In Cheermark Investment Ltd v Director of Lands ([2017] HKEC 2536 (CA)) the Court of Appeal had to consider appeals from the Director of Lands concerning the basis on which compensation was payable in respect of two shops, the ownership of which had been resumed by the Government.
The shops were held on Government Leases that included restrictions on use which were contravened by the use of the property as shops. The Lands Tribunal found that the Government had abandoned the restrictive covenant.
The Director of Lands appealed against this finding. The Director also argued that section 12 of the Lands Resumption Ordinance (‘LRO’) meant that any abandonment was irrelevant to the valuation exercise to be carried out. The compensation payable would be much lower if the valuation had to take account of the restrictive covenant.
The Government leases on which the shops were held contained a covenant that the lessee would not allow the land to be used other than for ‘dwelling houses workshops factories or godowns or similar purposes’ (‘the user covenant’).
The Court of Appeal (Kwan JA giving the main judgment), reversing the Lands Tribunal on this point, held that the use of the property as shops was a breach of the user covenant.
The Lands Tribunal found that the Government had abandoned the user covenant on the basis of ‘the open and notorious breaches over a lengthy period without enforcement action’. The Court of Appeal said that whether the facts are capable of establishing the abandonment of a covenant ‘is primarily a matter for the fact finding tribunal’ ([69]). There was no basis, in this case, to interfere with the Lands Tribunal’s judgment.
Did section 12 of the LRO mean that the abandonment was irrelevant when it came to calculating the compensation payable? The section provides, among other things, that, ‘no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held’.
The use of the properties as shops was not in accordance with the terms of the Government lease unless the court could take account of the fact that the Government had abandoned the user covenant.
The owners were entitled to fair compensation following the resumption; this is the principle of equivalence which would operate even in the absence of article 105 of the Basic Law ([106]). Further, ‘the principle against doubtful penalisation imports a presumption against the imposition of a statutory detriment to a person’s property or other economic interests without clear language’ ([107]).
Through the abandonment, the Government had disposed of the right to enforce the restrictive covenant. It could no longer charge a premium for a change of use to that of a shop. The owners’ interest in the shop was to be valued in such a way as to reflect this: ‘compensation is required to be paid for the interest resumed’ ([108]).
Michael Lower