a) which relates to the land of the covenantor;

(b) the burden of which is expressed or intended to run with the land of the covenantor; and

(c) which is expressed and intended to benefit the land of the covenantee and his successors in title or persons deriving title to that land under or through him or them."

76. The first two requirements do not give rise to any difficulty. The phrase "relates to the land" was considered by the Court of Appeal in Lamaya Ltd. v. Supreme Honour Development [1991] 1 HKC 198. Although no concluded opinion was expressed, the Court of Appeal considered (at 203) that there was much force in the argument that "relate" is a modern form of the traditional words "touch and concern". That is the meaning that I would ascribe to "relate". In the present case the covenants contained in the Assignments plainly "touch and concern" the land thereby assigned.

77. There are three elements to the third statutory requirement :

(i) The covenant must be expressed to benefit the land of the covenantee and his successors-in-title;

(ii) The covenant must be intended to benefit the land of the covenantee and his successors-in-title;

(iii) The covenantee must have land that could be so benefited.

78. Both parties accepted that (i) and (ii) above are cumulative : see Lamaya at 203H-I.

79. As to the element that the covenant be "expressed" to benefit the land, the Defendant referred to Greene L.J.'s statement in Drake v. Gray [1936] 1 Ch.451 at 466 :

"There are two familiar methods of indicating in a covenant of this kind the land in respect of which the benefit is to enure. One is to describe the character in which the covenantee receives the covenant. That is the form which is adopted here, a covenant with so and so, owners or owner for the time being of whatever the land may be. Another method is to state by means of an appropriate declaration that the covenant is taken 'for the benefit of' whatever the lands may be."

80. Although neither method appears to have featured in the present case, those methods are not exhaustive. It does not necessarily follow that there can be no "expression" if neither method was used. The anti-nuisance covenant was expressed to benefit the "Vendor or the occupiers of the land adjacent thereto". Again, the Vendor or "the owner or owners of adjacent premises" were permitted to connect to the drains. Thus in each case the object or focus of the benefit is the land rather than the Vendor personally. Accordingly, I find the expression sufficient to satisfy the first element.

81. The second of these three elements requires no further comment since I have found the requirements of a building scheme established.

82. As to the third element, the Defendant contended that as LHE had sold the entire Section Q under the Pang Sang Agreement, there was no land that belonged to LHE as covenantee. For LHE, it was submitted that the land of the covenantee consisted of the other subsections in Section Q.

83. Nothing in para.(c) requires that the original covenantee be not only the legal but also the beneficial owner of the land that the covenant was expressed and intended to benefit. The fact that LHE had entered into the Pang Sang Agreement does not of itself preclude para.(c) from being satisfied. A more difficult question is whether s.41 can apply to covenants in building schemes at all. What is "the land" that the covenant is expressed and intended to benefit? If "land of the covenantee" means land retained by the covenantee at the time he took the covenant in question, s.41 can never apply to building schemes. Of its nature, a building scheme would involve the disposition of the lots at different times and once the first lot is conveyed, it would no longer be "land of the covenantee", stricto sensu. If s.41 has any application to building schemes at all, "the land of the covenantee etc." cannot mean land which at the time of the relevant assignment was legally and/or beneficially vested in him. In such a case, the only rational meaning to be given to those words is that contended for by Mr Li. So, on this analysis, where there is a building scheme, the relevant "land" in respect of each of the assignments is the other subsections of the scheme area including any that may already have been assigned by the covenantee as part of the building scheme. The fact that para.(c) in terms refers to the covenantee's "successors-in-title or persons deriving title to that land under or through him or them" lends some support to that view.

84. The point which does not appear to have been considered before is one of considerable difficulty. The legislative history of ss.39 to 41 of the CPO is of obvious relevance in ascertaining the legislative intent in enacting s.41 and I will therefore set this out briefly.

85. Sections 39 to 41 of the CPO was first enacted in 1984. It repealed and replaced the Law of Property (Enforcement of Covenants) Ordinance 1956 which was enacted when the early surge of development was taking effect. The effect of the 1956 Ordinance was described in the Annual Report of the Registrar-General for 1956-1957 (para.55) as follows :

"legislation which made provision for the mutual enforcement of covenants and agreements relating to the use, maintenance, repair, insurance or management of buildings divided into flats or other separately occupied premises or relating to the support, demolition or rebuilding thereof. The inordinately heavy increase in recent years in building development generally in Hong Kong, and in particular in the very large number of blocks of flats which have been erected, has brought into prominence the question of how far covenants and agreements of this kind entered into between the original owners of such flats will be enforceable in future years between those subsequently becoming owners thereof, there being some doubt as to the extent to which the burden of certain types of covenants can at law be said to run with the land. This Ordinance was therefore enacted to provide expressly that such covenants or agreements are to run with the land so as to be enforceable by and against the owner or owners for the time being of the various parts of the building ."

