WEST COAST INTERNATIONAL (PARKING) LTD. v. SECRETARY FOR JUSTICE

HCA14736/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14736 OF 1999

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J U D G M E N T

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Background

1. The plaintiff is an operator of public car parks. It has a number of tenancy agreements with Government for such car parks.

2. In 1994 the Government had earmarked an area at Fanling known as Area 11 for the building of a Regional Indoor Stadium at some time in the future. In the meantime it was decided to put the land up for tender for use as a car park. The plaintiff tendered successfully for the land. It entered into a tenancy agreement in respect of the land, commencing on 18 April 1994 for 18 months certain and thereafter quarterly until termination. The agreement was terminable, once that stage was reached, on three months' notice. The rent was $3,003,000 p.a. and could be unilaterally varied by the landlord after three years.

3. The plaintiff took over the car park and operated it without incident, and without any variation of the rent, for some years. Then in 1999 a competitor of the plaintiff wrote to the Government offering a better rental. Acting on this, on 30 July 1999 the District Lands Officer (North) gave the plaintiff three months' notice to quit to take effect on 1 November 1999.

4. The plaintiff's case is that the Government operated a policy in respect of land which had been earmarked for building but was in the meantime leased on a short term tenancy for use such as vehicle or container parking. In particular it was contained in Clauses 5.2 and 5.3 of the Government's Land Instructions, which are set out below. This policy had been made known to the plaintiff which had acted on it. The policy effectively meant that once the land was leased, the lease could only be terminated if the land was required for the purpose for which it was earmarked, or if such purpose was known to be more than three years in the future, in which case it could be tendered for re-letting on a different basis.

5. The plaintiff says that such policy had become an express and/or implied term of the contract between the plaintiff and Government. The Notice to Quit in 1999 was in breach of this express and/or implied term and was invalid.

6. Accordingly the plaintiff seeks declarations that the tenancy at the end of the fixed term continued as a periodic tenancy; that the periodic tenancy continues until the premises are required for its permanent use, subject to rental review and the tenant observing the tenancy conditions; and that the notice to quit is invalid and of no effect.

7. The defendant's case is that the alleged policy is merely a guideline. The terms of the tenancy agreement are contained only in the written agreement and there is no room for implied terms. It counterclaims for possession and mesne profits. In addition the defendant alleges breaches of the tenancy agreement in that the plaintiff did not form and plant with trees an area adjacent to the car park known as the "Green Area", and did not maintain the fencing round the car park, as it was required to do by express terms of the tenancy agreement, and claims damages for breach of covenant.

8. It was agreed that the trial before me would be on liability only and that in the event of findings in the defendant's favour there should be a separate assessment of mesne profits and damages.

The Land Instructions

9. What the plaintiff claims was a policy is contained in the Government's Land Administration Office Instructions (the "Land Instructions"). It is not in dispute that these are an internal document of the Lands Department, copies of which are not available to the public.

10. The Land Instructions provide inter alia :

"Section C-2

5.2 Periodic tenancies, i.e. those where the original term certain has expired will continue until the land is required for its permanent use and subject to rental review in accordance with Paras 6 and 7 below and the tenants observing the tenancy conditions.

5.3 Fixed term tenancies will similarly be allowed to continue periodically unless it is clearly established that the site will be available for more than 3 years from the date the fixed term ended. Where appropriate within the last 6 months certain, a re-tendering exercise should be undertaken allowing the existing tenant to participate.

9.1 If upon expiry of the initial term, the site will be available for a further term of 3 years or more, the site should be re-tendered. Where appropriate the re-tendering exercise should be conducted within the last 6 months of the term certain thereby allowing the existing tenant to participate. If he is successful in his bid, his occupation continues uninterrupted. Special circumstances may exist when it would be beneficial to permit an existing tenant to remain in occupation subject to a review of rent being undertaken. Such cases should be referred to LAM for prior approval.

9.2 If the site is available for less than 3 years, the tenancy may be permitted to run periodically at the tendered rent or subject to a rent review to a full market basis 3 years from the date of commencement of the tenancy or last rent review."

11. In effect the plaintiff says that the policy contained in Clauses 5.2 and 5.3 is incorporated into the lease. The result is that, so long as the land is not required for its permanent use, the tenancy has to continue. It is subject to rent review every three years but the Government cannot otherwise terminate it unless a decision is made that the land is not required for a more than three years in which case it can be put to tender. Either way, no matter what the written terms of the lease may be, the Government cannot get out of it until it fixes a date when it will start building on the land. The period could be indefinite.

Evidence

12. On the plaintiff's side this comes from Mr James Ng Yiu Wah, Madam Susan Yeung Kwok Sau Fong, both of whom are surveyors who used to work in the Lands Department, and Mr Patrick Kan Ho Ming, a director of the plaintiff who manages its car parking business. For the defendant, the witnesses are Mr Daniel Lam Kwai Kam, an Estate Surveyor in the District Lands Office (North) and Mr Iain James MacNaughton, the Assistant Director, Estates Management, of the Lands Department.

