STRONG BEAUTY LTD v. GAIN LEGEND INDUSTRIES LTD

cacv 337/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 337 of 2007

(on appeal from HCMP NO. 2565 of 2006)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from an order made on 4 September 2007 by Mr Recorder A Ho SC dismissing the vendor’s originating summons seeking various declarations and orders and granting the relief sought by the purchaser in its notice of counterclaim.  At the conclusion of the hearing, the appeal was dismissed with written reasons to be handed down which we now do.

Background

3.  The dispute arose out of a sale and purchase agreement between the vendor (the plaintiff) and the purchaser (the defendant) of the building known as 13 Eastern St (“the property”) for $10.8 million.  The parties entered into a provisional sale and purchase agreement on 19 June 2006 with the purchaser paying 5% of the purchase price by way of deposit.  They entered into a formal agreement on 12 July 2006 (“the agreement”) when a further 5% of the purchase price was paid as deposit.

4.  The property is a prewar building consisting of a ground floor shop with a cockloft and five floors above.  Each of the five floors was a self-contained flat but the fifth floor flat also included the roof.

5.  Clause 3 of the agreement provided for completion on or before 31 August 2006 and, on completion, the vendor was to assign the property “free from encumbrances subject only as hereinafter appears”.  Clause 9 provided, inter alia, as follows:

“	9.	(a)	Save and except the Ground Floor and cockloft of the Property of which vacant possession will be delivered to the Purchaser on Completion, the Property is sold subject to the existing tenancies thereof particulars of which are set out in the Third Schedule hereto (“the existing Tenancy”).
		(b)	Clause 5 in Part A of the Second Schedule of the Conveyancing and Property Ordinance (Cap.219) shall apply.
			…”

The Third Schedule contained particulars of five existing tenancies, one affecting each of the five floors.  According to the particulars, the tenancy of the fifth floor was for a period of two years commencing 7 October 2004.

6.  Completion did not take place on 31 August 2006.  Instead, the parties entered into a supplemental agreement extending completion to a date on or before 31 October 2006.  A further $200,000 was paid as further deposit and part payment as well as a sum of $129,000 as agreed interest for the postponement of the completion date.  Completion never took place with the parties accusing each other of wrongfully repudiating the contract.

7.  It should be mentioned that at 16:17 hours on 31 October, less than an hour before the time fixed for completion, the purchaser’s solicitors faxed a letter to the vendor’s solicitors referring to their client’s inspection of the property earlier that day which revealed, inter alia, that furniture and miscellaneous chattels had been found on the roof.  Photographs showing the same were also faxed to the vendor’s solicitors.  The vendor’s solicitors’ response was that those chattels had been there for a long time, that the purchaser never asked for the same to be removed at the time of the agreement and the fact that those chattels were on the roof was not a breach of the agreement by the vendor.

8.  In the court below, one of the two main issues was whether the vendor was under a contractual obligation to deliver vacant possession of the fifth floor and the roof and, if so, whether the vendor had failed to do so.  The hearing had been set down for two days and directions had been given for the witnesses to be cross-examined.  However, before the mid-morning adjournment on the first day, counsel for the parties were agreed that, given the issues before the court, no oral evidence was necessary.  The hearing was adjourned until the following morning so that written submissions could be prepared.

9.  On the issue of the contractual obligation to deliver vacant possession, the recorder held that on the true construction of the agreement, the vendor was under such an obligation.  As to whether the vendor had discharged that obligation, the recorder decided the matter on the basis of the affidavit evidence.

10.  The recorder found that the tenant was no longer staying in the fifth floor flat on 31 October and that the vendor had the keys to the flat.  In fact it was the vendor’s evidence (which the recorder accepted) that a week or so prior to 31 October it had delivered the keys to its solicitors for the purposes of completion.  On the totality of the evidence, the recorder considered that the vendor was not in a position to dispute the fact that various objects and furniture remained present both inside the fifth floor flat and on the roof.  He came to the conclusion that the vendor failed to deliver vacant possession because the presence of those items interfered, in a substantial manner, with the purchaser’s physical enjoyment of its right to the use and occupation of those parts.

This appeal

11.  At the outset of the appeal, Mr Chong (who did not appear below) was asked to clarify whether it was his case that the tenancy affecting the fifth floor at the date of the agreement was subsisting on 31 October 2006 since the position was not entirely clear from his written submissions.  Mr Chong confirmed that no statutory rights were in question and that “the tenancy had gone” by 31 October 2006.

12.  In its notice of appeal, the vendor asked for an order that the originating summons be converted into a writ action or, alternatively, a declaration that it was entitled to call off the sale and purchase and to forfeit the deposits paid by the purchaser.  In view of the vendor’s stance at the hearing below when witnesses could have been examined and its agreement that oral evidence was unnecessary, I agree that it should not be allowed to retract from the position it had taken.  In any event, there were no genuine issues of fact that needed determination.  Thus, the only issue left in the appeal was whether the recorder’s construction of the agreement as to the vendor’s contractual obligation to provide vacant possession was correct.

