Sylvia Seto and Another v. Kowloon Shopping Center Ltd and Another

HCA001891/1978

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Action No. 1891 of 1978

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Coram: Hon. Fuad, J. in Court.

Date of Judgment: 29th October, 1980.

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JUDGMENT

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1. The plaintiffs, Mesdames Sylvia Seto and Wong Maice, who are related by marriage, acquired the premises with which we are concerned in 1964. They comprise shop I on the ground and mezzanine floors of a building called New Lucky House, which was then new, and which occupies a site bounded by Nathan Road and Jordan Road, Kowloon. For some ten years both floors of the shop had been leased to Yue Hwa Emporium Ltd. The Emporium also occupied all the other units in New Lucky House, on the ground and mezzanine floors, except shop E which was in the occupation of a bank. The internal staircase which gave access from the ground to the mezzanine floor of Shop I had been removed at the request of the Emporium, as had the walls on both floors which had divided shop I from shop H. The Emporium was to re-instate the walls and the staircase when they handed over possession to the lessors.

2. After the ladies had regained possession of their shop from the Emporium, they let it, as a whole, to Fung Kwong Enterprises Ltd., effectively from 1st August 1977. The Emporium was not held to its obligations with regard to the reinstatement of the two dividing walls or of the internal staircase, because Fung Kwong Enterprises agreed to take over and be bound by the undertaking given by the Emporium, when their lease, in turn, came to an end. There is still no internal staircase between the two floors, but the dividing wall between shop I and H on the ground floor was re-built by Fung Kwong Enterprises a few months after they took over the lease, when that floor was to be used as a restaurant. And some three months after that, the Emporium, in circumstances which need not detain us, re-instated the dividing wall on the mezzanine floor.

3. The present position is that access to the mezzanine floor of shop I can only be gained by way of a common staircase which leads out to a scavenging lane at the side of the building.

4. As has been mentioned above, Mesdames Seto and Maice granted a tenancy of both floors of shop I to Fung Kwong Enterprises. This was by an agreement dated 27th September 1977, which was expressed to take effect from 1st August 1977, granting a lease for a term of five years ending on 31st July 1982. During the first three years the rent was to be $45,000 per month, payable in advance, and for the remaining two years the rent reserved was to be $54,000 per month. The rent payable was to be exclusive of rates. The lease contained a covenant against sub-letting unless certain conditions were fulfilled, and there was the usual provision relating to forfeiture for non-payment of rent.

5. It seems that sometime in November 1977 Fung Kwong Enterprises Ltd. changed their name to "Kowloon Shopping Centre Ltd." and that they sub-let the ground floor of shop I to Gladsome Restaurant Ltd. We are not concerned with that sub-letting. On 5th June 1978 Gladsome assigned their business and assets to five named gentlemen, and by an agreement dated 14th June 1978 the Kowloon Shopping Centre Ltd. sub-let the same floor to those gentlemen for a term, beginning on 1st June, 1978, of four years and 58 days at a rent of $27,000 per month, exclusive of rates. A partnership was then formed under the name "Goodwill Restaurant".

6. On 17th June, 1978 the two ladies who own shop I issued a writ against Fung Kwong Enterprises and obtained judgment in default of appearance on 3rd July 1978 for possession of the premises, for arrears of rent and for mesne profits. It would be convenient here to mention that at the start of the trial of this action, for reasons which appear on the record, I gave leave for the pleadings to be amended by substituting the expression "Kowloon Shopping Centre Ltd. (formerly trading as 'Fung Kwong Enterprises Ltd.')" for "Fung Kwong Enterprises Ltd." in the title of the action. By this time, although differently styled, they had become the first defendants because on the 12th July 1978 those trading as the Goodwill Restaurant had obtained leave to be joined as second defendants. The plaintiffs amended their writ on 27th September, 1978 to take account of the new situtation, and on the 25th October, 1978 obtained summary judgment against the second defendants. Cons J. (as he then was) reversed the Registrar's decision on appeal and gave them conditional leave to defend in a judgment dated 6th December, 1978. The conditions imposed by the learned Judge were expressed in money terms, but their effect was that the second defendants should pay to the plaintiffs' solicitors all the arrears of rent due under the head-tenancy at the date of the judgment, and thereafter the full monthly rent reserved in the main lease.

7. The second defendants, being dissatisfied with the terms imposed by Cons J., appealed to the Court of Appeal and that Court's decision has now been reported - Lai Kwok-wah and Others v. Sylvia Seto and Another (1979) H.K.L.R. 416. The Court of Appeal allowed the appeal to the extent of varying the conditions upon which leave to defend would be granted, and ordered that the appellants (the second defendants) should only pay arrears of rent for the part of the premises occupied by them and then continue to pay, monthly in advance, the rent reserved in the sub-lease.

8. As the pleadings now stand, and ignoring the original claim against the first defendants who are no longer parties to the action, by the amended statement of claim, the plaintiffs claim possession of the premises on the ground floor against the second defendants, and mesne profits. It is averred, in effect, that since the first defendants defaulted in payment of rent due under the head-lease for the month of June, 1978 for more than 15 days, under its terms the lease had become liable to be forfeited and was so forfeited on the issue of the writ. For the same reasons, the rights of the second defendants as sub-tenants had also been determined.

