Eastrade Holdings Ltd v. Secretary for Justice for and on behalf of the Director of Lands

CACV 31/2024, [2024] HKCA 1137

On Appeal From [2023] HKCFI 3356

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 31 OF 2024

(ON APPEAL FROM HCMP NO 1736 OF 2021)

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

A. Introduction

1.This is an appeal by the plaintiff, the lessee of New Kowloon Inland Lot No. 886 (“Lot”) under a Government lease dated 2 October 1930 (“Lease”), from the judgment[1] dated 27 December 2023 (“Judgment”) of Recorder Eva Sit SC (“judge”) refusing to make any of the three declarations sought in the plaintiff’s originating summons.  The appeal is opposed by the defendant, who is sued on behalf of the Director of Lands (“Director”).

2.There are 2 main issues on this appeal: (1) whether on the true construction of the Lease the Director’s consent is required for erecting the building constructed on the Lot in 2015, and (2) if so, whether the Government had waived any breach of the requirement of consent in relation to the preceding building, so that the “before” value for the purpose of calculating the premium payable for obtaining consent should be determined on the basis of the development parameters of that building rather than the original building erected at the time of the Lease.

B. Background

B1.  The Kowloon Tong Garden Estate

3.The relevant facts and background have been set out by the judge in §§3-41 of the Judgment, which we adopt with modifications in §§4-32 below. 

4.The Lot was part of a building scheme known as the “Kowloon Tong Garden Estate” (“Estate”) initiated in around 1921 and completed in around 1930.  The Estate covered about 81 acres (33 hectares) of land situated to the east of the Kowloon-Canton Railway tracks, south of Cornwall Street, west of Waterloo Road, and north of Boundary Street. 

5.The origin of the idea of creating a garden estate in Kowloon Tong is described in the book by Prof Ho Pui Yin, Making Hong Kong, A History of its Urban Development (2018), as follows (footnotes omitted):

“ … Kowloon Tong was a pilot trial of a comprehensive development model based on the British garden city. On 18 November 1920, Chief Secretary A. G. M. Fletcher estimated during a Legislative Council meeting that the monthly rent would be around 25 Hong Kong dollars in the Kowloon Tong residential area, which was tailored for the middle class. On 14 November 1921, Chief Secretary Claude Severn reiterated in a Legislative Council meeting that the houses in Kowloon Tong would provide low-rental properties. …

The Kowloon Tong Development Project was also known as the Garden City Project, the concept of which originated from the book Tomorrow: A Peaceful Path to Real Reform written by British national Ebenezer Howard in 1899. … Howard’s concept combined a twentieth-century urban lifestyle that facilitated economic and societal development with a humanised country lifestyle. The concept … was acclaimed in Europe and the United States, with many countries striving to follow suit. …

In 1921, the government planned to invite the private sector to bid for the development of Kowloon Tong. …”

6.In around 1921, The Kowloon Tong and New Territories Development Co Ltd (“Company”), a non-profit making company, was established under the aegis of Mr Charles Montague Ede, then Manager of the Union Insurance Society of Canton, Limited, who had interested himself in the project of creating the Estate.  As stated in the report of the committee referred to in §13 below, the object was to build houses for persons of small means whose work or circumstances caused them to regard Hong Kong as their home, and to enable such persons to reside in their own houses or homes in more healthy and pleasant surroundings than the then usual alternative, namely flats (Chinese or otherwise) in congested areas. A small community, living in detached or semi-detached houses with small gardens and enjoying common recreational grounds, was contemplated, borrowing from the “garden city” concept which had become popular in the United Kingdom around the turn of the 20^th century.

7.To that end, the Estate provided for 250 detached houses with gardens, with streets named after English counties (including Devon, Kent and Cumberland) and public parks and playgrounds, and offered 4 main types of houses, each with standardized layout, of two storeys and designed with verandas, arched windows and a pitched roof, and equipped with modern amenities including electricity and flushed toilets.  Apparently the standardisation in design and the possibility of mass production in the construction process meant that the houses could be sold at prices affordable to the middle class.

8.On 26 October 1922, an agreement was entered into between the Crown and the Company (“1922 Agreement”), which provided:

(1)  the Company undertook to submit a development plan (“Development Plan”) for the approval of the Director of Public Works, which would include the roads (not less than 40 ft wide) to be formed, the formation levels of the proposed building sites and of the whole area generally, the disposition and number of the lots to be created none of which was to be less than 5,000 sq ft in area, designation of recreation and playground areas, as well as specimen forms of agreements to be entered into with prospective purchasers;

(2)  on the approval of the Development Plan, the Company undertook to submit for the approval of the Director of Public Works, inter alia, a plan and elevation of 3 or more types of houses and bungalows proposed to be erected in the Estate at a cost of not less than HK$4,000 each;

(3)  the Company undertook within 7 years from the date it was notified of the formation and levelling of the whole area of the Estate to complete all the buildings to be erected on the Estate in accordance with the approved Development Plan;

