THE INCORPORATED OWNERS OF HAMILTON MANSION v. YU KIEM CHIU AND ANOTHER

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H E A D N O T E

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Building management--Operation of guesthouses in a multi-storey building-- Operation of a photo-studio with a live-in employee in a multi-storey building -Breach of deed of mutual covenant(DMC)--Whether such user constitute a breach of the provision "otherwise than for private residential purpose"-- Similar breaches are not uncommon and have been tolerated for a long time, whether the incorporated owners can now enforce strictly the provision in the DMC--Waiver of covenant -General change of character of the building-Acquiescence-- Act and conduct of the chairman of the management committee in his personal capacity not attributable to the Applicant

Held:

(1) The test laid down in German v Chapman 7 Ch D. 271 and C&G Homes Ltd. v Secretary Of State For Health(1991( applied. In the circumstances, operation of guesthouses and photo-studio are in breach of the DMC.

(2) On the facts of the case, there being no complete or substantial change in character of the building, the object of the covenant against business use can still be achieved and is therefore still enforceable.

(3) Sayer v Collier (1884) 28 Ch D. 103 distinguished. The chairman's act and conduct in his personal capacity cannot be imputed to the other owners or the owners corporation and cannot be taken into consideration in determining acquiescence.

(4) An owners incorporation is under a statutory obligation to enforce the DMC and is not to held bound by its acquiescence. The Incorporated Owners Of Hoi Luen Industrial Centre & Another V Ohashi Chemical Industries (Hong Kong) Ltd. (1995) HKC 11

(5) In any event, the amount of acquiescence is not sufficient as to make it inequitable to grant the injunction.

IN THE LANDS TRIBUNAL OF HONG KONG

BM 57 OF1997

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J U D G M E N T

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1. The applicant is the incorporated owners of a block of multi-storey building in Causeway Bay. [J1] By these three applications it seeks injunctions to restrain the owners and tenants of three flats from committing or further committing a breach of a clause in the Deed of Mutual Covenant (DMC) of the building. By Clause 9 (K) of the DMC each owner in effect entered into a covenant that :

"Not to use his flat otherwise than for private residential purpose provided always that the ground floor of the said building may be used for business purpose."

2. Tenants of flats 1C and 2B the respective subject premises of BM57 and BM59 operated guesthouses in the flats. The license of one of which has been granted by the relevant authority since the filing of these applications . The other one is still awaiting the issue of license. In the third flat ,1B, a photographer's studio is run there. The first respondent of BM58, Mansita Limited, was absent and unrepresented at the hearing and did not file any notice of opposition. All other respondents are represented by counsel, Mr. Yeung. All these represented respondents in their grounds and particulars of opposition contends that the use of their flats as guesthouses and as photo studio is not in breach of the covenant. However Mr. Yeung abandoned this contention and merely relied on the defence of acquiescence and in BM58 additionally on estoppel. He also informed me that the position of the absent respondent, the landlord and flat owner of the photo studio, is neutral. Having regard to fact that the absent respondent is unrepresented and that his position as related to me is only neutral, I think the applicant still has the burden of proving that the user of the photo studio is in breach of the covenant.

User of Flat 1B

3. The evidence of the respondent tenant shows that a photo studio is operated there. Photo sessions are conducted in the flat. Substantial expenses have been incurred publicising the address of the studio and expensive professional equipment has been installed or stored there. From the decoration and set up as can be seen from the outside, any passer-by would have no difficulty to conclude that certain kind of business or trade is being carried on there. On the other hand the tenant permits one of its staff member to reside there. The exact arrangement of such is not clear.

4. The test whether a dwelling is being used as a private residence is whether it can be described as a private residence of someone who resides there. It has been laid down in a number of English cases. In those cases the court had to decide the meaning of the words "private residence only". In the leading case of German v Chapman 7 Ch D. 271 James L.J in delivering the judgment of the Court of Appeal asked the following question at P.278 : " Whose Private residence can it be said to be?" The Lord Justice went on to say, " It is not a question you can argue upon any philological considerations, or any other considerations except upon the plain meaning of the words as understood by the particular individual who applies his mind to it." This dictum was considered and followed in another court of appeal case of C & G Homes Ltd. v Secretary Of State For Health (1991) Ch 365. In that case Nourse L.J. said at P385 :

"In summary, I would say that if a house cannot fairly be described as someone's private dwelling house, it cannot be said to be being used as such. I therefore ask myself the question which was asked by James L.J.: Whose private dwelling house can it said to be?-----"

