Afh Hong Kong Stores, Ltd v. Fulton Corporation Ltd

CACV 201/2021

[2022] HKCA 1243

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 201 OF 2021

(ON APPEAL FROM HCA NO 2103 OF 2017)

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BETWEEN

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(by original action)

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AND BETWEEN

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(by counterclaim)

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J U D G M E N T

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Hon Yuen JA:

Introduction

1.1.This is an appeal from a Decision of K Yeung J (“the judge”)  given on 31 March 2021 (“the Decision”)¹ after the hearing of a summons under Order14A² of the Rules of the High Court for the determination of 3 Questions³, primarily arising from the construction of a lease dated 17 March 2011 (“the Lease”)⁴ signed between the plaintiff (“the Tenant”)  and the defendant by original action (“the Landlord”).  The 2^nd defendant by counterclaim is the Tenant’s parent company and was its guarantor (“the Guarantor”)  under a Deed of Guarantee and Indemnity for the Tenant’s performance of the Lease⁵.

1.2.The judge answered the 1^st and 2^nd Questions in favour of the Tenant.  Given those conclusions, the judge considered that it was not necessary to consider the 3^rd Question, but observed that he was inclined towards accepting the Landlord’s submissions on it. 

1.3.Having answered the 1^st and 2^nd Questions in favour of the Tenant, the judge gave judgment in its favour and made a number of consequential orders.

2.On 28 April 2021, the Landlord filed a notice of appeal.  On 18 May 2021, the Tenant and the Guarantor filed a respondent’s notice regarding the 3^rd Question only.

Background

The Premises

3.The premises in question were described in the Lease as

“All Those the Whole of the LOWER GROUND FLOOR, MEZZANINE FLOOR, FIRST FLOOR, SECOND FLOOR and PORTION OF THE GROUND FLOOR (“the Premises”)  of the building now known as ‘PEDDER BUILDING’, No. 12 Pedder Street, Hong Kong (‘the Building’)  erected on INLAND LOT NO.2319 (which Premises are shown for the purpose of identification only on the Floor plans attached hereto and thereon delineated and coloured Orange)”.   

4.1.The judge held⁶:

“Those floor plans (the ‘Floor Plans’)  were annexed as Annexure D of the First Schedule. They identify the original layout of those floors before the Lease (the ‘Original Layout’)”.

4.2.Annexure D of the First Schedule of the Lease contains 6 floor plans entitled “MVAC Layout Plan” for respectively “M/F”, “B/F”, “G/F”, “M/F” (with different markings), “1/F” and “2/F”.

5.Pausing there, it is clear that the premises leased to the Tenant comprised a number of individual floors, including the Mezzanine Floor (which, according to the plans, was not substantially different in area from the ground and 1^st floors).

6.It is not disputed⁷ that after entering into possession, the Tenant:

(1)  demolished the entire Mezzanine Floor, as well as part of the ground, 1^st and 2^nd floors, removing floor slabs and staircases;

(2)  installed lift(s)  and internal staircases between the basement and the 2^nd floor⁸;

(3)  removed washrooms in the basement, and moved fire exit stairs;

(4)  removed the original air-conditioning system⁹;

(5)  reconfigured the external facade of the Premises facing Pedder Street and Theatre Lane;

(6)  reconfigured or removed lobbies and partition walls related to common corridors; and

(7)  reconfigured essential building services.

7.At the hearing of the appeal, it was clear that the Landlord was mostly concerned[10] about reinstatement of the demolished floors set out at §6(1)  above.   

Term of Lease

8.1.The Premises were leased for a term of 9 years commencing 1 November 2011. 

SC (11)  “Break Clause”[11]

8.2.However, Special Condition[12] (11)  Break Clause in the Third Schedule provided that the Tenant shall have the right to terminate the agreement after 5 years from the commencement date by serving not less than 6 months’ prior written notice to the Landlord, provided that the Tenant shall compensate the Landlord with a specific sum to be paid in two instalments.  The Break Clause also stated:

“Subject to payment of the Compensation as aforesaid and subject to the delivery of vacant possession of the Premises by the Tenant to the Landlord in accordance with such notice and upon compliance of all other terms and conditions of this Agreement up to the date of delivery of vacant possession of the Premises to the Landlord, this Agreement shall terminate at the expiry of such early termination notice and the parties shall enter into a Deed of Surrender to reflect the early termination of this Agreement and the release of the rights thereby created (save for antecedent breach)”.

8.3.On 11 November 2016, the Tenant served a notice of early termination under the Break Clause.  The notice also said:

“We will surrender the Premises in a ‘bare shell’ condition in accordance with Clause (13)  in the Third Schedule of the Lease and Clause 3.29 [presumably meaning Clause 3.27[13]] of the Tenancy Agreement”.

8.4.These provisions are set out below. In the Decision, the judge broke up the contents of Clause 3.27 and SC (13)  into different “Parts”[14], shown below by the square brackets added before each part.

