3 Leasehold covenants I & II: Obligations of
landlords and tenants
1. Intro
a. The express obligations of landlord and tenants are stipulated in the terms
of the lease, often referred as covenants.
b. Technically a covenant is a promise made under seal ie in a deed. Thus it is a
term or a promise in a legal lease.
c. Promises made in a valid agreement to create a legal lease under section 3
of the Conveyancing and Property Ordinance are enforceable covenants
even though they are not in the form of a deed.
d. Thus, a term in an equitable lease is often referred to as a covenant, and
they are enforceable even though no deed is used to create the lease.
e. There are also certain obligations implied by law as part of the terms of the
lease, ie implied covenants and usual covenants.
f. Different from condition, a breach of condition automatically brings the
term to an end, but a breach of covenant does not end the term
automatically and the landlord may not terminate the lease for breach of
covenant in the absence of express provisions of forfeiture. Whether a
condition or a covenant depends on the intention of the parties.
2. Express terms
a. Express obligations by landlord few – eg clause 3(a) to pay government rent
and property tax; 3(b) quiet enjoyment
b. Express obligations by tenant extensive – eg clause 2(a)-(w)
c. Other express terms: eg right of re-entry by landlord on breach (cl 4(a)), to
be indemnified (cl 4(d)), stamp duty (cl 4(i)), deposit (cl 8), break clause (cl
9).
3. Implied terms by the landlord
a. When the lease does not contain covenants relating to certain matters,
these matters will be governed by implied covenants. But if the lease
contains such an express covenant, there is no room for an implied covenant
covering the same ground or any part of it.
b. Quiet enjoyment
i. There is usually an express covenant for quiet enjoyment (see clause
3(b)). However, in the absence of an express covenant, there is an
implied covenant for quiet enjoyment. This means that landlord will
not interfere with tenant’s use of the land. Interference can take
many forms. An interesting example is Union Assurance Society of
Canton v The Hong Kong Land Co Ltd [1977] HKLR 597 where
changing the name of the building was held to be a breach.
ii. A regular excessive noise could constitute substantial interference.
However, this does not cover noise caused by things done before
the grant of the tenancy, for example, the lack of soundproofing of
neighbouring flats owned by the landlord which causes ordinary
day-to-day noise by the tenant in those flats to interfere with the
reasonable enjoyment of the flat by the complaining tenant (see
Southwark London Borough Council v Mills [1999] 4 All ER 449, HL)
iii. Whether a behaviour is a breach or not is a matter of degree and
extent.
c. Not to derogate from grant
i. This means that the landlord must not do anything which frustrates
the purpose for which the tenancy was granted. Merely making it
more expensive or less profitable to carry out the intended use is
not enough. (see Lam Kwok-leung v AG [1979] HKLR 145 where
Crown land was granted for redevelopment, and Crown built a
public toilet on adjoining land which reduced the size of the building
which could be built on the land granted, held no derogation).
ii. You must identify in the first place what obligations, if any, on the
part of the grantor can fairly be regarded as necessarily implicit in
the grant, taking into account the particular purpose of the
transaction when considered in the light of the circumstances
subsisting at the time it was entered into. Only then can one
determine whether the grantor’s conduct constitutes a derogation
from grant in violation of the implicit obligation identified. The
obligation said to be necessarily implicit has to be one which both
parties must necessarily be taken to have accepted as part of the
transaction. (see Rank Profit Industries Ltd v Secretary for Justice
[2009] HKEC 1022, CFA, where after grant of government lease,
government allowed other lessees in the area to modify use which
made grantee’s plan to build commercial car parks less profitable.
