In March 2024, the Hong Kong Court of Final Appeal handed down its reasons for refusing leave to appeal in AFH Hong Kong Stores, Ltd v Fulton Corporation Ltd [2024] HKCFA 5, ending the seven-year long dispute. This case focuses on the interpretation of the commonly used term “bare shell” in the context of a multi-floor lease. Background In August 2012, the Tenant opened its flagship store in Hong Kong occupying the entire lower ground floor, mezzanine floor, first floor, second floor and part of the ground floor of the Pedder Building (the “Premises”) under a lease dated 17 March 2011, as amended and supplemented by a Supplemental Agreement dated 1 November 2011 (collectively, the “Lease”). The term of the Lease was nine years commencing on 1 November 2011, subject to a break clause which gives the Tenant the option to terminate the Lease early after five years from the commencement date by giving six months prior written notice to the Landlord. Upon commencement of the Lease, and with the Landlord’s consent, the Tenant carried out various structural and fit-out works on the Premises, including the demolition of the entire mezzanine floor and parts of the ground, first and second floors of the Premises by removing floor slabs and staircases. On 11 November 2016, the Tenant exercised its option to early terminate the Lease by serving six months’ written notice of termination to the Landlord. The termination date of the Lease was 11 May 2017. Pre-action negotiation The Landlord and the Tenant engaged in lengthy discussions on the scope of the Tenant’s obligations to restore the Premises under the Lease, which turned on the interpretation of Special Condition (13) of the Third Schedule to the Lease (SC(13)).1 On 28 November 2016, after a walk-through of the Premises by representatives of both the Landlord and the Tenant, the Tenant sent an email to the Landlord with a document setting out the scope of works to be completed by the Tenant prior to the termination date. On 2 December 2016, the Landlord replied to the Tenant, stressing the requirement to restore the Premises (including the reinstatement of the demolished floors) in accordance with the original layout as of the date of the handover of the Premises to the Tenant. In its letter dated 8 December 2018, the Tenant argued that the term “bare shell” was not defined in the Lease and that its ordinary meaning was “unfurnished and undecorated” and did not imply that the Tenant was required to restore any structural alterations it had made. In its letter dated 12 December 2016, while the Landlord agreed with the Tenant on the meaning of “bare shell”, the Landlord considered that “bare shell” should mean the removal of furniture, movable fittings and decorations. According to SC(13), the Premises must be returned with all the original floors restored so that if any part of these floors have been demolished, it must be reinstated and returned in bare shell condition at the end of the Lease. On 22 December 2016, the Landlord’s architect sent an email to the Tenant with a consolidated list of required reinstatement works. On 19 January 2017, the Tenant’s solicitors wrote to the Landlord disputing the Landlord’s interpretation of the term “bare shell” and arguing that the structural alterations (which were approved by the Landlord and the Building Authority) had become part of the Premises – the Tenant had no right or obligation to remove and/or reinstate the structural alterations. Moreover, the Landlord failed to send its nine-month written notice before the termination date, as stipulated in SC(13), to require the Tenant to reinstate the structural alterations. On 26 January 2017, the Landlord’s solicitors responded by letter stating that the Landlord’s approval of the structural alterations did not mean the Tenant was not required to reinstate them upon termination. Furthermore, the Landlord would not have agreed in the Lease to accept the return of the Premises with some floors and ceilings demolished resulting in the loss of considerable lettable area in the Premises.  Treating the Landlord’s architect’s email dated 22 December 2016 as the required nine months’ written notice under SC(13), the Landlord gave the Tenant up to 18 months from 22 December 2016 to complete the reinstatement works but would charge a monthly licence fee if the Tenant could not return the Premises by the termination date. On 12 May 2017, one day after the termination date, the Landlord’s solicitors wrote to the Tenant’s solicitors and asserted that the Tenant had failed to comply with the reinstatement obligations under the Lease, therefore its repudiation of the Lease had been accepted by the Landlord. Questions for the court The Tenant commenced proceedings in the High Court to demand for the repayment of deposit and excess of payment of rent. The Landlord counterclaimed that the deposit was forfeited and asked for damages as the Tenant failed to reinstate the Premises. A summons was issued by the Tenant pursuant to Order 14A rule 1 of the Rules of High Court to ask the court to determine three questions. The Court of First Instance (before K Yeung J) (CFI) gave judgment in favour of the Tenant.  