9. By their defence, the second defendants put the plaintiffs to strict proof regarding the facts which allegedly led to the forfeiture of the head-lease, set out the basic terms of their sub-lease, and deny that their rights as sub-tenants have been determined. By way of counterclaim the second defendants pray to be relieved from the alleged forfeiture on such terms as the Court shall think fit.

10. The plaintiffs' amended reply to the defence joins issue and sets out various clauses in the head-lease relevant to the terms upon which a sub-tenancy could be created. It avers that the sub-tenancy was given without the plaintiffs' knowledge or consent, and that it only came to their notice when a copy of the affirmation filed in support of the second defandants' application for leave to defend was served on their solicitors. According to the copy of the sub-tenancy agreement sent to the plaintiffs' solicitors by letter dated 22nd June, 1978 (five days after the writ had been issued) and the undertaking signed by the second defendants as required by the head-lease, they had acknowledged that their sub-tenancy would itself determine on the expiry or sooner determination of the main lease and bound themselves thereupon to deliver up vacant possession of their part of the premises. This they had failed to do.

11. In the defence to the counterclaim, the plaintiffs say that since the sub-tenancy was created without their knowledge or consent, relief from forfeiture cannot be granted [this point has not been pursued before me] and that by reason of the undertaking the second defendants had given, coupled with the express terms under which the sub-tenancy was granted, they had waived their right to claim, or alternatively were estopped from claiming, relief against forfeiture. Then come certain averments regarding the absence of access from the ground to the mezzanine floor of the shop.

12. In the alternative it is pleaded that if relief from forfeiture is to be granted it should be on certain terms depending upon whether or not the Court has jurisdiction to apportion rent. The alternative terms may thus be summarised:-

13. If the Court has no jurisdiction to apportion rent

14. The second defendants should -

15. If the Court has jurisdiction to apportion rent

16. The second defendants should -

17. In either set of circumstances, the Court is asked to require the second defendants to perform and observe certain terms of the head-lease and to undertake not to sub-let the ground floor, on pain of forfeiture. Vacant possession of the ground floor would be required to be given at the expiry of the sub-tenancy.

18. Before I begin a review of the legislation and cases which need to be examined in the light of the submissions made by Mr. Oswald Cheung and Mr. Martin Lee, I would wish respectfully to echo, and adopt as my own, the words of Park J. in one of the cases cited to me, Earl of Jersey (Doe d.) v. Smith (1819) 7 Price 281, at p. 312, for they are an apt tribute to learned Counsel. "This case has been argued very elaborately, and with very considerable ability at the bar, and much research has been bestowed upon it".

19. Counsel have taken me through the United Kingdom statutes which qualified a lessee's right to relief against forfeiture and a landlord's right to forfeit. Sections 2 to 4 of the Landlord and Tenant Act 1730 (the preamble to S.2 explains in colourful terms the problems previously faced by landlords in connection with re-entry at common law and the effect upon their interests of the unfettered right of a lessee to come to equity for relief without limit of time) provided that where a landlord has a right to re-enter for non-payment of rent and six months rent is in arrear, no formal demand is necessary, and if no sufficient distress can be found on the premises, he may recover judgment on proof of all these matters. A tenant who suffers judgment in such a case, and who does not pay the rent and arrears with full costs, and who does not seek relief within six months of the execution of the judgment, is thereafter barred from such relief. If a lessee proceeds for relief within the time limited, he must, within 40 days of the landlord's answer to his claim for relief, lodge in court the amount stated to be in arrear together with the taxed costs of the suit in which judgment was given. If all the rent and arrears, and the costs, are paid or tendered to the landlord, or paid into court, then the ejectment proceedings shall be discontinued and the lessee holds the demised property under the original lease without a new lease having to be made.

20. The 1730 Act was repealed, and re-enacted in substance, but with some modernisation of language, by ss. 210 to 212 of the Common Law Procedure Act 1852, which provisions remain in force in the United Kingdom today. And they have their counterpart in Hong Kong in 0. 88A rr. 2 - 4 of the Rules of the Supreme Court.

21. Section 1 of the Common Law Procedure Act 1860 enabled relief against forfeiture for non-payment of rent to be given by the common law courts, a jurisdiction which passed under the Judicature Acts of 1873 and 1875 to the High Court. The provisions of that section were re-enacted in substantially the same form by s. 46 of the Supreme Court of Judicature (Consolidation) Act, 1925 which is in the following terms -

"In the case of any action for a forfeiture brought for non-payment of rent, the High Court or a Judge thereof shall have power to give relief in a summary manner, and subject to the same terms and conditions in all respects as to payment of rent, costs and otherwise as could formerly have been imposed in the Court of Chancery, and if the lessee, his executors, administrators or assigns are so relieved they shall hold the demised premises according to the terms of the lease and without the necessity of any new lease."