Grantee argued that this amounted to derogation. Held: Given
Hong Kong’s constantly changing land use needs and property
market conditions, it is wholly implausible for taking the parties to
have contracted on the footing that the government would sterilize
for 50 years its entitlement as landlordto negotiate lease
modifications, including changes to user, with the lessees of the 40
other lots in the area as a necessary consequence of requiring the
provision of public car parking facilities on the tenant’s Lot); see also
Kung Ming Tak Tong Co Ltd v Park Solid Enterprises Ltd [2008]
HKEC 1497, CFA.
iii. The difference between quiet enjoyment and not to derogate is the
degree of the interference, if the degree is just small it might just be
quiet enjoyment, if the degree is high then it is not to derogate, the
conduct must frustrate the purpose for which the lease was granted
and not merely render it more expensive or less profitable to carry
out the intended use.
d. No implied obligation on fitness and repair
i. At common law, landlords do not make implied promises as to
fitness and repair: Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD
754. You get what you see. There are however exceptions:
ii. Exceptions:
1. Furnished residential letting
a. Where the house is let furnished, it is implied that
the premises will be fit for human habitation at the
time of letting. (Smith v Marrable (1843) 11 M&W
5, 152 ER 693)
b. But not if the premise is unfurnished and only
limited to condition of the property at the beginning
of tenancy. (Li Ching Wing)
2. Implied term necessary for business efficacy
a. The court is prepared to imply any term in order to
give effect to the business efficacy of the leasehold
agreement.
b. Thus, there may be an implied duty of care to keep
the common parts and facilities in reasonable repair
and usability (see Liverpool City Council v Irwin
[1977] AC 239, HL), or an implied term that the
Government land is fit for such purpose in the
manner envisaged by the Government lease (see
Hang Tak Co Ltd v AG (1986) HCt HCA No 2567 of
1983).
4. Implied terms by the tenant
a. To pay rent
i. Landlord and Tenant (Consolidation) Ordinance ss 117(3) and 126
ii. 126 is about business tenancy
b. To pay rates and taxes
c. Not to use for immoral or illegal purpose: s 117(3)
d. Not to cause unnecessary annoyance etc: s 117(3)
e. Not to make structural changes without prior written consent: s 117(3)
f. Not to commit waste – not to alter property and must return in original
condition except fair wear and tear
i. The obligation is one in tort
ii. Tenants are not supposed to commit equitable waste (ie wanton
destruction of the property: Vane v Lord Barnard (1716) 2 Vern 738),
voluntary waste (ie positive act which is short of wanton
destruction, but which detrimentally alters the nature of the
property: Fu Lam Investment Co Ltd v Mok Cheong Che (1983) HCt
No 1978 of 1983), and ameliorating waste (ie positive act which is
an improvement to the property but which does not alter the
character of the property: Cheung Yueng-kan v Lui Kwan (1975) HCt
No 2358 of 1974).
iii. A fixed term tenant is also liable for permissive waste (ie failure to
repair: Yellowly v Gower (1855) 11 Exch 274), but not a periodic
tenant).
iv. No implied forfeiture right at common law but statutory implied
right of forfeiture for breaches of (a)-(d): s 117(3)
v. E.g. if the door didn’t work, it is fair wear and tear to repair the door
or get a new one
5. Usual covenants
a. Usual covenants are basically implied covenants in equitable leases.
b. In an equitable lease (such as a provisional tenancy agreement or formal
tenancy agreement which does not take effect in possession), the following
covenants are implied, and are often called usual covenants:
i. tenant will pay rent
ii. tenant will pay rates and taxes
iii. tenant will keep the premises in repair
iv. If landlord has covenanted to repair, he will be allowed reasonable
access to view and repair the premises
v. landlord will allow the tenant quiet enjoyment
vi. landlord will not derogate from his grant
vii. landlord has an implied right to re-enter should the tenant fail to
pay his rent: Sun Hing Co Ltd v Brilliant Investment Co Ltd [1966]
HKLR 310
6. Enforcement of covenants in a legal lease
L1 -----------A1--------A2
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T1 -----------T2--------T3
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ST
a. There are Privity of contract and privity of estate between L1 and T1
b. When the reversion is assigned to A1 or A2, there is no privity of contract between
A1 (or A2) and T1. But there is privity of estate between them. L1 will cease to have
privity of estate with T1.
c. When T1 assigns the tenancy to T2, then T2 only has privity of estate with L1, and T1
ceases to have privity of estate with L1.
d. When the land is sublet by T3 to ST, there is privity of estate between T3 and ST, and
there is also privity of contract. But as privity of estate describes the relationship of
landlord and tenant, there is no privity of estate between ST and L1. L1 is not ST's
landlord, L1 is the landlord of T3 with regard to the head lease between L1 and T3.