The Court of Appeal (before Yuen, Au and G Lam JJA) (CA) allowed the appeal of the Landlord. Below is a summary of the ruling of the court. Question 1: Whether SC(13) requires the Tenant to restore the Premises to the original layout to the extent permitted by the building plans, absent any notice given by the Landlord. Court of First Instance The Landlord’s interpretation of SC(13) was that the Tenant was required to restore the Premises to a “pre-lease” bare shell, i.e. to the original layout to the extent permitted by the building plans, even without any notice from the Landlord. The CFI found that the Lease did not expressly impose an obligation to reinstate and yield up the Premises according to the Landlord’s interpretation.  The Landlord’s interpretation was uncertain because the Lease did not stipulate what were the original layout of the Premises and the building plans. The CFI also considered that the reference to “on each floor of the Premises” in SC(13) could not assist the Landlord. Furthermore, SC(13) only referred to a “bare shell” state not “pre-lease bare shell” as suggested by the Landlord’s interpretation. Court of Appeal The CA’s interpretation of SC(13) was that the natural and ordinary meaning of “bare shell” as applied to the subject building was “the structural concrete frame of the building and that only, free of non-structural partition walls and … unfurnished and undecorated“. When a building was divided into different floors, “bare shell … condition on each floor” meant that the Tenant was also obligated to reinstate the structural walls and demolished floors of the Premises. Accordingly, it was held that the Tenant was required to return the Premises in a “bare shell” condition on each floor, including by restoration of demolished floors, absent any notice given by the Landlord. Observing that SC(13) of the Lease did not contain the words “to the extent permitted by the building plans“, Question 1, as framed by the parties, was answered by the CA in the negative.   Question 2: Whether the Landlord’s three letters amounted to valid notices under SC(13), requiring the Tenant to carry out the reinstatement works set out by the Landlord’s architect and/or to restore the Premises to the original layout to the extent permitted by the building plans. Court of First Instance The CFI ruled that the various letters and emails given by the Landlord to the Tenant could not constitute valid notice under SC(13)(ii) because these correspondences did not give at least nine months’ notice to the Tenant and did not mention that they were given under SC(13)(ii). Court of Appeal The CA agreed with the CFI that Question 2 should be answered in the negative.   Question 3: If the Landlord’s three letters amounted to valid notices under SC(13), could they impose an obligation on the Tenant to carry out the works set out by the Landlord’s architect and/or to restore the Premises to the original layout to the extent permitted by the building plans, in light of the fact that the termination of the Lease and the delivery of vacant possession would have to take place on 11 May 2017 (i.e. before the expiry of the nine-month notice period under SC(13)). Court of First Instance As both Questions 1 and 2 were ruled in favour of the Tenant, it was not necessary to deal with Question 3. Court of Appeal As Question 2 was answered in the negative, Question 3 was not engaged. Nevertheless, the CA observed that if the Landlord had given a valid notice under SC(13) to “pick and choose“, the Tenant would have been obliged to complete the reinstatement works within nine months from the date of the notice, even if that period expired after the termination of the Lease.   Further appeal by the Tenant The Tenant’s applications for leave to appeal to the CA and the Court of Final Appeal were both dismissed. In particular, the Court of Final Appeal agreed with the CA’s ruling that SC(13) required the Tenant to reinstate the floor slabs of the Premises which the Tenant previously demolished with the Landlord’s consent. Commentary This case illustrates the importance of interpreting contract terms in context. The context in this case is that the Lease concerned multi-floor premises. It is also advisable to have detailed drafting of provisions in the first place, so that any negotiations or litigations between the parties after the contract is signed are steered towards the right direction. 1 SC(13): “Upon the expiry of this Agreement or sooner determination of the said term, the Tenant shall return the Premises to the Landlord in a ‘bare shell’ good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord. The Landlord shall have the right, subject to giving to the Tenant not less than 9 months’ prior written notice, to require the Tenant to leave all or any part of the fixtures and fittings which have been affixed to the Premises by or on behalf of the Tenant or which have become part of the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages) and all additions erections alterations and improvements or any part thereof which the Tenant may have made to the Premises with or without the consent of the Landlord … OR at the discretion of the Landlord, to require the Tenant to remove any additions, alterations or improvements to the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages (both inside or outside of the Premises)) and make good all damages caused thereby at the Tenant’s sole costs and expenses to the satisfaction of the Landlord and the Manager in accordance with the applicable laws and subsidiary legislation.”