(4)  the Government undertook to form the area to approved general levels in accordance with an agreed timetable, and to complete drainage and other works affecting the use of the Estate;

(5)  the Company would pay premium at the rate of 12 cents per sq ft for the whole area of the Estate by 3 instalments tied to different stages of development of the Estate;

(6)  it was expressly provided that the Company could enter into agreements with prospective purchasers for the sale of the lots in the Estate with completed houses thereon – clearly with the intent that such purchasers could then shoulder the actual cost of development and the land premium charged by the Government – and that upon completion of the houses the Crown Leases for the respective lots would be issued directly to the purchasers; and

(7)  it was further provided that the Crown Leases to be issued would contain a five-year non-alienation clause (subject to consent of the Governor-in-Council which consent would not be granted if it was requested for the purpose of speculation or obtaining any enhanced profit), would in other respects be “in the usual form” and would be for the term of 75 years from 1 July 1898 renewable for 24 years less 3 days.

9.Having reached agreement with the Government, the Company proceeded to enter into agreements with prospective purchasers for the sale and purchase of the individual lots in the Estate with houses built on them.  One such purchaser was Madam Lau Gee (劉子), who entered into an agreement with the Company on 26 February 1923 to purchase the Lot (see §15 below) and to whom the Lease was eventually granted by the Government in 1930 (see §19 below).

10.The Development Plan of the Estate and the plans and elevations of several types of houses (nos. 3, 3A, 6, 6A and “Special”) and of bungalow (type 8) were in due course submitted by the Company and approved by the Director of Public Works between 1923 and 1925. 

11.Difficulties were encountered in the development of the Estate, on the Government’s side by unforeseen natural causes as well as the strike in 1925 which delayed the formation and levelling of the area, and on the Company’s side by unforeseen natural causes, failures of the construction teams and strikes, and the untimely death of Mr Ede in May 1925 which caused loss in confidence and aggravated the default in instalment payments by the purchasers.  The delay in the works was such that it was only by 1928 that the Government completed the handing over of the entire formed area of the Estate to the Company. 

12.Having done so, the Government demanded payment of the balance of land premium, which the Company was at that time not in a position to pay, as the estimated cost of construction had been exceeded and many of the purchasers refused to meet the Company’s calls for further contribution.  In the face of unpaid premium and the purchasers’ demands for the Government to intervene, the Government exercised its forfeiture right and re-entered on the Estate on 23 August 1929 (other than any portions thereof in respect of which Crown leases had already been granted or the agreements with the purchasers had been carried out).

13.After the re-entry, the Government proceeded to issue Crown Leases to those purchasers who paid the balance of the land premium attributable to their respective lots.  A committee was appointed to advise the Government as to whether any and if so what relief or monetary assistance should be granted to the Company or the purchasers.  The committee issued its report in April 1930, and its recommendations were accepted by the Governor in Council, with approval from the British Secretary of State for the Colonies, in around mid-1930.  The solution reached between the Government, the Company (as represented by Mr Ede’s son who had stepped in), its creditors such as construction companies, and the purchasers, involved the Government granting relief to the Company by contributing a sum (HK$105,000) equivalent to a quarter of the total premium to a fund set up for settling all claims, so that the remaining houses in the Estate could be completed, Crown leases could be issued and the purchasers could obtain title to their properties.  With that, the Estate was eventually completed in or around 1930, and the Company was dissolved in March 1932.

14.Accordingly, the Crown leases for lots in the Estate were issued at different times, depending on when the conditions for issuance (completion of building, payment of land premium etc) were satisfied. Nevertheless, it appears that the conditions of the Crown Leases for lots within the Estate were similar; in fact there are references in the contemporaneous records to a “printed ‘Kowloon Tong’ form”. 

B2.  The Lot and the Lease

15.In the case of the Lot, as mentioned above the original purchaser was Madam Lau Gee.  By an agreement dated 26 February 1923 between the Company and her (“Purchase Agreement”), the Company agreed to procure the Lot to be formed in accordance with the Development Plan and a house to be constructed thereon for Madam Lau in accordance with the specifications annexed thereto and a drawing for “Type 6” house, for a consideration of HK$13,000 plus an additional HK$1,600 for a higher ceiling specifically requested by Madam Lau. 

16.The specifications annexed to the Purchase Agreement stipulated that the 2-storey house to be built was a “Type 6” house and set out the materials to be used for its foundations, walls, floors, roof, windows, stairs and finishes, and that it should be completed with boundary walls, electric wiring, and connections to electric light, water and sewer mains.

17.The Purchase Agreement provided that the 1922 Agreement together with “the Development Plans therein referred to” shall form part of the Purchase Agreement.  It was recited that both the Development Plan and the drawing for Type 6 house had not yet been approved by the Director of Public Works, and stipulated that in the event the Director of Public Works did not approve the plan and the drawing in toto and as a consequence it was in the opinion of the Company not possible to carry out the Purchase Agreement, then the Company would be entitled to cancel it and refund the instalments paid to Madam Lau.