Clause 3.27 “Yield Up Premises and Handover”

9.This is part of Clause 3, in which the Tenant agrees and covenants with the Landlord (among other things):

“[a] To yield up the Premises in a ‘bare shell’[15] good clean state of repair and condition (fair wear and tear latent inherent structural defects not caused by the act of default of the Tenant excepted)  at the expiration or sooner determination of this Agreement in accordance with the stipulations herein contained

[b] Provided That the Landlord reserves the right subject to not less than 9 months’ prior written notice being given by the Landlord to the Tenant

[b(i)] EITHER to require the Tenant to leave all fixtures and fittings or any part thereof which have been affixed to the Premises by or on behalf of the Tenant and which have become part of the Premises (except trade fixtures and fittings which the Tenant may remove subject to making good all damages caused by the removal thereof at the Tenant’s own cost)  and yield up the Premises together with such alterations fixtures and additions thereto which the Tenant may have made to the Premises with or without the consent of the Landlord

[b(ii)] OR at the discretion of the Landlord, to require the Tenant to reinstate remove or do away with any additions, alterations or improvements to the Premises, including the Staircase[16], elevators, air-conditioning system and the signages (both inside and outside of the Premises)  and make good all damages caused thereby in a proper and workmanlike manner at the Tenant’s sole costs and expense before delivering up the Premises to the Landlord”.

SC (13)  “Reinstatement and Hand Back Condition of the Premises”

10.“[1]   Upon the expiry of this Agreement or sooner determination of the said term, the Tenant shall return the Premises to the Landlord in a ‘bare shell’ good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord.

[2] The Landlord shall have the right, subject to giving to the Tenant not less than 9 months’ prior written notice, to require the Tenant

[2(i)] to leave all or any part of the fixtures and fittings which have been affixed to the Premises by or on behalf of the Tenant or which have become part of the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages)  and all additions erections alterations and improvements or any part thereof which the Tenant may have made to the Premises with or without the consent of the Landlord (save and except the trade fixtures and fittings of the Tenant that brand the Premises as an Abercrombie & Fitch store, which the Tenant shall remove subject to making good all damages caused by the removal thereof at the Tenant’s own cost)

[2(ii)] OR at the discretion of the Landlord, to require the Tenant to remove any additions, alterations or improvements to the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages (both inside and outside of the Premises))  and make good all damages caused thereby at the Tenant’s sole costs and expenses to the satisfaction of the Landlord and the Manager in accordance with the applicable laws and subsidiary legislation”.
(Italics added).

11.1.There are a number of differences between the wording used in Clause 3.27 and SC (13).  For example, in Clause 3.27 Part [b(i)] the word “either” appears, and in Part [b(ii)], the word “reinstate” appears.  Neither is found in SC (13).

11.2.However, it was stipulated in Clause 12.13 that in the event of any conflicting provisions in the Special Conditions and the Agreement, the Special Conditions shall prevail, and the parties’ submissions have therefore concentrated on SC (13).

Events after the Break Clause notice

12.1.Coming back to the facts, after a “walk-through” of the Premises by representatives of both parties, on 28 November 2016 the Tenant sent an email to the Landlord attaching a document[17] said to be “the scope of works that we intend to complete prior to surrender of the Premises on May 11, 2017".

12.2.This led to three letters from the Landlord which are material to the 2^nd Question.  It is therefore necessary to set them out in some detail.

Landlord’s 1^st Letter (2 December 2016)

13.1.On 2 December 2016 (“Landlord’s 1^st Letter"), the Landlord wrote to the Tenant regarding the latter’s proposed “reinstatement scope”[18].  After seeking some clarifications, it went on to say:

“In the meantime, we would like to draw your attention to [SC (13)] which provides that the Tenant shall return the Premises to the Landlord in ‘bare shell’ good clean state of repair and condition ‘on each floor of the Premises’ to the reasonable satisfaction of the Landlord. You are therefore required to reinstate the Premises (including the reinstatement of the demolished floors or any part thereof)  in accordance with their original layout as at the date of the handover of the Premises to you (unless otherwise agreed by us)  prior to return thereof to us on 11 May 2017 in accordance with your letter dated 11 November 2016 in which you have exercised your right to terminate, inter alia, the Lease on 11 May 2017 pursuant to [SC (13)]”. (Italics added).

13.2.The Tenant replied on 8 December 2016 saying, among other things, that

-  SC (13)  Part [1] states the “general/basic obligation” of the Tenant to return the Premises to the Landlord in a “bare shell” good clean state of repair and condition on each floor of the Premises;

-  the term “bare shell” was not defined in the Agreement; its “ordinary meaning” was “unfurnished and undecorated”, and it did not imply that the Tenant was obligated to reinstate any structural alterations it had made;

-  the Landlord’s demand that the Tenant reinstate the demolished floors in accordance with their original layout was not an obligation under the Lease.  The Tenant did not offer to reinstate the demolished floors in any other way (its case throughout is that it was not obliged to reinstate any of the demolished floors).

