HSBC Trustee (Singapore) Ltd v Lucky Realty Co Pte Ltd [2015] SGHC 93

In determining the true construction of the express terms of the lease read together with a deed of variation, the Singapore High Court in HSBC Trustee (Singapore) Ltd v Lucky Realty Co Pte Ltdconsidered, inter alia, the admissibility of various types of extrinsic evidence and whether such evidence, if admissible, could be used as an aid to construction of the Deed of Variation read together with the lease. The court found in favour of the plaintiff.

Allen & Gledhill Partners Edwin Tong, SC and Lee Bik Wei acted for the successful plaintiff.

Background

The dispute between the parties centred on a parcel of land formerly known as Lot 3041. The owner of Lot 3041 passed away in 1948, with his will settling Lot 3041 on certain trusts. The plaintiff, HSBC Trustee (Singapore) Limited, was appointed as the trustee in 2006.

In 1975, the then-trustee of the estate leased the “whole of Lot 3041 … together with the buildings in the course of construction thereon” to Lucky Realty, the defendant, for 60 years (the “lease”). The lease obliged Lucky Realty to pay a yearly rent of S$3,877.15. The lease also obliged Lucky Realty to develop Lot 3041 by erecting buildings on the site.

Lucky Realty built four buildings, referred to as Blocks A through D. Two sections of the original Lot 3041 became State land and the remainder of Lot 3041 was known afterwards as Lot 5245N (on which Blocks A through D sat). Lot 5245N was subdivided into 66 strata units in Blocks A, B and C and 53 strata units in Block D. Lucky Realty eventually sold 64 of 66 strata units in Blocks A, B and C and retained all 53 strata units in Block D and the two remaining units in the other blocks. Notwithstanding the sale, the rent of S$3,877.15 did not change and continued to be paid.

Following a dispute between the then-trustee and Lucky Realty which arose in 1994, the parties agreed to vary the obligation to pay rent under lease in 1995 which is today evidenced in a Deed of Variation executed in 1996. The variation replaced only one paragraph of the lease with a more detailed one comprising three limbs. No change was made to the reference to “Lot 3041”. The result of the change was two-fold: (i) there was an immediate increase in the yearly rent payable by Lucky Realty from S$3,877.15 to S$120,000, and (ii) the lessor was granted the right, every five years thereafter, to increase the yearly rent “to the market rent prevailing at the time” or by 10% of the existing rent, whichever was higher.

The first two rent reviews occurred with no dispute. During the first rent review, a 10% increase was applied. During the second rent review, the yearly rent was increased by 13.6% to $150,000 per annum.

The third rent review was due in 2009. The plaintiff’s position was that the terms of the Deed of Variation read with the lease allowed the trustee to charge market rent for the whole of Lot 5245N. Lucky Realty contended that it was obliged to pay yearly rent only for Block D.

The plaintiff commenced these proceedings in 2014 seeking, inter alia, a declaration that the five-yearly increase should be calculated by reference to the whole of Lot 5245N and not by reference only to Block D. The plaintiff submitted that the ordinary meaning of the plain words of the lease was that the “yearly rent” and “market rent” related to the whole of Lot 5245N. Lucky Realty submitted that the rent escalation clause must be construed in the light of the facts and circumstances surrounding the variation, including the parties’ pre-contractual negotiations and their subsequent conduct. Its case was that extrinsic evidence showed that the terms “yearly rent” and “market rent” as used in the lease referred to the rent for Block D only.

Court sets out approach to construing contracts

At the outset, the court noted that the law on the proper approach to construing a contract has been set out by the Singapore Court of Appeal in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich”) and Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193 (“Sembcorp”).

The court was bound to apply the contextual approach to construction as set out in Zurich andSembcorp. In applying this approach, it remained the case that “the primary source for understanding what the parties meant is their language interpreted in accordance with the conventional usage”. The context of a contract was to be viewed as a series of circles: beginning with the natural and ordinary meaning of the words, phrases and sentences chosen by the parties to express their contractual intention in the operative part of the document, to the document as a whole, and finally to evidence of matters extrinsic to the contract.

Extrinsic evidence was divided into four broad types: circumstances surrounding the contract, subjective intentions of parties (which, unlike the others, were admissible only if there is a latent ambiguity in the contract), pre-contractual negotiations, and parties’ conduct subsequent to entering into the contract. The court was permitted to have regard to extrinsic evidence only if the evidence satisfied the three Zurich criteria - relevant, reasonably available to all contracting parties and relates to a clear or obvious context - and is also admissible as a matter of the law of evidence.

Based on these principles, the court found that:

  • the phrases, sentences and paragraphs used by the parties in the operative part of the lease suggested that “yearly rent” and “market rent” was for the whole of Lot 3041;
  • the whole of the lease suggested that “yearly rent” and “market rent” was also to be a rent referable to all of the buildings on Lot 3041; and
  • the extrinsic evidence of the circumstances surrounding the variation at the time means that Lot 3041 (which no longer existed after the subdivision) ought to be construed as Lot 5245N (which remained and was renamed after the subdivision).

A consideration of the whole of the lease in light of the surrounding circumstances (as above) led to the conclusion that Lucky Realty was obliged to pay “yearly rent” and “market rent” for the whole of Lot 5245N and referable to all of the buildings on Lot 5245N. 

The court noted that there was no ambiguity in the lease when it was entered into in 1975 that Lucky Realty obliged itself to pay rent for the whole of Lot 3041 and referable to all of those buildings. The only material ambiguity in the lease, following the 1995 variation, was a latent ambiguity as to the meaning of “Lot 3041” (as no lot with the number 3041 existed in 1995) which had been resolved as set out above. The fact that Lucky Realty had, by the time of the 1995 variation, sold virtually all of the units in Blocks A, C and C on long leases cannot, as a matter of construction, introduce an ambiguity into the words defining Lucky Realty’s obligation to pay rent where none previously existed.

On the particular facts of the case, the court held that:

  • The evidence of the pre-contractual negotiations relied upon by Lucky Realty was evidence of subjective intentions and, in the absence of any latent ambiguity, were inadmissible as a matter of the law of evidence. Even if the evidence of the pre-contractual negotiations were admissible, they did not provide a clear or obvious context and could not be used as an aid to construction pursuant to the law of contract;
  • The evidence of the circumstances surrounding the contract and the parties’ subsequent conduct relied upon by Lucky Realty, whilst admissible as a matter of the law of evidence, also failed to provide a clear or obvious context and could not be used as an aid to construction pursuant to the law of contract; and
  • Even if the extrinsic evidence relied upon by Lucky Realty provided a clear and obvious context, Lucky Realty’s construction of “yearly rent” and “market rent” went beyond the penumbral meaning of these words such that the effect of such evidence was to contradict, vary, add to or subtract of the terms of the lease. This was not permitted under Zurich.

Whilst having to pay rent on the whole of Lot 5245N may be an uncommercial result, the court noted that it was not, an absurd result as alleged by Lucky Realty.

Finally, the court also considered Lucky Realty’s alternative argument that the trustee was precluded by the doctrine of estoppel by convention from calculating the yearly rent by reference to the whole of Lot 5245N. This was also dismissed on the basis that the doctrine cannot operate as a defence to extinguish the trustee’s contractual right to collect future rent after the common assumption is revealed to be erroneous.

Judgment

For the reasons set out above, the court found in favour of the plaintiff