18.Although the house on the Lot was not completed as at 20 September 1930, it was presumably substantially built and the Lease was granted to Madam Lau on 2 October 1930, consequent upon her payment of the outstanding balance of the premium. 

19.The Lease granted was for a total premium of HK$1,861.57, with annual rent of HK$46, and for the term of 75 years from 1 July 1898, renewable for 24 years less 3 days.  It was partly in a printed form and partly handwritten.  The lessee’s covenants contained therein include the following clauses which follow immediately one after the other (in the quotations below, the handwritten words are italicised and the printed words crossed out by hand are struck through):

(1)  a clause containing a building covenant (“Building Covenant”) in these terms (with the Roman numerals (i), (ii) etc added for ease of reference, as done by the judge):

“ And the said Lessee hereby covenants … that he the said Lessee will … And will (i) before the expiration of Twelve calendar months from the Second day of May One thousand nine hundred and thirty (ii) at his her or their own proper costs and charges (iii) erect build and completely finish fit for use in a good substantial and workmanlike manner and with the best materials of their respective kinds one or more good substantial and safe brick or stone messuage or tenement messuages or tenements upon some part of the ground hereby demised with proper fences walls sewers drains and all other usual or necessary appurtenances and (iv) shall and will before the expiration of the said Twelve calendar months lay out and expend thereon the Sum of Four thousand dollars at the least (v) which said messuage or tenement messuages or tenements shall be of the same rate of building elevation character and description and shall front and range in an uniform manner with the buildings (if any) immediately adjoining in the same Street and (vi) the whole to be done to the satisfaction of His said Majesty’s Director of Public Works (hereinafter referred to as ‘the said Director’)”

(2)  a clause requiring the consent of the Director of Public Works (“Consent Clause”):

“ And the said Lessee shall not nor will at any time during the continuance of the term hereby granted erect any other messuage or dwellinghouse on the said piece or parcel of ground hereby demised or any part thereof without the consent in writing of the said Director first had and obtained in that behalf”

(3)  a repair and maintenance covenant (“Repair Covenant”):

“ And shall and will from time to time and at all times hereafter when where and as often as need or occasion shall be and require at his her or their own proper costs and charges well and sufficiently Repair Uphold Support Maintain Pave Purge Scour Cleanse Empty Amend and keep the messuage or tenement messuages or tenements and all other erections and buildings now or at any time hereafter standing upon the said piece or parcel of ground hereby expressed to be demised and all the Walls Banks Cuttings Hedges Ditches Rails Lights Pavements Privies Sinks Drains and Watercourses thereunto belonging and which shall in any-wise belong or appertain unto the same in by and with all and all manner of needful and necessary reparations cleansings and amendments whatsoever the whole to be done to the satisfaction of the said Director”

and

(4)  a covenant for the surrender of the buildings at the end of the Lease (“Surrender Covenant”):

“ And the said messuage or tenement messuages or tenements erections buildings and premises so being well and sufficiently repaired sustained and amended at the end or sooner determination of the term hereby granted will peacefully and quietly deliver up to His said Majesty”.

B3.  The building on the Lot

20.Although there is no record available now of the appearance of the house first erected on the Lot, the plan annexed to the Lease indicated its footprint.  From that and the specifications to the Purchase Agreement, one can deduce that the house then built (“Original Building”) was a two-storey house of rectangular shape with site coverage of about 1,350 ft² (or 125.4 m²).

21.Not long afterwards, in 1934, the Lot was assigned to another, before it was sold again in 1947.  The aerial photographs indicate that by 1945, the outline of the building on the Lot had changed into an L-shape, with the addition of a rectangular wing at the southeast side of the Original Building.  The total footprint of this L-shape building was around 2,095 ft² (or 194.6 m²).

22.This has been called the “Second Building” in the evidence although it is unclear whether it resulted from a demolition of the Original Building and wholesale rebuilding, or simply the addition of a wing.  There is no documentary evidence showing that the Lands Department consented to the demolition of the Original Building or the erection of any new building in the 1930s or 1940s. 

23.In 1997, the Lot changed hands again.  The aerial photographs taken in the following year suggest that while the building on the Lot remained in an L-shape, its footprint had expanded to around 3,123 ft² (or 290.1 m²).  This has been referred to in the evidence as the “School Building” because it had at times been used as a school.  Again there is no direct evidence when the expansion took place and whether it resulted from addition works or complete rebuilding.

24.In mid-1998, an application for permission under section 16 of the Town Planning Ordinance (Cap 131) was submitted to change the user of part of the building on the Lot from residential to a school.  That application was unsuccessful.

25.A year later, in June 1999, another section 16 application was made by a different prospective tenant of the building, Canadian Overseas International School, to operate a kindergarten there.  This application was approved subject to conditions on 27 August 1999. 

