AVION INVESTMENT LTD v. MAN YUN KWAN AND OTHERS

LT Application Nos. 1043 – 1049
and 1884 of 1993

HEADNOTE

LANDLORD AND TENANT – Landlord’s intention to rebuild domestic premises – financial ability to do so – position of sub-tenants where tenancy is governed by Part IV different from those governed by Part II of landlord and Tenant (Consolidation) Ordinance (Cap. 7) – effect of section 119p(8) of Cap. 7 – legal effect of oral informal transfer of tenancy with Landlord’s approval – whether transferee estopped from denying valid legal assignment – surrender by operation of law – restriction on Tribunal’s discretion with regard to costs – sections 68 and 119R of Cap.7.

IN THE DISTRICT COURT OF HONG KONG

LANDS TRIBUNAL APPLICATION NOS. 1043, 1044,

1045, 1046, 1047, 1048, 1049 AND 1884 OF 1993

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REASONS FOR DECISION

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1. On the 2^nd September 1994 I dismissed these consolidated applications for orders of possession.  Due to the lateness of the hour, and to space all parties more inconvenience and expense, I undertook to give my reasons in writing at a later date.  This I now do.

2. The applicant, Avion Investment Ltd (“the landlord”) seeks to recover possession of various post-war premises in a building located at 108-110 Castle Peak Road, Kowloon (“the building”), because it wishes to redevelop the site, by erecting thereon a larger building for residential and commercial use.  The building was completed in 1949.  Due to lack of proper maintenance it is dilapidated and in urgent need to major repair or redevelopment.  The proposed new building will be a 15 storey composite building, containing 24 domestic units and 10 commercial units.  It will have a gross floor area of 1483 metres compared with the gross floor area of 715 square metres for the building.

3. On the information placed before me, I am satisfied that the proposed rebuilding will result in an increase in accommodation for domestic use; and would be in the public interest.  The plans have been approved by the Building Authority.  The landlord will need to get approval to demolish the building; but in practice this cannot be obtained until after an order for possession is made by the Tribunal or vacant possession is obtained by other means.  Nevertheless, I am satisfied that the landlord has proved that all requirements of sections 53A(1) and 119F(1) have been met.  The crucial question is whether it has proved that it intends to rebuild the premises; or proved that it can do so in accordance with the mandatory conditions which the Tribunal is obliged to determine and impose by sections 53A(2) and 119F(2) of Cap.7.

4. Although the statute does not expressly require a landlord (or principal tenant) to demonstrate the financial ability to carry out the proposed redevelopment, sections 53(2)(c) and 119E(1)(c) have been construed by authority binding on me, as importing such requirement.  In proceedings of this nature it is customary to place before the Tribunal material showing that the applicant can afford to meet all costs of the proposed redevelopment.  In the present case, I feel bound to say that such material is skimpy and gives rise to doubts about the landlord’s ability to carry out the proposed redevelopment.  Allowing for inflation over the period of 40 months, estimated by the landlord’s architect as necessary for the rebuilding work, it is likely that the estimated cost of $9,850,000 will be exceeded by a substantial sum.  That figure does not include the cost of compensating the occupants.  Using the information supplied by the Commissioner of Rating and Valuation, pursuant to orders or requests by the Tribunal, and applying the factor of 1.7, laid down by sections 53A(a) and 119F(4)(a) of Cap.7, I estimate that the total amount of compensation which the Tribunal can award to the tenants and sub-tenants is in the region of $610,000.  The estimated costs of construction do not include other expenses, such as the fees of architects and lawyers.

5. In order to show that it can meet all probable costs, the landlord has adduced evidence from Mr. Lee King Yue, one of its directors, who produced a financial statement (Exhibit 12) a rent roll (Exhibit 13); and a certificate from the Kincheng Banking Corporation to the effect that on the 3^rd August 1994 the sum of $12,000,000 was held in favour of the landlord (Exhibit 14). This amount and the sums required to purchase the building was apparently borrowed from the parent company, Henderson Land Development Co. Ltd.  Although the landlord has been in business for 5 yeas it has yet to make a profit. However, the landlord and its parent company have executed a Redevelopment Deed, under which the parent company, in effect, undertakes not to call in this loans to the landlord until the redevelopment is completed.  Accordingly, I am satisfied that the landlord does have the financial resources to carry out the proposed redevelopment.