86. See Sihombing and Wilkinson's Hong Kong Conveyancing Vol.1 at para.121.

87. Whilst ss.39 and 40 are modelled on ss.78 and 79 of the Law of Property Act 1925, s.41 does not have a counterpart in the English statute. It is unique and peculiar to Hong Kong and provides for the enforceability of covenants. In 1988, the 1984 version of s.39(1) was amended and s.41 was repealed and replaced : LN 31 of 1988 ss.13 and 14. The current ss.39(1) and 41 reflect the changes introduced in 1988. The Explanatory Memorandum to the Conveyancing and Property (Amendment) Bill 1987 which, inter alia, contained these amendments set out the reasons for replacing s.41 :

" Clause 12 repeals and replaces section 41 which deals with the enforcement of covenants between flat owners in multi-storey buildings. This is an extremely complex area of the law and doubts have been expressed regarding the efficacy of the present section 41 because of the negative manner in which the covenants are said to be enforceable. For the avoidance of any doubt this provision has now been recast in a positive manner. It has also been expanded to include covenants relating to other land e.g. a large, staged development may be carved out in sections which are developed and conveyed separately, but as part of one composite overall scheme, with some common services. There are technical rules which may otherwise prevent covenants being enforceable between such owners."

88. When the Attorney General moved the Second Reading of the Amendment Bill, he had this to say :

"Clause 12 deals with the enforcement of covenants ... the provision has been recast to clarify the law. At the same time, the opportunity has been taken to deal with the enforcement of covenants between the owners of pieces of land within a development scheme."

89. Hong Kong Hansard, Session 1987/88, Vol.1 (28 October 1987) at pp.173-4. What emerges from the passages quoted is the clear intention that s.41 should extend to covenants in a building scheme whether it is vertical, as in a multi-storey building, or horizontal, as in the present case.

90. It is in the context of ascertaining the legislative intention of s.41 that the Explanatory Memorandum is of particular relevance. Despite the exclusionary rule, in an appropriate case where it would settle the matter one way or the other, the court may disregard the rule : see the discussion in Bennion on Statutory Interpretation (2d Ed.) sections 219-220. The present is one such case. Having regard to the plain legislative intent of s.41, the meaning contended for by LHE must prevail.

91. In the result, I conclude that the covenants (both positive and restrictive) are enforceable under s.41 by LHE as original covenantee and also as owner of No.10.

IV. DEFENCES

92. The Defendant raised two defences. First, the covenants should not be enforced because of the change in the character of the neighbourhood. Second, LHE's conduct cannot be regarded as "equitable" and therefore it would offend equity for the court to grant any injunction.

A. Change in the character of the neighbourhood

There are various formulations of the proper test to be found in the leading cases on this topic :

"If there is a general scheme for the benefit of a great number of persons, and then, either by permission or acquiescence, or by a long chain of things, the property has been either entirely or so substantially changed as that the whole character of the place or neighbourhood has been altered so that the whole object for which the covenant was originally entered into must be considered to be at an end, ...."

per James L.J. in German v. Chapman (1877) 7 Ch.D.271 at 279;

"... before granting equitable relief, Courts of Equity look not only to the words of a covenant, but to the object to attain which it was entered into, and if, owing to circumstances which have occurred since it was entered into, that object cannot be attained, equitable relief will be refused."

per Lindley L.J. in Knight v. Simmons [1896] 2 Ch.294 at 297; and

"... the defendant must show that there has been so complete a change in the character of the neighbourhood that there is no longer any value left in the covenants at all. ...."

per Farwell J. in Chatsworth Estates v. Fewell [1931] 1 Ch.224 at 230.

93. The burden of proof of a change in the character of the neighbourhood is upon the Defendant : see Chatsworth Estates (supra) at 229-230. Whichever formulation is adopted, the test is undoubtedly a high one. Where the parties differ is as to the application of the test, in particular, whether changes outside the scheme area may be taken into account.