26.On 22 April 2002 the plaintiff acquired the Lot at the price of HK$49 million.  Shortly thereafter, a section 16 application was made by another prospective tenant, Delia School of Canada, to operate an elementary school cum kindergarten there.  This application was approved by the Town Planning Board subject to conditions on 12 July 2002.

27.In 2010, the plaintiff obtained the Building Authority’s approval for its demolition plans for the existing building on the Lot.  Those plans were not sent to the Lands Department.  The plaintiff’s proposal to build a new house on the Lot was however circulated to and opposed by the Lands Department.  In particular, by a letter dated 26 May 2010, the Lands Department informed the plaintiff that the general building plans submitted were not acceptable since written consent of the Director was required under the Consent Clause in the Lease for the erection of a new messuage or dwellinghouse.  Notwithstanding this, the plaintiff proceeded to demolish the existing building by the end of 2010.

28.Thereafter the plaintiff entered into correspondence with the Lands Department with a view to obtaining consent under the Lease for the proposed redevelopment.  At the same time, the plaintiff revised the building plans which eventually received the Building Authority’s approval in February 2015.  Without obtaining the Director’s consent under the Lease, the plaintiff proceeded to construct and complete a building pursuant to those plans (“Current Building”).  The occupation permit for this building was issued on 16 July 2015.

29.The Current Building, in comparison to the Original Building, has the following features:-

	Original Building	Current Building
Layout	Two-storey dwelling house	Two-storey single family building for domestic use One-storey basement with car park, plant rooms and ancillary accommodation for non-domestic use
GFA	2,360.5 ft2	6,531.54 ft2 Basement excluded from GFA calculation and is said to have a size of some 3,000 ft2
Site coverage	1,350 ft2	3,571.4 ft2

B4.  The Dispute and the Judgment

30.The correspondence between the plaintiff and the Lands Department eventually resulted in the Director being prepared to give consent pursuant to the Consent Clause upon certain basic terms which were acceptable to the plaintiff but subject to the payment of premium which the District Lands Office later assessed in the sum of HK$106,240,000. 

31.As described in the Director’s evidence, the assessment of the premium in accordance with the relevant Technical Circular and Land Administration Practice Notes was intended to reflect the enhancement in the land value of the Lot with the Director’s consent by (1) adopting the fair market land value of the Lot reflecting the potential of erecting the building permissible under the Lease (having regard to the Original Building) as the “before” value of the Lot; (2) adopting the fair market land value of the Lot reflecting a relaxed potential of erecting the Current Building with the prospective consent as the “after” value of the Lot (without taking into account the area of the basement); and (3) subtracting such “before” value from such “after” value.

32.The plaintiff objected to the premium, and lodged an appeal against the amount with the District Lands Office.  That appeal has since been suspended as the parties could not agree on which previous building on the Lot should be used for determining the “before” value.

33.On 3 November 2021, the plaintiff issued an originating summons claiming declarations that: (1) on the proper construction of the Lease, it is entitled to erect the Current Building without the Director’s consent; (2) in the alternative, even if the Director’s consent is required, the charging of a premium in the sum of HK$106,240,000 would amount to derogation from the grant of the Lease; and (3) in the further alternative, in assessing the “before” value of the Lot for premium calculations, the Director is required to take into account the value of the building (including all alteration and addition works) that was demolished and replaced by the Current Building, that is to say, the School Building.

34.The first declaration was sought on the basis that on the true construction of the Lease, the words “erect any other messuage or dwellinghouse” in the Consent Clause refer to an additional house.  In other words, consent would only be required if the lessee proposed to have more than one house on the Lot.  Since the Current Building has replaced the Original Building as the single house there, the plaintiff did not need the Director’s consent to erect it.  In contrast, the Director’s interpretation of the Lease is that his consent is required for the erection of any building other than the Original Building which was approved by the Director of Public Works.  The judge agreed with the Director and rejected the plaintiff’s construction of the Lease.

35.The second declaration is no longer pursued in this appeal and no more need be said about it.

36.The third declaration was sought on the ground that even if the Director’s consent was required under the Lease, compliance had been waived in relation to the School Building which had existed since at least 1998 until its demolition in 2010.  The “before” value to be adopted for premium calculations should be the land value of the Lot based on that building rather than the Original Building.  On that basis, according to the plaintiff’s valuation evidence, the “before” value would only be lower than the “after” value by HK$510,226, which should be the amount of the premium charged, instead of HK$106,240,000.  The Director disputed that there was any waiver.  The judge rejected the plaintiff’s case of waiver.