6. The real difficulty is whether the landlord can carry out the proposed rebuilding as a practical proposition and in accordance with the conditions which the Tribunal is obliged to impose by section 53A(2)(b) or 119F(2)(b) of Cap.7. More particularly the question is whether the Tribunal can determine when the rebuilding works should be commenced, as it is required to do by the statute.  In short, the difficulty has arisen because of a very informal transaction which took place in 1984 with respect to one of the premises in the building, namely, the third floor of No. 108 Castle Peak Road (“the premises”).  The premises are now occupied by some 20 people.  They are, or were, all subtenants of Mr. Lee Tung Chau (“Mr. Lee”); and are joined with him as respondents to LT Application No. 1884 of 1993.  This was originally filed with the Tribunal on the 11^th May 1993; and consolidated with the other applications on the 2^nd September 1993.  Some of these sub-tenants have lived in the premises since dates before the 10^th June 1983.  Prima facie, their sub-tenancies are subject to, and receive the protection of, Part II of Cap.7.  The others became sub-tenants after that date; and they are, prima facie, subject to the different protection and machinery of Part IV or Cap.7.  But, with the exception of one consequence which I will advert to later, these differences are not the cause of the unfortunate difficulty which has arisen.  The problem stems from uncertainty over the nature of Mr. Lee’s tenancy of the premises; and whether it is subject to Part II or Part IV of Cap.7.

7. It is most unfortunate that the problem was not identified until a very late stage, i.e. the second day of the original hearing in August 1994.  If it had been identified earlier, and the suggested solution had been put forward earlier or at the initial hearing, it may be that much more satisfactory and detailed evidence could have been placed before the Tribunal with regard to the informal transaction in 1984 and the nature of Mr. Lee’s tenancy.  Be that as it may, on the 9^th August 1994 I considered that I should grant the landlord’s request for an adjournment to consider the position and, possibly, arrive at a solution by negotiation.  The hearing was then adjourned to the 19^th August 1994.

8. On the 19^th August 1994 the landlord was represented by Mr. Mok of counsel, who made an application to amend the Notice of Application (formerly known as Form 13; now Form 22) to allege that Mr. Lee’s tenancy of the premises was governed by Part II of Cap.7, because of a transfer or assignment by the previsous tenant, Mr. Lee Chik Fook, on the 15^th July 1984, carried out with the consent of the landlord’s predecessor in title and subject to the then existing sub-tenanceies.  In the original Form 13 it had been alleged that Mr. Lee’s tenancy was governed by Part IV and had been terminated on the 14^th April 1993 by a Notice of Termination (Form CR 101) dated the 28^th September 1992, because Mr. Lee had failed to serve a Form CR102 on the landlord; and had not applied to the Tribunal for the grant of a new tenancy.  The proposed amendment did not really affect Mr. Lee, who was present on this occasion.  But, it seemed to me to be of fundamental concern to some or all of Mr. Lee’s subtenants because it tended to take away the security of tenure to which they seemed to be entitled by virtue of section 119P(8) of Cap.7.  On the information then before the Tribunal, it seemed to me that it was arguable that all of Mr. Lee’s subtenants became direct tenants of the landlord on the 14^th April 1993; and then became entitled to the protection of Part IV of Cap.7, including a right to be given notices of termination (CR 101) and to apply to the Tribunal for grants of new tenancies.  As some of the respondents to LTA 1884 of 1993 were absent when this application was made, I directed that the hearing should be further adjourned to enable them to be served with the amended Notice of Application.  I did not think that it would have been just to refuse the application to amend, sine it arose from a situation which occurred long before the landlord acquired the building; and was obviously not anticipated by its lawyers.  Furthermore, the statutory law governing the position of sub-tenants of domestic premises in Hong Kong is, in my view, notoriously complex; and made more difficult by informal dealings by people who are understandably ignorant of their legal rights or duties, or the legal effect of their dealings.  Contrary to what may have been thought when the decision was taken to transfer disputes over domestic tenancies and sub-tenancies from the District Court to the supposedly less formal environment of the Tribunal, the law governing such relationships in still extremely complex; and is not easy to apply to the informal arrangements which are not uncommon in this filed.

