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Fund Management Ltd v Fifita (No.2) [2000] TOLawRp 64; [2000] Tonga LR 342 (7 November 2000)

IN THE LAND COURT OF TONGA

Fund Management Ltd

v

Fifita (No 2)

Land Court, Nuku'alofa
Ford J
L 11-17/2000

23, 24, 25, 30 October 2000; 7 November 2000

Land law — Royal Family Estate — sub-lease — whether Cabinet consent required — challenge to validity by non-party — burden of proof

The first plaintiff held a sub-lease of the northern half of the property. The second plaintiff held a sub-lease of the southern half of the property. They wanted to develop part of the land by building a two-storey office block. The property concerned was an area of prime commercial land in downtown Nuku'alofa which was part of the Royal Family Estate known as "Finefekai". The seven defendants were all occupants of existing buildings on the land. The plaintiffs sought vacant possession so that they could start on their development project. They served notices to vacate and eviction notices on the defendants. The defendants refused to vacate the property and they challenged the validity of the plaintiffs' sub-leases claiming that they were unlawful and, therefore, null and void. The principal defence was that, although the sub-leases had been approved by Cabinet, as the land in question was Royal Family Estate, Cabinet approval was not required but His Majesty had to satisfy himself that the sub-leases were for projects of general public interest and benefit in terms of section 10(2) of the Land Act. The defendants also alleged that as the plaintiffs had paid significant consideration for the sub-leases, they were invalid because clause 104 of the Constitution made it illegal to sell any land in the Kingdom and section 2 of the Interpretation Act defined "land" as including leaseholds.

Held:

1. As it was the defendants who contended that the sub-leases were invalid, the burden of proving the assertion was on them. They must prove prima facie, as they contended, that the sub-leases were null and void. There was no onus on the plaintiff to prove the validity of the sub-leases unless and until the defendants had made out a prima facie case.

2. Clause 114 of the Constitution applied to sub-leases and hence Cabinet consent was required. The onus was on the defendants to prove their assertion that the sub-leases were not of "general public interest and benefit" and they had failed to do so.

3. It was a misnomer to speak of the creation of a sub-lease as the "sale of land" and the grant of the sub-leases did not amount to a sale of land within the meaning of clause 104 of the Constitution.

4. A deed of sub-lease was a contract which could only impose obligations and confer rights on the parties to it; the defendants were not parties to the sub-leases.

5. Judgment was entered for the plaintiff and various orders were made including an order requiring the defendants to vacate the land.

Cases considered:

GJ Coles & Co Ltd v Federal Commissioner of Taxation [1975] HCA 19; (1975) 49 ALJR 188; 6 ALR 83

Ma'umalanga v Tupou [1994] Tonga LR 30

OG Sanft and Sons v Tonga Tourist and Development Co. Ltd, Hamilton and Minister of Lands [1981-88] Tonga LR 26

Russ & Brown's Contract, In re [1934] Ch 34 (CA)

Viliama Hema v Fatani Tavake Hema and Minister of Lands (Land Court, L 48/57, 13 Feb 1959, Hunter J)

Statutes considered:

Interpretation Act (Cap 1)

Land Act (Cap 132)

Counsel for plaintiffs: Mr Niu
Counsel for defendants: Mr Tu'utafaiva

The judgment was appealed to the Court of Appeal and the appeal was dismissed. The Court of Appeal judgment will be reported in a later volume of the Tonga LR.

Judgment

This case is about an area of prime commercial land in downtown Nuku'alofa. It is part of the Royal Family Estate known as "Finefekai."

The first plaintiff holds a sub-lease of the northern half of the property. The second plaintiff holds a sub-lease of the southern half of the property. They want to develop part of the land by building a two storey office block.

The seven defendants are all occupants of existing buildings on the land. The plaintiffs want vacant possession so that they can start on their development project. They have served notices to vacate and eviction notices on the defendants.

The defendants challenge the validity of the plaintiffs' sub-leases. They claim that they are unlawful and therefore null and void. They also claim that any tenancy agreements between the parties are invalid.

The defendants' case is that the sub-leases are void because:

1. His Majesty had not given his required consent to either the sub-leases or to the "sub-division" of the head lease into the two sub-leases.