Landlord’s 2^nd Letter (12 Dec 2016)

14.This led to a letter from the Landlord dated 12 December 2016 (“Landlord’s 2^nd Letter”)  saying:

“Whilst we agree with you that the ordinary meaning of ‘bare shell’ means ‘unfurnished and undecorated’, this can only mean the removal of furnitures, movable fittings and decorations. It is totally inconceivable that the term ‘bare shell’ can mean you are allowed to return the Premises to us without the need even to reinstate any structural alterations made by you or the floors you have demolished. If your argument is adopted, you need only deliver to us an empty structure with no ceilings and floors, which no landlord would accept.

In addition, [SC (13)] requires you to return the Premises in ‘bare shell’ condition ‘on each floor of the Premises’. As the Premises comprise over four floors, it is clear that by specifically referring to each floor of the Premises in the Clause, it would mean the Premises must be returned with ALL the original floors reinstated so that if any part of these floors has been demolished, it must be reinstated and returned in bare shell condition at the end of the lease.

In view of the above, we reiterate our stance and demand in [the Landlord’s 1^st Letter]. You are therefore reminded to seek and obtain the relevant Government approvals to the necessary reinstatement works and proceed with the same without further delay so that the Premises can be returned to us in accordance with the terms of the Lease on 11 May 2017". (Italics added).

15.1.On 22 December 2016, the Landlord’s architect sent an email to the Tenant attaching a “consolidated list of reinstatement works as required by the Landlord in accordance with the Lease provisions” (“the Consolidated List”).

15.2.It should be noted that irrespective of other items, this List includes the replacement of the Mezzanine Floor[19] which the Tenant, on its construction of “bare shell” condition, refused to reinstate.

16.On 19 January 2017, the Tenant’s solicitors wrote to the Landlord disputing the latter’s interpretation of the term “bare shell”, and asserting the following:

(1)  the Dispute Items[20] “as structural alterations” approved by the Landlord and the Buildings Department “have become the landlord’s fixtures and part of the Premises”, and the Tenant has no legal “right or obligation to remove and/or reinstate them upon delivery of vacant possession”;

(2)  [SC (13)] was to the effect that “if the landlord requires that such alterations (including staircases and elevators)  be removed, 9 months’ prior written notice must be given to the tenant.  This must mean that [the Tenant] only becomes obliged to reinstate the Premises if 9 months’ prior written notice has been given, but not otherwise. As you have accepted[21], no such written notice has been given and it is not possible to now do so if the Lease were to terminate upon expiry of the 6-month notice period”.

Landlord’s 3^rd Letter (26 Jan 2017)

17.This in turn led to a letter from the Landlord’s solicitors dated 26 January 2017 (“Landlord’s 3^rd Letter”)  to the Tenant’s solicitors which said (where material):

“With respect, the term ‘bare-shell’ must be interpreted in the context of [SC (13)] which reads’ in a ‘bare-shell’ good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord’. Since your client has removed part of the floors of the Premises, by expressly requiring delivery in bare-shell condition ‘on each floor of the Premises’, it would mean that the Premises must be returned with ALL the demolished floors reinstated so that if any part of these floors has been demolished, it must be reinstated and returned in bare-shell condition at the end of the lease.

The fact that our client has approved the structural alterations of your client including, but not limited to, the removal of floor slabs and installation of internal staircases cannot mean your client is thereby relieved from its obligation to reinstate them upon lease termination/expiry. In particular, the demolition of part of the floors and ceilings by your client has resulted in the loss of considerable lettable area in the Premises. It is therefore totally inconceivable that our client (or any landlord)  would agree to accept a permanent loss of lettable area resulting in substantial financial loss to them as landlord.

To substantiate our client’s claim, our client’s emails on 2 and 12 December 2016 to yours requiring your client to reinstate the Premises (including the reinstatement of demolished floors or any part thereof)  in accordance with their original layout as at the date of handover to your client constitute written notice to your client to remove the alterations or improvements to the Premises and make good all damages caused thereby under [SC (13)].

Further, subsequent to the telephone conference between our respective clients and their architects on 20 December 2016 going through the removal/reinstatement works to be carried out by your client at the Premises, our client’s architect ... has sent a finalised Scope Summary of Reinstatement Works in writing to your client via email on 22 December 2016. The said email, which was dispatched on behalf of our client, can also constitute the written notice on your client under [SC (13)][22].

Hence, your client has up to 9 months from, at the latest, 22 December 2016 to complete such reinstatement although our client would of course welcome such reinstatement to be duly completed earlier i.e. by the lease termination date on 11 May 2017 if practicable. However, if the reinstatement works cannot be completed by 11 May 2017, your client is still obliged to pay our client the existing rent of the Premises (i.e. at HK$9,800,000 per month)  until such time when such reinstatement is duly completed (but in any event not later than 22 September 2017)  and the Premises can be returned in accordance with the terms of the Lease to our client’s reasonable satisfaction”. (Italics added).