There is no privity of contract and no privity of estate between L1 and ST.
e. Between original parties: continuing liability
i. Tenant's continuing liability
1. Before 3 June 1988
a. As a matter of contract, the tenant remains liable after he
has assigned his tenancy: Warnford Investments Ltd v
Duckworth [1979] Ch 127 at 138C.
2. Since 3 June 1988
a. Arguably tenant ceases to be liable after he has assigned his
tenancy if the conditions in s 41(2) are met: s 41(8) of the
Conveyancing and Property Ordinance.
b. But note s 41(8) only applies to ‘any covenant, whether
positive or restrictive in effect (a) which relates to the land
of the covenantor(the person who is giving the promise);
(b) the burden of which is expressed or intended to run
with the land of the covenantor, and (c) which is expressed
and intended to benefit the land of the covenantee and his
successors in title or persons deriving title to that land
under or through him or them (other form of expression
acceptable: Lee Hysan Estate Co Ltd v Sky Heart Ltd [1997]
1 HKC 313 approved [1999] 1 HKC 18, CFA)’: s 41(2), CPO.
c. Can't apply s 41(8), will apply the common law rule, will be
liable even after he has assigned his tenancy
ii. Landlord's continuing liability
1. Before 3 June 1988
a. As a matter of contract, landlord remains liable after
assignment of reversion: Hui Sai Hoi v Chan Lai Wan (1932-
33) HKLR 31.
2. Since 3 June 1988
a. Again, it seems that landlord ceases to be liable after
assignment under s 41(8) CPO.
iii. Right to sue after assignment for breach committed before assignment
1. Landlord cannot enforce the covenant after he has assigned his
reversion(继承权): Re King [1963] Ch 459 followed in Elegant Profit
Ltd v Chung Lai Sang [2006] 1 HKLRD 156. This is because under s
31(1) ‘ … the benefit of every covenant or provision therein
contained having reference to the subject matter thereof …, and
every condition of reentry and other condition therein contained,
shall be annexed and incident to and shall go with the reversionary
estate in the land….’ Thus, after assignment, the landlord no longer
has the benefit of such covenants etc.
2. On the other hand, interestingly, the tenant retains the right to
enforce the landlord’s covenants even after he has assigned his
tenancy: City & Metropolitan Properties v Greycroft [1987] 1 WLR
1085. This is because s 32(1) which makes the burden of the
landlord’s covenants run to his assignee says that ‘the obligation
under a condition or of a covenant with reference to the subject
matter of the lease… shall be annexed and incident to and shall go
with that reversionary estate…. and may be taken advantage of
and enforced by the person in whom the term is from time to time
vested by assignment, devolution in law, or otherwise…’ (see John
Mowbray QC’s judgment extracted at p 4 55-6 of Goo).
f. Between persons other than original parties
i. Covenants by the original tenant (T1)
1. Passing of benefit to landlord's assignee (assignment of reversion)
a. Conveyancing and Property Ordinance s 31(1) (identical to s
141(1) of the English Law of Property Act 1925)
b. Covenant must have reference to the subject matter of the
lease. This means that the covenant must affect the mode
of user and it is not on the face of it personal: Caerns Motor
Services Ltd v Texaco Ltd [1995] 1 All ER 247.
c. For covenants by tenant with reference to subject matter of
the lease see p 458 of Goo.