13.  The recorder held that, subsales apart, as a general rule, a purchaser is entitled to vacant possession of the property on completion in the absence of any contrary provision in the contract.  The proposition is supported by the standard textbooks on conveyancing reference to which was made in § 13 of the judgment below.  As I understand it, Mr Chong does not take issue with the correctness of the proposition as such.  His case was that it has no application in the instant case because the agreement was not silent on the question of possession: rather, there were express provisions dealing with it inasmuch as the property was sold subject to the disclosed tenancies.  It was also his alternative submission that there was no room for any implied term because of the express provisions.

14.  The subject matter of the agreement was the entire building which, at the time of the agreement, save for the ground floor and cockloft, was subject to existing tenancies which were disclosed in the Third Schedule to the agreement.  The purchaser plainly could not complain if it failed to get vacant possession of any part of the property because of the subsistence of any of the disclosed tenancies since the agreement made it quite clear by clause 9(a) that the sale was subject to those tenancies.  But Mr Chong went further: his stance was that because the sale was subject to the disclosed tenancies, the purchaser could not complain if furniture found in any of the vacated flats had been left behind by the previous tenant.

15.  The agreement in fact made no express provision to cater for the situation which arose, of a tenancy (to which the sale had been subject) coming to an end prior to the date of completion.  Whether the vendor was under an obligation to deliver vacant possession in that eventuality is ultimately a question of construction of the agreement.

16.  As the agreement could be said to be ‘silent’ on what actually materialized, there appears to be no reason why the general rule (referred to in § 13 above) should not apply so long as it is not incompatible with or contrary to the provisions of the agreement.  There is an express provision in clause 3 for property to be sold free from incumbrances.  Prima facie, that requires that the purchaser be put into actual (and not constructive) possession.  It is also relevant that the agreement provided for vacant possession to be given of the ground floor and cockloft those being the only parts of the property that were not subject to any tenancy at the date of the agreement.

17.  The saving provision in clause 3, namely, “subject as hereinafter provided”, so far as it is referable to clause 9(a) of the agreement, does not militate against the application of the general rule.  Clause 9(b) incorporated by reference the provisions of clause 5 in Part A of the Second Schedule to the Conveyancing and Property Ordinance, Cap. 219.  Clause 5(5) provided as follows:

“

(5)

If a tenancy subject to which the property is sold terminates for any reason, the vendor shall inform the purchaser and, on being indemnified by the purchaser against all consequential loss, expenditure or liability, shall act as the purchaser directs.”

The first matter to note is that the vendor was in breach of that provision.  It never informed the purchaser of the termination of the tenancy of the fifth floor.

18.  Prior to completion, the vendor continued to be the proper person to enforce any rights in respect of the property which depended on the possession of the legal estate.  It was entitled to the rents and profits up to the date fixed for handing over possession.  This is clear from clause 9(c) and clause 10 of the agreement.  But broadly speaking, as Romer J observed in Rafferty v Schofield [1897] 1 Ch 937 at 945, “as between the vendor and purchaser generally the powers of the vendor to act as the owner of the property, and (inter alia) to change tenants and holdings, are suspended pending completion of the purchase.”  Clause 5(5) catered for situations of that nature, conferring on the purchaser the ability to give directions as to what is to be done such as reletting pending completion upon his indemnifying the vendor.  Those directions would or might have consequences that survive the completion date.

19.  I do not consider the fact that the departing tenant had left furniture behind is a matter that falls within the ambit of clause 5(5).  That, as well as matters such as the recovery of arrears of rent relating to a period prior to completion, are matters exclusively between the vendor and the departing tenant and are not the concern of the purchaser.  The vendor held the departing tenant’s deposit.  It could have defrayed the costs of disposing of the furniture out of that deposit.  Whilst it is clear that the vendor did nothing to dispose of the furniture, the fate of the deposit is not a matter dealt with in the evidence.  Be that as it may, the purchaser was not in a position to direct how the deposit was to be applied, nor, under clauses 9(c) and 10(b), was it entitled to the deposit of a tenancy that terminated pre-completion.  Accordingly, there is nothing in clause 9(b) to prevent the application of the general rule.

20.  Having regard to all those circumstances, I have no hesitation in coming to the conclusion that it was the clear intention of the parties that in the event of any of the disclosed tenancies coming to an end prior to the date of completion (as actually transpired with the tenancy of the fifth floor), vacant possession had to be delivered and, as the recorder correctly found, that the vendor failed to do.

Hon A Cheung J:

21.  I agree.