Hop Luen Enterprises Ltd v. Attorney General

HCA003259/1978

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Coram: Hon. Fuad, J.

Date of Judgment: 19th May, 1981

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JUDGMENT

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1. By this action the plaintiff company seeks declarations relating to two restrictive covenants affecting a plot of land on the corner of Durham and La Salle Roads in Kowloon (New Kowloon Inland Lot No. 41477). There is no dispute as to the facts and no evidence was called. My task is to decide how the covenants should be interpreted.

2. The plaintiff is now the registered owner of the plot of land and holds it under a Crown lease dated the 22nd May 1967. The lease contains, inter alia, the following covenants -

3. In obedience to the second covenant and after complying with the requirements of the relevant statutory provisions, the plaintiff erected a single structure on the plot which comprised four flats. Each flat has three floors with internal staircases, a type of design known, I understand, as a triplex. An occupation permit issued under the Buildings Ordinance was obtained in respect of the whole building on the 30th June 1977.

4. The plaintiff company has been unable to sell any of the flats as they stand and so wishes to alter them to make each of the three floors of each flat into a self-contained apartment. When this proposal was put to the Registrar General (in his capacity as Land Officer) by the plaintiff's solicitors, his reaction was to indicate the view that if carried out it would constitute a breach of the second covenant. The Registrar General also declined an invitation to confirm that nothing in the terms of the lease prohibited the use of the triplexes, or some of them, for non-residential uses other than industrial uses. Hence this action.

5. The declarations sought are in the following terms -

6. On behalf of the plaintiff company, Mr. Ogden submits that once the building was erected in accordance with the second covenant it ceased to have any further effect. There was no covenant against making structural alterations and thus there was nothing to prevent the division of each flat into three separate apartments as had been proposed. The second covenant had nothing to do with user, for restrictions against user were contained exclusively in the first covenant. A trade or business (such as a nursing-home or ladies hairdresser, as examples) that was not expressly prohibited by the terms of that covenant could therefore legitimately be carried on. He contended that if the ordinary principles of construction were applied to the lease and if it were construed as a whole, as it must be, this was the inevitable result. Such a construction was the only way that the covenants could be interpreted to bring them into harmony with each other, and with the other terms of the lease.

7. Mr. Ogden argued that covenants which restrict user to private residential purposes were extremely common, as were covenants relating to structural alterations, and it had to be assumed that they were familiar to the very experienced Hong Kong conveyancers. In his submission it would be quite wrong to import into the terms of the lease restrictions that were not plainly put forth. He drew my attention to the opening passage of the judgment of James L.J. in Kemp v. Bird [1877] 5 Ch. D. 974, where he said, at page 976 -

"Persons ought to look after their own interests in framing their own contracts and their own covenants. Persons who are men of business, as they were here, are able to get protection and advice, and they must make their covenants express, so as to state what they really mean, and they cannot get a Court of Law or of Equity to supply something which they have not stipulated for in order to get a benefit which is supposed to have been intended."

8. Mr. Ogden relied on Hyman v. Rose [1912] A.C. 623 and submitted that that decision of the House of Lords was applicable to the facts of the present case. There, a piece of land upon which a chapel was in the course of being built was let on a long lease which contained covenants by the lessees to complete the building by a stipulated date and to repair, maintain and keep the chapel and the walls, fences and other appurtenancies in good and substantial repair. There were also covenants forbidding the use of the demised premises for certain specified trades of an offensive nature. The chapel was duly completed and used for religious purposes for 60 years. Later purchasers of the premises adapted the building for use as a cinema. Among the alterations effected were the removal of internal staircases and the opening of a new door-way.