18.This led to further correspondence between the parties’ respective solicitors which it is not necessary to set out here, save to say that on 12 May 2017, the Landlord’s solicitors wrote to the Tenant’s solicitors referring to the handover arrangement the day before, and asserted that the Tenant having failed to comply with the reinstatement obligations under the Lease, its wrongful repudiation of the Lease was accepted by the Landlord.

Pleadings

19.1.On 13 September 2017, the Tenant issued HCA2103/2017 against the Landlord for:

(1)  repayment of $31,076,317 being the deposit paid by the Tenant to the Landlord to secure the due observance and performance by the Tenant of the terms and conditions of the Lease (“the Deposit”);

(2)  repayment of $7,417,960.20 being excess payments of rent, management fees and rates (“the excess amounts”); and

(3)  unspecified damages for breach of the Lease. 

19.2.On 19 December 2017, the Landlord filed a Defence and Counterclaim[23] asserting that:

(1)  by reason of the Tenant’s breach of Clause 3.27 and SC (13), it (the Landlord)  was entitled to retain the Deposit and deduct from it the costs expenses loss or damages sustained by such breach;

(2)  the excess amounts should be in the sum of $7,080,148.92[24], which it was entitled to set-off against the sums claimed in the Counterclaim;

(3)  by reason of the Tenant’s failure (as particularised in §27)  to restore the Premises to the Original Layout[25] to the extent permitted by the building plans approved by the Buildings Department in 2007 prior to the Lease (“the Building Plans”)[26], the Landlord had suffered loss and damage, being:

(a)  the costs incurred by the Landlord to complete the reinstatement works[27], and

(b)  loss of rent

to be assessed.

As mentioned earlier, the Guarantor was joined as the 2^nd defendant to the Counterclaim.

19.3.On 18 May 2018, the Tenant and the Guarantor filed their Reply and Defence to Amended Counterclaim[28], asserting (among other things)  that:

-  on the true construction of Clause 3.27 and SC (13), the Tenant was not obliged to

-  carry out the reinstatement works set out in the Consolidated List, or

-  to reinstate the Premises according to the Original Layout to the extent permitted by the Building Plans

unless the Landlord had given not less than 9 months’ prior written notice, and that such notice should expire on or before the date of expiry of the Lease or the sooner determination of the same[29];

-  the Landlord’s 3 letters did not constitute such notice[30]; and

-  “bare shell” ... “simply connote the meaning of ‘unfurnished or undecorated without fixtures, fittings or furniture’”[31].

Order 14A Summons

20.On 6 September 2019, the Tenant and the Guarantor issued a summons for an order that 3 issues be determined pursuant to Order 14A rule 1[32], and that if the issues are determined in their favour, final judgment be entered in their favour for orders that the Landlord repay the Deposit and excess amounts[33] to the Tenant with interest, and that the Landlord’s Counterclaim be dismissed.  The Landlord did not ask for any orders.

Questions

21.The issues (“the 3 Questions”)  are as follows:

(1)  Whether, on the true construction of Clause 3.27 and SC (13), the Tenant is required to restore the Premises to the Original Layout to the extent permitted by the Building Plans, absent any notice given by the Landlord;

(2)  Whether, on the true construction of Clause 3.27 and SC (13), the Landlord’s 3 letters amounted to valid notices requiring the Tenant to carry out the works set out in the Consolidated List and/or to restore the Premises to the Original Layout to the extent permitted by the Building Plans;

(3)  Whether, on the true construction of the Lease and/or by reason of an implied term(s)  therein, the Landlord’s said letters, even if they amounted to valid notices as aforesaid could impose an obligation on the Tenant to carry out the works set out in the Consolidated List and/or to restore the Premises to the Original Layout to the extent permitted by the Building Plans, in light of the fact that the termination of the Lease and the delivery up of vacant possession would have to take place on 11 May 2017 (i.e. before the expiry of the obligatory 9 month notice period prescribed under the Lease).

The judge’s Decision

22.1.For reasons set out in the Decision, the judge answered the 1^st Question[34] and the 2^nd Question[35] in the negative.  As for the 3^rd Question, the judge observed that had this Question been engaged, he would have accepted the Landlord’s submission, supported by a passage in a textbook which said the law was “not wholly clear”[36], that where a notice to reinstate may be given at any time up to the term date, the tenant is entitled to remain in occupation of the premises for such period thereafter as is reasonably required in order to complete the reinstatement works.  The judge noted that it was no longer the Landlord’s case that the Tenant would have to pay a licence fee for that period[37].

22.2.As a result of the judge’s answers to the 1^st and 2^nd Questions, he entered Judgment in favour of the Tenant and made various consequential orders.  

Appeal

23.The Landlord appealed, and the Tenant and the Guarantor filed a Respondent’s Notice regarding the 3^rd Question only.

Discussion

The Law

24.There is no dispute between the parties on the law.  In Eminent Investments (Asia Pacific)  Ltd v DIO Corp[38], the Court of Final Appeal held that the starting point in the construction of a contract is the ordinary and natural meaning of the words, but if there can be much debate over exactly what is the ordinary or natural meaning of words, the surer guide to interpretation is context.  Account should be taken of the purpose of the contract and the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time the contract was executed, the quality of the drafting, and commercial common sense[39].  

