Cheermark Investment Ltd v. The Director of Lands

CACV 165/2016 AND CACV 184/2016

CACV 165/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 165 OF 2016

(ON APPEAL FROM LDLR NO 2 OF 2013)

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AND

CACV 184/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 184 OF 2016

(ON APPEAL FROM LDLR NO 5 OF 2012)

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J U D G M E N T

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Hon Cheung CJHC:

1.I agree with the judgment of Kwan JA.

Hon Yuen JA:

2.I agree with the judgment of Kwan JA.

Hon Kwan JA:

3.The Director of Lands is the appellant in these two appeals which are heard together, as they raise common issues of law in the judgments of the Lands Tribunal (Deputy Judge Tracy Chan and Member Alex Ng) on 3 November 2015 and 17 March 2016 regarding compensation under the Lands Resumption Ordinance, Cap 124 (“the LRO”).  The Tribunal had assessed compensation on the basis that the use of each of the premises as a shop is a permitted use under the user covenant in the government lease.  So compensation was assessed at $9.7 million in the case concerning Cheermark Investment Limited (“Cheermark”; CACV 165/2017), and at $10.96 million in the case of Happy Enough Limited (“HEL”; CACV 184/2017).  If the premises were to be valued as residential premises, compensation would have been assessed at $4.12 million for Cheermark and $3.846 million for HEL.

4.The two judgments of the Tribunal are referred to herein as “the Cheermark Judgment” and the “HEL Judgment”.  The relevant background matters in each case will first be related.

Background: Cheermark

5.On 29 January 1917, the Government granted a Government Lease in respect of New Kowloon Inland Lot No 49 (“NKIL No 49”).  The Government Lease contained this restriction on user:

“AND ALSO that he the said lessee his Executors, Administrators or Assigns, shall not at any time during the said term use or allow to be used the said demised premises or any part thereof for any other purposes than for Reclamation building dwelling houses workshops factories or godowns or similar purposes[1] without having first obtained the licence or consent of His said Majesty, His Heirs, Successors, or Assigns, signified in writing by the Governor for the time being of the Colony of Hong Kong …” (“the User Covenant”)

6.In 1954, a five-storey building standing on No 177 Hai Tan Street Kowloon was built on a piece of land registered in the Land Registry as NKIL No 49 Section C Sub-section 4 (“NKIL No 49 SC ss 4”).  The occupation permit issued on 29 January 1954 was in respect of “the new buildings being one European & four Chinese houses”[2].  It was headed “Domestic Permit” and stated that the new buildings “comply in all respects with the provisions of the Building Ordinance (Chapter 123 of the Revised Edition, 1950)” and “Permission is hereby granted to occupy and use the buildings for domestic purposes.”  The relevant building plan in 1953 approved by the Buildings Ordinance Office showed each of the ground floor premises of the five buildings marked as “shop”.

7.On 12 June 1970, Cheermark’s director and shareholder purchased the ground floor of the building at No 177 Hai Tan Street (“the Cheermark Property”) and later assigned it to the company by an assignment dated 12 June 1987.  The Cheermark Property was purchased at a price which reflected commercial use.  It is not disputed that it had been used as a shop.  It is also not disputed that the 1^st, 2^nd, 3^rd and 4^th floors of the building were used for residential purpose.

8.The Government issued a notice of resumption dated 1 November 2010 in respect of inter alia NKIL No 49 SC ss 4.  The date of resumption of this piece of land with the building was 19 February 2011.

9.Cheermark applied to the Lands Tribunal on 22 February 2013 under section 6(3) of the LRO for determination of the compensation payable by the Government.

10.The Tribunal held that “dwelling house” in the User Covenant, construed in the context of the statutory definition of “domestic building” in section 6(22) of the Public Health and Buildings Ordinance 1903 (“the 1903 Ordinance”), permitted the Cheermark Property to be used as a shop in that the five-storey building was primarily or partly used for residential purpose and this was not in breach of the User Covenant[3].  Further, the phrase “or similar purposes” in the User Covenant can be widely construed to cover user of commercial purpose and the ejusdem generis rule should not be applied[4].

11.The Tribunal also upheld the alternative case of Cheermark in that if the construction point should be decided against it, the Tribunal is satisfied there was an abandonment of the User Covenant on the part of the Government by acquiescence or waiver, as opposed to merely having waived or acquiesced in taking enforcement action[5].

12.As there was abandonment of the User Covenant on the part of the Government, the Tribunal ruled that section 12(b) of the LRO would not bar compensation according to the acquiesced use[6].

Background: HEL

13.HEL became the registered owner of the property concerned being the ground floor including the mezzanine floor at No 13 Pei Ho Street Kowloon (“the HEL Property”) by an assignment dated 10 January 2001.  The HEL Property was in a four-storey tenement block constructed on a piece of land registered in the Land Registry as NKIL No 49 Section L.  It stood at the junction of Pei Ho Street and Hai Tan Street.  NKIL No 49 SL was granted to the lessee by the Government under the same Government Lease dated 29 January 1917 with the User Covenant as quoted above.  The occupation permit issued on 18 June 1953 was in respect of “the new building being four Chinese type houses at Pei Ho Street”[7]. It was headed “Domestic Permit” and contained the same provisions mentioned above in the occupation permit covering the Cheermark Property.

14.HEL divided the HEL Property into five units for letting.  The Tribunal did not think it necessary to analyse the existing uses in the five units separately as the permitted best-use is the question to be asked when dealing with the arguments on construction of the User Covenant.  It found that the HEL Property had not been used for domestic purposes and had been used as a shop in the broad sense[8].

15.It is not in dispute that the 1^st to 3^rd floors of the building were used for residential purpose.

16.By the same notice of resumption issued on 1 November 2010, the Government gave notice to resume NKIL No 49 SL.  The land with the building on it reverted to the Government on 19 February 2011.

17.HEL applied to the Lands Tribunal on 13 June 2012 for determination of compensation for resumption of its property.

18.The Tribunal reached the same conclusion on the construction of the User Covenant and held that shop use was not prohibited, when construed in the light of the definition of “domestic building” in the 1903 Ordinance.  So long as the primary use of the building was domestic, it would fall within the ambit of “dwelling house” in the User Covenant and there was no breach.  There was no breach of the occupation permit either[9].  And even if shop use does not come within “dwelling houses workshops factories or godowns”, it is caught by the general words “or similar purposes” and the ejusdem generis rule of construction did not apply[10].