2. The sub-leases are "sales" of land contrary to clause 104 of the Constitution.

3. The sub-leases were not for a project of "general public interest and benefit" as required by section 10(2) of the Land Act.

4. The sub-leases are incomplete in their contents.

5. The term of each sub-lease had not been approved by the Privy Council as required by section 124(3) of the Land Act.

6. The sub-leases have never been registered as required by section 128(2) of the Land Act.

The defendants, in addition, claim that any tenancy agreements with the plaintiffs are un-enforceable because they are unlawful agreements by virtue of section 13 of the Land Act.

These then are the matters for determination.

The property in question fronts on to Taufa'ahau Road in an area bounded by the Pacific Royale Hotel to the south and the OG Sanft building to the north. It presently consists of what was described in a publication produced in evidence by consent as a "row of ramshackle single and double storey buildings lining the main street."

In July 1918 the southern half of the property was leased for the first time by Her late Majesty to Alfred Cowley the founder of a long established bakery business in Nuku'alofa. The following year (1919) the northern portion was leased to a Mr WA Smith and then there was a smaller area of about 20 perches situated at the rear of the northern block which was not leased but held by one, Sione Tongilava.

The lease of the Cowley block was renewed for different terms up to 1980 but it was not renewed after that date.

The lease of the Smith block was renewed for various terms up to 1961 but it was not renewed after that date.

In 1993, His Majesty Taufa'ahau Tupou IV, King of Tonga, granted a lease of the whole of the land comprising the Cowley, Smith and Tongilava blocks to a Dr Sam Wong, who was described as an "Asian entrepreneur". The lease to Dr Wong which had been approved by Cabinet was registered on 15 June 1993 as lease 5405. The term of the lease was for 50 years expiring on 14 June 2043. Dr Wong proposed to develop an elaborate shopping plaza on the site accommodating three floors of office space along with other floors made up of stores and food outlets.

Although the reasons were not canvassed before me, it appears that Dr Wong's ambitious plans for the site came to nothing. He had obtained mortgage finance from the ANZ Bank using the lease as security but he found himself unable to meet the repayments under the loan.

Towards the end of 1997 the ANZ Bank took possession of lease 5405 from Dr Wong pursuant to its mortgage.

In the months leading up to the Bank becoming mortgagee in possession, Dr Wong had entered into an agreement to sell a sub-lease of the northern half of the land in lease 5405 for US$340,000 to Fund Management Limited, ("Fund Management") the first plaintiff. Fund Management had commenced business in December 1994. The company operates Western Union which is a worldwide electronic money transfer company. It also holds the franchise in the Kingdom for Avis Rental cars and it operates an IATA accredited tourist agency.

Fund Management had been searching for office space in downtown Nuku'alofa for sometime. Up until last year, Western Union had operated out of an upstairs office and that arrangement had not proved to be satisfactory. Fund Management proposes to develop a two storey office building on its new site.

For reasons, again, which were not fully explored before me, it seems that after Fund Management had paid across the purchase price to Dr Wong the sub-lease arranged between Dr Wong and Fund Management was found to be invalid. The problem appears to be that the sub-lease did not have the approval of Cabinet and it apparently contained a fraudulent ministerial signature. There may also have been an issue over whether Dr Wong could legally sub-lease only half the land in lease 5405.

At about this time the ANZ Bank began to take a more active role in the negotiations between Dr Wong and Fund Management. The Bank was mortgagee to both parties and as soon as the validity of the sub-lease was questioned, the Bank's security position was compromised.

While the problems with the invalid sub-lease were being looked into, Dr Wong approached Fund Management again and offered the company a sub-lease of the southern half of the land for US $220,000 which Fund Management regarded as "a very good price". Fund Management accepted the offer and then set about acquiring the second plaintiff, Tourist Services Ha'apai Limited ("Tourist Services"). The plan was that the sub-lease of the southern half of the property would be held in the name of Tourist Services, a fully owned subsidiary of Fund Management, and the sub-lease of the northern half of the property would remain in the name of Fund Management.

Having set the structure in place, the ANZ Bank as Mortgagee in Possession, then made an application to the Supreme Court under Lease 5405 for formal orders approving the mortgagee sale of the two sub-leases under section 109 of the Land Act.