2. Passing of burden to tenant's assignee (assignment of lease)
a. S 41(3) or Spencer's Case (1583) 5 Co Rep 16a: must touch
and concern the land, and privity of estate.
ii. Covenants by the original landlord (L1)
1. Passing of benefit to tenant's assignees (assignment of lease)
a. S 41(3) or Spencer's Case (1583) 5 Co Rep 16a
2. Passing of burden to landlord's assignees (assignment of reversion)
a. Conveyancing and Property Ordinance s 32(1) (identical to s
142(1) of the English Law of Property Act 1925)
7. Enforcement of covenants in an equitable lease
a. Between original parties
i. Remain liable. Section 41(8) does not apply to equitable lease
because it only applies to ‘covenants’ which technically are
provisions made in a deed.
b. Between persons other than original parties
i. Covenants by original tenant (T1)
1.
2. Benefit of tenant’s covenant can pass to the landlord’s
assignee under s 31(1) CPO. Section 31 applies also to
‘provisions’ and ‘conditions’ in an equitable lease.
3. Burden of tenant’s covenant does not pass to his assignee
under Spencer's Case which only applies to legal lease
because Spencer’s case is a common law case. Section 41(3)
only applies to ‘covenants’ so does not apply to equitable
lease. However, negative covenants which touch and
concern the lease can pass under Tulk v Moxhay (1848) 2 Ph
774.
ii. Covenants by original Landlord (L1)
1.
2. Burden of the landlord's covenants can pass to his assignee
under s 32(1) CPO as it applies to conditions and covenants.
3. Benefit of landlord's covenants can pass to tenant's assignee
by express assignment. Spencer's case and s 41(3) does not
apply.
8. Remedies for breach of covenants
a. Tenant's remedies against landlord
i. Criminal liability for forceable entry: Public Order Ordinance (Cap
245) s 23.
ii. Nuisance or trespass
b. Landlord's remedies against tenant
i. Action to recover rent
ii. Distress
1. Common law remedy for the tenant’s default in paying
rents. regulated by Part III of the Landlord and Tenant
(Consolidation) Ordinance.
2. Landlord can take possession of the tenant’s belongings up
to the value of unpaid rent for up to 12 months (s 79)
3. must first apply to the District Court for a warrant of
distress, if the landlord can establish a prima facie case, to
seize the goods found on the premises and in the apparent
possession of the tenant.
4. only be levied between 9 am and 7pm except by special
leave of the court (s 86)
5. bailiff may break open inner doors (s 91)(1)), may not obtain
entry by breaking an outer door or window without specific
warrant of the court (s 91(2)), may enter through an open
window.
6. Certain goods cannot be seized such as things in actual use,
in the hands of a person at the time of seizure, tools and
implements not in use if there is other movable property to
cover the amount of rent and costs, the property of a guest
or lodger, the tenant’s clothing etc
7. Only authorized bailiff or officer can execute distress
8. After the seizure, the tenant must be given prescribed
notice which states the property seized, the rent due and
the date on which the property will be sold if the rent is not
paid within 5 days of seizure (s 89). After 5 days, the
property will be sold usually by public auction, and the
proceeds of sale will be used to cover the costs of distress
and the unpaid rent. Any surplus will be returned to the
tenant.
iii. Forfeiture
1. Forfeiture allows the landlord to repossess the land and
thereby terminate the lease when there is a breach of
covenant to pay rent or a breach of other covenants.
2. First, the right to forfeit must be given expressly or in some
case impliedly
a. Legal lease, the landlord only has such a right if
there is an express provision in the lease which gives
him such right (an express forfeiture clause: see eg
clause 4(a) in the sample lease).
b. Equitable lease, a usual covenant.
i. An implied covenant for forfeiture for non-
payment of rent in Part V business tenancies
cases (s 126 L&T(C)O).
ii. An implied forfeiture clause for breach of
express or implied covenant (i) to pay rent,
(ii) not to use premises for immoral or illegal
purpose, (iii) not to cause unnecessary
annoyance, inconvenience, or disturbance,
or (iv) not to make structural alteration to
premises without prior written consent: s
117(3) L&T (C) O.