22. The next statutory provision to which I must refer is s. 14 of the Conveyancing and Law of Property Act 1881. The current edition of WOODFALL states: "Except in the case of non-payment of rent, and failure to insure, and except in rare cases of fraud, mistake, accident and surprise, no relief against forfeiture could be given until the Conveyancing Act 1881 came into force. "[Para. 1-1924] The cases cited to me clearly show this. The section has the effect of restricting the landlord's right to forfeit for breach of covenant and gave power to the court to relieve in the circumstances set out in the section. However sub-section (8) expressly provided that the section did not affect the law relating to forfeiture or relief in cases of non-payment of rent (clearly on the authorities, the legislature's intervention was unnecessary in this field). The landlord was thereafter required to serve a notice on the lessee specifying the particular breach complained of before seeking to enforce forfeiture, and where the breach was capable of remedy, requiring the lessee to remedy it, and in any case, requiring compensation for the breach. Forfeiture could only be enforced if the notice had not been complied with within a reasonable time. Even where the landlord had proceeded under and in accordance with the section, the lessee could apply for relief in the landlord's action (or in an action brought by himself), and the court was given power to grant or refuse relief having regard to all the circumstances of the case, including the conduct of the parties. If relief were granted, it could be on such terms as to costs, expenses, compensation etc. as the court thought fit, including, if necessary, an injunction to restrain any like breach in the future.

23. The courts having held that s. 14 of the Conveyancing and Law of Property Act 1881 did not apply as between ground landlord and under-lessee (both WOODFALL para. 1-1935, and Carson's Real Property Statutes, 3rd Ed. (1927) mention Burt v. Gray [1891] 2 Q.B. 98 in this context) the U.K. Parliament enacted the Conveyancing and Law of Property Act 1892 which, by s. 4 made special provision for the protection of sub-lessees. This section was re-enacted as subsection (4) of s. 146 of the great Law of Property Act 1925, and the rest of s. 146 reproduced, with some modifications, s.14 of the 1881 Act and ss. 2 and 5 of the 1892 Act. Section 146(4) of the Law of Property Act 1925 is in the following terms -

"(4) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture under any covenant, proviso, or stipulation in a lease, or for non-payment of rent, the court may, on application by any person claiming as under-lessee any estate or interest in the property comprised in the lease or any part thereof, either in the lessor's action (if any) or in any action brought by such person for that purpose, make an order vesting, for the whole term of the lease or any less term, the property comprised in the lease or any part thereof in any person entitled as under-lessee to any estate or interest in such property upon such conditions as to execution of any deed or other document, payment of rent, costs, expenses, damages, compensation, giving security, or otherwise, as the court in the circumstances of each case may think fit, but in no case shall any such under-lessee be entitled to require a lease to be granted to him for any longer term than he had under his original sub-lease."

24. The only difference between that subsection and s. 4 of the 1892 Act is the insertion of the words "or for non-payment of rent" between "or stipulation in a lease" and "the court may" occurring in lines three and four. The earlier section had in fact been construed as applying to rent-breach cases (see Gray v. Bonsall [1904] 1 K.B. 607). In view of this modification, subsection (11), which provides that s.146 does not affect the law relating to re-entry or forfeiture or relief in the case of non-payment of rent, includes the expression "save as otherwise mentioned" (c.f. s.14(8) of 1881 Act).

25. It has been noted that in this jurisdiction, in the text of 0. 88A rr. 2-4 are to be found provisions very similar to those of ss. 210 - 212 of the Common Law Procedure Act of 1852 which, themselves, had their origin in the Landlord and Tenant Act of 1730. But no legislative provisions are in force in Hong Kong which parallel s. 146 of the Law of Property Act 1925 (derived from the Conveyancing Acts of 1881 and 1892) or s. 46 of the Supreme Court of Judicature (Consolidation) Act 1925 (which owed its origins to s. 1 of the Common Law Procedure Act 1860).

26. While Counsel for the parties agree about the state of the Hong Kong statute book as outlined above, they do not agree about the result. Counsel are at one, however, that 0. 88A has no application to the case before me - the plaintiffs have not proceeded for ejectment, and the second defendants do not claim relief, under the provisions of that Order.

27. I will now deal with a submission made by Mr. Lee which, if it succeeds, would defeat the counterclaim for relief. It relates to the conditions in the head-lease and the under-lease governing sub-lettings. Clause 7 of the head-lease, inter alia, stipulated that "the tenant shall procure the sub-tenant to execute the undertaking to the landlord in the prescribed form annexed hereto." And within 14 days, the tenant was required to deliver a copy of the sub-lease certified to be correct by a solicitor, to the landlord, together with the original of the undertaking signed by the sub-tenant. By the under-lease the sub-tenant covenanted [clause 4(c)] to deliver up vacant possession of the premises to the landlord at the expiration or sooner determination of the term, notwithstanding any rule of law or equity to the contrary.

28. When the ground floor of the plaintiffs' shop was sublet to the second defendants on the 14th June 1978, the undertaking required by the terms of the head-lease was duly drawn up and sent to Mme. Seto. It is dated the same day and bears the signatures of all the partners who are now the second defendants, and was witnessed by a solicitor. The undertaking is in the following terms -

29. In Mr. Lee's submission, the undertaking makes all the difference, and the second defendants, by signing it, have in effect bargained away their right to claim relief from forfeiture. This case was different from all those cited to the Court because their written undertaking and the clause in the sub-lease required them to deliver up possession on expiration, not to the principal tenant, as was usual, but to the landlord. Unlike the more common clauses dealing with sub-letting, here the plaintiffs' position was that they were not concerned who took an under-lease; they merely wanted to ensure that the sub-tenant left when the head-lease ended. The very dangers that had arisen had been foreseen and elaborate precautions had been taken to obviate them. No lawful sub-tenancy could have come into existence unless the stipulations had been observed. The undertaking was, and had been intended to be, legally binding. The second defendants had presumably received legal advice (their signatures having been witnessed by a solicitor), there was good consideration and they should be held to the contract. No grounds had been averred or proved upon which the agreement could be set aside - no suggestion had been made of mistake, fraud, misrepresentation or the like.

