XCHRX CENTRALING LTD. v. QUANFORD ENTERPRISES LTD.

HCA646/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.646 OF 1998

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J U D G M E N T

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The appeal

1. This is the Plaintiff's appeal against the decision of Master Cannon who granted leave to the Defendant to defend on the Plaintiff's application for summary judgment.

2. The Plaintiff was the Purchaser and the Defendant, the Vendor, of a property known as Flat H, 38/F, Goldwin Height, No.2 Seymour Road, Hong Kong (the "Property"). The parties entered into a Provisional Agreement for Sale and Purchase ("the Agreement") of the Property dated 17th October 1997.

3. The Plaintiff seeks in this action, among other things, a declaration that it had validly rescinded the Agreement and for return of the deposit paid under the Agreement.

Tenancy

4. The Agreement provided for completion on 5th December 1997. The total purchase price was $14,150,000. Clause 18 of the Agreement provided that the Property was sold subject to tenancy. The monthly rent was $45,000 and the term of the tenancy was from 15th November 1996 to 14th November 1998.

5. What happened in this case is that the Defendant became the owner of the Property on 12th August 1997. The former owner of the Property had let the Property to a tenant called BHP Minerals Asia Inc. ("the tenant") since 4th November 1994. The lease had been extended to 14th November 1997 and the tenant was given an option to renew for one year from 15th November 1997 to 14th November 1998 at $45,000 per month.

6. The lease and the extension agreement were supplied to the Plaintiff before the signing of the Agreement and, according to the Plaintiff, there was representation by the Defendant that the tenant had extended the lease to 14th November 1998.

7. The Plaintiff on 20th October 1997 and 21st October 1997 received from the Defendant two notices from the tenant in which the tenant informed the Defendant that it had informed the previous owner that it would only extend the lease to 31st March 1998, and its intention was to extend the lease up to 31st March 1998.

Rescission by the Plaintiff

8. On 29th October 1997, the Plaintiff's solicitors Yen Yu & Kong, wrote to the Defendant's solicitor, Ho & Wong. The letter referred to the notices from the tenant and stated that if the Defendant was unable to sell the Property as contracted under the Agreement, this was a repudiation by the Defendant and the Plaintiff accepted the repudiation. The letter further stated that the Defendant had misrepresented the matter concerning the tenancy which entitled the Plaintiff to rescind the Agreement.

9. On 30th October 1997, Ho & Wong sent to Yen, Yu & Kong, a Tenancy Agreement dated 30th October 1997 in which the Defendant let the Property to a Goldmain Ltd. from 1st April 1998 to 14th November 1998 at $45,000. Ho & Wong also sent an amended draft of the Formal Agreement for Sale and Purchase which referred to this Tenancy Agreement.

10. By a letter dated the same date, Yen, Yu & Kong informed Ho & Wong that the new tenancy was entered without the consent of the Plaintiff and this new tenancy was "a clear and further breach and repudiation of the Provisional Agreement" which entitled the Plaintiff to terminate the Agreement.

The Law

11. The law is that a vendor generally only needs to establish a good title by the date of contractual completion : A-Mayson Development Co. Ltd v. Betterfit Ltd. [1992] 2 HKC 533 and the cases cited in Chu Wing Ning v. Ngan Hing Cheung & Others HCA 9409 of 1991.

12. However, a purchaser may rescind the sale before the completion when he discovers a fundamental defect in title or some other fundamental breach by the vendor, see again A-Mayson Development Co. Ltd. v. Betterfit Ltd. [1992] 2 HKC 533 and Hero Profit Enterprises Ltd. v. Kadesy Development Ltd. & Others [1995] 3 HKC 193 Jumbo King Ltd. v. Faithful Properties Ltd. & Others, HCMP No.160 of 1998.