Chief Justice Lewis made the orders sought on 24 February 1998. His Honour directed the Minister of Lands:

1) to approve the two sub-lease application

2) to arrange for the sub division of all the land in lease 5405 into equal halves and

3) to have prepared and registered the two new sub-leases and

4) to have registered the mortgages over the sub-leases in favour of the ANZ Bank.

On 11 March 1998 His Majesty's Cabinet approved the Applications from Fund Management and Tourist Services to sub-lease their respective parts of Lease 5405. The sub-leases were signed up on the 2nd December 1998 and registered on 18 December 1998. The mortgage to the ANZ Bank of $525,000 was registered on 21 December 1998.

Those are the relevant background facts.

In about the middle of June this year each defendant was given formal notice by the respective plaintiffs to vacate the property followed by an eviction notice. They failed to vacate and the present proceedings were issued. They were issued as seven separate proceedings but for convenience of reference they have been consolidated into the one proceeding and they were dealt with on that basis at the hearing.

I turn now to consider the issues raised by the defendants in their statements of defence. As it is the defendants who are contending that the sub-leases are invalid, the burden of proving the assertion is on them. They must prove prima facie, as they contend, that the sub-leases are null and void. There is no onus on the plaintiff to prove the validity of the sub-leases unless and until the defendants have made out a prima facie case.

The first question for determination relates to the alleged failure to obtain His Majesty's consent.

The case for the defendants, in relation to this point is that section 10(2) of the Land Act created a unique category of lease which did not require Cabinet consent but did, so their argument ran, (because the land involved was a Royal Family Estate) require His Majesty to satisfy himself that the sub-leases, like the lease itself, were for a project "of general public interest and benefit" within the wording of the section.

I will deal with the public interest and benefit issue when I look at the third element advanced by the defence, but on the Cabinet consent issue, I cannot accept the defence submission that Cabinet consent is not required to a lease under section 10(2) of the Land Act. Whilst section 10(2) may well create a new category of lease in addition to the 3 categories recognised by the Privy Council in O G Sanft and Sons v Tonga Tourist and Development Co. Ltd, Hamilton and Minister of Lands [1981-88] Tonga LR 26, 31, that does not mean that it is unnecessary to obtain cabinet consent to such a lease. Clause 114of the Constitution provides:

"114. No lease, sub-lease, transfer of a lease or of a sub-lease shall be granted –

(a) without the prior consent of Cabinet where the term is ninety – nine years, or less, or

(b) without the prior consent of the Privy Council where the term is over ninety - nine years..."

That clause is of general application. It applies without exception to all leases including leases under section 10(2) of the Land Act.

Clause 114 has equal application to any sub-lease. I do not accept the defendants' submission that it was necessary for His Majesty to give his personal consent to any sub-lease under Lease 5405. In any event, Lease 5405 gave express power to Dr Wong to grant a sub-lease or transfer of the lease provided that he first obtained Cabinet consent and he duly complied with that requirement.

The second aspect of the consent issue was the claim by the defendants that His Majesty had not consented to the "subdivision" of Lease No. 5405.

The thrust of this submission was that because of the "unique" requirement in section 10(2) of the Land Act, that His Majesty may lease for projects of "general public interest and benefit," His Majesty would need to approve any sub-division of the lease so as to ensure that the sub-divided lease still met the purpose prescribed in section 10(2) of the Land Act. Going on from there, the defendants said that as there is, no procedure laid down in the Constitution, the Land Act or the head lease for applying for a sub-division of a lease, the absence of such a provision makes any sub-division of a lease unlawful.

Under this head the defendants also challenged the validity of the Orders made by Lewis CJ on 24 February 1998 where his Honour directed the Minister of Lands to give effect to the sub-division of the lease by dividing the leasehold in two equal halves. The defendants made two points:

(1) The Chief Justice was acting in the Supreme Court jurisdiction whereas under section 149 of the Land Act only the Land Court had jurisdiction and

(2) The Crown was not a party to those proceedings.

At common law a lessee may sub-lease part only of the land the subject of the lease - GJ Coles & Co Ltd v Federal Commissioner of Taxation [1975] HCA 19; (1975) 49 ALJR 188 at 193; [1975] HCA 19; 6 ALR 83.