30. Mr. Lee relied on the decision of the House of Lords in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691 as showing the circumstances in which courts exercising equitable jurisdiction would relieve against ...(illegible) men's bargains. In Lord Wilberforce's speech, at p. 723, occurs the following passage -

"[It] remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited circumstances to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result."

31. Mr. Lee pointed out that in the case before us, the plaintiffs had not procured the undertaking to secure the payment of rent, but to ensure that they had vacant possession at the end of the head-lease. The "stated result" could not therefore be obtained by relieving on terms that the rent in arrears should be paid. However much money the second defendants were willing to offer this would be "uncovenanted" payment and it would be unconscionable to grant relief from the undertaking. Mr. Lee also relied on Peachey v. The Duke of Somerset (1721) 1 Stra. 447 which was cited with approval in Shiloh, and which sets out the true foundation of relief against penalties - the court gives all that is "expected or desired" where they are "designed only to secure money".

32. At the time Mr. Lee first made these submissions, he had been unable to find any direct authority to assist the Court, but taking advantage of an over-night adjournment, his junior had come across Nance v. Naylor [1928] 1 K.B. 263. Mr. Lee suggested that while at first sight the case might appear to be against him, it could easily be distinguished, and he felt able to maintain the stand he had previously taken. In that case, the landlord recovered judgment for rent in arrears and possession, and the tenant signed an undertaking to pay the amount due and costs under a fi. fa. and to render up possession on a fixed date, in consideration of the landlord not proceeding to execution on the writ for possession. A very strong, if I may say so, Court of Appeal held that the tenant's under-taking did not preclude the Court from granting relief against forfeiture. Mr. Lee pointed out that in Nance v. Naylor (Atkin) L.J. had clearly been influenced by the fact that there was no evidence from which it could be inferred that the tenant knew anything about his right to relief against forfeiture. Here the second defendants were represented by a solicitor whose signature is to be found on the undertaking. An important distinction, too, was that in this case it was the sub-tenant (second defendants) who was applying for relief and not the principal tenant, as occurred in Nance, who had been quilty of default. The consideration was that the second defendants would become lawful sub-tenants - without the undertaking they could not lawfully have possessed the property for a single day. In Nance the tenant could have gone to Court for relief without any agreement but in this case, without the undertaking which founded their lawful possession, the sub-tenants would have had no standing before the Court.

33. Mr. Lee also submitted that all three Judges in Nance v. Naylor had construed the agreement to give up possession on or before a certain date as not being inconsistent with the right to relief still subsisting. The proper construction of the undertaking given by the sub-tenants in this case, when read with the sub-tenancy agreement, was clearly that they would go when the principal tenant left. This was quite inconsistent with their application for relief. Moreover, unlike the position in Nance, here the clock could not be put back. There the tenancy had been determined because the tenant had not paid rent, and relief could be given on terms that it be paid. The sub-tenancy here had not been determined because the sub-tenants had defaulted in paying rent, but because the head-tenancy had lapsed, and so long as it remained so, the sub-tenants were still bound by the undertaking.

34. These are powerful arguments indeed, and I have decided not to accept them only after very considerable hesitation. It seems to me that Mr. Cheung is right when he submits that the undertaking, in its effect, did not really go further than what an ordinary lease usually contains. Although Nance v. Naylor can certainly be distinguished on the facts, I feel it is right to approach the matter from the standpoint adopted by Scrutton L.J. in that case, "the right to grant relief is one which the Courts have always jealously preserved in favour of tenants." The under-taking does not expressly abandon the right to come to Court for relief and I do not think that such a term must necessarily be implied into it. I therefore hold that the undertaking does not bar the second defendants from relief.

35. The cases and text-books which have been referred to me establish very clearly that from the earliest times the Courts of Chancery consistenty granted relief from forfeiture for non-payment of rent. Equity regarded the proviso for re-entry as no more than security for the payment of rent, and was willing to relieve on terms that the rent was paid, with interest and costs, where appropriate, and provided the interests of third parties were not prejudiced. The Chancery Courts intervened by granting to the tenant (and where relevant, to those claiming under him) an injunction to prevent the landlord from proceeding with his suit for ejectment. Equity gave relief even after judgment and it has been seen how the Landlord and Tenant Act of 1730 regulated the mode of granting relief in such cases.

36. The Courts of Chancery, however, were not consistent in granting relief from forfeiture on account of other breaches, and since we are not here primarily concerned with such breaches, it is only necessary to note that the early cases were reviewed in Hill v. Barclary 18 Ves. Jun. 55 and much more recently in Shiloh Spinners v. Harding [1973] A.C. 729.

37. Mr. Cheung submitted that the cases showed that in rent-breach cases the courts gave relief on terms that were just and equitable in all the circumstances of the particular case and that the legislation reviewed above did not affect the principles upon which equity intervened. Equity treated principal and under-tenants alike and did not invariably insist, even where a head-lease was involved, that the tenant should pay up all the arrears of rent. He relied upon a number of cases in support of his submission and I do not think it necessary to refer to them all.