The 1^st Question

25.1.Despite the way in which the 1^st Question has been framed, it is clear from the Landlord’s letters, the parties’ respective positions and the Decision that the “crux of their dispute is the meaning of the phrase ‘bare shell’ state”[40] in SC (13)  and in particular, whether it obliges the Tenant to reinstate the demolished floors. I shall first discuss in summary my understanding of SC (13).  

25.2.First, the 2 Parts are “stand-alone” clauses.

25.3.Part [1] provides that upon the expiry of the Lease or sooner determination of the said term (e.g. by the Tenant invoking the Break Clause), the Tenant is obliged to return each floor (including the Mezzanine Floor)  of the Premises to the Landlord in a ‘bare shell’ condition, in the sense set out in § 26.1 below.

25.4.Part [2] provides that if, however, the Landlord wishes to “pick and choose” which of the items put in by the Tenant it wishes the Tenant to leave behind and which it requires the Tenant to remove, it must give the Tenant 9 months’ prior written notice.  

SC (13)  Part [1]   

Natural and ordinary meaning

26.1.It is clear in my view that the natural and ordinary meaning of the words “bare shell”, when applied to a building such as this, is the structural concrete frame of the building and that only, free of non-structural partition walls and (as both parties agree)  unfurnished and undecorated.  Where a building is divided into different floors, the obligation to return it in a “bare shell ... condition on each floor” means that the tenant must return the structural walls and floors on each of the floors demised.

26.2.In the Lease, each of the Lower Ground Floor, Ground Floor, Mezzanine Floor, 1^st Floor and 2^nd Floor was individually specified as a floor within the definition of the term “Premises”.  A floor is separated from another floor by a floor slab between them.  Accordingly, an obligation to return each individual floor is not fulfilled by leaving only a void in place of floors which have been entirely or partly demolished, and the natural and ordinary meaning of the words means that the entirely or partly demolished floors should be reinstated.

26.3.Insofar as the submission of counsel for the Tenant that

“the words ‘on each floor’ are linked to the ‘bare shell’ condition of the Premises, not the subject-matter to be returned”[41]

means anything different from §§26(1)  - (2)  above, I am unable to agree.  What is to be returned are the Premises, consisting of individual floors, in a “bare shell” condition as discussed above.

Contextual considerations

27.Counsel for the Tenant submit that the present case is one “which should start and end with the plain meaning of the express terms”[42].  With respect, I agree.  However, even if we were to go beyond that and consider the contextual factors mentioned in Eminent, I do not see anything in the context that would detract from what I consider to be the natural and ordinary meaning set out above.

- Purpose of contract and provision

28.1.There can be no doubt that the purpose of the Lease was to govern the parties’ rights and obligations as landlord and tenant. 

28.2   The purpose of SC (13)  was to set out those rights and obligations regarding the state of the property at the point in time when the tenant leaves, which is particularly important to the landlord who would wish to use the property profitably (e.g. by re-letting)  thereafter.

28.3.I see nothing in the purpose of the contract and the provision in question which would detract from what I consider is the natural and ordinary meaning of the words, which restores the number of floors as per the property originally demised, and which would leave it in a ready state for the next tenants’ fit-out works. 

28.4.Having said that, it should be noted that SC (13)  Part [1] does not oblige the Tenant to reinstate the property as it was before the commencement of the lease. Thus, e.g. if the original staircases and lifts have been replaced by new staircases and lifts, the “bare shell” requirement in SC (13)  Part [1] does not require the Tenant to demolish the new items and replace them with the old ones.

- Other provisions in the contract   

29.I shall now look at other relevant provisions in the Lease.

30.First, the Tenant says that Clause 3.27[43] does not contain the words “on each floor”.  As noted earlier, there are a number of differences in the wording of Clause 3.27 and SC (13), but it was provided in Clause 12.13 that in the event of any conflicting provisions in the Special Conditions and the Agreement, the Special Conditions shall prevail.  So there is nothing in this argument whether or not there is a conflict.  

31.1.Second, the Tenant also refers to Clause 3.4, in which it agrees and covenants with the Landlord:

“Good Repair of Interior

3.4 Upon completion of the fitting out works to be submitted by the Tenant and approved by the Landlord, to keep all the non-structural parts of the interior of the Premises and all relevant structural parts of the Premises if they have been constructed and/or altered by the Tenant including the flooring and interior plaster or other finishing material or rendering to walls floors and ceilings and the Landlord’s fixtures and fittings therein and all additions (whether of the Landlord or the Tenant)  thereto including all doors, windows, electrical installations and wiring, elevators, light fittings, suspended ceilings, fire fighting apparatus and air-conditioning plant and ducting, and the external walls and signages in good clean tenantable substantial and proper repair and condition (fair wear and tear latent inherent structural damages not caused by or attributable to the acts or defaults of the Tenant excepted)  and as may be appropriate from time to time properly painted and decorated and so to maintain the same at the expense of the Tenant, and at the expiration or sooner determination of the said term, to deliver up the same to the Landlord in the condition set out in this Agreement in good clean and tenantable repair and condition (fair wear and tear latent inherent structural damages not caused by or attributable to the acts or defaults of the Tenant excepted)”.