C. Construction of the Lease

37.The general principles of construction of documents such as the Lease are not in dispute.  The judge set them out[2] based on a summary in Gale on Easements (21^st edn), §9-20, cited by this court in Dairy Farm Co Ltd v Secretary for Justice [2022] HKCA 1902 at §33.  That summary reads as follows:

“ (1) interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to both parties in the situation in which they were at the time of the execution of the document;

(2) the court will focus on the meaning of the relevant words in their documentary, factual and commercial context;

(3) the meaning of the words is to be addressed in light of –

(a) the natural and ordinary meaning of the provision;

(b) any other relevant provisions in the document;

(c) the overall purpose of the relevant provisions;

(d) the facts and circumstances known or assumed by the parties at the time that the document was executed;

(e) commercial common sense;

(4) the process is an objective one in which one disregards subjective evidence as to the intentions of the parties;

(5) the general rule is that all relevant facts and circumstances can be taking into account as an aid to interpretation of the words used in the document;

(6) as an exception to the general rule referred to in (5) above, the court will not take into account the contents of pre-contractual negotiations save in so far as those negotiations reveal the existence of a background fact which is otherwise relevant”.

38.We bear in mind that the construction of a contract is a unitary exercise that takes into account the natural and ordinary meaning of the provision in question, the purpose of the contract and of the provision, and the factual matrix at the time when the contract was executed.  Whilst it is a truism that the starting point is the ordinary and natural meaning of the words of the contract, in certain cases there can be much debate over what exactly the ordinary and natural meaning is; in those cases the surer guide to interpretation is context.  See Fully Profit (Asia) Limited v Secretary for Justice (2013) 16 HKCFAR 351 at §15; Eminent Investments (Asia Pacific) Ltd v Dio Corporation (2020) 23 HKCFAR 487 at §§43-45.

39.We start with the language of the document in question.  As the judge pointed out,[3] the Consent Clause is placed immediately after the Building Covenant.  The Building Covenant contains stipulations not only on the time within which the messuage or tenement had to be built, but also the materials to be used (brick or stone, the best materials of their respective kinds), the minimum amount of money to be expended on it (HK$4,000), and its rate and range (shall be of the same rate of building, elevation, character and description, and shall front and range in a uniform manner with the buildings, if any, immediately adjoining in the same street).  The covenant further requires that the whole of it is to be done to the satisfaction of the Director of Public Works.

40.The Consent Clause then follows immediately to provide that the lessee “shall not nor will at any time during the continuance of the term hereby granted erect any other messuage or dwellinghouse on the [Lot] or any part thereof without the consent in writing of the said Director”.

41.These provisions have to be seen in the context of the Lease.  It is not a lease of an isolated lot granted in a stand-alone transaction between the Government and the lessee as a result of a land auction or tender.  As explained above, the Lot forms part of the Estate which was the product of a special arrangement for the purpose of creating a garden estate.  It was a scheme to provide houses for persons of small means whose work or circumstances caused them to regard Hong Kong as their home and to enable them to reside in their own houses in more healthy and pleasant surroundings than flats in congested areas.  The Lease was one of many grants contemplated in and made against the backdrop of the 1922 Agreement, which covered a large area (74.2 acres as stated therein and 81.2 acres as implemented).  Under that agreement, the Government was responsible for forming the site to agreed levels which required both excavation and filling-in, providing the necessary water supply, and providing sufficient storm water and sewage systems.  These were significant burdens (which incidentally were to cost the Government approximately HK$1.07 million,[4] more than double the land premium receivable at 12 cents per square foot[5]).

42.In addition to the 1922 Agreement, the Lease was preceded by the Purchase Agreement between the Company and the first lessee, Madam Lau Gee.  From both agreements the Government’s interest in the houses to be built was palpable.  The former required the Company to submit for the approval of the Director of Public Works, inter alia, plans and elevations of 3 or more types of houses to be erected at a cost of not less than HK$4,000 each (see §8(2) above).  The importance of such approval was underscored in the latter, which specified that the house to be built was a “Type 6” house and that in the event approval of the house drawing was not granted by the Director of Public Works, the agreement could potentially be cancelled (see §17 above).

43.The scheme at the time was not for the Company simply to sell bare land to the purchasers with full development rights.  The purchasers entered into the transaction to purchase the lots and the houses built each in accordance with a set of drawings required to be approved by the Government.  In the case of the Lot, as at the date of the Lease the house already existed, although records show it was unoccupied and not yet completed.  No doubt it was anticipated that it would soon be completed, as the period for compliance with the Building Covenant was stated to be 12 months from 2 May 1930, i.e. only 7 months from the date of the Lease.  The requirement of spending not less than HK$4,000 on building the house was included in the Building Covenant, reflecting the same stipulation in the 1922 Agreement.