38. I will first deal with Howard v. Fanshawe [1895] 2 Ch. 581, which was approved by the Court of Appeal in Lovelock v. Margo [1963] 2 Q.B 787. In Howard v. Fanshawe it was urged upon Stirling J. that no relief could be granted to a lessor who had re-entered peaceably without the assistance of a Court. This argument was rejected, and Stirling J. held that the jurisdiction of the Court was not limited to cases where the landlord had regained possession by legal process. Mr. Cheung argues that this case shows that the statutes of 1730 and 1882 did not modify the principles upon which courts of equity would grant relief and that it further indicated that no compensation could be granted in respect of the time during which the applicant has been kept out of possession. In my view the judgment does not throw light on the appropriate relief to be granted to under-lessees of part of demised premises. As regards rent for the time that the applicant was kept out of possession, the 17th Edition of WOODFALL certainly draws this conclusion from the case, but the report itself does not appear to support it in so many terms. Even if, as Mr. Cheung has suggested, an arithmetical calculation of the amount established to be due, and ordered to be paid, under the judgment justifies this assertion, it seems to me that this part of the decision does not assist him. I have no doubt that a tenant applying for relief should not be ordered to pay rent for the time during which, for any reason, he was dispossessed. I do not think that this happened in the case before me. The second defendants have never claimed a right to occupy the mezzanine floor and have never been out of possession of the part that was leased to them.

39. Mr. Cheung cited Chatham Empire Theatre (1955) Ltd. v. Ultrans Ltd. and others [1961] 1 W.L.R. 817. In that case a cinema, a theatre, a restaurant and a car park were comprised in the head-lease. It was argued that relief should only be granted to the defendants (to whom only the cinema had been sub-leased) if they paid the whole of the rent outstanding at the time of the writ on all the property comprised in the head-lease. Salmon J. asked himself the very question that has to be answered in the case presently before me:-

"In this case, however, the question is how that principle [that in a case of relief against forfeiture, the plaintiffs are entitled to be put back into the position that they would have been had the forfeiture not occurred] - and it obviously does apply - when a sub-lessee of a part of the premises is claiming relief against forfeiture; is the landlord entitled to be put back in the same position as he was before the forfeiture qua the whole of the premises in the head-lease or only in respect of the premises of which the sub-lessee is in possession?"

40. Salmon J. referred to London Bridge Buildings Co. v. Thomson 89 L.T. 50 (where Joyce J. granted relief only in terms that the under-lessee should pay the whole of the rent in arrears in respect of all the property embraced by the head-lease) and took the view that Joyce J. had not purported to lay down any general principle upon which the very wide discretion of the Court should be exercised, but had decided the case on its own particular facts. He noted that Joyce J. had been considering s.4 of the Conveyancing and Law of Property Act, 1892 and he himself had to consider the corresponding provision, which was s. 146(4) of the Law of Property Act, 1925. He held that the sub-section conferred the widest discretion on the Court as to the terms upon which relief should be granted, and ordered the defendants to pay, as a condition of obtaining relief, only that part of the arrears attributable to the property sub-let to them, plus an element of the premium. At p. 820, Salmon J. had this to say -

"One can envisage a case in which a block of property comprising a large number of shops and other premises is let to one corporation for £30,000 a year. The corporation then sublet the separate shops to various small shopkeepers at perhaps £300 a year each. After some time the corporation goes into liquidation owing perhaps half a year's rent. It is quite plain that the legislature gives the right to the small shopkeeper to come and ask for relief. If Mr. Goodall's contention is correct, the apparently wide discretion conferred by subsection (4) of section 146 is so limited that the court could not grant relief to the small shopkeeper unless he paid the £15,000 rent in arrear in respect of the whole block. It is suggested that that would not work any hardship because he could recoup himself from the corporation. That does not really commend itself to me as a practical argument because, in the first place, he will not be able to find the £15,000, and, in any event, the insolvent corporation could not pay. I cannot believe that in circumstances such as those the court's discretion is fettered as contended on behalf of the plaintiffs. I should have thought that if the shopkeeper paid his proportion of the arrears, namely, £150, and it was otherwise just and equitable that there should be relief, he should obtain relief on that basis. I can certainly conceive of cases where it would be quite wrong to give a sub-lessee relief on this basis; great hardship could be caused to the head lessor if granting relief to one or two of many sub-tenants would make it impossible for him to deal with the premises as a whole. Every case must be considered on its own facts."

41. Mr. Cheung submits that Salmon J's decision would have been the same if the ancient jurisdiction in equity had been relied upon because equity gave relief by granting an injunction, and in doing so considered what was just and equitable in all the circumstances of a particular case, balancing very finely the rights of the landlord as against those of the tenant or sub-tenant. With respect, I consider it would not be safe to read this into the case. The Judge was clearly basing his decision on s.146(4) of the L.P.A. which give him, in the plainest terms, jurisdiction to grant relief on the terms that he did. And it is to be noted that in the passage I have quoted above from his judgment, when suggesting how inequitable it would be to require the small shopkeepers in the circumstances that he gave as an example, to pay the arrears for the whole block of shops, he did say "It is quite plain that the legislature gives the right to the small shopkeeper to come and ask for relief." [Emphasis added] It was not necessary, of course, for him to consider what the Court could have done, had s. 146(4) of the L.P.A. not been available. It is also pertinent to recall that Salmon J. envisaged circumstances in which it would be wrong to give relief in this basis, emphasing that each case must be considered on its own facts.