94. LHE submitted that the area for the test is the area of the scheme itself and not to any area outside it for the following reasons. A scheme involves a defined area and the enforceability of covenants between owners within the defined area inter se. As such, the object of such covenant is to serve the interests of the owners within this defined area and the community of interest imports in equity the reciprocity of obligation. So in deciding whether the covenants are valid, whether their object is at an end, or cannot be attained, or is no longer possible, it is only the change within the defined area that is relevant. The scheme area is thus confined to Section Q and it is not permissible to look at changes outside that area.

Sobey v. Sainsbury [1913] 2 Ch.513 appears to be an authority to the contrary. In that case, the scheme area consisted of 18 lots. The covenant had not been observed in respect of 4 out of a total of 18 lots due to the acts and omissions of the plaintiff and his predecessors-in-title. Equitable relief was refused. In coming to that conclusion, the judge appeared to have taken into account changes that occurred outside the scheme area, namely, on the other side of the road upon which the scheme area abutted.

95. LHE submitted that non-enforcement of the covenant by the plaintiff and his predecessors-in-title was a sufficient ground for the court to refuse equitable relief in that case. Insofar as Sobey v. Sainsbury is authority that the court can take into account changes outside the scheme area, LHE submitted that it is wrong in principle and ought not be followed. Moreover, doubts have been expressed as to the correctness of that decision both in Chatsworth Estates (supra) at 227-228 and Bill v. Norman [1956] 7 P & CR 359 at 370. It was submitted that even if it were correct as a matter of law, at most, it is only authority for taking into account changes immediately outside the scheme area such as adjacent or contiguous areas. On that basis and very much as a fall-back to its principal submission that the area is confined to the scheme area, LHE defined "neighbourhood" as extending to the properties situate on the other side of each of the four streets by which Section Q is bounded only. This area is delineated by broken lines in Appendix A.

96. Sir John Swaine Q.C. for the Defendant advocated a common sense approach and submitted that in speaking of "neighbourhood", it is what lies outside the scheme area but neighbouring it that is referred to. On that basis, the Defendant considered "neighbourhood" to refer to the area of land bounded by Percival Street, Leighton Road, Pennington Street, Jardine's Crescent and along Hennessy Road until the junction with Percival Street as delineated on Appendix A. This area is more extensive than IL29 itself in as much as it is known (from a perusal of the occupation permits) that Golden Mark Building, Lin Fok House, part of Hennessy Centre, Hennessy Apartments, part of the block between Hennessy Apartments and Russell Street, part of AIA Plaza, part of the Lee Garden's redevelopment, the substantial part of Caroline Centre, 40-42 Yun Ping Road as well as half of Fortune Centre fall outside IL29.

97. It is difficult to discern any logical basis behind the Defendant's definition of "neighbourhood" or the principles to be applied in ascertaining it. It does not purport to represent IL29; nor is the area defined by main roads : the use of Jardine's Crescent (which is a market through which vehicles cannot pass) rather than Jardine's Bazaar as one of the boundaries is one of the puzzling features. As the case progressed, there appeared to have been a shift of emphasis to the area bounded by Hennessy Centre which is on the other side of Kai Chiu Road, Caroline Centre along Yun Ping Road and what was formerly the Lee Gardens Hotel currently under redevelopment, all of which are high-rise commercial redevelopments by LHE or members of its group and away from the several office developments south of Hysan Avenue.

98. The correct approach appears from the following passage in Emmet on Title, 19th Ed. at para.19.081 :

"Where a restrictive covenant is otherwise enforceable in equity and, either by permission or acquiescence or by a change of circumstances, the property becomes so changed that the character of the place or neighbourhood is altered, and the object for which the restrictive covenant was originally entered into is at an end, then equity in the exercise of its discretion will not permit the covenant to be enforced (Duke of Bedford v British Museum Trustees (1882) 2 My & K 552; German v Chapman (1877) 37 LT 685; Sayers v Collyer (1884) 28 Ch D 103; Sobey v Sainsbury [1913] 2 Ch 513). But the court requires very strict evidence of changes in the character of the neighbourhood before holding that a person has in consequence lost his right to enforce restrictive regulations (Meredith v Wilson (1893) 69 LT 336; Ramuz v Leigh-on-Sea Conservative Club Ltd (1915) 31 TLR 174; Westripp v Baldock [1939] 1 All ER 279)."