19.On the alternative case that the Government had waived or abandoned the User Covenant by acquiescence over the long period of years, the Tribunal considered the evidence before it as well as the evidence it had viewed in the Cheermark case for which judgment was handed down earlier and came to the same conclusion there was abandonment of the covenant[11].

20.As in the Cheermark Judgment, the Tribunal held that compensation on the acquiesced use would not be barred by section 12(b) of the LRO[12].

The issues in these appeals

21.Three issues are raised in these appeals.

22.Firstly, whether the User Covenant would permit the use of the properties concerned as shops.  It is the contention of Cheermark and HEL that the use of their properties would come within “dwelling house” and/or “or similar purposes” in the covenant.

23.Secondly, if the contention of Cheermark and HEL on the construction of the User Covenant is rejected, whether the Government had waived the User Covenant by abandonment.

24.Thirdly, if there was abandonment of the covenant by the Government, whether the Government can rely on section 12(b) of the LRO to bar compensation in respect of the acquiesced use.

25.The issues will be addressed in the above order. Before dealing with them, it would be appropriate to mention a preliminary objection taken by Mr Mok Yeuk Chi on behalf of the Director of Lands in CACV 184/2017.

Preliminary objection in CACV 184/2017

26.In the proceedings below, the Tribunal had before it a valuation report in which the expert witness of HEL, Mr Wayne Lee, addressed the contention of the expert for the Director of Lands, Mr Patrick Lai, that the occupation permit and the approved building plan in the 1950s permitted the use of the HEL Property for domestic purposes only. Mr Lee considered this in the historical context, going through the earlier versions of the Buildings Ordinance and the Report of the Housing Commission 1935 (“the 1935 Report”), and arrived at a contrary view.  Appendix 2 to the 1935 Report was a memorandum drawn up by the secretary to the commission, in which he mentioned three main types of “Chinese tenement houses” found in Hong Kong before and after the 1903 Ordinance, with plans annexed.  The 1935 Report with Appendix 2 was annexed to Mr Lee’s expert report.

27.In the arguments advanced by Mr Valentine Yim for HEL before the Tribunal, he did not deploy the 1935 Report and more specifically Appendix 2 for his contention that the matters contained in these documents should be regarded as part of the relevant context in construing the User Covenant.  These documents did not form part of the factual and legal background the Government Lease was entered into in 1917 that the Tribunal took into consideration in construing the User Covenant.

28.In his skeleton submissions for CACV 184/2016, Mr Yim raised a new argument that according to the 1935 Report, Chinese tenement houses as a result of the 1903 Ordinance and the latest development in 1935 were typically designed with the ground floor used as shop or workshop and the upper floors for residential purpose and this should form part of the prevailing factual context against which “dwelling houses” in the User Covenant should be construed.

29.Mr Mok objected to the new point being raised on appeal, as this is fact-sensitive and the Director of Lands is prejudiced in that he has no or no sufficient opportunity to investigate and respond to factual matters in the 1935 Report.  He complained that he was not given a fair opportunity to adduce evidence in answer.  He queried whether the description of houses in the 1935 Report in congested areas would hold good for a new undeveloped location such as NKIL No 49 where public roads were yet to be built in 1917.  He submitted there are disputed facts to be determined.  We were referred to Cathay Pacific Airways Flight Attendants Union v Director-General of Civil Aviation [2007] 2 HKLRD 668 at §45.

30.We indicated to Mr Yim we were not prepared to allow him to argue a new point of law (an appeal from a decision of the Lands Tribunal is on the ground that the decision is erroneous in point of law) without a respondent’s notice to affirm the Tribunal’s decision on an additional ground.  He did not seek to file a respondent’s notice.  We exercised our discretion to refuse him leave to argue the new point arising from the 1935 Report.

31.The outcome of our ruling is that the factual and legal background against which the Tribunal construed the User Covenant is the same in both appeals.

“Dwelling houses” in the User Covenant

32.The construction of the Tribunal is that “dwelling houses” in the User Covenant would cover a building in which part of the building was used for shop purpose and the remaining part for residential purpose.  The Government Lease ought to be construed in its context including the legal and factual background prevailing at the time when the Government Lease was granted in January 1917.  The equivalent of the present day Buildings Ordinance at the time was the 1903 Ordinance and section 6(22) defined “domestic building” to mean:

“any building constructed, used, or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night.”

33.The Tribunal held that construed in the light of the definition of “domestic building” in the 1903 Ordinance, so long as the primary part of the building was used for residential purposes, the use of the ground floor premises as a shop would be within the ambit of “dwelling houses” in the Government Lease and permitted under the User Covenant.

34.Mr Mok submitted that the Tribunal was wrong to apply the statutory definition of “domestic building” to interpret “dwelling houses” in the User Covenant.  It should have applied the ordinary and natural meaning of “dwelling houses”, there being nothing to indicate that the ordinary and natural meaning is inconsistent with the context or purpose of the Government Lease.

35.On the ordinary and natural meaning of “dwelling houses”, he submitted that although the word “houses” has a fluidity of meaning and takes its flavour from the context in which it is used (Annicola Investments Ltd v Minister of Housing and Local Government [1968] 1 QB 631 at 640B to C; Wah Yick Enterprises Co Ltd v Building Authority (1999) 2 HKCFAR 170 at 176H to I; Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351 at §16), here it is qualified by the word “dwelling” as to the user or purpose such that there is no fluidity of meaning in this expression.  It connotes a place to live in or an abode.

36.We were taken by the parties to what Lord Neuberger said in Penny’s Bay Investment Company Limited v Director of Lands, FACV 1/2017 and FACV 2 to 9/2017, 16 October 2017 at §64 about a two‑stage approach in interpretation:

“… having identified the rival interpretations, the first stage is to decide what seems to be the natural meaning of the relevant words, and, the next stage is to consider whether there was anything in the document …, or in the surrounding circumstances when it was made, which called that interpretation into question.”

37.Mr Yim would seem to accept that “shop” would not come within the natural meaning of “dwelling houses”, as he did not make submission on the natural meaning of this expression whilst contending that there is something in the context to call into question the interpretation of its natural meaning.  As for Mr Simon Lam who appeared for Cheermark, he did not take any position on the ordinary and natural meaning of “dwelling houses”. His submission was quite simply that this should be construed in the context of the legal meaning prevailing at the time of the Government Lease, with particular emphasis that for the purpose of contractual interpretation, there is no conceptual limit to what can be regarded as relevant background and it includes “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”, citing various dicta of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]1 WLR 896 at 912H to 913A, and Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at §39.