42. For the same reasons, I do not feel much assistance can be derived from the judgment of Joyce J. in London Bridge Buildings Co. v. Thomson - he was, to my mind, clearly founding his decision on s. 4 of the 1892 Act. When he expressed the difficulty presented by the fact that the section did not prescribe the principles and conditions upon which relief was to be granted, he did not go on to apply the principles he felt to be appropriate in vacuo, but against the background of statutory provisions which spoke of "the property comprised in the lease or any part thereof" in relation both to the status of the applicant and to the relief which could be granted. And in the result the judgment offered relief on terms that all the arrears of rent due should be paid to the lessor down to the recovery of possession against the other tenants, and thereafter a fair rent for the premises comprised in the under-lease in respect of which relief from forfeiture was prayed.

43. In Belgravia Insurance Co. Ltd. v. Meah [1963] 3 W.L.R. 1033, [1964] 1 Q.B. 436 the Court of Appeal had to consider the position of a mortgagee who claimed for relief from forfeiture where judgment was signed for possession, arrears of rent and mesne profits against the mortgagor who had fallen into arrears with his rent. The application for relief was made both under s. 46 of Judicature Act 1925 and under s. 146(4) of the L.P.A. 1925. Lord Denning, M.R. reviewed the history of the relief granted to under-lessees and mortgagees in such cases by the Courts of Chancery and traced the interaction of the statutes upon that ancient relief. He held that the jurisdiction to grant relief under s. 46 of the Judicature Act 1925 was founded on the jurisdiction of the old Court of Chancery and concluded (at p. 1039) that -

"The principle was thus clearly established that, in case of forfeiture for non-payment of rent, a Court of Chancery would, in the ordinary way, grant relief to an under-lessee or a mortgagee by sub-demise, if he paid all the rent in arrear and performed all the covenants and paid all the costs. The court, however, as a rule only granted relief if the original lessee was made a party (see Hare v. Elms) though this rule could be relaxed for good cause: see Humphreys v. Morten."

44. As regards the application under s.164 of (4) of the L.P.A. 1925 he said, (at p. 1039) -

"It seems to me that, in exercising this discretion, the court will, in the ordinary way, grant relief to an under-lessee on the terms of paying the rent in arrear performing the covenants, and paying all the costs: see Gray v. Bonsall, per Romer L.J. In short, on the same terms as the old Court of Chancery would have done. The only difference is that it is not necessary to make the lessee a party."

45. Mr. Cheung adopted Lord Denning's interpretation as to the effect of the statutes on the jurisdiction to relieve from forfeiture for non-payment of rent, submitting that the equitable principles had not altered. He did recognise, however, that Belgravia Insurance Co. Ltd. v. Meah was a case where the under-lessee was in possession of the whole of the premises demised.

46. This case assumes special importance for in it Lord Denning refers to the old case of Webber v. Smith (1689) 2 Vern. 103. Mr. Lee relies on that case as still governing the position in the absence of statutory provisions, while Mr. Cheung submits that equity developed principles which showed that the terms upon which relief was granted were merely that they should be fair and reasonable, taking all the circumstances into account.

47. The report of Webber v. Smith is so short that I set it out in full -

48. In Belgravia, Lord Denning gave Webber v. Smith as an illustration of the principles upon which relief was given by a Court of Equity to under lessees, noting that the Court had granted relief on terms that sub-tenants paid the whole rent in arrear. A Court in England today would not need to refer to Webber v. Smith except, perhaps, as part of an historical survey as Lord Denning did in Belgravia (and as Lord Wilberforce did in Shiloh, there citing it as an early example of a case where equity granted relief from forfeiture for a breach of a covenant to repair) because of the plain and very wide discretion given (if Mr. Lee is right) or merely confirmed (if Mr. Cheung is right) by s. 146(4) of the L.P.A. 1925. Since Lord Denning had before him a case where an under-lessee was in possession of the whole of the demised premises, I do not think that Belgravia can guide me towards the correct answer to the question posed in the instant case, one way or the other.

49. Mr. Cheung relied on certain passages in the speeches of the House of Lords in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691. I will quote one of them. Lord Simon of Glaisdale, discussing the standing of old cases on equitable relief, stated, at p. 726 -