9. The House of Lords held that since the lease did not prohibit the proposed uses, none of the alterations constituted either a breach of the covenant or waste. I will read part of the speech of Lord Loreburn L.C., with which Lord Macnaghten, Lord Atkinson and Lord Shaw of Dunfermline concurred without further comment. At. p.631 the Lord Chanceller of the day said -

10. In the forefront of the submissions made by Mr. Kaplan on behalf of the Attorney General was the proposition that to construe the second covenant in the way urged upon me by Mr. Ogden would defeat its whole object. If it were to be regarded as spent once the building had been erected, it would mean that immediately thereafter, subject to the height restriction, the lessees could covert them into anything they liked and, as an example, could make each floor of the flats into individual residences for dozens of people. Such a construction would result in absurdity. Mr. Kaplan drew my attention to pages 128-135 of Restrictive Covenants Affecting Freehold Land by Preston and Newsom (6th Edition) where the precise point falling to be decided in the present case is discussed, and he adopted the authors' arguments as his own. He submitted that none of the cases referred to in the relevant passages of the work were directly in point and that they were not easy to reconcile, inviting me to accept the authors' reconcilliation. I think it is only necessary for me to read a short passage from Preston and Newsom before going on to consider the three authorities referred to therein, which were cited to me by Mr. Kaplan. The passage occurs at page 134 -

"It is submitted that the true principles are to be found in the judgment of Stirling J. in the Acton case. If the covenant appears merely to forbid a given sort of building to be erected, the court must still ask itself whether it is possible either to infer from words used in the document itself that the covenant in fact forbids such a building to be on the premises, or to find that the covenant would be futile or nugatory for its purpose if it were literally construed. Bray v. Fogarty and Webb v. Fagotti are decisions favouring the wider construction on the ground that the covenant must not be rendered futile."

11. In Holford v. Acton Urban District Council [1898] 2 Ch. 240 some building land was put up for auction subject to a condition that the purchasers of certain specified plots should each covenant with the vendors to erect within two years a dwelling house and a shop on the plot of a minimum stipulated value. The plaintiff bought one of the specified plots. The U.D.C. was unable to sell the others and so sought to erect a fire station which would have taken up four of the specified plots. The plaintiff claimed that the U.D.C. would thereby infringe the building scheme in faith of which he had bought his plot. It was held that the scheme was enforceable against the U.D.C. but that it should not be so construed as to prohibit anything other than shops and dwelling houses from being erected on any of the specified plots. At page 246, Stirling J. states -

"The next question is, what restriction arises out of this 9th condition? Now it was pointed out, and it is an important observation, that no express stipulation or condition is to be found with respect to the user of the buildings when once erected. It is not, however, I apprehend, necessary, in order to impose on the defendants an obligation of this kind, that there should be an express stipulation that the user of the property should be confined in a particular way, or that a particular use should not be made of the property. The general rule on the subject is very briefly and tersely stated by Bowen L.J. in one sentence in the case of Oriental Steamship Co. v. Tylor [1893] 2 Q.B. 518, 527, namely, that, 'where the contract as expressed in writing would be futile, and would not carry out the intention of the parties, the law will imply any term obviously intended by the parties which is necessary to make the contract effectual.'"

After giving some illustrations of the application of that rule, at p.248 he adds: "It appears to me plain that it may be discovered from an examination of all the facts and circumstances that the meaning of the parties was that a particular thing should not be done; but the court must be very careful not to imply restrictions unless it is satisfied that these were fairly within the contemplation of the contract, judging from the terms in which it is expressed." Stirling J. concludes his judgment (at p.248) as follows-

"Now, ought I to imply from the conditions of sale that there is any stipulation that nothing but separate buildings shall be erected, or that nothing but shops and dwelling-houses shall be erected upon the land? It is to be observed that there is no covenant - no express stipulation that the buildings to be erected shall be maintained for ever as shops and dwelling-houses. There is nothing, as it seems to me, to prevent a person who bought all the lots from erecting in the first instance buildings which were shops and dwelling-houses, and afterwards throwing them into one by alterations of the party walls between them, or from using the single building so formed otherwise than as a shop or dwelling-house. Such a restriction ought not to be implied except when the contract as expressed in writing would, in the language of the Lord Justice, be futile, or would not carry out the intention of the parties. It does not seem to me that such a restriction could fairly be said to have been within the contemplation of the parties, or that the condition as it stands is futile, and does not carry out the intention of the parties. That being so as regards the shops and dwelling-houses when once erected, I do not think I ought to infer a negative stipulation that nothing but shops and dwelling-houses should be erected. No doubt this is a departure from the conditions of sale; but I cannot see that is such a departure as would render the whole transaction futile, as it would be rendered futile, for example, by the erection of a shop or a manufactory upon property which had been sold for residential purposes. In my judgment it would be going too far to imply any such restrictive condition; and I therefore think that the plaintiff is not entitled to the relief which he asks."