5. Applying the test to the present case, I have to consider the use of the whole of the flat. The sole purpose of the tenant to rent the flat is to operate a photo studio there. The rent is substantial. It would not have been commercially expedient and wise if the tenant does not utilise most, if not all, of the space in the flat. The permission or license given to the staff member to live there is only incidental to his employment. For these reasons, I do not think that there is any likelihood that the staff member who is permitted to live there has to his exclusive use more than a bedroom. There is no evidence as to the extent of the license. While the staff member himself or herself can live there, I do not think he or she is given general permission to entertain guests overnight. This must be so as there are expensive equipment and apparatus in the flat. Definitely, it is most unlikely that he or she can let a guest stay overnight in the flat alone when he or she is absent from the flat. This likely limit to the license , the fact that the primary user of the flat is one of business, and the set up and the decoration as can be seen from the outside, have driven me to the conclusion that the flat cannot be fairly described as the residence of the staff member who is permitted to live there. No one else lives in the flat. It follows that the flat cannot be described as the private residence of anybody. It is not used for private residential purpose. The user of the flat is in breach of Clause 9 (K) of the DMC. The concession made by Mr. Yeung on this point is most appropriate and proper.

User of flats 1C and 2B

6. Covenants against the use for the purpose of any business and for any purpose other than private residence are often found in deeds of mutual covenants in Hong Kong. Although there appears to be no Hong Kong cases on the effect of such covenants in regard to user as a guesthouse, their effect in regard to use of a lodging house is well settled as far as English case law is concerned (see for example: Thorn v Madden (1925( Ch. 847 and Tendler v Sproule (1947( 1 All E.R.) I have no reason not to follow those cases. Operating guesthouses in these flats plainly and clearly constituted a breach of Clause 9(K) of the DMC. The concession made by Mr.Yeung is most proper and appropriate.

Defence of Guesthouses Respondents

7. The facts relied on by the defence and which I find proved are:

1. Out of the forty eight flats , there are twelve flats in which commercial activities of one kind or the other are being conducted there.

2. Among these forty eight flats, five are being carried on as guesthouses. Two of these are under the management of one Mr. Yeung. He started to run a guesthouse in one of these two flats as early as 1988 and another in the other one in 1991.

3. The history of guesthouse business in the building dates back a long time. According to Mr. Yeung it could have been as early as 1986.

4. Mr. Yeung, the operator of the two guesthouses, has received no objection from the applicant for operating guesthouses in his two flats. Indeed on request from the applicant he has been paying double management fees for the two flats on account that they are guesthouses.

5. At one time one of the flats above the ground floor was used a kitchen by Daimaru, a department store operating on the ground floor.

6. The applicant has or must have knowledge about all or most of these commercial activities and in particular the guesthouses.

7. The chairman on one occasion provided his acquaintance information about the guesthouses presumably to encourage him to stay in one of them.

8. The chairman on one occasion was a customer of the dancing school.

9. The chairman is a jewellery designer and works at home. He has been using his flat for his trade ever since he moved in to live there. He registered his trade at the address of his home. From time to time his clients came up to his flat to see his design drawings.

General Change In Character of Upper Floors

8. To succeed on this ground of defence, the respondent must not only show that the object of the covenant cannot now be achieved because of the complete or substantial change in character of upper floors but also that such change has been brought about by the acts or omissions of the applicant. This principle was laid down clearly in two English cases. James L.J. has this to say at P.279 in German v Chapman:

"That is to say, 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 so 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, then the covenantee is not allowed to come into the Court for the purpose of merely harassing and annoying some particular man where the Court could see he was not doing it bona fide for the purpose of effecting the object for which the covenant was originally entered into."

9. It is arguable that James L.J. seems to suggest that the change need not be brought about by the covenantee as long as it was brought about by a long chain of things. However in a later case of the Court of Appeal: Sayers v Collyer (1884) 28 Ch.D. 103, Fry L.J. made it clear that the covenantee could still enforce the covenant if the change was beyond his control. He said at page 110:

"It applies where an alteration takes place through the acts or permission of the plaintiff or those under whom he claims, so that his enforcing his covenant becomes unreasonable. But I do not think that it applies to cases where the change which has taken place was beyond the control and independent of the action of the plaintiff"