9. When the matter finally came before me on the 2^nd September 1994, Mr. Lee was not present.  Accordingly, the Tribunal was deprived of the evidence he might have been able to give as to the details of his “takeover” of the premises in 1984 or his intention at that time.  Mr. Lee Chik Fook was not available.  The previous landlord of the premises was not called to give information on the “transfer” of July 1984.  In the circumstances, Mr. Mok was forced to rely on the “evidence” of Mr. Poon Wing Hung, an employee of Henderson Real Estate Agency Co. Ltd., an agent of the landlord.  In fact, all that Mr. Poon could do was to pass on fragments of a conversation which he had with Mr. Lee on the 17^th August 1994; and certain documents (Exhibit 18) which Mr. Lee had apparently sent to the landlord’s solicitors at some unspecified date.  Of course, the Tribunal is not bound by the normal rules governing the admissibility of facts in evidence.  It can act on any information. Nevertheless, the inadequacy of Mr. Poon’s “evidence” has to be recognized. Not surprisingly, it leaves many gaps in the factual features of the transaction between Mr. Lee and Mr. Lee Chik Fook and the landlord’s predecessor in title in July 1984.  I fully appreciate the difficulties of adducing more reliable evidence in the circumstances of the case.  But the fact remains that, in my judgment, the scope for drawing inferences from primary fact is severely restricted.  With these reservations in mind, I make the following findings of fact.

10. Prior to the 10^th June 1983 the premises were let to Mr. Lee Chik Fook on an oral monthly tenancy which contained no prohibition against assignment or subletting or parting with possession.  In or about July 1984 Mr. Lee Chik Fook “introduced” Mr. Lee to the then landlord of the premises with a view to Mr. Lee renting the premises as the principal tenant and occupying the front room. At that time, the rest of the premises was occupied by various sub-tenants. The landlord of the premises consented to the “takeover” by Mr. Lee, who lived at an address on the other side of Castle Peak Road.  The transfer or “takeover” of the premises was not made by deed or by any written instrument.  At least since 1989, rent receipts in respect of the premises have been issued by the landlord to Mr. Lee.  Mr. Lee does not now occupy any part of the premises.  Indeed, I doubt whether he ever occupied any part of the premises. But for the purpose of dealing with the critical question in this case, I assume that he did live in part of the premises for some time.

11. Upon these findings, Mr. Mok submits that I should find that the informal “transfer” between Mr. Lee Chik Fook and Mr. Lee, approved by the then landlord, gave rise to an estoppel which prevents Mr. Lee from denying that a valid legal assignment of the monthly tenancy had been made.  Mr. Mok concedes that, in the absence of a deed, the oral transfer of the tenancy was not an effective assignment of the tenancy.  (See Crago v Julian [1992] 1 WLR 372)  But, he submits that by taking over the tenancy and the sub-tenancies, with the consent of the landlord, it was the intention of all parties that the tenancy of Mr. Lee Chik Fook was to continue; and accordingly the proper inference is one of an intended assignment.

12. In support of his submission Mr. Mok cited the case of Rodenhurst Estates Ltd v. W.H. Barnes Ltd [1936] 2 ALL ER3 and a passage from paragraph 16.042 of Woodfall’s Law of Landlord and Tenant.  In the case cited there was ample evidence to show that the parties intended the defendant to be an assignee and liable on the covenant to pay rent.  Solicitors for the tenant and the defendant had written to the landlord’s solicitors asking for a licence to assign. They did not ask for consent a under-letting or parting with possession. Secondly, the landlord gave consent to the proposed assignment by a form of licence in writing.  Thereafter the defendant paid rent on the footing that it was a legal assignee; not merely an equitable assignee.