38.When it is said that context and purpose are the starting point in the interpretation exercise, that is not to say that the words to be construed should be put to one side (HKSAR v Fugro Geotechnical Services Ltd (2014) 17 HKCFAR 755 at §22).  For the first stage of the exercise, I would start with the premise that “shop” would not come within the natural meaning of “dwelling houses”.  Going to the second stage, it seems to me that the Tribunal’s heavy reliance on the 1903 Ordinance is beset with problems.

39.On a fair reading of the two judgments, I do not think Mr Mok had over-stated the position in submitting that the Tribunal had applied the legal definition of “domestic building” in the 1903 Ordinance to determine the meaning of “dwelling houses” in the User Covenant.  I do not agree with Mr Yim that the Tribunal was merely considering the statutory definition as the relevant context. In any event, I think the reliance on the 1903 Ordinance is misplaced.

40.As the courts have repeatedly emphasised, when construing an expression in a document, one must be very careful of relying on authority (Texaco Antilles Ltd v Kernochan [1973] AC 609 at 621E; Crest Nicholson Residential (South) Ltd v McAllister [2003] 1 All ER 46 at §30; Penny’s Bay Investment Company Limited v Director of Lands at §63).  A definition for a particular statutory purpose does not really help one to determine the meaning of the word one has to construe in a different document, even when they involve the same or a similar expression, as the same word in different documents may take on different meanings because of the textual or factual context.

41.Mr Lam repeated his submission before the Tribunal that the legal meaning of “dwelling house” prevailing in 1917 was a building or part of a building in which people live or which is capable of being used for human habitation[13], citing the definition for this expression in Hong Kong English‑Chinese Legal Dictionary, LexisNexis 2005, p 639, which in turn cited two English cases decided before 1917 (Lewin v End [1906] AC 299 and Lewin v Newnes Ltd (1904) 90 LT 160).  These cases on how this expression found in English statutes of a very different nature, setting and purpose should be construed would be of no assistance to how this expression in the Government Lease should be construed.

42.As Mr Mok has pointed out, the statutory definition relied on in the 1903 Ordinance was in respect of “domestic building”, whereas the expression “dwelling house” appeared in the ordinance in section 131 but was not defined.  Prima facie, even for the purposes of the ordinance, the two terms would appear to have different meanings.  “Domestic building” was very widely defined; even where the only domestic activity of a building was having three caretakers passing the night, it would have been regarded as falling within the definition for the purpose of the ordinance.  If the statutory definition (any building constructed, used or adapted to be used, wholly or partly, for human habitation) were to be applied to construe the User Covenant, this would mean as long as part of a building is for human habitation, there would be no restriction on the user of the remaining part.  Subject to the argument to be considered on primary user, it seems to me this would create an absurdity.

43.Further, section 5 of the 1903 Ordinance provided that “Nothing herein contained shall vary or affect the rights or liabilities as between landlord and tenant under any contract between them.”  This provision should apply equally to government leases made between the Government as landlord and its subjects as lessees.

44.Even more importantly, the context and purpose of the 1903 Ordinance were substantially different from the User Covenant in the Government Lease.  The ordinance was primarily concerned with the regulation of public health and sanitation.  It was enacted against the background of ravages of the plague in Hong Kong and a commission was appointed by the Governor in 1896 to report on the insanitary condition of properties and make recommendations how such conditions might be improved[14].  The ordinance gave effect to the recommendations of the commission.  A Sanitary Board was established by the ordinance and was entrusted with extensive powers to deal with matters concerning public health, such as the power to enter, inspect and demolish buildings that were dangerous, prejudicial to the health of inmates or unfit for human habitation.  Provisions relating to “domestic building” in the ordinance addressed issues such as overcrowding, sufficient ventilation, damp-proof floors and roofs.  Mr Mok made a valid point that “domestic building” was widely defined to cover as many buildings as possible to address the widespread concerns of public health and sanitation.

45.Mr Lam sought to rely on a letter in 1894 addressed to the committee regarding housing of the Chinese by one Mr Danby, an architect who had designed many Chinese houses in Hong Kong.  This letter was produced as an appendix to the Bill and Explanatory Memorandum of the 1903 Ordinance and was mentioned by the Colonial Secretary at the second reading of the Bill[15]. In his letter, Mr Danby made suggestions with drawings for the design of a more sanitary type of dwelling house for the Chinese, and one of the drawings showed two shops on the ground floor, for the sale of Chinese groceries, provisions, and etc.  Mr Lam submitted this letter would go to show that the use of ground floor premises as shop was commonly considered as ancillary to domestic use.

46.Mr Yim was not so ambitious.  He recognised it might well be said that the letter only reflected how Mr Danby thought the design of Chinese dwelling houses should be improved and would not serve as proof whether his suggested model dwellings were in fact adopted.  He relied instead on the mention by the Tribunal that “at the time of the Government Lease, residential cum retail use was not unusual.”[16]

47.Mr Lam also referred to the use of ground floor premises as shops in neighbouring lots with identical user restrictions in their Government leases, but the occupation permits for the neighbouring lots, stating “shops for non-domestic use”, were all issued after 1982[17].  Mr Yim referred to the development in 1921 of 15 one-storey shops erected on NKIL No 49 RP and NKIL No 47 RP, and that in 1949 the landlord sought to redevelop the two lots by building three more storeys on top of the one-storey shops and the ground floors were to remain as shop use[18]. He further relied on a statement in the petition to the Governor in Council in 1949 of a group of tenants affected by the redevelopment that they carried out “small trade in the front portion and abode in the hinder portion.”

48.In my view, none of the above matters, whether separately or cumulatively, would have provided proper evidential foundation of the alleged prevalence of ground floor premises being used as shop at the time of the Government Lease in 1917 such that it would have been understood that “dwelling houses” would be designed and built in a way that the ground floor would be used as shop.  Mr Yim argued that as the subject of the Government Lease was a piece of land of 22,500 sq ft, both parties were likely to have in mind the legal background such as the statutory definition in the 1903 Ordinance.  There is no basis for this surmise.

49.There is nothing in the evidence or documents to suggest that the Government and the lessee had intended to use the statutory definition of “domestic building” or to give a special meaning to the expression “dwelling houses” at the time they entered into the Government Lease, apart from the consideration whether evidence of subsequent conduct to aid construction is admissible (neither Mr Lam nor Mr Yim pursued this on appeal).  I fail to discern a context which would require the meaning of “dwelling houses” to be enlarged in the manner as suggested by Mr Lam and Mr Yim.