44.All of this signified a special arrangement that involved the Government, through the Director of Public Works, having control over the drawings for the first houses to be constructed on the lots in the Estate and consequently over their building parameters including footprint and height.  It is thus not entirely correct for the plaintiff to submit that there was nothing in the 1922 Agreement that evinced an intention that the size, site coverage or plot ratio of buildings on each lot should be subject to control.  It may be that the Building Covenant itself did not impose any requirement of prior approval of the drawings of the house to be built.  The control had already been exerted through the 1922 Agreement, resulting in a house approved by the Government.  The kind and extent of control imposed was wholly consistent with the purpose of permitting the development of the Estate as “a garden suburb with fairly standardised detached single family houses with gardens and common recreational areas.”[6] 

45.The plaintiff submits that the primary purpose of the Lease is to allow the lessee to use the Lot for the erection of a house as a residence and that it would be repugnant to that purpose if the lessee is restricted from rebuilding over the entire term.  The plaintiff also submits that it would be a wholly unusual covenant to require a lessee to seek consent for rebuilding on his own lot, and that the more unreasonable the result, the more unlikely it is that the parties could have intended it, citing Building Authority v Appeal Tribunal (Buildings) (2018) 20 HKCFAR 194 at §54.  The purpose of the Lease, as it seems to us, was however not only to enable the lessee to have a residence built on the Lot, but included also maintaining the Lot as part of a building scheme in the form of a garden estate and preserving its special character.  An unbridled right to redevelop the Lot would be at odds with this purpose.  Creating and preserving the area as a garden estate could mean that the lots within it would be precluded from their maximum development that could be supported by the general amenities of the neighbourhood.  As the judge said, in that light it makes sense for consent to be required of any building other than the one approved by the Director of Public Works under the parameters laid out for the Estate.[7] 

46.Against this background, one can see that whereas the Building Covenant in the context of the two preceding agreements and their implementation regulated the first house built on the Lot, the Consent Clause preserved this control on the occasion of redevelopment.  There would be no restriction at all left in the Lease, if, as soon as the first house was erected, the lessee was to be at liberty to replace it with any building (subject only to compliance with statutory standards under the PHBO which we discuss below), as the plaintiff contends.  We do not think that could have been the intention of the parties.

47.We agree with the judge that it was not unreasonable for there to be no unfettered redevelopment right for the lessee. The Lease does not prohibit rebuilding absolutely but provides a mechanism through the Consent Clause to address any need to rebuild.  As the judge said, there is no basis to think that the Consent Clause would be used by the Director in such a way as to prevent all rebuilding whatever may be the needs or invariably to charge such premia as would make consent all but illusory.[8]

48.The plaintiff submits that the “rate and range” clause within the Building Covenant (see the sub-clause designated (v) as quoted in §19(1) above) would preserve the special character of the Estate, and that there was no restrictive covenant in the Lease in relation to size, site coverage or plot ratio.  However, that clause is part of the Building Covenant which concerns the first building to be constructed on the Lot.  On the plaintiff’s own case, it has no relevance to any subsequent development on the Lot.  As such it cannot be relied upon to preserve the character of the Estate during the term granted.  Contrary to the plaintiff’s submission, its existence does not militate against the Director’s construction of the Lease.

49.The plaintiff has faintly advanced a secondary case that the Consent Clause is to be construed as imposing only a requirement that any rebuilding must also be subject to the rate and range clause.  It is however difficult to see how the language of the Building Covenant and the Consent Clause can be read to bear this meaning.  The argument involves re-writing the latter to add, after “shall not … erect any other messuage or dwellinghouse”, the words “than one of the same rate and range ...” or words to like effect.  It is not a submission that we feel able to accept.

50.It is also submitted on behalf of the plaintiff that part of the background at the time was section 203 of the Public Health and Buildings Ordinance (Ord. No. 1 of 1903) (“PHBO”). This section provided, inter alia, that the Building Authority had the power to refuse his approval of the plans of any building which differed in design or character from those in the immediate neighbourhood.  That power has a modern parallel in section 16(1)(g) of the Buildings Ordinance (Cap 123), under which building plans may be rejected where the resultant building would differ in height, design, type or intended use from buildings in the immediate neighbourhood.  It is submitted that section 16(1)(g) is available to preserve the character of a neighbourhood and had in fact been invoked by the Building Authority and, on appeal, by the appeal tribunal, in a case in the 1970s to reject the plans for a 16-storey building in the Estate on the ground that the proposed building would be incongruous in its immediate neighbourhood: see the discussion of Nos. 101, 103 and 105 Boundary Street Case (No. 1)[9] in the article written by Bokhary NPJ before his ascension to the bench, Section 16(1)(g) of the Buildings Ordinance (Cap 123) – A Shooters’ Guide (1989) 19 HKLJ 314, 321.  Given the existence of section 203 and since the Director of Public Works was also the Building Authority at the time,[10] it was unnecessary, the plaintiff submits, for him to have control through the lease terms in order to preserve the character of the Estate as a garden suburb. 