The Land (Compulsory Sale for Redevelopment) (Amendment) Ordinance 2024, gazetted on 26 July 2024, comes into effect today (6 December 2024). The amendments seek to facilitate and streamline the compulsory sale regime under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (the “Ordinance”) which has been in operation for over 25 years since 1999. Major amendments in the Ordinance include: Lowers threshold for application for compulsory sale of lot for certain categories of buildings; Allows and facilitates multiple lots application and imposes requirements on purchaser that redevelopment of certain multiple lots must be under, or form part of, “one site”; Streamlines the legal process of application at the Lands Tribunal; and Enhances support to minority owners residing in affected property. Lowering compulsory sale  thresholds By amending the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (Cap 545A) (the “545A Notice”), the application threshold lowers from the lowest of 80% to 65% for certain categories of buildings1. Differentiation is not only by age of the building, but also its location. Buildings in designated areas will be allowed a lower application threshold, reflecting priority for urban redevelopment to areas with more old and dilapidated buildings. Designated areas are defined by Outline Zoning Plans (OZPs) in (1) Sai Ying Pun & Sheung Wan OZP No. S/H3/34; (2) Wan Chai OZP No. S/H5/31; (3) Yau Ma Tei OZP No. S/K2/24; (4) Mong Kok OZP No. S/K3/36; (5) Cheung Sha Wan OZP No. S/K5/39; (6) Ma Tau Kok OZP No. S/K10/30; and (7) Tsuen Wan OZP No. S/TW/35.2 Application threshold is summarised below: Class of lot Thresholds prior to amendments Existing thresholds Building type Age Designated area Non-designated area Private buildings <50 90% 90% ≥50 but <60 80% 70% 80% ≥60 but <70 80% 65% 70% ≥70 80% 65% Industrial buildings not located within industrial zone ≥30 80% 70%   Facilitating multiple -lots compulsory sale Prior to the amendments, an applicant is only allowed to take the simple average of ownership threshold to meet the application threshold for buildings connected by staircase intended for common use by the occupiers. As a result of the amendments, apart from allowing simple averaging for buildings connected by common staircase, an applicant can, in certain situations, take advantage of a new averaging requirement of ownership percentages of the multiple lots to meet the application threshold, in order to facilitate redevelopment of a larger site. Various types of multiple-lots application are as follows: Type 1 – Two or more lots that are majority-owned lots (meaning each lot meets the application threshold);3 Type 2 – Two or more lots that are staircase-connected lots in which case the majority owner may take simple average of the acquired undivided shares in the lots to meet the application threshold;4 Type 3 – Two or more lots that are adjoining lots where:5 the following is satisfied: (A) in the case of two lots, they adjoin each other along a common boundary; or (B) in the case of three or more lots, each lot adjoins at least one of the other lots along a common boundary; the lots are adjoined to form a cluster of lots bound by a continuous boundary; the percentage of the undivided shares owned by the majority owner in each lot is – (A) for a lot belonging to a specified class of lots, not less than 65%; and (B) for a lot not belonging to a specified class of lots, not less than 90%; and the averaging requirement (calculation method as prescribed in the Ordinance6) is fulfilled for the lots, each of which belongs to a specified class of lots; Type 4 – Three or more lots that are composed of more than one set of staircase-connected lots or a combination of any two or more of the following, and that are adjoined to form a cluster of lots bound by a continuous boundary: one or more majority-owned lots; one or more sets of staircase-connected lots; one or more sets of adjoining lots; 7 Type 5 – allowing one or more additional lot to be added to Type 4 if:8 the application covers at least one set of staircase-connected lots; the additional lot, or each of the additional lots, belongs to a specified class of lots; the following is satisfied – (A) if only one additional lot is covered – the additional lot adjoins a set of staircase‑connected lots along a common boundary; or (B) if more than one additional lot is covered – at least one of the additional lots adjoins a set of staircase-connected lots along a common boundary; the additional lot or lots, together with the other lots the subject of the application, form a cluster of lots bound by a continuous boundary; the percentage of the undivided shares owned by the majority owner in the additional lot, or each of the additional lots, is not less than 65%; and the averaging requirement is fulfilled for the lots (excluding the staircase-connected lots) the subject of the application. Further, the majority owner can now include wholly-owned lot9 in the multiple-lots application in Type 2, Type 3, Type 4 and Type 510. Streamlining determination of compulsory sale application In determining whether an Order for Sale is to be made, the Lands Tribunal has to be satisfied that (i) redevelopment of the lot is justified having regard to the age or state of repair of the existing development on the lot (the “age or state of repair requirement”); and (ii) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (the “reasonable steps requirement”).11 Now: For buildings of 50 years or over, if the whereabouts of all the minority owner(s) of the lot(s) are known, and each of them has filed a notice of no objection12, the applicant will be dispensed with the age or state of repair requirement. Both the age or state of repair requirement and the reasonable steps requirement do not apply to a