50.A similar submission was made in Pandix Ltd v Hui Kam Kwei, LDCS 4000/2009, 14 October 2010, and was rightly rejected by Deputy Judge Lui at §§23 to 25.

51.Mr Lam and Mr Yim sought to rely on Mexx Consolidated (Far East) Ltd v Attorney General [1987] HKLR 1210, in which Deputy High Court Judge Cruden held that where the user covenant in a deed of variation varying the Crown lease restricted the use of the demised premises or any building erected thereon to industrial and godown purposes, the covenant was complied with if the primary user of the premises was industrial.  But the primary user discussed in the judgment was the primary user of a certain part of the building which was occupied by only the plaintiff, not the primary user of the whole building (at 1219A and H).  The other cases they cited are to the same effect (The Incorporated Owners of Wing Ming Industrial Centre v Mantex Supplies Co Ltd, HCA 1505/2007, 3 October 2007 at §39; Raider Ltd v Secretary for Justice [2000] 3 HKLRD 300 at 309H to 311E).  If these decisions were to be applied to the present situation, it would create an anomaly in that the owner of an undivided share in the land with exclusive possession of a particular part who was in breach of the User Covenant would be allowed to ride free on the owners of other undivided shares who had complied with the covenant.

52.I am inclined to agree with Mr Mok that if primary user is the test in this instance, primary domestic use should be required for every part of the building.  Besides, even if one applies the primary user test, there ought to be some link between the primary and ancillary uses, as the approach is to consider the cumulative effect of the activities carried on in the premises as a whole and not their individual characteristics (Mexx Consolidated at 1219B and H; Raider Ltd at 309H and 311C to D; Pandix Ltd v Hui Kam Kwei at §14).  Here, the shop use was wholly distinct from the domestic use and could not conceivably be regarded as ancillary to domestic use.  I do not agree with the Tribunal that if all the upper floors were for domestic use, even if the ground floor was not for domestic use, there would still be compliance with the User Covenant.

53.Nor do I think any assistance could be derived from the statements in Tsuen Wan Trade Association Education Foundation Limited v Chui Kam Ying, HCMP 1735/2011, 26 April 2012 at §22, which were made in the context of a conveyancing transaction in a vendor and purchaser summons.  The fact that the Government had not taken enforcement action for breach of the government lease or occupation permit for a very long time would be relevant to waiver and acquiescence affecting title issues between vendor and purchaser but has no bearing on the construction of the covenant.

“Or similar purposes” in the User Covenant

54.The phrase “or similar purposes” was preceded by “dwelling houses workshops factories or godowns”.  To give effect to “similar”, this phrase should be construed as meaning that the user is similar to one or more of the purposes specified under the User Covenant.

55.Mr Yim submitted that the Government Lease in 1917 was a primitive form of town planning.  The land granted to the lessee was in a newly undeveloped area, with roads yet to be built.  And as “dwelling houses workshops factories or godowns” would require “shops” to support their daily activities, he contended that the use as a shop was related to one or more of the specified users and “similar purposes” should be construed in that light.  His contention is nothing short of an attempt to re-write the Government Lease to include the user of commercial purpose and must be rejected.

56.Mr Lam and Mr Yim cited a number of cases to support the Tribunal’s ruling that the ejusdem generis rule should not be applied here.  They contended that no discernible genus can be found in the four specified users as they do not possess some common and dominant feature, and, given the diversity of the functions of the specified users, the words “similar purposes” should not be construed so narrowly to exclude the use as a shop.

57.The Tribunal accepted their submission that “or similar purposes” can be widely construed, for the reason that the definition of “dwelling houses” can be quite widely construed under the 1903 Ordinance at the time of the Government Lease and the Buildings Ordinance 1950 at the time the occupation permit was issued.  The Tribunal also agreed with them that the different users listed in the Users Covenant do not fall into a common category for the ejusdem generis rule to take effect.

58.As the Tribunal’s approach to the construction of “dwelling houses” is in error and it is wrong to give this expression an extended meaning by applying the statutory definition of “domestic building”, this cuts away the underlying premise that the words “or similar purposes” should also be widely construed.  It is not necessary to have regard to the ejusdem generis rule in this instance, as effect must be given to the word “similar” in the User Covenant.  The use as a shop can hardly be regarded as having a similar purpose to that of “dwelling houses” or any of the other specified users.

59.Like the Tribunal[19], I do not think it necessary to have regard to the line of cases invoked for the proposition that in the event of ambiguity, the court must lean toward the construction most favourable to the Government.

60.In summary, the Tribunal has erred in law in holding that the User Covenant would permit the use of the properties concerned as shops.  This disposes of the first issue in these appeals.

Abandonment of the User Covenant

61.This issue was lightly argued by Mr Mok.  He took the position it would suffice for his purpose if he succeeds on the first and third issues (the construction of the User Covenant and section 12(b) of the LRO).

62.The Tribunal was alive to the distinction between waiver of a breach of the covenant and waiver of the covenant itself, and the proposition that waiver of a covenant should not be lightly inferred but only where the conduct of the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct[20].

63.In respect of the evidence in the Cheermark case, the Tribunal found that the five ground floor premises for which the occupation permit was issued in 1954 (which included No 177 Hai Tan Street) were not the only ones in breach of the User Covenant.  There were other buildings with ground floor units being used as shops as indicated by their occupation permits and during the site visit, the Tribunal saw “the phenomenon in Hai Tan Street, Pei Ho Street and Yee Kuk Street that ground floor units were being used as shops for commercial purpose.”[21]  There was also evidence that extended the period of continuous breach in the Pei Ho Street section[22] to as early as 1935 at least and adding another 20 years to shop use making 75 years in total[23].

64.The Tribunal came to the conclusion that the Government was aware of ground floor units being used as shops through occupation permits in the neighbouring lots for 30 years and took the view that it would be odd and unrealistic to say the Government had no knowledge of shop use at the ground floor for more than 50 years and in the Pei Ho Street section for 75 years.  In light of the open and notorious breaches over a lengthy period without enforcement action, the Tribunal was satisfied that the Government had abandoned altogether its rights under the User Covenant, as in the case of Attorney General of Hong Kong v Fairfax [1997] HKLRD 243[24].  The Tribunal regarded the circumstances of the present case as close to those in Fairfax, recognising that the magnitude of the breach did not match that in Fairfax[25].