13. In the present case, however, there is not, in my judgment, any clear evidence of the parties’ intentions.  I accept that the landlords consent to the transfer was sought by the former tenant’s “introduction” of Mr. Lee; and that such consent was given to the transfer expressly and by conduct, e.g. accepting rent from Mr. Lee.  But, in my judgment, these acts are equivocal and insufficient to amount to an estoppel.  The not uncommon practice of “transferring the tenancy”, without more information to explain the parties’ actions, is, in my view, ambiguous; simply because the change in the identity of the tenant could be the result of an assignment or the creation of a new tenancy, as a result of an express or implied surrender by operation of law.

14. If Mr. Poon had appreciate the subtle distinctions between legal and equitable assignees and the doctrine of surrender, I am sure that he would have asked Mr. Lee for more specific information on the arrangement reached in 1984.  Like me, he probably assumed that Mr. Lee would attend the adjourned hearing and he available to give evidence.  It is unfortunate that he did not do so.  But, his absence is understandable.  He does not live at the premises.  His share of the compensation which the Tribunal is empowered to award must be a nominal sum. He was not ordered to attend to give evidence.  He probably has no real interest in these proceedings, in spite of the fact that Exh. 18 suggests that he was making a substantial profit from sub-letting the premises.  I must endeavour to do the best with the information placed before me.  The applicant and its lawyers have known about the transfer in 1984 for some considerable time.  Since the 28^th September 1992, when they sent a Notice of Termination (CR101) to Mr. Lee to terminate his tenancy, on the basis that it was governed by Part IV of Cap.7, they have had ample opportunities to gather more information about the circumstances of the transfer in 1984; and the intentions of the parties on that occasion.  Apparently the documents of title handed over in 1989 included rent receipts.  Yet, no attempt has been made to reconstruct a history of the rents paid by Mr. Lee since 1984.  Such information might have shed some light on the parties’ intentions at that time.

15. At the end of the day, I am felt with the basic facts that, in July 1984, there was a change in the identify of what is known as the Principal Tenant, without any physical surrender of vacant possession of any part of the premises to the landlord; and this was done at the request of the then tenant, Mr. Lee Chik Fook; but with the then landlord’s approval.  Thereafter, Mr. Lee was accepted by the landlord as its tenant by accepting rent from him and issuing rent receipts to him.  In my judgment, there facts lead to the conclusion that there was a termination of the tenancy then held by Mr. Lee Chik Fook, as a result of a surrender by operation of law.  That tenancy was a monthly tenancy which had never been determined by forfeiture or service of a notice to quit.  Accordingly, it could be terminated by any of the methods available at common law, subject to the continuation provisions of Parts II and IV or Cap.7.

16. Mr. Mok rightly accepts that surrender by operation of law is an alternative to his contention that there was an equitable assignment, followed by conduct giving rise to an estoppel.  Understandably, he contends that it was more probable that the parties intended an assignment of the tenancy then held by Mr. Lee Chik Fook.  That would mean that the tenancy of the premises is still governed by Part II of Cap.7.

17. In my view, the actual evidence or information before the Tribunal is in a state of equilibrium.  There are no additional facts which might clarify or explain the parties’ true intentions, as in Rodenburst Estates Ltd. v. W.H. Barnes Ltd., supra.  In my judgment, it cannot be reasonably inferred, from the information before the Tribunal in this case, that Mr. Lee Chik Fook intended to assign the Tenancy to Mr. Lee in 1984.  Whether any consideration passed between them on that occasion is unknown.  But, on the basis of my experience of dealing with problems involving landlords and their tenants, I consider that I am entitled to find that it is inherently improbable that the parties intended the “transfer” in 1984 to take effect as an assignment of the existing tenancy, as distinct from the grant of a new tenancy to Mr. Lee.  It is, in my view, more probable that the parties intended a complete break, in the sense that Mr. Lee Chik Fook would no longer be bound by the obligations of the tenancy.  In particular, it was surely never intended that he should be liable for future rent in respect of the premises.  If there had been an assignment of the tenancy in 1984 (when it was still a contractual tenancy), Mr. Lee Chik Fook would have continued to be liable for rent.  I think that it is extremely unlikely that he intended to give up his right to receive the profits from collecting rents from his sub-tenants; but, at the same time to continue to be liable to pay rent to the landlord, if Mr. Lee failed to do so.  It is more probable that all parties intended that Mr. Lee Chik Fook’s obligations arising from his tenancy of the premises should be brought to a complete end once the landlord consented to the “transfer” to Mr. Lee.