29th October 1997

13. The first question is whether on 29th October 1997, the Defendant had committed a breach so fundamental or that its title was so fundamentally defective that entitled the Plaintiff to rescind the sale. I think not. The tenant had indicated that it was only prepared to stay until 31st March 1998 instead of the full extension of 14th November 1998. But what is there to preclude the Defendant from reaching an agreement with the tenant between 29th October 1997 to the completion on 5th December 1997 for the tenant to stay until 14th November 1998?

14. Furthermore, even if the tenant was to leave on 31st March 1998, the shortfall of rental from that time to 14th November 1998 would only be $45,000 per month x 7 1/2 months, or $337,500. This is a relatively small sum compared to the purchase price of $14,150,000. The Defendant might well have agreed to pay for the shortfall. If so, I really do not see what objection could have been raised if the tenant chose to leave on 31st March 1998. In my view, the Plaintiff was clearly not entitled to rescind on 29th October 1997.

30th October 1997

15. On 30th October 1997, the Defendant furnished a new tenancy to the Plaintiff. Clearly this tenancy was not the one envisaged in the Agreement. A purchaser is not bound to accept a tenancy different from the one agreed between the parties : Pagebar Properties Ltd. v. Derby Investment Holdings Ltd. [1972] 1 WLR 1500 and the tenancy to which the property is subject to is a matter of title : Bechal v. Kitsford Holdings Ltd. [1989] 1 WLR 105. Equally clear is the principle that a vendor holds the property on trust for the purchaser after the agreement for sale is entered into.

16. However, the issue is this : did the Defendant on 30th October 1997 committed a breach so fundamental, or the defect in title was so fundamental, that would entitle the Plaintiff to rescind the Agreement there and then.

17. Mr Kwok S.C., Counsel for the Plaintiff, argued that Clause 18 is not a common clause, it was inserted specifically in the Agreement. The parties must have attached importance to this clause and effect must be given to the wishes of the parties that this clause was to be observed.

18. I think ultimately the question is one whether the defect was so fundamental that the Vendor could not possibly have removed it at the time of the completion.

19. Mr Mok, Counsel for the Defendant, on the other hand argued that the defect could be removed by the time of the completion. He also referred to William Sindall PLC v. Cambridgeshire County Council [1994] 1WLR 1016, a case on misrepresentation, in which the English Court of Appeal held that a contract might be affirmed even if there was misrepresentation if the misrepresentation was minor and could be remedied by payment of compensation. He also referred to Price v. Strange [1978] 1 Ch. 337, where it was held that in ordering specific performance the Court can order financial adjustment as compensation to a party who is not in breach. In Mohammed Yousuf Naz v. Raja and Others (Decision 7th April 1987), the English Court of Appeal commenting on Pagebar Properties Ltd. stated that :

"....Plainly he (i.e. the Vendor) does not need to have fulfilled all the obligations which would have to be fulfilled when completion takes place. He is not bound to have tendered a transfer of the property or to have evicted persons in occupation who have arranged to leave before completion takes place. He is not bound to have discharged outstanding mortgages which are intended to be discharged in the usual way out of the purchase money on completion."

Arguable case

20. In my view, even leaving aside the dispute whether the new Tenancy Agreement was created at the request of the Plaintiff, it is certainly arguable that if the new tenancy created a defect in title on the Property, the defect could be removed before the completion. Afterall, the new tenant was an associated company of the Defendant and the Property would be used to accommodate the employee of the Defendant. The Defendant could easily procure the termination of the new tenancy.

21. Mr Kwok argued that the matter was academic because first, the Defendant had not informed the Plaintiff of its intention, and second the Defendant had indicated that it would not remove the defect in title by reference to the correspondence. I think this over-simplifies the situation. More likely, the matter was simply not addressed at that stage of the dispute. The Plaintiff had chosen to rescind on 30th October and in response the Defendant demanded payment of the further deposit.

Appeal dismissed

22. This being a summary judgment application, the Defendant has raised a triable issue which entitles it to defend. The Master was correct in her decision and the appeal is dismissed.

23. Costs of the appeal to the Defendant in any event.