13. There is no real issue on the facts so I will not set out the evidence in detail. Basically the evidence for the plaintiff is that the provisions of Clauses 5.2 and 5.3 of the Land Instructions were well known to the plaintiff and other car park operators for many years. This was so even though it is admitted that the Land Instructions were an internal document of the Lands Department, copies of which were not available to the public. Indeed Madam Yeung says that she told officers of the plaintiff of the policy stated therein. Government has always adhered to the policy stated therein; indeed this case represents the first time that the Government departed from it, although it has done so since then in other cases.

14. Mr Kan unfortunately was not working for the plaintiff when it entered into the lease so he cannot give evidence of any specific discussions between himself or his staff and the staff of the District Lands Office about this lease. He is able to give evidence of the cost to the plaintiff of preparing a car park for use and this sort of thing. It is unfortunate that the statement on which he relied contained, as such statements commonly do, legal argument. He refers to the "legitimate expectation that the policy/practice should apply to the Tenancy" and asserts that the Government is "estopped from denying the plaintiff the right to have the Tenancy continued according to the said policy/practice". Estoppel is not pleaded and even if it were this sort of assertion on a point of law from a witness is inappropriate.

15. Evidence for the Government is to the effect that the Lands Instructions were an internal document intended to provide consistency in the practices and procedures of the Lands Administration Office of the Lands Department. They were not intended to be and never were inflexible. According to Mr MacNaughton there were other instances, apart from those cited by the plaintiffs after the notice to quit in this case, where leased lands were re-tendered, for various reasons, and not strictly in accordance with the procedures laid down in the Lands Instructions.

16. In fact when one looks at the relevant parts of the Land Instructions set out above it is clear that this short term tenancy does not exactly fit them. More than three years have elapsed since the expiry of the original fixed term of 18 months. Mr Lam said that the site could still be available for two to five years from the date of the notice to quit. However it does not appear that there was ever any consideration of a re-tendering exercise, which should happen if the site is to be available for more than three years.

Express Term

17. The plaintiff says that its officers well knew the terms of the policy. They had discussed them with officers of the Lands Department. There is however no specific evidence of which officer of the plaintiff spoke to which officer of the Lands Department or what was said by either of them.

18. There is a written agreement, contained in the lease document. There is at least an implication or rebuttable presumption that the written agreement contains all the terms of the contract between the parties. See Gillespie Bros & Co. v. Cheney, Eggar & Co. [1896] 2 QB 59 at 62.

19. To incorporate any part of the Land Instructions as an express term of the contract there would have to be evidence of an agreement between the parties that it would be so incorporated. There is no affirmative evidence as to which officers of the plaintiff and the Government had discussions on this matter or what was said in such discussions. There may have been discussions but it is most unlikely that any sensible government officer would hold out that the Government was irrevocably bound by the policy and would not terminate the lease, no matter what the lease itself provided. There is no evidence from which I can infer that this must have happened.

20. In any event, says the Government, there is no room for the importation of any term into the contract, because of the effect of Clause 12 of the Tender Notice. This Notice was given to prospective tenderers, with a copy of the proposed lease, and by tendering the plaintiff accepted and was bound by this Clause. It reads as follows :

".... It is hereby specifically declared by Government that any statement, whether oral or written, made and any action taken by any Government officer in response to any enquiry made by a prospective tenderer shall be for guidance and reference purposes only. Any statement shall not be deemed to form part of this Tender Notice and such statement or action shall not and shall not be deemed to amplify, alter, negate, waive or otherwise vary any of the terms or conditions as are set out in this Tender Notice and/or the form of Tenancy Agreement annexed hereto."

21. The defendant says that the plaintiff, by tendering in accordance with the Notice of Tender implicitly accepted that the written agreement contained all the agreed terms and the Government accepted the tender on that basis.

22. The plaintiff argues that this Clause is unreasonable and as such is struck down as unreasonable by section 3 of the Control of Exemption Clauses Ordinance, Cap.71. I do not think that there is any merit in this argument or that it needs to be dealt with at length. In the first place, section 3 only applies to the "requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap.284)". It would be necessary to show that the Ordinance applied to Clause 12.

23. The purpose of the Ordinance is "to limit the extent to which civil liability for breach of contract, or for negligence or other breach of duty, can be avoided by means of contract terms...". Section 5, which is headed "Varieties of Exemption Clause" refers to "the exclusion or restriction of any liability". Clause 12 to the extent that it is a contract term does not seek to avoid liability, or to exclude or restrict liability but merely to indicate that the entire agreement is contained in the lease.