18. In my view, the proper conclusion to be reached on the facts I have found is that there was a surrender of the tenancy by operation of law which did not extinguish the sub-tenancies.  (See Woodfall’s Law of Landlord and Tenant, paras. 17.030, 17.031, 17.044 and 17.046)  The continued existence of the sub-tenancies would not prevent a surrender in these circumstances, since delivery of vacant possession is not an essential feature of this mode of surrender.  The important feature is the fact that all parties agreed upon a complete change in the identity of the tenant; and that brought the tenancy to an end, subject to the possibility that it might be extended or continued by some statutory provision.

19. The tenancy of Mr. Lee Chik Fook was one to which Part II of Cap. 7 applied.  At all material times it was what is conveniently called a contractual tenancy. In other words, its duration had not come to an end by service of a notice to quit or by expiry of time.  For the reasons I have given it came to an end in 1984 upon completion of the arrangements for the transfer to Mr. Lee.  It did not continue under section 52(1) of Cap.7 because of the provisions of section 52(2) of Cap.7.  The change of identity of the tenant brought about a surrender by operation of law.  When the landlord agreed to accept Mr. Lee as its tenant in July 1984, a new tenancy was created, and it was governed by Part IV of Cap.7.  Indeed, the possibility of the previous tenancy being released from the shackles of the rent control and security of tenure, imposed by Part II of Cap.7, may have been a powerful factor in securing the landlord’s consent to the transfer from Mr. Lee Chik Fook to Mr. Lee in 1984.

20. As always, Mr. Mok’s submissions were cogent and attractive.  But, on this occasion, I feel that I must resist the temptation to adopt them simply because there is not sufficient evidence to support his argument in favour of estoppel. As already indicated, the evidence is equivocal.  But, there is also no indication that the landlord or its predecessor in title ever relied on any belief, induced but the conduct of Mr. Lee, that there had been a valid assignment of the tenancy granted to Mr. Lee Chik Fook.  On the contrary, at all times until the 19^th August 1994.  It has conducted its affairs and these proceedings on the basis that there was no assignment of the tenancy in 1984; but there was then created a new tenancy governed by Part IV of Cap.7.  Instead of a simple notice to quit, the landlord served a Notice of Termination (CR101), thereby setting in motion the machinery for the grant or refusal of a new tenancy.  Until the Notice of Application (Form 13/22) was amended, the application was relying on the fact that Mr. Lee had not applied to the Tribunal for the grant of a new tenancy before the 14^th April 1993, when the Notice of Termination (CR101) took effect.  Accordingly, the essential element of an estoppel is totally absent in this case.  The landlord cannot show that it acted on a belief that Mr. Lee’s tenancy was governed by Part II of Cap.7 because it had been legally assigned to him in 1984.  In all the circumstances, resort to the doctrine of estoppel fails.

21. In the result, I find that Mr. Lee’s tenancy of the premises was one to which Part IV of Cap.7 applied.  He was served with a Notice of Termination (CR101) in September 1992.  He did not serve any counter-notice; and he never applied to the Tribunal for the grant of a new tenancy.  Accordingly his tenancy came to an end automatically on the 14^th April 1993.  Copies of the CR101 were not served on Mr. Lee’s sub-tenants; possibly because they had not given notice of their interest, as required by section 119P(2).  Furthermore, as Mr. Lee never applied for the grant of a new tenancy, the provisions of sub-sections (2), (3), (4) and (5) never came into play.  In my view, the situation of Mr. Lee’s sub-tenants is governed by sub-section (8) which provides :

“Notwithstanding any termination of a tenancy, a sub-tenancy granted without breach of the current tenancy shall continue as between the landlord and sub-tenant on the same terms as the sub-tenant held from the tenant in the same way as a tenancy would continue under this Part.”