65.In the HEL case, the Tribunal found that not only had the HEL Property been used as a shop after development in the early 1950s, but at least all the ground floor units of the other nine buildings in the same section of Pei Ho Street eventually used the ground floor premises as shops and the same happened to the five one-storey buildings in NKIL 47 RP across Pei Ho Street[26]. The same stretch of Pei Ho Street had been used as shops since 1921 according to a decision of the Tenancy Tribunal, and public records showed there was commercial use at No 13 Pei Ho Street since 1935[27].  The Tribunal also took into account the evidence in the Cheermark case concerning other buildings facing Hai Tan Street in the same lot under the Government Lease.  And that means, in two sections of NKIL No 49, there were at least 10 such ground floor units being used as shops which were in breach of the User Covenant for 75 years and five such ground floor units for 50 years[28].

66.Having regard to the magnitude and duration of the breach, the Tribunal found in the HEL case it would be odd and unrealistic to say that the Government had no knowledge of shop use at the HEL Property for not less than 75 years.  There was no evidence the Government had taken enforcement action for such breach against the owner in NKIL No 49, or any of the owners in the neighbouring lots.  The Tribunal held it was established to its satisfaction that the Government had abandoned altogether its rights under the Government Lease as opposed to having acquiesced only in taking enforcement action[29].

67.There is no basis to disturb the findings of fact that the Government had knowledge of the breach of the User Covenant in respect of the ground floor premises in the relevant parts of Hai Tan Street and Pei Ho Street and the length of time that the Government had such knowledge.

68.It was contended on appeal that the findings of fact were short of establishing, as a matter of law, that the Government had waived the User Covenant altogether.  For Cheermark and HEL to succeed, it must be proved that the Government had knowledge not only of the breach but also its rights and legal position.

69.Whether the facts found are capable of establishing an abandonment of a covenant as opposed to a waiver of a breach of covenant is a matter of judgment, and is primarily a matter for the fact finding tribunal.  On the facts found by the Tribunal, there is no basis to interfere with that judgment unless the Tribunal has made an error in law or that it is plainly wrong.

70.In light of the Government’s knowledge of the breach and the extent of the breach, as found by the Tribunal, I agree with Mr Yim that any contention that the Government had no knowledge of its rights and legal position would fly in the face of the standard forfeiture clause found in the Government leases.  And I am not persuaded that the Tribunal is plainly wrong in its conclusion or has made any error in law.

71.There is nothing in the contention that the Tribunal erred in law in failing to take into account two modifications in the Government lease of a neighbouring lot as evidence that the Government had not abandoned the User Clause.  The Tribunal had considered the two modifications in 1991 of the Government lease of NKIL No 47 which contained a provision identical to the User Covenant.  The modifications were granted at a nominal administrative fee of $10,000 and $11,000.  There was no evidence from the Government why only a nominal administrative fee was charged.  Further, the Tribunal noted that the extent of the modification was more complicated than just including shop use for ground floor units but it imposed a new restriction on domestic use on the ground floor and affected the use of the first floor as well[30]. There is no valid criticism here.

72.On the issue of abandonment of the User Covenant, there is no basis to overturn the determination of the Tribunal.

Section 12(b) of the LRO

73.This issue, which did not appear to have been extensively argued before the Tribunal, is the main contention of the Director of Lands in these appeals.

74.The relevant parts of section 12 of the LRO are as follows:

“12. Additional rules for determining compensation

In the determination of the compensation to be paid under this Ordinance –

…

(b) no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held;

(c) no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever; …

(d) subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.”

75.As noted by Lord Millett NPJ in Director of Lands v Yin Shuen Enterprises Ltd & Anr (2003) 6 HKCFAR 1 at §29, sections 12(b) and (c) are both in derogation of section 12(d).  So to the extent that they apply, the open market value of the land which forms the basis of valuation under section 12(d) is excluded.  Sections 12(b) and (c) describe particular circumstances in which the legislature considered that the resuming authority ought not to be required to pay the open market value of the land (at §§29 and 13).

76.The question of construction here is whether the words in section 12(b) (“any use of the land which is not in accordance with the terms of the Government lease under which the land is held”) would bar compensation of a user that the Government has acquiesced in by virtue of the abandonment of the user covenant in the Government lease.

77.The rival constructions may be put in this way.  It is the Government’s contention that user in accordance with the Government lease constitutes the basis for compensation upon resumption of the land, and as the use of the ground floor premises as shops at the date of resumption is not permitted by the User Covenant and is not in accordance with the terms of the Government lease, the Government is not required to pay compensation on the basis of a non-conforming use.  The contention of Cheermark and HEL, as upheld by the Tribunal, is that as the User Covenant was abandoned by the Government, the current use of the ground floor premises as shops is permitted and not in contravention with the terms of the Government lease, and hence compensation is required to be paid on the basis of such a conforming use.

(1) The legislative history and intent

78.We were taken to the legislative history of section 12(b) with a view to finding out its legislative intent.

79.By the Crown Lands Resumption Ordinance 1921, a provision similar to the present section 12 of the LRO was first introduced into the statute books.  Section 2 was headed “Additional rules for determining compensation” and section 2(c) was the equivalent to the present section 12(b), which excludes compensation for non-conforming use.

80.A year later, the Crown Lands Resumption Amendment Ordinance 1922 was enacted.  Section 2 of the 1921 ordinance was repealed and substituted by a new provision in section 2 of the 1922 ordinance. The repeal of the whole of the old section 2 and the re‑enactment of a new provision was just to add a new sub-section (c) which was the equivalent of the present section 12(c), which excludes compensation for mere expectancies or probabilities.  No change was made to the old section 2(c) which was re-numbered as section 2(b)[31].