31.2.The Tenant says that the words “to deliver up the same” include “all relevant structural parts of the Premises if they have been constructed and/or altered by the Tenant including the flooring”. 

32.I do not think this provision changes the natural and ordinary meaning of the words “bare shell” in SC (13).  First, this is only a clause in the agreement, and as noted before, Clause 12.13 provides that the Special Conditions prevail.  Second, generally in the context of building works, “alteration” and “demolition” are regarded as being different works, the former being works to change a part of a building, and the latter the destruction of that part in its entirety.

33.Finally, the Tenant says that if it were required by Part [1] of SC (13)  to reinstate the Premises by removing any alterations without the Landlord having to give notice, it would have been “completely pointless” to have inserted Part [2(ii)] so as to give the Landlord a discretion to require the Tenant to “remove any additions, alterations or improvements to the Premises”.  I shall therefore discuss the construction of Part [2] before returning to other contextual considerations.

SC (13)  Part [2]   

34.1.I have earlier summarised my understanding that the natural and ordinary meaning of the words in Part [2] is that the Landlord can “pick and choose” which items it requires the Tenant to leave behind and which items it requires the Tenant to remove, by giving the Tenant 9 months’ prior written notice. It is to be contrasted with Part [1] which is the default option.  The Landlord’s right to pick and choose items[44] in Part [2] is to be contrasted with wholesale demolition works to result in the Premises being returned in a bare shell condition under Part [1].

34.2.Part [2(i)] entitles the Landlord[45] to choose which items (including fixtures)  it requires the Tenant to leave behind.   In common law, the mere fact that an item is affixed to the land does not necessarily mean that the tenant may not remove it at the expiry of his lease; hence, the concept of “tenant’s fixtures”[46] which are the fixtures he may remove.  Part [2(i)] entitles the Landlord to require the Tenant to leave behind even a tenant’s fixture which the Tenant might otherwise have the right and intention to remove.

34.3.Part [2 (ii)] entitles the Landlord[47] to choose at its discretion any additions, alterations or improvements it requires the Tenant to remove.  Fixtures are not referred to.  Thus the Landlord may not require the Tenant to remove fixtures if the latter does not wish to do so.

35.Counsel for the Landlord submitted that under SC (13)[48], Part [2(i)] and Part [2(ii)] are not disjunctive but may be complementary.  So the Landlord may require the Tenant to leave behind under Part [2(i)] a fixture, such as a fireplace, but require the Tenant under Part [2(ii)] to remove an addition, such as a decorative feature on the fireplace, and to make good any damage caused by such removal.

36.Be that as it may, the pertinent point is that, contrary to the argument of the Tenant regarding the construction of Part [1], Part [2(ii)] is not “completely pointless”, because it caters for a different situation from Part [1].  In Part [2(ii)], fixtures are not included in the list of items which the Landlord may require the Tenant to remove, whereas in Part [1], even on the Tenant’s own case, a bare shell condition requires that fixtures should also be removed.  In Part [2(ii)], the Landlord can in its discretion choose which items (“any additions, alterations or improvements”)  it wants removed.  In Part [1], all additions etc. must be removed for the Premises to be left in a bare shell condition.

- Facts and circumstances known or assumed by the parties at the time the contract was executed

37.The Tenant has “highlighted” as background the original term of the Lease, the fact that the Tenant was obliged to obtain the Landlord’s approval before carrying out works, and the compensation to be paid upon the Tenant invoking the Break Clause.   None of these facts detracts from the natural and ordinary meaning of the words in SC (13).

- Quality of the drafting

38.The Lease was drafted and approved by the parties’ respective solicitors.  There is no particular significance in this, by reason of the matters discussed in §45(c)  and (d)  of Eminent.

- Commercial common sense

39.There is commercial common sense in the Landlord having the choice between the return of the Premises in a bare shell condition in Part [1] and the “pick and choose” scenario in Part [2].  It gives it greater flexibility, depending on the use of the Premises after this tenant’s departure.  In the Part [1] scenario, the stripping out would render the “frame ready to receive the next tenant’s fit-out” as the Tenant itself acknowledged in correspondence[49].  As for the Part [2] scenario, as the Tenant was obliged to fit out the Premises up to the standard of the group’s flagship stores in Tokyo and New York[50], no doubt at some expense, it made sense for the Landlord to wish to take advantage of whatever parts of the fit-out as would attract prospective tenants[51].

Wording of the 1^st Question

40.I have set out above what I understand to be the natural and ordinary meaning of SC (13), in particular that the “bare shell” condition in Part [1] requires the reinstatement of the entirely or partly demolished floors, which was the Landlord’s main concern.  I shall now discuss the references in that Question to “Original Layout” and “to the extent permitted by the Building Plans”.