lot that is wholly owned by the majority owner13. Support to minority owners As a result of the amendments in the Ordinance, a minority owner may continue to occupy the property for a period not exceeding six months after the day on which the purchaser of the lot becomes the owner of the lot if the person (i) has filed a notice of occupation, and (ii) has satisfied the Tribunal that the person has occupied the property for not less than three months immediately before the date of filing notice of occupation.14 Apart from that, the Government has also put in place the following administrative measures to support minority owners: The Development Bureau has set up the Dedicated Office of Supporting Services for Minority Owners under Compulsory Sale (DOSS) which is responsible for formulating the policy and scope of the one-stop, enhanced support services provided to affected minority owners; The Urban Renewal Authority (URA) has set up the Support Service Centre for Minority Owners under Compulsory Sale (SMOCS) which operates independently from the URA and is accountable to the DOSS. The SMOCS provides enhanced support services to affected minority owners, either through in-house or outsourced parties, as appropriate. Enhanced support services include handling general enquiries on the statutory/legal rights of minority owners, provision of preliminary professional advice (provided by volunteer lawyers and surveyors), promoting mediation, provision of independent valuation reports to facilitate mediation, referral to legal and other professional services for litigation, emotional counselling, and assistance in finding alternative accommodation and relocation. Additional conditions imposed on the purchaser of lots through Order for Sale New requirements are imposed on purchasers with respect to redevelopment of the lots bought and sold through an Order for Sale: Under Type 3, Type 4 or Type 5 application, the purchaser, or each successor in title of the purchaser, must redevelop the subject lots in such a way that they form one site or part of one site15 . Redevelopment must be completed and made fit for occupation within six years from the date the purchaser of the lot became owner if the Order for Sale is only for one lot (this is same prior to the amendments), but extended to within seven years if the Order for Sale is for two or more lots. 16 1 Each class of lots specified in section 4 of the 545A Notice is referred to as “specified class of lots” under the Ordinance. 2 Schedule of the 545A Notice 3 Section 3(2)(a) of the Ordinance 4 Sections 3(2)(b) and 3(8)(a) of the Ordinance 5 Sections 3(2)(c) and 3(8)(b) of the Ordinance 6 Sections 3(8)(c) and 3(9) of the Ordinance 7 Section 3(2)(d) of the Ordinance 8 Section 3(2A) of the Ordinance 9 The Court of Appeal ruled in Bond Star Development Ltd v Capital Well Ltd [2004] 2 HKLRD 855 that the objective of the Ordinance is to resolve disputes between the majority owner and minority owner, thus the Ordinance is not intended to permit an application where there is no minority owner when the majority owner already owns 100% of the lot. Accordingly, prior to the amendments in the Ordinance, a wholly-owned lot cannot be included in an application. 10 Section 3(2B) of the Ordinance 11 Section 4(2) of the Ordinance 12 Section 4(2A) of the Ordinance 13 Section 4(2C) of the Ordinance. 14 Section 4B(1) of the Ordinance 15 Sections 4C of the Ordinance 16 Section 1 of Schedule 3 of the Ordinance

In a recent disciplinary action, the Stock Exchange of Hong Kong Limited (SEHK) censured two executive directors (the chairman and the vice chairman, respectively) of a listed company (the “Listco”) for their failure to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. SEHK also criticised two non-executive directors, three independent non-executive directors and a former independent non-executive director of the Listco. All the aforementioned directors (the “Relevant Directors”) were directed to attend 24 hours of training on regulatory and Listing Rules compliance. In this particular case, the Listco granted four loans to certain borrowers, the principal amount of which totalled RMB 1.11 billion. The borrowers were in financial difficulty and were themselves creditors of debts secured by certain properties and equities of the ultimate borrowers. The Listco saw this as a fire sale opportunity, where if one of the borrowers defaulted it would then have the opportunity to purchase the collateral at a discounted price. The collateral consisted primarily of a property in Beijing. The Relevant Directors failed to conduct sufficient due diligence prior to granting the loans, even though they knew of the substantial risks of lending to these borrowers. They also did not devise a proper strategy for the Listco to recover the loans if the fire sale opportunity failed. Eventually, the borrowers failed to repay and the Listco made a loss provision of RMB 619.9 million in total. The Listing Committee found that the Relevant Directors were in breach of the directors’ general duty of exercising due skill, care and diligence under Rule 3.08 in relation to the granting and enforcement of the loans and the internal control deficiencies. The Relevant Directors were also found to have not used their best endeavours to ensure the Listco complied with the Listing Rules in breach of Rule 3.09B(2). The two executive directors were censured for they were responsible for procuring such due diligence and for implementing the transactions. Key takeaway: Even in the absence of conflict of interest or involvement in the underlying matter in question, if a director fails to exercise his or her fiduciary duty, which includes procuring proper due diligence and internal controls, he or she may still be held personally liable under the Listing Rules.