24. In the second place, if Clause 12 relates to liability arising in contract the only section of the Ordinance which could apply to it is section 8. The Clause does not provide for exclusion or restriction of liability for breach of contract or otherwise come within the contemplation of this section. In any event, Schedule 1 of the Ordinance provides that section 8 does not apply to any contract insofar as it relates to the creation or transfer of an interest in land.

25. The Control of Exemption Clauses Ordinance, Cap.71 clearly has no application here.

26. In sum, there is no direct evidence of any specific agreement, which could be imported into the lease as a term of the contract, nor any evidence from which such specific agreement could be implied. There may have been oral statements by an officer of the Lands Department to an officer of the plaintiff but Clause 12 of the Notice of Tender makes it clear that the entire agreement is contained in the lease itself.

27. I find that the policy or practice contained in Clauses 5.2 and 5.3 of the Lands Instructions was never incorporated as an express term of the contract between the parties.

Implied term

28. The plaintiff says that the provisions of Clauses 5.2 and 5.3 of the Lands Instructions, if they were not incorporated as express terms of the contract between it and Government, were implied terms therein. For the purposes of this discussion I leave aside the effect of Clause 12 of the Tender Notice.

29. There are five conditions which must be satisfied before any term can be implied into a contract; see Shung Shing Hing Investment Co. Ltd v. A.G. [1983] 2 HKC 314 relying on BP Refinery (Westernport) Pty Ltd v. President, Councillors and Ratepayers of Shire of Hastings [1978] AJLR 20. These conditions are set out by Lord Simon at page 20 :

"... (1) It must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

30. I cannot see how it would be reasonable and equitable to bring in the provisions of the Lands Instructions as implied terms of the contract, or that that was necessary to give business efficacy to the contract. It is true that according to Mr Kan, it cost a lot of money to prepare a car park for leasing. Here the surface was asphalt and about 70,000 square feet. On his figures, preparation would cost something between $400,000 and $500,000. He says that it would be absurd for an operator to think in terms of only the fixed term of the lease without consideration of the period for which the lease might continue. Therefore before entering into the lease inquiries would have to be made as to how long it would last. The plaintiff, in effect, had to be sure of getting its money back.

31. This does not impress me. The only way a prudent businessman could approach this sort of contract would be by seeing if he could get his money back, at the very least, in the fixed term of 18 months, because when he enters into the lease he can have no guarantee that it will last any longer. Any indication he receives that it may last longer may be worth putting his money on but at the end of the day, if there is no guarantee, he is only making a wager. If he can cover his outlay in the fixed term, all else is profit. If he cannot, why should he bother? Indeed if he cannot make a profit in the fixed term, the proposition cannot be very appealing to him.

32. Here we have some figures from Mr Kan of the cost of parking and so forth but no actual figures of the takings. We know that the rent was $3,000,300 p.a., or $4.5 million, roughly, for the fixed term of 18 months; a figure against which $500,000 for preparation pales into insignificance.

33. Against this we have the obvious need on the part of Government for flexibility in raising revenue. Madam Yeung said that raising revenue, though not the primary intention of the Land Instructions, was one of the intentions. It is a matter of public policy that if Government temporarily leases land it should get the best return that it can. That is in the interests of every member of the community.

34. I cannot therefore see why it would be reasonable and equitable to tie the Government down to the lease indefinitely. Nor can I see why business efficacy would require the plaintiff to have any more than what the lease gives it, i.e. 18 months fixed and then a continuing lease thereafter.

35. As to whether the implied term is obvious, I can do no better than adopt the reasoning of Hunter J in Shun Shing Hing, above. One has to consider whether, if the "officious bystander" were to ask whether the lease must automatically continue until the Government decides to build on the land, what the parties would answer. While he might observe that in the past, that is what had happened, it is by no means obvious that he would answer that that is what must happen. That it must happen in fact would fly in the face of the express terms of the lease.

36. This brings me to what is perhaps the most important consideration, namely, whether the implied term which the plaintiff says must be incorporated contradicts an express term of the lease. Now the lease provides that once the fixed term is ended, there is a renewable periodical tenancy of three months which either party may terminate on three months' notice. The Government may in any event terminate on one month's notice if the land is required for a public purpose, on payment of compensation if such termination is within the fixed term; see Clause 4(f). If the term sought were implied it would effectively nullify the three-month termination provision by making it indefinite. The only way the Government could get the tenant out would be by relying on Clause 4(f). But since the land was intended for a public purpose, the Government could, in any event, rely on Clause 4(f). There would have been no need, if the parties had intended to agree an indefinite period of occupation, to provide for the renewable periodical tenancy of three months.