As there is no prohibition in the Constitution, the Land Act or the Lease itself against the sub-leasing of part only of the land in a lease, the transaction which resulted in two sub-leases of all the land in Lease 5045 cannot, in itself, be unlawful.

The fact that there is no prescribed form of application to sub-lease part only of a lease does not affect the legality of the situation. No application form is prescribed in the legislation for the grant of a sub-lease of all the land in a lease but sub-leases are recognized in both the Land Act and the Constitution. The Chief Registration Officer for Lands, Samisoni Pone, gave evidence about how, in practice, lease application forms were adapted to handle sub-leasing applications and I have no doubt that similar adjustments could be made to the form to cater for applications for the sub-leasing of part only of the land in a lease.

The circumstances surrounding the Orders made by Lewis CJ were not explored before me. Counsel for the plaintiffs stressed, however, that whether or not the Orders were valid does not really matter because the Orders were directed to the Minister, not to Cabinet, and it was the Cabinet that received and approved the two sub-lease applications. I agree with that analysis.

The second ground of defence put forward is that the sub-leases are invalid because they were sold by Dr Wong to the plaintiffs and a sale of a lease or sub-lease in the Kingdom is contrary to Clause 104 of the Constitution. Clause 104 makes it illegal to "sell any land whatever in the Kingdom of Tonga". The defendants rely on section 2 of the Interpretation Act which defines "land" as including "... leaseholds and interests in lands of every description."

The evidence was that Fund Management had paid Dr Wong US$340,000 for the sub-lease of the Northern block and Tourist Services had paid Dr Wong US $220,000 for the sub-lease of the southern block.

The plaintiffs response to this submission is that leases are an exception to the prohibition against sales prescribed in clause 104 of the Constitution and the Interpretation Act cannot override the Constitution.

The plaintiffs referred the Court to the well known excerpt from the speech of His Majesty Tupou I on this subject at the opening of Parliament in 1875 which they say supports that proposition.

It is a misnomer to talk about the sale of a lease with reference to a "sale" of a lessee's interest in a lease. The disposition of a lease by the lessee is at common law effected either by an assignment of a lease or by the creation of a sub-lease. In neither case is it appropriate to describe the transaction as "a sale".

Conversely, the disposition of the freehold landlord's estate in leasehold property is effected either by transfer and registration or by conveyance, in the case of unregistered land.

A reference to a sale of leasehold property, per se, is taken to be a reference to the sale of a lease by the freeholder - In re Russ & Brown's Contract [1934] Ch 34 (CA), 43. Given the unique Land Law structure in Tonga, a sale of leasehold by the freeholder in the manner just described could never arise.

The definition of "land" in section 2 of the Interpretation Act upon which the defendants have based this part of their argument is subject to the introductory words to section 2 which read "... unless the contrary intention appears."

A contrary intention very plainly appears if any attempt is made to equate the prohibition against the sale of land in clause 104 of the Constitution with a prohibition against a lessee's right to assign or grant a sub-lease of his interest in a leasehold property for valuable consideration.

For these reasons I reject this ground of the defendants' submissions. The ANZ Bank, as mortgagee in possession was able to grant valid sub-leases to the plaintiffs. The grant of such sub-leases did not amount to a sale of land within the meaning of clause 104 of the Constitution.

The third ground of defence the defendants advance is that the sub-leases were not for a project of "general public interest and benefit" as required by section 10(2) of the Land Act.

The argument under this head is that while His Majesty may have determined that the lease to Dr Wong was for a project of general public interest and benefit, there is a considerable difference between the seven storey shopping plaza proposed by Dr Wong and the two storey office building which Fund Management proposes to develop on its site. Furthermore, no final development proposal has yet been put in place for the Tourist Services site.

The defendants say that while Cabinet has power under clause 105 of the Constitution to determine the terms of a lease or sub-lease, it does not have authority to determine such a matter as whether the purpose of the lease or sub-lease is of "general public interest and benefit".