10. The principle has been applied in a Hong Kong case : Lee Hysan Estate Company Limited v Sky Heart Limited No. A8239 of 1995. It is quite clear that the change of character of the upper floors in the building in the present case is not beyond the control of the applicant. No doubt it could have taken legal actions against some if not all flat owners guilty of breaches of the covenant. Therefore if it can be shown that the object of the covenant cannot be now be achieved, the respondents must succeed on this ground. In such case, the applicant would have been found acting not bona fide and guilty of being capricious in bringing these proceedings. In the present case, the object of Clause 9(K) is for the better enjoyment and protection of upper floors as private homes. Only one quarter of the residential flats are being used one way or the other for business purpose. It should be noted that the commercial activities as can be inferred from the evidence both documentary and oral are quite restrained or, to adopt the phrase frequently used by witnesses in giving evidence, 'of low profile'. The main doors of four offending flats are depicted in photographs. The others' are not referred to in any way in evidence except that of the photo studio. These four main doors are usual doors for residential flats. Above each of three of these doors a conspicuous signboard is displayed. Without these signboards, these flats have every appearance of a residential flat. From the totality of evidence, I can only infer that these signboards are put there to help customers to identify easily the address of the business they are visiting and to reduce the nuisance caused to the residents by customers pressing the wrong door bells or the nuisance of making enquiry at the wrong places. They are definitely not put there to attract passers-by or that their presence would in effect encourage or induce passers-by in the street to come inside the building to have a tour to see if what goods or services they can obtain. In fact the majority of the complaints by the residents relates to the customers of guesthouses. I do not think that the presence of these various commercial activities in the building has ever attracted any significant number of strangers, if any at all, to shop around inside the building. No doubt the applicant has tolerated these commercial activities for some time. However I am not satisfied that by their tolerance or permission or omission, the character of upper floors has either entirely or so substantially changed that the object of the covenant must be considered to be at end. This ground of defence must fail.

Acquiescence

11. The second ground of defence is that the covenant is severable. The applicant has acquiesced in a particular kind of breach, namely, operating guesthouses. While it might still restrain others from committing more serious breaches, say, operating other types of high profile business, hotels, restaurant, department stores or the like. It is now inequitable for it to restrain others from committing the same breach i.e. operating guesthouses or the same kind of breach which is no more serious than those being committed by others. He cited in support the decision of the Court of Appeal in Cheung Yuet & Another v The Incorporated Owners Of Oriental Gardens (1979( H K L R 536. The Court of Appeal in that case reversed the findings of facts by Yang J., as he then was, and refused the injunction on findings of facts. All the judges found it inequitable to grant the injunction on applying the principle to the facts of the case. That case did not lay down any new principle of law.

12. The simple question to ask is whether it would be inequitable to the defendant to grant the injunctions. The test would be in many ways similar to estoppel as Farwell J. said in Chartsworth Estates Company v Fewell(1931( 1 Ch. 224, 231:

"In other cases it is said that the plaintiffs, having acquiesced in past breaches, cannot now enforce the covenants. It is in all cases a question of degree. It is in many ways analogous to the doctrine of estoppel, and I think it is a fair test to treat it in that way and ask, ' Have the plaintiffs by their acts or omissions represented to the defendant that the covenants are no longer enforceable and he is therefore entitled to use his house as a guest house?'"

13. The visiting of the dancing school and providing information of guesthouses to his acquaintance by the present chairman of the applicant were acts done in his personal capacity. These acts cannot amount to representation by Applicant to the respondents or to the whole world that the Applicant has acquiesced in breaches in those flats. These acts should only be taken into consideration as the acts of an ordinary owner resident. While this might be taken as substantial amount of acquiescence on his own part as in the case of the plaintiff inSayer v Collyer, his conduct could not be imputed to the other owners or the applicant. Further whatever has been said by the present chairman in his meetings with Mr. Yeung, the witness, likewise cannot amount to representation by the applicant. He has made it clear that he attended the meetings in his personal capacity. In any event I accept his evidence and nothing he said in the meetings by itself and taken together with other circumstance amounts to acquiescence. The meetings with Mr. Yeung is of no assistance to the defence. Nothing he said or did make it inequitable to grant the injunctions.

14. As I have said the applicant could have taken action against those breaches much earlier. The present chairman explained why there have been such a delay. Like many others in his position he wanted to be as tolerant as possible. At first he thought that guesthouses would be phased out by the recently imposed government regulation of the industry. This does not work out. The situation is getting worse and the applicant eventually resolved to take legal actions. I accepted his evidence that the applicant is going to put an end to these breaches and to take legal actions if necessary The reasons he gave for suing these guesthouses respondents first are justifiable in the circumstances. The case against them are much stronger than against those operated by Mr. Yeung, the witness. The applicant has all along objected to the respondents' threatened breaches. The only possible ground of defence is whether acquiescence in the past breaches by others constituted a sufficient amount of acquiescence which makes it inequitable to grant the injunction.

15. It is clear the applicant has acquiesced in the past breaches. There is no direct evidence of extent of prior knowledge of these breaches and acquiescence on the part the respondents. It would not be too difficult for them to find out the current state of the upper floors if they cared to take a tour in the building or to make some basic enquiry. It is also more probably than not they knew of that the past breaches in particular relating to guesthouses had been tolerated for quite some time before they decided to start their own operation. It is not disputed that the breaches committed by the respondents are no more serious than the past breaches by others. Acquiescence in breaches by others often leads the court to find it inequitable to grant the injunction. However it is not a necessary consequence in every case. There is no rule of law or principle that acquiescence in the past would automatically confer a license to anyone to commit similar breaches. It is true to say that if breaches are no less serious than those condoned in the past, the court is more likely or on many occasion compelled to find it inequitable to grant the injunction. However other circumstances have to take into account and it is matter of degree and a question of fact in each case.

