Introduction
It is not unusual to find restrictive covenants in tenancy agreements nowadays. Such restrictive covenants would limit the uses of the premises concerned and may forbid the premises to be used in some particular manner. In cases the tenant breaches such restrictive covenants, the landlord may, depending on the terms and conditions of the particular tenancy agreement, be entitled to various remedies and/or actions, one of which is forfeiture of the tenancy agreement.

However, pursuant to the Conveyancing and Properties Ordinance (Cap. 219) (“CPO”), there are several requirements for a forfeiture notice, to be served by the landlord on the tenant, before forfeiture can be effected. In the recent case of Mutualbest Limited v Ngai Wah Kit LDPD 1548/2013, the Lands Tribunal has to rule on, among other things, whether a forfeiture notice served by the landlord on the tenant was valid under the CPO.

Mutualbest Limited v Ngai Wah Kit

Background
This case involves a tenancy agreement executed in September 2011 (the “Tenancy Agreement”) by which a residential premises (the “Premises”) was leased by the landlord (the “Landlord”) to the tenant (the “Tenant”).

In the Tenancy Agreement, there is express prohibition of using the Premises for any purpose other than for residential purpose. Further, there is another restrictive covenant providing that the Tenant shall not assign, transfer or sublet with the possession of the Premises (or any part of it) to any other person, and that the tenancy shall be personal to the Tenant (these covenants are hereinafter collectively referred to as “Covenants”).

In late January 2012, media coverage revealed that the Premises had been used as an unlicensed guesthouse for travellers. The Landlord hence issued a letter to the Tenant on 31 January 2012 (the “Notice”) seeking his confirmation on whether he has breached the Covenants, but received no reply from the Tenant.

In November 2012, the Landlord through its solicitors sent another letter to the Tenant demanding termination of the tenancy. This time the Tenant replied by email denying the breach and invited the Landlord to perform a premises check.

About 4 months later, media coverage again revealed the use of the Premises as a guesthouse. The Landlord through its solicitors issued another letter dated 17 April 2013 indicating its intention to take legal action unless the Tenant delivered vacant possession on or before 30 April 2013. The Tenant replied denying any breach, and hence the Landlord commenced the present proceedings.

Whether the Notice is valid under s.58 CPO
Having dealt with the preliminary disputes between the Landlord and the Tenant over the contract terms, the Lands Tribunal concluded that the use of the Premises as a guesthouse is in breach of the Covenants. The remaining question is whether the Notice served on the Tenant on 31 January 2012 was a valid notice under s.58 of the CPO.

According to s.58(1) of CPO, a right of re-entry or forfeiture under any terms in a lease for a breach of any covenant or condition shall not be enforceable, unless and until the landlord serves on the tenant a notice:-

(a)      specifying the particular breach complained of; and

(b)      if the breach is capable of remedy, requiring the tenant to remedy the breach; and

(c)       specifying the compensation, if any, which the landlord requires in respect of the breach,

and if the tenant fails to remedy the breach (if it is capable of being remedied) or to make reasonable compensation in money, within a reasonable time after receipt of the notice, to the satisfaction of the landlord, for the breach.

The Notice is the notice relied upon by the Landlord in compliance with s.58(1) of CPO, but in the Notice the Landlord only stated that if there is a breach of the Covenants, the Landlord would have no alternative but to ask the Tenant to forthwith vacate the Premises. The Notice did not mention if he would give the Tenant any opportunity to remedy the breach pursuant to s.58(1)(b) of CPO.

Is the breach capable of remedy?
The solicitors for the Landlord argued that the breach of subletting the Premises is a breach that is incapable of remedy, so even though nothing had been mentioned in the Notice to require the Tenant to remedy the breach, the Notice is still valid.

This argument was however not accepted by the Lands Tribunal. The Lands Tribunal, quoting the judgement of the English Court of Appeal case of Akici v LR Butlin Ltd [2006] 2 All ER 872, was of the opinion that the running of the guesthouse in the Premises involved parting of possession of part of the Premises only without creating or transferring any legal interests in the Tenancy Agreement to the guests. As no legal interest was transferred to the guests of the Premises, this breach is capable of remedy and so the Notice should allow a reasonable time for the Tenant to remedy the same. For such reason the Notice failed to satisfy the requirement under s.58 of CPO and hence is invalid.

Conclusion
s.58 CPO is definitely one section that landlords need to be aware of when seeking forfeiture of tenancy for breach of covenants under tenancy agreements. Considerations must be given as to whether the alleged breach is capable of remedy, and if yes, a reasonable time should be allowed for the tenant to remedy that breach.

After all, no landlord would want to end up like the Landlord in the Mutualbest case – having succeeded on the interpretation of the Tenancy Agreement and having proved there was breach by the Tenant, yet failed to forfeit the tenancy and has to bear the costs of the legal proceedings!

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.