"With reference to the fifth question - whether this is a case where a court of equity might grant relief against exercise of the right of entry - I agree that Sanders v. Pope (1806) 12 Ves. Jun. 282 and Hill v. Barclay (1811) 18 Ves. Jun. 56 are not in themselves inconsistent authorities; nevertheless, they seem to me to be the respective culminations of a more liberal and a stricter attitude towards equity's jurisdiction to relieve against forfeiture. Lord Eldon L.C.'s inclination, with its emphasis on strict respect for contractual rights and obligations, was more congenial to the following age, and came to be followed. Barrow v. Isaacs & Son [1891] 1 Q.B. 417 was a natural consequence; and I am bound to say that it seems to me to demonstrate an abnegation of equity, and to show that the trail from Hill v. Barclay leads into a juristic desert. Since what was said by Lord Cairns L.C. in Hughes v. Metropolitan Railway Co. (1877) 2 App. Cas. 439, 443, was obiter, and merely reflects the acceptance then generally current, none of the authorities binds your Lordships. The last hundred years have seen many examples of relaxation of the stance of regarding contractual rights and obligations as sacrosanct and exclusive of other considerations: though these examples do not compel equity to follow - certainly not to the extent of overturning established authorities - they do at least invite a more liberal and extensively based attitude on the part of courts which are not bound by those authorities. I would therefore myself hold that equity has an unlimited and unfettered jurisdiction to relieve against contractual forfeitures and penalties. What have sometimes been regarded as fetters to the jurisdiction are, in my view, more properly to be seen as considerations which the court will weigh in deciding how to exercise an unfettered jurisdiction (cf. Blunt v. Blunt [1943] A.C. 517; Kara v. Kara and Holman [1948] P. 287, 292). Prominent but not exclusive among such considerations is the desirability that contractual promises should be observed and contractual rights respected, and even more the undesirability of the law appearing to condone flagrant and contemptuous disregard of obligations. Other such considerations are how far it is reasonable to require a party who is prima facie entitled to invoke a forfeiture or penalty clause to accept alternative relief (e.g., money payment or re-instatement of premises) and how far vindication of contractual rights would be grossly excessive and harsh having regard to the damage done to the promisee and the moral culpability of the promisor. (I do not intend this as an exhaustive list.) It is these internal considerations which may limit the cases where courts of equity will relieve against forfeiture, rather than any external confine on jurisdiction."

50. With regard to this passage, as I understand it, while, Lord Simon of Glaisdale was suggesting a more liberal and extensively based approach by Courts not bound by the old authorities as to the limits of equitable jurisdiction to relieve from forfeiture, and canvassing some of the conflicting considerations which have to be balanced, he was not, I think, dealing with the terms on which relief readily given in equity should be granted. I have set out the passage in full for reasons which will later appear.

51. As regards Thatcher v. C.H. Pearce and Sons (Contractors) Ltd. [1968] 1 W.L.R. 748 and Standard Pattern Co. Ltd. v. Ivey [1962] 2 Ch. 432, while these authorities, dealing as they did with the application of the Common Law Procedure Act 1852, would have been relevant had I been considering 0.88A of our Rules of the Supreme Court, in my view they throw no light on the matter before me. And, as has been noted, we do not have the equivalent here of s. 46 of the Judicature Act 1925, also discussed in Standard Pattern.

52. It seems to me that on the authorities which were decided before the legislature intervened into this area of equitable jurisdiction, the principle firmly established was that equity gave relief whenever the Court was able to accord full compensation to the person entitled to forfeiture, to the extent that he could be placed in the position in which he would have been had the breach not occurred. Many cases can be found to support this proposition, and the following are examples -

53. Davis v. West 12 Ves. Jun. 476

54. Popham v. Bamfield 1 Vern. 325 and 1 Vern. 167

55. Grimston v. Lord Bruce and Ux 1 Salk. 156

56. Hill v. Barclay 18 Ves. Jun. 55

57. In my judgment Webber v. Smith was merely an instance of the operation of the principles on which equity gave relief. In declining to apportion rent, I apprehend that the Court was adhering to those principles, and applying them to the situation where an under-lease did not comprise the whole of the property in the head-lease. For unless all the arrears of rent on the entire premises were paid, the landlord could not have been restored to the position he had been in before the breach occurred. Nothing less would have justified the intervention of equity.

58. Mr. Cheung was not able to cite a single case where a Court exercising purely equitable jurisdiction, without the aid of statutory provisions, granted relief to a sub-tenant occupying only part of the property comprised in the head-lease, by requiring him to pay only the arrears of rent in respect of the part of the premises sub-leased to him.

59. In my view the cases indicate that it was only after the enactment of s. 4 of the Conveyancing and Law of Property Act 1892 that the Courts had power to vest the remainder of the term under the head-lease in an under-lessee in possession of that part of the premises sub-let to him by the principal tenant, and by virtue of the wide discretion conferred, require him to pay only such arrears (and future rent) as was attributable to the portion comprised in his under-lease. Without the intervention of statute, equity would, in such circumstances, have reinstated the head-lease.

60. Since the burden of Mr. Cheung's submissions was that the legislative developments to which reference has been made did not affect the principles upon which equity granted relief from forfeiture for breaches of covenant, he did not invite me to hold that the conditions of modern Hong Kong dictated a modification of such principles in rent-breach cases. I will only say that the matter before me does not appear to involve conditions or factors peculiar to Hong Kong which would render it necessary and appropriate to modify the ordinary equitable principles to meet them.

61. It is to be noted that the legislature is not slow to apply to Hong Kong, or to enact, legislation deriving from England when the public interest so demands. And the Hong Kong legislature has been active in the field of landlord and tenant law in other areas. Indeed the existence of 0. 88A of the Rules of the Supreme Court shows that it is alive to some of the problems that the unregulated rules of equity created in relation to forfeiture and relief in rent-breach cases. It cannot be that the court is free to develop the law in the direction of corresponding legislation that governs the position in the United Kingdom, assuming that equitable principles would have so developed without that legislation. Apart from being arbitrary, and likely to lead to uncertainty and confusion in the law, any such attempt would be, as Lord Ellenborough C.J. put it in Davis v. West (1806) 7 East 363 (one of the cases cited to me) "exercising the function of legislation instead of judicial construction."