81.Sections 2(a) and (b) of the 1921 ordinance (re‑numbered as sections 2(a) and (d) of the 1922 ordinance) were adopted from English legislation, being sections 2(1) and (2) of the Acquisition of Land (Assessment of Compensation) Act 1919[32]. Section 2(c) (the predecessor of section 12(b) of the LRO) however was not adopted from English legislation.  Mr Mok asked us to contrast section 12(b) with section 2(4) of the English act which provided as follows:

“Where the value of the land is increased by reason of the use thereof or of any premises thereon in a manner which could be restrained by any court, or is contrary to law, or is detrimental to the health of the inmates of the premises or to the public health, the amount of that increase shall not be taken into account:”

82.Hence, under the English provision, compensation would not be payable for a non-conforming use where this “could be restrained by any court”, whereas compensation would be payable if the court could not restrain such use due to waiver, acquiescence or estoppel.  Mr Mok submitted that contrasting section 12(b) (the old section 2(c)) with section 2(4) of the English legislation, and bearing in mind that sections 2(a) and (b) of the 1921 ordinance were adopted from sections 2(1) and (2) of the English legislation but section 2(c) was not based on section 2(4) of the act, it must be the deliberate intention of the Hong Kong legislature to avoid the concept of restraint by the court and instead it resorted to a simpler provision to exclude compensation for “any use of the land which is not in accordance with the terms of the Government lease under which the land is held”.  He would have us infer the reason for couching section 2(c) in different terms was to avoid legal and factual disputes on waiver, acquiescence and estoppel and to bring about a greater level of certainty in the application of the provision.

83.He sought to buttress his argument by referring us to the observations of Lord Millett in Yin Shuen that section 12(c) of the LRO, read with section 12(b), form a consistent whole (at §32), and that section 12(c) has no or no direct counterpart in the English statutes[33] (at §§17 and 25).  He submitted that the twin provisions of sections 12(b) and (c) underpinned the legislative intent to make unique provisions different from the English regime, the clear effect of which is that compensation is given only in respect of the land taken.  So in assessing compensation, no account is to be taken of any value which the land may have by reason of its non-conforming use, or by reason of the probability or expectancy of obtaining any licence, permission, lease, or permit whatsoever, to which the claimant is not entitled as of right (Yin Shuen, §30).

84.Whilst the Explanatory Memorandum to the Bill of the 1921 ordinance stated that sections 2(a) and (b) of the 1921 ordinance were adopted from sections 2(1) and (2) of the 1919 English act, it did not mention the reason why section 2(c) was not based on section 2(4) of the act. Instead, the following reasons for its enactment were given in §3 of the Explanatory Memorandum:

“Paragraph (c) of clause 2 is intended to prevent claims being made on public moneys in respect of uses of the land which are not in accordance with the terms of the Crown lease. Such claims are sometimes made, and they are generally supported by the production of permits to use the land in that particular way. Though such permits are intended to be only temporary they are often renewed from year to year for long periods, and the argument is that the Crown must be taken to have waived the breach of the Crown lease. It has also been argued that the expectation of the continued renewal of such permits must be taken into account in fixing the compensation.”

85.In moving the first reading of the Bill of the 1921 ordinance, the Attorney-General said this regarding section 2(c):

“The third main provision is that, in any resumption under the proposed Ordinance, no compensation is to be given in respect of any use of the land which is not in accordance with the terms of the Crown lease under which the land is held. That affects two main classes of cases; one is the case where land is held on a particular title, say, an agricultural lease which only entitles the holder to use the land for farming purposes. In some cases such land is allowed by the Government to be used temporarily for other purposes. The owner may get a permit to put up and maintain some kind of factory there, for example. It is a temporary permit, and is liable to revocation on short notice. If the owner chooses to spend a large sum of money on the erection and maintenance of the factory he can hardly complain if, when the land is required for public purposes, he is reminded that his title is merely an agricultural one and that the permit was only temporary. It is his own risk if he spends money; in some cases he may be prepared to take the risk, but if he does, he can only be compensated on the basis of what he is entitled to, and that is agricultural land. The other class of case is farm leases. These vary considerably. In some cases, they seem to give almost indefinite rights, but where the rights are restricted it is intended that where the Government have to resume in the public interest they shall have to pay only the value of the land as farm land. If, for example, the farm lease allows the owner only to put up farm buildings and he chooses to cover the land with a factory, or a row of domestic buildings, then, if the Government should require to resume the land, he is to be paid only the value of the land as farm land. He has to abide by the risk he has taken. These are the two chief classes which the third main principle of the Bill will affect. …”

86.It is far too speculative to deduce that the reason for not adopting section 2(4) of the English Act must be to shut out the waiver or abandonment of a covenant in a Government lease (as distinguished from the waiver of a breach of covenant), when this was not given as a reason in the detailed explanations for the enactment of this provision.  There may well be other reasons why section 2(4) of the English Act was not adopted.  A more plausible reason is the reason given for the enactment of this provision in the Explanatory Memorandum and the speech of the Attorney-General in introducing the Bill.  The apparent mischief that this provision sought to address was the two main classes of cases mentioned by the Attorney-General, namely, temporary permits and farm leases.  And, as submitted by Mr Yim, the scope of the mischief does not extend to the situation where the covenant had been waived altogether.

87.For the above reasons, I reject Mr Mok’s submissions on the legislative intent.

88.Section 12(b), like section 12(c) enacted a year later, was not derived from English legislation.  The legal context in which it was enacted in 1921 was the same as the latter provision and the relevant legal principles at the time were summarised by Lord Millett in Yin Shuen at §17[34]:

“(1) The value of the land is the value to the claimant, not its value to the acquiring authority.

(2) Although it is common practice to speak of the value of the land, the property taken, and therefore the subject of compensation, is not the physical land itself but the claimant’s estate and interest in the land. That is why the sitting tenant is entitled to compensation for his lease, but not to the chance of obtaining its renewal.

(3) The subject land must be valued not only by reference to its present use but also by reference to any potential use to which it may lawfully be put.

(4) Where land is subject to restrictions which affect its value, the claimant is not entitled to be paid the unrestricted value of the land. While, however, the existence of the restrictions must be taken into account, so too must the possibility of obtaining a discharge or modification of the restrictions. In such a case the costs as well as the risks and delays involved in obtaining any necessary consents must also be taken into account.”

89.The factual context in which section 12(c) was enacted was set out in Yin Shuen at §20.  This would be the same for section 12(b). In short, the legislation was prompted by the explosive growth of Kowloon, which was experiencing a speculative boom in land prices.  The conditions which might be imposed on the grant of land or a change of use were not limited by statute, and there was no town planning legislation at the time. I have set out the reason for the enactment of section 12(b) as stated in the Explanatory Memorandum and the Attorney-General’s speech.