41.1.First, the reference to “Original Layout”.  It is important to note the following contents of the Landlord’s 1^st letter:

“In the meantime, we would draw your attention to [SC (13)] which provides that the Tenant shall return the Premises to the Landlord in “bare shell” good clean state of repair and condition “on each floor of the Premises” to the reasonable satisfaction of the Landlord. You are therefore required to reinstate the Premises (including the reinstatement of demolished floors or any part thereof)  in accordance with their original layout as at the date of handover of the Premises to you”. (Italics added).

41.2.It was therefore clear from the earliest correspondence that the Landlord was using the term “original layout” to illustrate the requirement of “bare shell” condition on “each floor” and the judge found[52] that the Original Layout had been identified in the floor plans annexed to the Lease.  The words “for the purpose of identification only” do not mean that the plans may not be looked to for elucidation[53], and on the face of it, those plans show the structural concrete frame of each floor of the Premises.  Therefore, the Landlord’s demand that the Tenant is required to restore the Premises to the Original Layout may be regarded as a way of illustrating the requirement of reinstatement to a bare shell condition on each floor.  However, it seems to me that the adoption of the meaning of a “bare shell” condition as set out in §26.1 above may be more helpful than a reference to the Original Layout.

41.3.The Tenant’s case was that “Original Layout” was not referred to in the Lease, which is correct.  But as the Tenant acknowledges[54], the dispute before the judge surrounded the meaning of the words “bare shell”, and its argument before this court remains that a bare shell condition on each floor does not include reinstatement of the demolished floors[55].

42.1.Secondly, the reference to “to the extent permitted by the Building Plans”.  These words are not set out in SC (13).  The approved general building plans of the Building were referred to only in Clause 12.2(a)  of the Lease which gives the Landlord the right to “to change, amend, vary, add to or alter the approved general building plans of the Building existing at the date hereof”.

42.2.It is notable that the Landlord’s 3 letters did not refer to the Buildings Plans at all.  The reference “GBP” (general building plans)  first appears in an attachment[56] to the email of 22 December 2016 from the Landlord’s architect.  It is not known to what extent this resulted in the appearance of those words in the Landlord’s pleadings, which were served on 19 December 2017, well after termination.  They should therefore not have affected the Tenant’s decision as to what to reinstate.

42.3.In any event, before this court, counsel for the Landlord submits[57] that:

“Naturally, [the Tenant’s] obligation to return the Premises in a bare shell condition must be understood as being constrained by what is permitted under the Building Plans” (italics added).

Read one way, that may be said to be an acceptance by the Landlord that the Tenant is only required to undertake works which are lawful.

42.4.Be that as it may, those words form no part of SC (13)  whether expressly or impliedly, and in my view add nothing to its true construction.

43.In conclusion on the 1^st Question, my answer is that on the true construction of Clause 3.27 and SC (13), the Tenant is required to return the Premises in a “bare shell” condition[58] on each floor, including (for the avoidance of doubt)  by reinstatement of entirely or partly demolished floors, absent any notice given by the Landlord.  Accordingly, although the 1^st Question as framed (with references to “Original Layout” and “Building Plans”)  is to be answered in the negative, there is no question of the Tenant being entitled to enter final judgment, and the judge’s orders must be set aside.

The 2^nd Question

44.The 2^nd Question can be disposed of briefly.

45.1.It is clear in my view that the Landlord’s 1^st and 2^nd letters were not notices under Part [2] of SC (13).  Both these letters expressly quote the “bare shell” condition requirement, reflecting Part [1].  Part [2] was never referred to, and the deadline imposed by the Landlord in both letters for return of the Premises on 11 May 2017 shows it is referring to the Part [1] option.

45.2.The Landlord’s 3^rd letter was what one might call “hybrid”.  The first page clearly reflects its case under Part [1].  However, on the second page, it seeks (unsuccessfully, in my view)  to argue that the 1^st and 2^nd letters were notices under Part [2].  It also advanced the argument that the architect’s email of 22 December 2016 “can also constitute the written notice”.  This argument was not pursued before the judge.  Nor did the 3^rd letter itself purport to constitute notice.

46.1.The Landlord’s case on this Question cannot be saved by the application of the principle in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[59].  The tenant in that case gave notices “pursuant to” a particular clause in the lease, but wrongly stated the termination date by one day.  The House of Lords held that on the objective construction of the notices, a reasonable recipient would have understood them as meaning that the tenant, who had expressly invoked the relevant clause, had wished to determine the lease on the third anniversary date (being 13 January 1995)  and not on 12 January 1995 as stated on the notices. 

46.2.In the present case, SC (13)  contained two alternative options: Part [1] the bare shell option, and Part [2] the “pick and choose” option.  On an objective construction of the Landlord’s 1^st and 2^nd letters, it would be clear to a reasonable recipient that the Landlord was not choosing Part [2].  As for the Landlord’s 3^rd letter, it advanced an unacceptable construction of the 1^st and 2^nd letters, and did not itself purport to give notice.