51.In our opinion this point does not take the plaintiff very far.  The availability of statutory control through the PHBO was part of the legal context at the time, but its scope was limited to “design or character”.  For one thing, as the learned author of the article referred to in the preceding paragraph also pointed out, the density and positioning of proposed buildings are outside the ambit of the word “design” in section 16(1)(g).[11]  The existence of the PHBO does not in our view suggest that the Government would therefore not wish to retain, as landlord through terms of the leases, more specific, extensive and direct control in relation to the special building scheme that was the Estate, in order to ensure its unique characteristics are maintained.  We agree with the judge that the PHBO does not detract from the construction of the Consent Clause based on the words used, the purpose and the rest of the context.[12]

52.The plaintiff submits that the printed words “or more” and “messuages or tenements” in sub-clause (iii) of the Building Covenant were deleted by hand, showing an intention that only a single building may be erected.  The Consent Clause was also inserted in manuscript and, in conjunction with the deletions, signified a clear intention that only one single building may be erected.  Relying on Mottram Consultants Ltd v Sunley (Burnout) & Sons Limited [1975] 2 Lloyd’s Rep 197, 209; Norandas-Girdhar v Bradstock [2016] 1 WLR 2366 at §19; and Mopani Copper Mines plc v Millennium Underwriting Ltd [2008] 2 All ER (Comm) 976 at §120, the plaintiff submits that the parties directed their minds to the question of the number of houses that may be allowed on the Lot and that “deleted words in a printed form may resolve the ambiguity of a neighbouring paragraph that remains”.  In the light of this, it is submitted that the words “any other messuage or dwellinghouse” in the Consent Clause should be construed to mean that the lessee may not erect another, i.e. an additional, messuage or dwellinghouse.

53.There is no dispute that the deletions can be taken into account and show that the parties addressed themselves to the question of the number of houses that may be erected on the Lot.  But we do not agree that this shows that by the Consent Clause the parties were concerned only with not having more than one house on the Lot.  In the light of the background, context and purpose discussed above, we do not read the words used to mean merely that the lessee cannot build “an additional” house. 

54.The plaintiff also relies on the fact that both the Repair Covenant and the Surrender Covenant include both the singular and the plural form of “messuage and tenement”.  This does not support the plaintiff’s construction.  As the judge pointed out,[13] since it is possible, pursuant to consent granted by the Director, for more than one house to exist on the Lot, it stands to reason for the parties to cover that scenario in relation to the lessee’s obligations to repair and surrender.

55.Finally, reliance is placed by the plaintiff on the provision in clause 7(c) of the 1922 Agreement that the Lease would contain a covenant against alienation for a period of 5 years but that the Lease would in other respects be “in the usual form”.  We do not think much weight can be placed on this vague phrase.  There is little evidence of what might or might not be “usual” for a lease in such a scheme.  It appears that most of the Government leases for lots within the Estate contain similarly worded building covenants and consent clauses.[14] It may also be noted that the Lease in this case does not actually contain the covenant against alienation referred to in clause 7(c).

56.Construed in context and in the light of the purpose of the Lease, it seems to us clear that the Consent Clause means that the Director’s consent is required for the lessee to erect any messuage or dwellinghouse other than the one built in compliance with the Building Covenant, which the parties knew had been approved by the Director of Public Works.  Accordingly, we agree with the judge that the first declaration sought in the originating summons should be refused.

D. Amount of premium

57.The grant of the Lease subject to the Consent Clause meant that it was a disposition of the Lot subject to the development parameters of the Original Building.  The erection of any other building would require the Director’s consent.  In giving consent for a new building with a larger bulk, the Government would in effect be making a further disposal of the land for which it was entitled to charge full value: see, by analogy, Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1 at §27; New Mercury Holding Corporation v Secretary for Justice (CACV 73 & 74 of 2013, 15 April 2014) at §15.

58.The plaintiff submits that although the Government has a discretion in demanding a premium for granting consent, that contractual discretion has to be exercised with regard to all relevant considerations, and a key consideration here is that the breach of the Consent Clause arising from the School Building had been waived by the Government.  The judge accepted the former proposition but not the latter.

59.In the context of a lease it is important to distinguish between three different types of waiver.  Waiver of forfeiture is simply the waiver of the right to forfeit a lease consequent upon a breach of covenant, without affecting the right to other remedies for the breach such as damages.  By doing an unequivocal act which affirms the continuing existence of the lease, the lessor by election cannot also enforce his right to forfeit.  Where a covenant has been breached, waiver of breach refers to the waiver of the covenantor’s liability in respect of that breach and precludes the covenantee from pursuing any remedy therefor, but does not affect the covenantee’s right in respect of future breaches.  Waiver of breach is not based on election but on an inference of consent to the breach.  For examples of waiver of breach, see Favourable Issue Co Ltd v Secretary for Justice [2014] 1 HKC 453, §27; Expressluck Development Ltd v Secretary for Justice (HCMP 1432/2005, 26 July 2007), §95.  Waiver of covenant on the other hand is a waiver or abandonment for all future time of the right to complain of any other breach of the covenant, of which a clear example is provided by Attorney-General of Hong Kong v Fairfax Ltd [1997] 1 WLR 149.  See generally Woodfall’s Law of Landlord and Tenant, §§11.044 – 11.044.3 and 17.092; Chinachem Investment Company Ltd v Chung Wah Weaving and Dyeing Factory [1978] HKLR 83.

60.The plaintiff emphasises that what it contends for is waiver of a breach of the Consent Clause, not a waiver or abandonment of the covenant which would require more to establish. 