90.The natural meaning of the language in section 12(b), that “any use of the land which is not in accordance with the terms of the Government lease under which the land is held” (emphasis supplied), does not support a construction that one is to have regard only to the terms of the Government lease at the time the interest in land was granted, without regard to the terms upon which the land is held at the date of resumption.  The focus should be on the claimant’s interest in the land at the time of resumption.  Nor do I accept Mr Mok’s contention that his interpretation is not at odds with the words “is held” in that the Government Lease has not been modified by subsequent express agreement to remove the User Covenant so the covenant still featured in the lease at the time of resumption. This appears to be a strained interpretation of the ordinary language of the provision.

91.When this provision is construed in the light of the legal and factual context, the construction favoured by the Tribunal – that the use of the land is in accordance with the terms of the Government lease as at the time of resumption where the user is acquiesced in by the Government when the user covenant is abandoned – is consistent with the legal principles that the subject of compensation is the claimant’s estate and interest in the land (the original restriction in user having fallen by the wayside due to the abandonment of the user covenant by the Government) and that the land must be valued by reference to any potential use to which it may lawfully be put (lawful because of the abandonment of the user covenant by the Government).  And there is nothing in the factual context which would call that construction into question.  It does not contravene the broad legislative purpose of sections 12(b) and (c) that no account is to be taken of any value which the claimant is not entitled to as of right.

92.On a textual analysis, I am inclined to agree with the Tribunal’s interpretation.  I turn to consider how section 12(b) has been interpreted in the authorities, which is the other main plank of Mr Mok’s submission.

(2) The two Full Court decisions

93.These are the decisions of the Full Court in The Queen v The Board of Arbitrators Ex Parte The Attorney General (1955) HKLR 47 and In re A Compensation Board Ex Parte the Attorney General [1971] HKLR 338.

94.In The Board of Arbitrators, the Crown lease in respect of agricultural land contained a prohibition against the erection of buildings without prior consent.  The Full Court quashed by certiorari an award of the Arbitration Board in which compensation was allowed for buildings erected.  Gould J had this to say at 48:

“… in all probability the Crown had waived performance of the covenant not to build without a licence to a degree which in a private tenancy would prevent them from exercising their right of re-entry. The Crown has certain statutory protection, enacted in 1953[35], but we do not rely upon that when we say that such a waiver is a waiver of the covenant itself and not a waiver of right to have compensation assessed as provided in the Ordinance. In view, thereof, of the terms of Section 12(b), which states that no compensation shall be paid for any use of the land not in accordance with the terms of the Crown lease, it would appear that user of the land by the erection of buildings without the permission of the Crown, deprives the tenant of any right to compensation for the buildings.”

95.There was no further analysis of section 12(b) in the judgment.

96.In re A Compensation Board was also concerned with land demised as agricultural land and on which buildings were erected without prior consent, in breach of the covenant in the block Crown lease.  The board awarded compensation on the basis of the fair value of the buildings erected.  The Full Court quashed the determination of the Boardfor failure to follow the decision of the Full Court in The Board of Arbitrators.  It also rejected the claimant’s contention there was an implied licence to build based on the acts of waiver and acquiescence of the Government.

97.Blair-Kerr, the Acting Chief Justice, held that as there was no justification for presuming or implying the grant of a licence to build, the user of the land by the claimant had not been in accordance with the terms of the Crown lease and the Board had no jurisdiction to award compensation in respect of the unauthorised buildings (at 359).  He was in no doubt that the The Board of Arbitrators case was correctly decided although “there is nothing in the judgment to indicate that the question of “implied licence” was argued on that occasion” (at 360).  Briggs J agreed with the decision of the Acting Chief Justice.

98.McMullin J restricted himself to a narrower ground of decision (at 366).  He also rejected the argument there was an implied licence but did not base his decision on that ground as “there is a more simple and fundamental reason why the claimant’s contention should be rejected” (at 366 to 367), founded on his interpretation of section 12(b).  But first of all, he noted that the Government “is not seeking a forfeiture” but is “exercising its quite separate power to resume the land”, and “it is sought upon the other side to use the alleged licence not, as a shield by way of defence against the resumption, but as an implement to extract additional money compensation from the Crown in circumstances where the clear terms of the contract between the Crown and its subject, coupled with the relevant provisions of the law, would seem to disentitle the subject to any such payment”. (at 367)

99.On the wording in section 12(b), he gave this analysis at 367 to 368:

“But what section 12(b)of the Ordinance says is that compensation shall not be given in respect of any use of the land which is “not in accordance with the terms of the Crown lease under which the land is held”. These words supply to those who have to enforce the law a perfectly objective test for the assessment of compensation. The advantage of that test is its certainty. The express terms of the agreement between the Crown and its subject become a yardstick for measuring the limits of compensatable user. The need for choosing such a yardstick is not far to seek. In the special conditions of Hong Kong the “fait accompli” has a notorious attraction for all manner of persons, from the squatter whose desperate circumstances impel him to seek a sanctioned status through the familiar and tenacious drift from trespass through sufference into tenancy, up to the successful entrepreneur who prefers the flexible resources of the verbal contract above the certainties of the written. I find it very difficult to believe that the legislature chose this yardstick with any other end in view than the protection of the Crown from just that kind of claim which it here seeks to resist. I do not believe that the reference in section 12 to the “terms of the Crown lease” was ever intended to embrace such terms as might by lawyer's ingenuity be pieced together from a patchwork of negative reactions and ambiguous reticences on the part of the servants of the Crown. On the contrary I believe that those words can only refer to the express terms as they are to be found in the lease itself or as they may have been modified by subsequent express agreement between the contracting parties in the manner provided by the lease. The Ordinance deals with the obligation of the Crown to pay compensation. It was no doubt the intention of the legislature to provide the necessary machinery for establishing simply and with certainty the limits of the Crown's liability. In my view, it cannot have been intended, in choosing the terms of the lease as the measure of what must be paid, to leave those terms at the mercy of inference. If those words in the section are interpreted as wide enough to include terms which may be implied from circumstances including such matters as silence, inactivity and equivocal behaviour, such as the circumstances we have been considering in this case, the plain sense of the language chosen will be so greatly diluted that its value as a test will virtually be lost. The legislature of a territory in which the Crown frequently finds itself under the necessity of making a delicate choice between enforcing its strict rights and causing widespread disaffection on the one hand and overlooking the letter of the law in an effort to meet the immediate needs of its subjects on the other must I think, in this context, be presumed to have intended to safeguard the Crown from suffering a double loss through such expedient leniency.”