16. Of all the breaches, past and present, the guesthouse operators are the most serious. Indeed most of complaints by residents relate to misbehaviour of their customers. The situation would be getting worse if more and more guesthouses operate there. This must be obvious to a reasonable man. Respondents must have known this. While the residents and applicant can tolerate a certain amount of annoyance or nuisance and in fact they have so tolerated for a long time, can it be assumed by the respondents or by a reasonable man, that it would tolerate any further increase in the level of nuisance and annoyance to be brought about by the operation of more and more guesthouses. I think not. The respondents must have taken a conscious and calculated risk in deciding to go ahead with their running of guesthouses in the building. I should also take into consideration that an owners incorporation of a multi-storey building in Hong Kong can only be as efficient as the management committee which runs its management. Those who sit in the committee are not professional building managers, and they can only utilise their spare time for the committee work. If it does not employ any professional firm to manage the building, certain amount of tardiness and laches in enforcing the DMC is to be expected. One also must not lose sight of the fact the applicant is under a statutory duty to enforce the DMC. A reasonable man and ordinary person should not too readily come to conclude that the applicant would not carry out this statutory duty. Taking all these into consideration I do not think that amount of acquiescence is sufficient to make it inequitable to grant the injunction.

17. Mr. Yeung properly and fairly drew my attention to a recent case of the Court of Appeal which is not in his favour. In The Incorporated Owners Of Hoi Luen Industrial Centre & Another v Ohashi Chemical Industries (Hong Kong) Ltd. (1995( 2 HKC 11 Godfrey J.A. expressed the view that as the incorporated owners could not have expressly granted the right to any owner to act in contravention of the DMC equity would not hold him bound by acquiescence. Mr. Yeung rightly pointed out that these remarks are obiter dicta and were made without reference to the earlier case of The Incorporated Owners Of Oriental Gardens. He urged me not to follow the case of Ohasi. In the earlier case of Oriental Gardens, this point was not argued. In fact the court applied the principle of equity as if the incorporated owners is itself a covenantee who has secured to itself for the benefit of its own property by a covenant which it tried to enforce. The peculiar and particular circumstances in which multi-storey buildings in Hong Kong are run are not relied on by the Court. The special features of the incorporated owners , the special nature of its entity, and its functions did not seem to play any part in the decision of the Court. Godfrey J.A. however was making his observation with special reference to the peculiar nature of the owners incorporation. For these reasons I follow the dicta of his Lordship. I hold that the defence of acquiescence must also fail on this ground.

Defence Of The Photo Studio Respondents

General Change In Character Of Upper Floors

18. This ground of defence is indistinguishable from the case of the guesthouse respondents and must fail for the same reasons.

Acquiescence

19. As I have indicated earlier in dealing with the defences of the guesthouse respondents, the extent of nuisance or annoyance caused to other residents by the photo studio would be less serious than in the case of guesthouses. Both respondents took the risk of intervention by the applicant. The owner of the flat knew very well that the lessee respondent was going to operate a business in his flat. He must have thought that by entering into a domestic tenancy agreement with the lessee respondent and he could have escaped liability. He could not. Apart from this all other relevant factors and legal principles applicable to this ground of defence are the same for both classes of respondents. In all these circumstances I do not think it inequitable to grant the injunctions

Estoppel

20. The applicant raised its objection at an early stage. In March 96, negotiations took place between the parties. The operator was told to keep a low profile, in particular, to remove certain conspicuous signboards. This the respondent did. The applicant did not carry out their threat to take legal actions until about a year later. In the meantime, the photo studio spent money on advertising the address of the studio and on apparatus and equipment. It is not disputed that the applicant has shown some forbearance. On the other hand, the applicant at no times told them they could carry on with their business. It should be clear to the respondents that while keeping a low profile would certainly make it less likely that the applicant would take legal action, no reasonable man could have been led to believe that the applicant was giving up the right to sue. It should also be clear to the respondents that the applicant is under a duty to enforce the provisions of the DMC. No one in the management committee including the chairman can giving assurance what the collective decision of the committee would be in this matter. They could not have prevented owners voting to take legal action in a general meeting. The fact that some members of the management have adopted a less belligerent attitude and has shown some forbearance does not amount to representation by the applicant that it would not take legal action against breaches by the respondent. This ground of the defence must also fail.

Order

21. The injunctions sought by the applicant are granted. I also make an order nisi for costs to be made absolute after twenty one days against all respondents with certificate for counsel, to be taxed if not agreed. There be liberty to apply.