3. Second, the breach must not have been waived by the
landlord.
a. In order to decide whether the landlord’s action
constitutes waiver, you ask three questions: (1) did
the act unequivocally recognize the subsistence of
the prohibited act, (2) did the landlord have
knowledge of the breach from which the right of
forfeiture arose at the time of the alleged act of
waiver, and (3) was the act of recognition
communicated to the tenant? If the answer to all
three is Yes, the act constitutes waiver: Cornillie v
Saha and Bradford & Bingley Building Society
(1996) 72 P & CR 147.
b. Demand for rent and acceptance of rent where the
breach does not involve non-payment can
constitute waiver (see Prudential Enterprises Ltd v
PH Shek Ltd (1988) HCt HCA No A4911 of 1987)
unless there is an express agreement to the contrary
(see eg clause 4(c) of sample agreement).
c. If the breach involves non-payment of rent, demand
for rent does not constitute waiver as it is often
necessary first to make a demand for rent in such
cases before the landlord can forfeit, unless such
requirement is dispensed with by express
agreement or in certain circumstances under the
District Court Ordinance or High Court Ordinance
(see s 69(2) of the DCO and s 21G of HCO).
i. Once demand of rent is made (unless
dispensed with), the landlord may re-enter.
If the tenant refuses to give up possession,
the landlord needs to take forfeiture
proceedings. The tenant may apply for relief
in forfeiture proceedings.
d. In the case of breach of other covenants, it is
necessary for the landlord to serve a notice under s
58 of CPO (1) stating the breach and (2) requiring
the tenant to remedy the breach if remediable. If
the landlord requires compensation for loss suffered
as a result of the breach, the notice should also ask
the tenant to give compensation. If the notice does
not satisfy (1) & (2), it is invalid, and any forfeiture
exercised after the notice is served is also invalid.
4. What breach is remediable?
a. A breach is remediable if the harm suffered by the
landlord can be effectively remedied if the tenant
were to comply with the notice requiring remedy
and compensation within a reasonable time: Expert
Clothing Service & Sales Ltd v Hillgate House Ltd
[1986] Ch 340.
b. Breach of positive covenant usually is remediable,
whether continuing or once and for all because it
can usually be cured by belated performance.
c. Breach of negative covenant which is continuing (eg
keeping animals, using the premises for illegal or
immoral purposes) is remediable if the harm is
removed by ceasing of breach unless there has been
a stigma on the premises as a result of the breach:
see Rugby School v Tannahill [1935] 1 KB 87.
d. Breach of negative covenant which is a once and for
all breach (eg assigning or subletting) is usually not
remediable as what is done cannot be undone:
Scala House and District Property Co Ltd v Forbes
[1974] QB 575. The tenant may apply for relief if the
sub-term created has come to an end before the
notice to forfeit is served, but the breach is still not
remediable. However the breach may be
remediable (eg removal of window frame) if the
harm can be removed by ceasing of breach and an
undertaking not to commit further breach: Expert
Clothing case.
5. After the notice is served, if the tenant does not comply
with the notice within a reasonable time, the landlord can
re-enter peaceably. Reasonable time can be outside the
time period stipulated in the notice (Powerful Dragon Ltd v
Windsor Sauna Co Ltd [2004] 2 HKC 105). If the tenant
refuses to give up possession, forfeiture proceedings would
be necessary. Again, the tenant may apply for relief.
6. Tenancy is a special type of contract, principles of contract
law usually apply. Forfeiture is in nature no different from
acceptance of wrongful repudiation of ordinary contracts.
The plaintiff is entitled to damages for consequential losses
upon acceptance of wrongful repudiation. So the landlord is
entitled to damages for consequential losses upon forfeiture
of tenancy.(Jumbo Enterprises Co Ltd v Cheung Kan [2001]
4 HKC 79)
iv. Mesne profits
1. If the tenant still retains the keys. Liable to pay for mesne profits.
2. For the period of his possession if tenant holds over (Prime Win Enterprises
Ltd v Nova Management Consultants Ltd [2004] 2 HKC 587) or to indemnify
the landlord for his liability to a third party for the period of possession if the
landlord has let the premises out to a third party to commence from the end
of the tenancy. (On Park Parking Ltd v Secretary for Justice [2004] 3 HKC
476).