12. Mr. Kaplan relies on that case as recognising the principle that in appropriate cases (and the present case was one) the construction which he urges upon me is valid since otherwise the second covenant would be futile and ineffectual. Mr. Ogden draws my attention to the finding that on the facts of that case, there was no express stipulation that the buildings to be erected should be maintained for ever as shops and dwelling houses.

13. Mr. Kaplan cited the Irish case of Bray v. Fogarty [1870] 4 I.R. Eq. 544 as an example of circumstances in which a court is able to hold that a literal interpretation of the terms of a covenant which would render it nugatory is not to be applied. In that case the covenant required that a house be built on the demised plot "fit for a private family, and no other." Such a house was duly built and occupied as a private dwelling for many years. An assignee of the lease proceeded to convert the house into a public house as soon as he obtained possession. One of the questions that arose was whether the lessor was restricted to sueing for the penalty of £10 additional annual rent for which provision was made in the covenant in case of breach. It was held that he was nevertheless entitled to an injunction to restrain the conversion of the dwelling house into a public house. Another was whether the lessor had acquiesced to the breach of covenant. In rejecting the contention that the covenant was only not to build the house as a public house and did not therefore contain any prohibition against subsequently using it as a public house, the Vice-Chancellor, at p. 547, had this to say -

"I am of opinion, upon the construction of the covenant, that it extends to the keeping the tenement intended to be built adjoining John Bray's house, as a private dwelling-house, and is not confined to the building of it as such. The restriction appears to have been intended for the protection of the privacy of the lessor's own dwelling-house; and the covenant would be nugatory for that purpose, if, as soon as the tenement was erected by the lessee, he was to be at liberty to change its character into that of which he was prohibited from erecting it. The continuance of the restriction is also shown by its being terminable in the event of the lessor converting his own house to a public use, but not otherwise."

14. Mr. Kaplan also referred me to Webb v. Fagotti [1898] 79 L.T. 683. In that case one of the covenants by which a purchaser of land was bound was in the following terms:- "Except on lots marked 'Tavern lot' no hotel tavern, public house, beer-house, shop, or other building for the sale of wine, spirits, ale, or stout, or any spirituous, malt, or excisable liquor of any kind, shall be built upon any lot now offered for sale, and on no lot shall any manufacture be carried on unless with the consent of the vendor, who shall be at liberty to grant a licence for the same." The plot purchased was not one so marked. The lessees of the purchaser built a restaurant on the plot. It was opened to the public and later a wines and spirits licence was applied for and obtained. The vendor applied for an injunction to restrain the lessees from using the restaurant for any of the purposes mentioned in the covenant. The Court of Appeal upheld the decision of North J. that the correct construction of the covenant was that no building on the plot should be used for any of the prohibited purposes and not merely that no building should be built for those purposes. The judgment of Lindley, M.R. is very short and I will read it out in full (p.684) -

"I think that the construction sought to be placed on the word "built" in this covenant is wider than it will bear. To my mind that word is not inserted in the covenant in contradistinction to other methods of dealing with the land. I do not attach such importance to the word "built" as the appellants contend ought to be done. The true meaning is that no hotel, tavern, public-house, beerhouse, shop, or other building, for the sale of wines, spirits, ale, or stout, or any spirituous malt, or excisable liquor of any kind, shall "be" on any lot except on the lots marked "tavern lots". I do not throw over altogether the language of the covenant. To put a building on the land which is used for the sale of wines and spirits absolutely defeats the covenant. It is not what was meant should be done. I feel no doubt that North, J. was right in his decision; and the appeal must therefore be dismissed, with costs."

15. Mr. Kaplan invited me to read the second covenant as having continuing effect and forbidding anything other than private residential buildings of the kind mentioned therein from being on the land demised. The very words used could, be contended, bear no other meaning. He argued that the facts in Hyman v. Rose were entirely different for in that case there was a positive obligation under the covenant to build a chapel within 2 years. That obligation had been performed. Here there was no obligation to build anything and the distinction was crucial. The covenant with which this court was concerned required that any building erected at any time during the currency of the lease had to comply with the terms of the covenant. As lending some strength to his submission Mr. Kaplan drew my attention to a certain agreement and conditions of sale dated the 15th November 1950 and pointed out that there had been a building on the plot before the Crown lease was drawn up in 1967. If Mr. Ogden's contention were sound there would have been no point in including the covenant in the lease involving land which was already in a residential area.