61.Before the judge the plaintiff relied on the following: (1) the existence and visibility of the Second Building and the School Building; (2) the planning applications made in 1998, 1999 and 2002; (3) an application made in 1999 for approval by the Buildings Department of works to add an external steel staircase for fire escape purposes; and (4) the long time elapsed since the Second Building and the School Building stood on the Lot.  On this appeal the plaintiff has focused on the School Building and no longer relies on the Second Building.

62.This is not a case where multi-storey apartment blocks had been constructed on land on which by the terms of the lease only “villa residences” could be built, which would have been obvious to everyone including the Government, as in Attorney-General of Hong Kong v Fairfax Ltd, p 152F-G.  Here the building on the Lot had remained throughout a 2‑storey one.  The judge did not think that the changes resulting in the School Building would have been obvious to anyone passing by outside the boundary walls of the Lot,[15] a view that seems to us unassailable. 

63.Instead, the plaintiff’s case of knowledge is principally based on the planning applications made in relation to the Lot in 1998 and 1999.  In particular, reliance is placed on the following:

(1)  The planning application made in 1998 (see §24 above) specified that the total floor area of the existing building was 638.4 m². This could not have been the Original Building which was a 2-storey house with a footprint of 1,350 sq ft.  The application was sent by the District Planning Officer / Kowloon to the District Lands Office / Kowloon East on 9 July 1998 for comment and information on the land status.  Although the application was eventually rejected by the Town Planning Board, the rejection was not caused by any objection from the Lands Department based on any breach of the Lease.

(2)  The planning application made in 1999 (see §25 above) stated that the area of each floor of the existing building was 299.7 m², which exceeded the footprint of the Original Building.  The application was again sent by the District Planning Officer / Kowloon to the District Lands Office / Kowloon East on 2 July 1999 for comment.  The application was approved by the Town Planning Board on 27 August 1999, without any objection having been raised by the Lands Department on the ground that there was any breach of the Lease.

64.On this basis it is submitted that the Government had knowledge of the breach of the Lease arising from the School Building.  Coupled with inaction, it is said that the Government had thereby acquiesced in or waived the breach, with the result that the “before” value for premium calculation should be based on the School Building. 

65.Whilst we asked the plaintiff’s counsel at the hearing to provide the court subsequently with authorities on waiver, we were surprised to find in the covering note for the authorities the following submission:

“ In our case, as is usual, the Crown Lease provided for the payment of rent. If the Court upholds the P’s contention that the Government had knowledge that the 1930 building had been extended/replaced by the Second Building/School Building in breach of the Consent Clause, and with such knowledge, had acquiesced in the continuation of the Government Lease whilst accepting rent, this would have the effect of waiving all past breaches.”

66.The point about acceptance of rent was not relied upon below or at the hearing before us, and should not have been raised in this manner.  It seems to have been prompted by Chinachem Investment Company Ltd v Chung Wah Weaving and Dyeing Factory [1978] HKLR 83, where Huggins JA at p 86 said that the acceptance of rent after the landlord discovered the breach of a restrictive covenant “clearly constituted a waiver of the past breach”.  But that was a case about a private landlord, and should not have been relied on without attention being drawn to the Government Rights (Re-entry and Vesting Remedies) Ordinance (Cap 126).  In the case of a Government lease, the point is precluded by section 6 of that Ordinance, which provides that the acceptance of rent by the Government shall not operate as a waiver of any right of re-entry accruing by reason of the breach of any covenant in a Government lease.  What is left is therefore simply inaction on the part of the Government. 

67.The planning applications made in 1998 to 2002 did not involve erecting any new building but merely a change of user.  The Lands Department considered whether the proposed change would breach the user restriction under the Lease.  From the Lands Department’s perspective there was no occasion that triggered the Consent Clause until 2010.  As soon as plans were circulated that involved erecting a new building (i.e. the general building plans submitted by the plaintiff in 2010 for the Current Building), the Director stated that his consent was required under the Consent Clause (see §27 above), and the premium subsequently assessed indicated clearly that the Government did not accept that any previous expansion of the building was authorised or waived.  In these circumstances we do not consider that there was such acquiescence as to constitute a waiver of the past breach of the Consent Clause arising from the School Building.

68.Accordingly we are in respectful agreement with the judge that the plaintiff has not established a case of waiver and that the third declaration sought should be refused.  It follows that this ground of appeal must also be rejected.

E. Conclusion

69.For the above reasons, we reject the plaintiff’s contentions both on the construction of the Lease and on waiver of breach of the Consent Clause arising from the School Building.  The appeal is therefore dismissed.  The plaintiff shall pay the defendant’s costs, to be taxed if not agreed.

Mr Benjamin Yu SC & Mr Anthony Ismail, instructed by Messrs. Kao, Lee & Yip, for the Plaintiff (Appellant)

Ms Frances Lok SC instructed by Department of Justice, and Mr Alvin Hor SGC (Ag.) of Department of Justice, for the Defendant (Respondent)