I cannot accept those submissions. First, as the party making the assertion, the defendants must prove the allegation that the sub-leases are not for projects of general public interest and benefit. The defendants have not done that. On the contrary, the evidence called by the plaintiffs from Mr 'Etueni Mo'ungaloa, the former deputy-secretary at the Royal Palace and from the plaintiffs' chief Executive Officer, Robina Nakao satisfies me that the sub-leases do meet the test in section 10(2). Secondly, under clause 114 of the Constitution, Cabinet must give its consent to a lease or sub-lease of less than 100 years and that provision enables Cabinet to consider and determine all relevant matters pertaining to the lease or sub-lease including, in the context of this case, whether or not the section 10(2) criteria is satisfied. So, in other words, the control mechanism is in place. The consent of Cabinet is a prerequisite to any lease or sub-lease. It must oversee the form and nature of the lease or sub-lease.

The third point I make under this head, and it has equal application to some of the other defences put forward, is that a deed of sub-lease is a contract which can only impose obligations and confer rights on the parties to it. The defendants are not parties to the sub-lease. In Ma'umalanga v Tupou [1994] Tonga LR 30, the defendant, who was a squatter, challenged the validity of the lease over the land he occupied upon the grounds that the lessee, as a United States citizen, should have held a permit before he was entitled to take out the lease. The Land Court agreed that a permit was a necessary prerequisite but it went on to say:

"If the Minister considers that he was misled by not being told that the plaintiff was a foreigner then it is for him to consider his position and take such action, if any, as he thinks appropriate. I am not persuaded that it is open to the Court to usurp his function and purport to cancel the lease on this ground, or even to direct the Minister to cancel it. Leases are granted only with the consent of Cabinet and any action by the Courts, except upon an application by the Minster supported by a Cabinet Decision, would certainly be inappropriate and, in my opinion, also be incompetent."

The language in the passage may be stronger than I would have used but I concur with the sentiments expressed and the principle has equal application in the present case.

The 4th and 5th grounds of defence advanced by the defendants can be disposed of in quick order. In fact, I am surprised that they are being seriously advanced. In relation to the 4th ground, it is correct, as the plaintiffs admit, that there are some omissions in the sub-lease documents. They should have been filled in and they are probably the result of an oversight on the part of the typist or the draftsman in the Ministry of Lands. Although the omissions are unfortunate they are of a minor nature and they certainly do not invalidate the lease. No one has been misled by the blanks and it would be a relatively simple matter to have them filled in correctly.

Counsel for the plaintiff referred me to an earlier decision of the Land Court in Viliama Hema v Fatani Tavake Hema and Minister of Lands (Land Court, L 48/57, 13 Feb 1959, Hunter J). In that case the Court ordered rectification of the register. In the present case, the parties to the sub-lease should take whatever steps are necessary to have the Ministry of Lands rectify the omissions and, if necessary, they are free to approach the Court for assistance.

The 5th ground for challenging the validity of the sub-leases raised by the defendants is that the term of the head lease expires on 15 June 2043 but the term of the sub-leases expire on 14 June 2943 and as the sub-leases are for 945 years the prior consent of the Privy Council should have been obtained under clause 114 of the Constitution.

It is clear, however, that the termination date for the sub-leases should have been shown as 2043 but in altering the words in the printed form which read: "in the year one thousand nine hundred and" to provide for the new millennium the typist deleted the words "one thousand" and typed in "two thousand" omitting to delete the words "nine hundred and". The expiry date thus appears as "the fourteenth day of the month of June in the year two thousand nine hundred and forty three".

The defendants argue that, having regard to the earlier sub-lease which was found to be invalid or fraudulent, it could not be assumed that there was an innocent mistake on this occasion. This particular allegation was not pleaded but, in any event, I disagree. The error is an obvious oversight and comes within the same category of omission I referred to earlier. Quite apart from that, by its very nature, a sub-lease is a transfer of something less than the whole of the lessee's interest in the lease, as in a transfer of the unexpired portion of the 1ease less one-day. In other words, a sub-lease could never carry on past the expiry date of the head lease.

There was an additional 6th ground advanced by the defendants which was not pleaded but which was argued. The point was that the sub-leases were not registered under the Land Act because there was no memorial of registration endorsed on the original lease as required by section 128(2) of the Act. It was up to the defendants to prove this allegation to my satisfaction on the balance of probabilities but they have not done so. I am not persuaded that the copy of the lease included in the agreed bundle of documents is a copy of the current head lease rather than an earlier version.