62. The same problem might arise in a different context. Suppose a Court in Hong Kong were concerned with a breach of covenant for which no relief could be given until the enactment of the Conveyancing and Law of Property Act 1881 (I have quoted para. 1 - 1924 of WOODFALL above). Could the court come to the conclusion, in the absence of legislation on the lines of s. 146 of the Law of Property Act 1925 (which is the modern provision) that equitable relief could nevertheless be granted, even in respect of covenants that needed the attention of the legislature? I think not, unless the Court felt able to rely on the passage quoted above from the speech of Lord Simon of Glaisdale in Shiloh Spinners v. Harding, which would be relevant in such a situation.

63. If I am right in my conclusion, it may be that the legislature of Hong Kong will feel that it is desirable to give consideration to these matters.

64. However all this may be, I must say at once, that on the facts before me, even if I had felt I had jurisdiction to apportion rent (to use a shorthand phrase), I would not have done so. It is clear that the plaintiffs always considered and let the ground and mezzanine floors of Shop I as one unit. They took special pains to ensure that if any part were sub-let, the under-lessee would not hold over on the termination or prior determination of the head-lease. The second defendants have certainly been placed in a difficult position through no fault of their own, but the contractual rights of the plaintiffs are no less important. If the defendants had honoured their undertaking and gone, all the plaintiffs would have had to do was to build the internal staircase to link the two floors (unless they found a tenant who did not need it as happened in the past) which the principal tenant had covenanted to reinstate - and they had a considerable sum by way of deposit they could have utilised for this purpose. The second defendants all along have had the use of the extra space in their restaurant that would be taken up by a staircase. By remaining in possession, I accept that the defendants have kept the plaintiffs out of both floors; as Mr. Lee put it, physically out of the ground floor, and effectively out of the mezzanine floor. I am satisfied that the plaintiffs could not reasonably have been expected to hunt around for someone who would be prepared to take over the mezzanine floor in its present state. The only access to that floor is by way of a common staircase (described in evidence as a fire-escape staircase) leading out into a scavenging lane. That entrance has been shown in a photograph to be most unprepossessing. Mr. Kwan frankly admitted that another stairway would need to be built to make leasing the mezzanine floor a viable commercial preposition. I would say in passing, that I do not think that the fact that Madame Seto felt it prudent to put a padlock on the door which leads into the mezzanine floor from the back staircase, is in any way relevant. She could not make commercial use of that floor without an additional staircase unless she had been extremely lucky in a search for a tenant. Moreover, since she (to my mind, perfectly justifiably) wanted to continue to treat the shop as one, she would have had to find someone who would take the mezzanine floor, not only as it stood, but for a period that would determine when the under-lease expired. The defendants come to court for relief from a legal obligation and I do not see how it can be granted without grave injustice to the plaintiffs, unless they assume responsibility for the rent and other expenses, and the covenants, applicable to the unit as a whole.

65. In my view the position here is just the sort of possible situation Salmon J. had in mind in Chatham Empire Theatre (1955) Ltd. (in the concluding part of the paragraph of his judgment set out above). Great hardship would be caused to Madame Seto if I were to give relief in respect only of the ground floor, for so to do would be to make it very difficult, if not impossible, for her to deal with the premises as a whole.

66. Since I have based my decision on the law as I find it, I do not think it is necessary for me to discuss all the equities that Mr. Cheung has urged against the plaintiffs and I have therefore contented myself with doing no more than explaining in broad terms what conclusions I would have reached if I had held that I could grant relief, limited in the manner prayed for by the second defendants.

67. However, there are certain matters to which I should refer, for they will undoubtedly affect a decision on costs. The second defendants made an offer to the plaintiffs in a letter dated 12th October 1978 to take over both floors of the premises on the following terms -

68. It will be seen at once that the plaintiffs were being asked to accept terms considerably less favourable than those contained in the original lease, for -

In the circumstances I do not think Madame Seto was being unreasonable in not accepting the offer; nor do I consider that it was incumbent on her to continue negotiations by making a counter-offer. Moreover, when the history of the proceedings is examined, it would not be fair, in my judgment, to lay the blame upon Madame Seto's shoulders for the fact that the passage of time has made possession of both floors of the shop a much less attractive proposition than it would have been earlier, when the head-lease fell through, or at the time the matter was before Cons J. and latter in the Court of Appeal.

69. It has not been easy for me to decide on the form of the order that should be made to reflect my decision. After considering the submissions of Counsel, in the absence of legislation that empowers me to make a vesting order, and doing the best that I can in all the circumstances, I make an order in the following terms -

70. It will be seen that I have not denied the second defendants, if they choose to accept these terms, the right to sub-lease in accordance with the terms of the head-lease. I can well understand why the plaintiffs have sought the imposition of this restriction - the present sub-lease has caused them so much trouble - but I did not think that this would be fair to the second defendants in case they are able to make legitimate commercial use of the mezzanine floor to re-coup some of their losses.

71. It would be right, I think, to give liberty to apply.

72. I will now hear Counsel on costs.

Representation:

Mr. M. Lee Q.C. with Mr. Allman-Brown (Philip K.H. Wong & Co.) for Plaintiffs.

Mr. O. Cheung, Q.C. with Miss H.C. Wong (Lau, Chan & Ko) for 2nd defendants.