22. The effect of the section is that from the 15^th April 1993 Mr. Lee’s sub-tenants became the direct tenants of the landlord.  Although the statutory provision is not easy to construe, in my view, the consequence in the present case is that such tenancies (12 in all) continue as contractual periodic tenancies until terminated by notice or forfeiture or surrender.  Those sub-tenants of Mr. Lee who entered into possession of parts of the premises before the 10^th June 1983 probably lost the protection afforded them by Part II of Cap.7 on the termination of Mr. Lee’s tenancy, i.e., on the 14^th April 1993.  From then they and the other sub-tenants have the protection of Part IV of Cap.7 as tenants of the landlord.

23. Strictly speaking, it is not necessary for me to come to a decision on the status of those sub-tenants of Mr. Lee who have lived in the premises since times before the 10^th June 1983.  At the end of the day, my conclusion is that there are at least 10 respondents in LTA No. 1884 of 1993 who cannot be evicted at this stage because their tenancies, created by section 119P(8), have not yet been terminated by notices of termination in accordance with Part IV.  If they are served with such notices, they may apply for the grant of new tenancies. It is not for me to comment on their prospects of success.  But I can, and do, take account of the very real prospect that, given the Tribunal’s current work-load, it is most unlikely that their cases could be heard by the Tribunal for another year or more.  All the respondents are persons of very limited means.  Many are elderly.  They are likely to grasp each and every opportunity to remain in the premises, in spite of their dilapidated state.  In these circumstances, I do not think that the landlord would be able to obtain permission to demolish the rest of the building, while there are people residing therein lawfully and enjoying the protection of Part IV of Cap.7.

24. It is, in my view, impossible for the Tribunal to fix the dated which are specified in the mandatory condition required by section 53A(2)(b) of Cap.7.  It could only do so by assuming that the Tribunal would make orders of possession against all respondents in LTA 1884 of 1993, after refusing them new tenancies, in about one year’s time; and by assuming that the operation of such orders would not be postponed.  But, apart from the fact that any deferred development plans may need fresh approval and re-appraisal, I do not think that it is right for the right for the Tribunal to now estimate the landlord’s future prospects of recovering possession of the premises on the 3^rd floor of 108 Castle Peak Road.  The result, in my view, is that the landlord is unable to satisfy the Tribunal that it can comply with the mandatory condition which the Tribunal must impose with regard to the rebuilding work, largely because the Tribunal is not in a position now to determine when such work should begin or be completed.  For these reasons, I consider that the only proper and sensible course is to dismiss all of these consolidated applications.

25. Before parting with these applications I would like to add a few comments on the issue of compensation.  During the hearing, it was suggested that the landlord was no really serious in its intention to rebuild because it offered so little to compensate the tenants for losing their homes.  I do not know what they were offered in the course of negotiations on the first day of the hearing, sine these negotiations were not very fruitful.  I suspect that the amounts offered were slightly above the limit imposed on the Tribunal by sections 53A(4)(a) and 119F(4)(a) of Cap.7; but substantially below what was frequently offered before those statutory provisions were amended in 1993.  It may be that the amount which the Tribunal is empowered to award needs to be drastically revised.  But, I wish to make it clear that I do not regard this suggestion as giving rise to any doubt about the landlord’s present intention or ability to carry out the proposed redevelopment.

26. Secondly, many of the respondents complained frequently and vociferously that the compensation which the Tribunal would have awarded, if it had made orders for possession, was not enough to even compensate them for earnings lost through attendance at the various hearings.  In my respectful view, their grievance is justified; but it cannot be redressed in these proceedings because of the restrictions imposed on the Tribunal’s discretion to award costs by sections 68B and 119R of Cap.7.  Although it may be said that the respondents have been greatly inconvenienced by the landlord’s conduct of these proceedings, I do not think that it has conducted its case in a “frivolous or vexatious manner.”  It is perhaps time that removal of these shackles on the Tribunal’s discretion should receive consideration.