99. The starting point has to be the scheme area itself, namely, Section Q. Unless there has been a change to the scheme area such as would alter the character of "the place or neighbourhood", the second stage of assessing what "neighbourhood" means (whether it is synonymous with or is more extensive than the scheme area) does not arise. The Defendant's approach, which was to look at the properties surrounding the scheme area in order to determine whether there has been a change in the character of the neighbourhood, is simply not supported by any of cases. InGerman v. Chapman and Sobey v. Sainsbury the two cases that make specific mention of "neighbourhood", there were substantial changes to the character of the scheme area itself. So the question whether the area of the neighbourhood is synonymous with or is more extensive than the scheme area itself simply does not arise unless the scheme area itself has been either entirely or so substantially changed so that the whole object to which the covenant was originally entered into must be considered to be at an end.

100. In the present case, Section Q remains intact : there are shops on the ground floor and residential premises on the other floors. The buildings remain those that were erected in about 1954. It is not the case that "pencil-shaped" developments have already sprung up on Section Q. So the answer to the question whether the object of the covenants, i.e. buildings of uniform design, and the type of user described can still be attained must be in the affirmative. That being the case, it becomes unnecessary to decide whether "neighbourhood" is synonymous with or is more extensive than the scheme area.

101. As a matter of principle, the logic of LHE's main submission that the area is confined to the scheme area is unassailable. But on any view of the matter, even if (contrary to what I have held) it were appropriate to apply the test in the manner contended for by the Defendant, it makes no difference to the result : it cannot be said that the change is so substantial that the original object is at an end. This is apparent from the plan at Appendix A which is a simplified version of the plan submitted by LHE at the hearing. The percentages stated are based on the number of floors as opposed to floor area (due to the lack of data), disclosed and relied on by the Defendant in the pleadings. All the buildings between Percival Street and Lee Garden Road north of 1 Hysan Avenue, Phoenix Apartments which is adjacent to the Lee Gardens Development, the block between Lan Fong Road and Pak Sha Road as well as 40-42 and 50-54 Yun Ping Road are still largely residential. Accordingly, the defence based on a change in the character of the neighbourhood fails.

B. Whether an injunction is appropriate

102. Where covenants are established and there is a threatened breach, the usual relief is an injunction to restrain the breach. The Defendant has the burden of showing why an injunction should not be granted.

103. The Defendant's submission is premised on LHE "buying" a cause of action by taking the assignment of No.10 in 1995 thereby "engineering" the creation of an injury to itself for no reason other than to litigate over it. The Defendant alleges that the sole purpose of this exercise was to impede the redevelopment of the Defendant's property. It was alleged that LHE has no cause of action but for being the owner of No.10.

104. That argument has of course been undermined by the fact that LHE has succeeded in its contention that the covenants are enforceable by it not only as owner of No.10, but also as original covenantee by virtue of s.41 of the CPO. Even if LHE had not succeeded, it would not follow that it had acted in bad faith. The legal position was not so obvious and clear to render the point taken a thoroughly bad and unarguable one, so as to impugn LHE's bona fides. In fact, the s.41 point raised is novel and not covered by authority. As appears from the facts as set out in Section II(F) above, LHE's stance has been consistent throughout : it believed it was entitled to enforce the covenants as original covenantee and the acquisition of No.10 was to strengthen its case against the Defendant. Suffice to say that no case has been made out that LHE has not done equity so that injunctive relief should be refused. In the circumstances, no grounds have been established to warrant a refusal of the permanent injunction sought.

105. In view of the foregoing, the question of damages does not now arise. Had the question arisen, I agree that the measure of damage would be the sum which might reasonably be asked by LHE and paid by the Defendant for relaxing the covenants : Jaggard v. Sawyer [1995] 1 WLR 269.

V. RIGHTS OF WAY

106. The Defendant has conceded that LHE has a right of way over the common staircase and landing between Nos.8 and 10 Kai Chiu Road and also over that portion of the scavenging lane that forms part of the Defendant's property. It has given an undertaking through its counsel that within the limits of the law (1) the right of way will not be interfered with and (2) the common staircase will be preserved. But for the undertaking, I would have granted the injunction sought.

VI. ORDER

107. I will grant a permanent injunction restraining the Defendant whether by itself its servants or agent or otherwise howsoever from acting in breach of the covenants contained in the Assignment of subsection 8 of Section Q dated 26 April 1954.

108. Costs must follow the event and I make an order nisi for costs in favour of the Plaintiff. There is to be liberty to apply.