16. Mr. Kaplan went on to submit that the existence of the first covenant, in a form in standard use, did not, as Mr. Ogden had suggested, detract from the validity of his submission. That covenant could have been intended to cover a situation where premises might be used partly for residential purposes and partly for business purposes. The second covenant in effect said that there could be no user other than for private residential purposes and the first covenant repeated this injunction in another way with particular reference to noisome trades.

17. Mr. Kaplan also contended that since the plaintiff company had not indicated to what use they intended to put the building or part of it, the second declaration should not, in any event, be granted. To do so might give rise to further disputes and would be contrary to the ordinary principles governing the exercise of the court's discretion in these matters.

18. I am bound to say that although the controversy revealed by this action lies within a comparatively small compass and I have been greatly assisted by Counsel for the parties, I have not found it an easy one to resolve. On the true construction of the covenants there has been ample scope for reasonable competitive argument. While the cases cited to me have been helpful they must, of course, be viewed with caution for they each turn on particular circumstances and the precise form of words used. It seems to me that no principles that are not ordinarily applicable to the construction of documents are discernible from any of them. I must look at the lease as a whole and, according to its terms, ascertain what the parties meant. I think I must confine myself to the four corners of the instrument and have no regard to events which occurred before the plaintiff company became involved, and the lease before me was drawn up.

19. Looking then at the document as a whole, in my judgment the second covenant is clearly intended to relate to the nature of permissible structures and does not concern the use to which any occupant might put any one of them. The lease could have forbidden any trade or business whatsoever from being carried on on the premises, but it did not. Instead, by the first covenant it prohibited the premises from being used for carrying on certain obnoxious trades and businesses. In my view there is nothing in the second covenant that can be said to add anything to the first. To each can be given a meaning and both can be read in harmony. The matter may perhaps be tested in this way. Suppose that one of the four flats had been sold to a doctor and that both covenants still bound him. Suppose, further, that after first using it solely as his private residence the doctor later took in a number resident patients. The nature of the flat structually would remain that of a private residence but its user would be different. In these circumstances, since the business use to which the flat had been put would not offend against the first covenant, he could not be held in breach of either of the two covenants.

20. However, I have reached the conclusion that a true interpretation of the second covenant does embrace a prohibition from erecting on the premises at any time during the currency of the lease any building other than one of a type expressly permitted. This seems to me to stem from the ordinary meaning to be given to the words used without implying anything. Mr. Ogden conceded that if the flats were knocked down any new buildings would have to comply with the second covenant but, as we have seen, submitted that there was nothing to prevent the plaintiff from carrying out internal structural alterations to convert each flat into three separate apartments. I do not think that this can be right. Even though there is no separate and express covenant restricting structural alterations, the result of such a coversion would be that a building comprising not four but twelve private residential flats would have come into existence and this would be contrary to the terms of the second covenant. It could not be that after the plaintiff had obtained the special approval of "the Director" to the "design" and "dispositions" of the building as required by that covenant, he would be free to convert in it that way, any more than he could have erected a building with more than four flats in it in the first place. In my judgment the parties could not have intended this by the words they used. Structural alterations that do not affect the character of the building as four private residential flats would not be caught by the covenant; therein lies the difference.

21. On this interpretation I am unable to grant the first declaration sought. But I see no reason why I should not grant the second, in the exercise of my discretion. I do not regard the matter as "academic" or "hypothetical". The plaintiff company is entitled, in my view, to a declaration as to the true construction of the first covenant and the nature and extent of the restrictions it contains. However in granting that declaration, since it is concerned solely with user, I think it would be right to delete the words "alter and" where they occur in the amended declaration prayed for by the statement of claim.

Representation:

Michael Ogden, Q.C. & Robert Kotewall (Woo, Kwan, Lee & Lo.) for Plaintiff.

Neil Kaplan, C.C. for Defendant.