The defendants, in conclusion, submitted that, even if the Court was to hold that the sub-leases were lawful, then the plaintiffs could still not claim the unpaid rent because the tenancy agreements were illegal under section 13 of the Land Act. The defendants say that the illegality arises because, contrary to section 13 of the Act, the agreements were not entered into in the manner prescribed by the Land Act or as approved in writing by the Minister. While the defendants accept that tenancy agreements are permitted in respect of buildings, here the buildings are owned by the tenants themselves and the rental is being claimed by virtue of the 1andlord being the holder of a sub-lease of the land under the buildings. That, the defendants say, brings the agreements within the scope of section 13 and makes them illegal.

The plaintiffs' response is that section 13 is a criminal provision and it must, therefore, be strictly construed. The plaintiffs say that section 13 applies only to a "landholder" and the definition of "landholder" in section 2 of the Land Act does not include lessees. They say that if that had been the intention then it would have been a very easy matter to have specifically included them in the six categories of persons listed in the definition of "landholder" in section 2.

Whilst there is some force in that submission, the defendants point to paragraph (f) of the definition of "landholder" which is: "(f) any person who claims to be entitled to any land or interest in land whether in actual possession or occupation or otherwise". They argue that the wording of paragraph (f) is so broad that it must include lessees.

In my view, it is not necessary to determine whether a lessee is a landholder within the meaning of paragraph (f) because section 13 is concerned only with a landholder who has a "holding". Although "holding" is not defined, it is only paragraph (b) of the definition of "land holder" that refers to a person having a "holding" and that reference is to any Tongan subject holding an hereditary estate (Tofia), a tax allotment (api tukuhau) or a town allotment (api kolo). The lessees in this case do not come within that category of person and section 13, therefore, has no application.

The plaintiffs have succeeded in their claim and they are entitled to judgment.

Remedies

In their prayer for relief, the plaintiffs seek a declaration that they are the lawful occupiers of the respective properties. They seek an order granting immediate vacant possession, damages and costs. In addition, arrears of rental payments are claimed against the first and sixth named defendants. The first plaintiff also called evidence of arrears of rental owing by the second defendant but no arrears of rental are sought against the second defendant in the pleadings.

Although damages are sought against each of the defendants, there is no evidence that would substantiate such an award apart from a claim for mesne profits and such a claim has been advanced. The concept of mesne profits has been described in the following terms:

"Where the tenancy has been terminated lawfully, a tenant who refuses to vacate the premises is a trespasser, and the landlord is entitled to "mesne profits", that is, to damages for the rent which would have been obtained but for the tenant's continued occupation. The landlord may claim for the period from the date of service on the lessee of the court process claiming possession to the date when physical possession is recovered, for service of the process constitutes a notional re-entry by the landlord. It is not necessary for the landlord to prove that he could, or would, have leased the premises to someone else in the absence of the trespasser." Land Law, Peter Butt, second edition, para 1591.

I invite counsel for the plaintiffs to file a Memorandum with the Court in due course updating the claim for outstanding rent against the first and sixth defendants and itemising the plaintiffs' claim for mesne profits in respect of each defendant. It may be possible for the parties to reach agreement on the plaintiffs' entitlement to arrears of rental and mesne profits (using the formula set out in the extract quoted above) but if such agreement is not possible then the Court will make appropriate orders.

Judgment is entered for the plaintiffs and the following orders are hereby made:

1) A declaration that the respective plaintiffs are the lawful occupiers of the land described in the pleadings against each defendant.

2) That on or before 1800 hours on Tuesday 21 November 2000, each of the defendants will remove themselves and their possessions and property from the said land which they presently occupy.

3) Judgment against the first and sixth defendants for arrears of rental and against the defendants for mesne profits in such sums as are to be agreed or, failing agreement, to be fixed by the Court upon receipt of a Memorandum from Counsel.

4) Costs in respect of the action in favour of the plaintiffs against each of the defendants (apart from sixth defendant who was not given leave to defend the action) to be taxed if not agreed.