47.For the above reasons, I respectfully agree with the judge that the 2^nd Question should be answered in the negative.

The 3^rd Question

48.In view of the answer to the 2^nd Question, the 3^rd Question is not engaged.  Had it been necessary to answer this Question, I would, in respectful agreement with the judge[60], have answered in the affirmative, such that the Tenant would have been obliged to complete the reinstatement works within 9 months of the date of whichever letter was found to be valid notice, even if that period would expire after the termination of the Lease.

49.SC (13)expressly applies to the scenario of a sooner determination of the Lease, which includes early termination upon the Tenant invoking the Break Clause, for which it need only give 6 months’ notice.  The Break Clause also expressly states the Tenant’s obligation of “compliance of all other terms and conditions of this Agreement”.  The parties therefore clearly intended that the Landlord could give a valid Part [2] notice after it receives the Break Clause notice, and the Tenant would be required to comply with the Part [2] notice.  Therefore, I do not agree with the Tenant’s submission that after the termination of the Lease, it was under no obligation to comply with the Part [2] notice.  Its obligation to do so had accrued during the currency of the Lease.

50.There was no provision in the Lease expressly stating the time when the Landlord was required to give the 9 months’ written notice under Part [2].  Obviously, as a notice given underthe Lease, it cannot be given after its termination[61].

51.1.Taking into account the wording of SC (13)  and applying commercial common sense, I think it may be implied that the notice may be given at any time immediately prior to the date of termination.  Up until the date of termination, the Tenant is entitled under the Lease to effect alterations to the Premises.  Since the effect of the Landlord’s notice is to “crystallize” the items the Tenant is required to leave behind or remove, it must necessarily have been intended by the parties as reasonable persons that the Landlord would not serve the Part [2] notice until immediately prior to the date of termination.

51.2.The Tenant would thereafter have 9 months to comply with the notice.  It matters not that such compliance would not commence or be concluded within the term of the lease.  The Landlord must have impliedly granted a licence to the Tenant to occupy the Premises for the purpose[62].  (As a matter of completeness, on 24 March 2017, the Landlord’s solicitors informed the Tenant’s solicitors that for the avoidance of doubt, the Landlord was prepared to permit the Tenant to remain on the Premises from 11 May to 4 September 2017 for the purpose of carrying out reinstatement works “subject to payment of any licence fee which [the Landlord] is entitled to recover as a matter of law”, but at the hearing before the judge, it was no longer the Landlord’s case that a licence fee was payable for that period).

52.As for the Landlord’s alternative argument that after its notice, the Tenant was required to “put in hand” the necessary works during the term (even if it is not required to be completed within it), I do not see how that could be reconciled with the Landlord’s covenant[63] to permit the Tenant to have quiet enjoyment of the Premises.  It is well-established that “quiet enjoyment” means enjoyment of the demised premises without interference.  The performance of those works during the term would substantially interfere with the Tenant’s ability to have the full benefit of using the Premises in an ordinary lawful way[64].

Order

53.1.For the reasons set out above, I would allow the appeal and set aside the orders made by the judge.  As far as the Order 14A Summons is concerned, I would:

(1)  in respect of §1, make the following determinations:

(a)  on the true construction of Clause 3.27 and Clause 13 of the Third Schedule of the Lease, the Tenant is required to return the Premises to the Landlord in a “bare shell” condition[65] on each floor, including (for the avoidance of doubt)  by reinstatement of entirely or partly demolished floors, absent any notice given by the Landlord;

(b)  on the true construction of Clause 3.27 and Clause 13 of the Third Schedule of the Lease, none of the Landlord’s letters of 2 December 2016, 12 December 2016 and 26 January 2017 amounted to valid notices thereunder;

(2)  dismiss §2 and remit the action to the Court of First Instance for trial.

53.2.It would be noted that although the Tenant sought consequential orders in the Order 14A Summons including judgment, the Landlord did not do so.  There was no argument before the judge as to what would ensue if the Landlord were to succeed on the 1^st Question.  Accordingly, the Landlord’s application for the orders in paragraphs (b)  to (h)  of the Notice of Appeal except for paragraph (g)  should be dismissed.

53.3.As for the costs order sought in paragraph (g)  of the Notice of Appeal, I would make an order nisi that

(i)   the Tenant pay to the Landlord its costs of the appeal, to be taxed if not agreed (the parties having agreed to certificate for two counsel), and

(ii)  there be no order as to costs before the judge, as it is apparent from the Decision that the Landlord’s arguments on construction before the judge were different from those advanced before this court.

Hon Au JA:

54.I agree with the judgment of Yuen JA.

Hon G Lam JA:

55.I agree with the judgment of Yuen JA.

Mr Patrick Fung SC and Mr Justin Lam, instructed by Dentons Hong Kong LLP, for the plaintiff (by original action)  and the 1^st and 2^nd Defendants (by counterclaim)

Mr Johnny Mok SC, Ms Bonnie Y K Cheng and Mr Keith Chan, instructed by Deacons, for the defendant (by original action)  and the plaintiff (by counterclaim)