37. The Government also argues that a tenancy cannot be terminable on a contingency. It is a requirement of all leases and tenancy agreements that the term created is of certain duration. See Prudential Assurance Co. Ltd v. London Residuary Body [1992] 2 A.C. 386 (H.L.(E.)) at 395 G-H, per Lord Templeman :

"A grant for an uncertain term does not create a lease. A grant for an uncertain term which takes the form or a yearly tenancy which cannot be determined by the landlord does not create a lease."

38. The plaintiff says that the position here is not the same. The tenancy would not be uncertain because it could still be terminated on three months' notice. The only difference is that the three months' period could only be relied on, once the Government had decided to build on the land.

39. I do not think this can be right. Lord Templeman approved, at page 390J, a very old dictum by Anthony Brown J reported in Say v. Smith (1563) Plowd. 269 :

"every contract sufficient to make a lease for years ought to have certainty in three limitations, viz. in the commencement of the term, in the continuance of it, and in the end of it; so that all these ought to be known at the commencement of a lease, and words in a lease, which don't make this appear, are but babble..."

40. If the term sought is implied there will be no certainty as to how long the lease will last or when it will end. The implied term sought would, in the robust view of an earlier age, reduce the lease to "babble".

41. For these reasons I do not see that the provisions of the Land Instructions, particularly Clauses 5.2 and 5.3, can be imported as implied terms in this lease.

The Counterclaim

42. The Government counterclaims for damages for breaches of Clauses 7 and 15 of the Special Conditions which appear in Schedule II to the lease agreement. These read as follows :

"7 (a) The Tenant shall at his own expense form and plant with trees the portion of public pavement delineated and shown coloured green on the plan annexed hereto (hereinafter referred to as "the Green Area") to such standards, levels and design as may be required by the District Lands Officer. The Green Area shall be formed and planted with trees prior to the operation of the public car park on the Premises.

(b) For the purposes only of carrying out the necessary works specified in sub-clause (a) of this Special condition, the Tenant shall on commencement date of this tenancy be granted possession of the Green Area. The Green Area shall be re-delivered to the Government by the Tenant upon completion. The Tenant shall at all reasonable times while he is in possession of the Green Area allow free access over and along the Green Area for all Government and public pedestrian traffic.

(c) The Tenant shall at his own expense maintain the Green Area to the satisfaction of the District Lands Officer until such time as possession of the Green Area has been re-delivered to the Government in accordance with sub-clause (b) of this Special Condition.

15. The Tenant shall at his own expense fence the Premises to the satisfaction of the District Lands Officer."

43. It is not in dispute that the plaintiff never actually did any work on the Green Area, whether before or after it commenced operating the car park. Nor is it in dispute that the fence runs across the Green Area, so that the car park encroaches on it, and has in any event not been maintained properly.

44. On 30 July 1999 the District Lands Officer (North) in a covering letter sent with the notice to quit wrote to the defendant requiring it to clear and remove all structures on the site by the date of termination and to leave the site clean and tidy and properly fenced. Then on 3 September 1999 he again wrote to the defendant, referring to an earlier telephone conversation and requiring the defendant to fulfil the obligations under Special Conditions 7 and 15 before they vacated the premises.

45. Mr Kan says that it was for the District Lands Officer to tell the defendant what work to do on the Green Area particularly since the Government had erected the fence across it, and because part of it was a pavement which was formed by the Government. In fact though Madam Yeung accepts that the District Lands Office should have followed up the question of whether the Green Area had been formed, there is no evidence that the Government ever did anything in that connection before they gave notice to quit.

46. It seems to me clear from a reading of Special Condition 7 that what was in contemplation was that the plaintiff should at the outset form the Green Area to the standards, levels and design as may be required by the District Lands Officer. It was to have possession of the Green Area on the date of commencement of the tenancy, for this purpose; and the work was to be completed before the car park commenced operations. Presumably it was contemplated that this work would be done at the same time as the car park was being prepared for use by surfacing it and laying it out. The Green Area was to be returned to the Government on completion, which can only mean completion of the work, because completion in the conveyancing sense would already have taken place. The Green Area was to be maintained at the plaintiff's expense until so returned.

47. There was as I read it no continuing obligation in respect of the Green Area. It was to be formed at the outset then returned to the Government. This was not done and the Government never took any steps to make the plaintiff do it, or impose any sanction for its failure. In my judgment the Government therefore waived the breach of Special Condition 7 and the counterclaim in respect of it must fail.

48. Special Condition 15 is, by contrast, a continuing obligation and there has never been any waiver of the breach of it.

Judgment

49. The result is that the plaintiff's claims must be dismissed.

50. The notice to quit was valid. The defendant must therefore succeed on its counterclaim for mesne profits, to be assessed.

51. The defendant's counterclaim for breach of covenant succeeds but only in respect of Special Condition 15 as to the fencing. In this respect there will be judgment for the defendant on the counterclaim for damages to be assessed.

52. Costs of the action (nisi) be to the defendant, to be taxed if not agreed.