100.Mr Mok relied on the judgment of McMullin J.  The chosen test for section 12(b) is “the lease in its express terms”, so “all questions as to breach of individual covenants, lying by, acquiescence etc may be permitted to recede into the background.” (at 369)  The Ordinance insisted upon “the express terms of the lease”, whilst acts of waiver or acquiescence might have “afforded a good ground for resisting a forfeiture for breach of covenant”, they “never even began to be a relevant reason for revising what was, in effect, the agreed basis for compensation”. (at 370)

101.Mr Mok further submitted that compensation is required to be paid for the interest in land acquired.  The right to use the ground floor premises as shop was not disposed of by the Government and remains the property of the Government for which it ought not to be required to pay compensation, paraphrasing Yin Shuen at §57.  The Government had not granted a modification of the user covenant, thereby making a further disposal of the land for which it was entitled to charge full premium (Yin Shuen at §27).  He said this echoed the statement of McMullin J at 369 that “the present user is not in accordance with the terms of the lease because it is fundamentally different from that which was stipulated between the contracting parties and it is the Crown’s case that that user (i.e. the agricultural user) and only that constitutes the basis for compensation upon the resumption of land.”

102.I leave aside the considerations that the Full Court decisions are not binding on the Court of Appeal[36] and that McMullin J’s judgment was in the minority.

103.There is attractiveness in certainty and simplicity in a rule for determining compensation if one looks only to the express terms of the Government lease and disregards whatever interest the lessee may have in the land so long as there is no subsequent express agreement between the contracting parties to modify the lease to provide for such interest.  It is pertinent to have regard to the background against which the two Full Court decisions were made to have a better understanding why so much was made of certainty in construing section 12(b).

104.The two Full Court decisions were decided in 1955 and 1971.  It was common knowledge at the time that “in 1949 a very large number of people came to Hong Kong from Mainland China and a very large number of structures of various kinds were erected on unleased Crown land and also on land leased for agricultural purposes, in breach of the covenants contained in the leases pertaining to such land”. (In re A Compensation Board at 345) The Acting Chief Justice remarked that it was no exaggeration to say that “a small township” had grown up in the area in which the claimant’s bungalow was built.  At 357, he spoke of the “herculean task” of the Government faced with breaches of the Government leases on such a massive scale:

“Having regard to the conditions prevailing here in 1949 and subsequent years, one can well imagine what an outcry there would have been if the Crown had attempted to exercise its powers of forfeiture and re-entry under the lease. There would have been ample justification for allegations of hardship. It was during this period that the Resettlement Department was born! So far as I am aware, there is no counterpart of that Department in England. Be that as it may, even if Government had wished to avail itself of its rights of forfeiture and re-entry (which, clearly, it did not) what a herculean task it would have been to have checked every breach of covenant and to have exercised powers of forfeiture and re-entry in every case! And to what purpose?”

105.In the passage I have quoted earlier, McMullin J likewise alluded to “the special conditions of Hong Kong” and the “notorious attraction” for the “fait accompli” when he spoke of the need for choosing the express terms of the Crown lease as a yardstick for measuring the limits of compensation.  And he was mindful of the delicate choice of the legislature between “enforcing [the Government’s] strict rights and causing widespread disaffection on the one hand and overlooking the letter of the law in an effort to meet the immediate needs of its subjects”.  These considerations weighed with him when he concluded that in this context, the legislature must be presumed “to have intended to safeguard the Crown from suffering a double loss through such expedient leniency”.

106.Times have moved on and it would not be right to approach a claim for compensation on resumption as an attempt to “extract additional money compensation” from the Government.  The emphasis in present times is on fair compensation, described by the courts as the principle of equivalence.  Even without regard to article 105 of the Basic Law[37], a claimant is entitled to be compensated fairly and fully for the land compulsorily taken from him, subject to the qualifications provided by statute.  In the words of Brett MR in Attorney-General v Horner (1884) 14 QBD 245 at 247: “It is a proper rule of construction not to construe an Act of Parliament as interfering with or injuring persons’ rights without compensation unless one is obliged so to construe it.”  And although the intention to interfere with property or other rights may be plain, there may still be a doubt as to whether adequate compensation is intended, a denial of this must be clearly stated (Bennion on Statutory Interpretation (6^th ed) p 751).

107.In construing section 12(b), one should not strive to achieve certainty for the sake of good governance at the expense of the principle of equivalence.  There is no necessity to give overriding weight to the need for certainty and simplicity by interpreting the words “the terms of the Government lease under which the land is held” to mean “the express terms of the Government lease”.  To the contrary, the principle against doubtful penalisation imports a presumption against the imposition of a statutory detriment to a person’s property or other economic interests without clear language.  One should not readily ascribe an intention to the legislature of going against the principle of equivalence or making an inroad to that principle that is wider than is warranted.

108.As for the contention that the right to exploit the ground floor premises as shop use was not disposed of by the Government, by virtue of the Government’s abandonment of the User Covenant, the lessee possesses a right to use the ground floor premises without its restriction.  This is an interest in the property enforceable against the Government.  To the extent that the Government is not entitled to enforce the covenant, it has disposed of its right to charge a premium for the modification of the Government Lease in that respect.  This is entirely consonant with the principle that compensation is required to be paid for the interest resumed.  In this instance, it is for the duration of the Government Lease not subject to the restriction of shop use in the User Covenant.

109.I would uphold the Tribunal’s construction on section 12(b) of the LRO.

Conclusion

110.For the above reasons, I would dismiss the appeal of the Director of Lands in each of the appeals.

111.As Cheermark and HEL are not successful on the issue relating to the construction of the User Covenant, I would deprive them of part of the costs of these appeals.  I would make an order nisi in each appeal that the Director of Lands is to pay the respondent half of the costs of the appeal, and that there be a certificate for two counsel in the case of HEL.

Hon Cheung CJHC:

112.Accordingly, we dispose of these appeals by orders as indicated in paragraphs 110 and 111 above.

Mr Mok Yeuk-Chi and Mr Jenkin Suen, instructed by the Department of Justice, for the Respondent (Appellant) in CACV 165/2016

Mr Mok Yeuk-Chi and Ms Teresa Wu, instructed by the Department of Justice, for the Respondent (Appellant) in CACV 184/2016

Mr Simon K C Lam, instructed by Chow, Griffiths & Chan, for the Applicant (Respondent) in CACV 165/2016

Mr Valentine Yim and Ms Chelsea Ma, instructed by Cheung, Chan & Chung, for the Applicant (Respondent) in CACV 184/2016