WONG YUK YING v. CHAN PUI SHAN MAY

CACV 265/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVI l appeal no. 265 of 2013

(ON APPEAL FROM DCMP 688 OF 2013)

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J U D G M E N T

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Hon Yuen JA:

1.  This is an appeal from a Judgment of Deputy District Judge Ludwig Ng given on 17 September 2013 (“the Judgment”) dismissing the originating summons of the plaintiff, a sub-purchaser of property, who sought a declaration that the defendant, the confirmor, was in breach of a Sub-sale and Purchase Agreement when she failed to deliver vacant possession of parts of the property on completion, and consequential orders for repayment of deposits/part payment, fees and costs.

2.  On 9 December 2013, the learned deputy judge gave leave to appeal, although there is a dispute as to whether he had given leave for all, or only one, of the grounds in the notice of appeal.  I shall return to this later in this Judgment.

Background facts

3.  The property known as Workshop C on the 22^nd floor of Superluck Industrial Centre (Phase 1) (“the Property”) was partitioned into three rooms, viz. Rooms C1, C2 and C3.  They were occupied under three different tenancies.

Tenancies

4.1.  The tenancies for C1 and C3 were for a fixed term of 25 months, commencing on 1 November 2010 and terminating on 30 November 2012 (although the tenancy agreements erroneously stated the term as “2 years”).

4.2.  The tenancy for C2 was for a term of 3 years, commencing on 1 March 2012 and terminating on 28 February 2015 with a break clause which is not material to this appeal.

5.  The issue in this appeal arises from the fact that although the tenancies for C1 and C3 expired by effluxion of time on 30 November 2012, the tenants did not vacate the units and were still occupying them on 15 January 2013.  The question is what was the impact of this occupation on the sale of the Property from the defendant to the plaintiff in the circumstances below.

Sales and Purchases of the Property

6.1.  On 11 October 2012, a company called Win Concept International Ltd (“the Head Vendor”) which was expected to (and subsequently did) acquire beneficial ownership of the Property on 27 November 2012 entered into a preliminary sale and purchase agreement to sell the Property to the defendant (“the Confirmor”).  The formal sale and purchase agreement for this transaction (“the Principal SPA”) was executed on 24 October 2012.

6.2.  In the meantime on 17 October 2012, the Confirmor entered into a preliminary sale and purchase agreement to sell the Property to the plaintiff (“the Sub-Purchaser”).  The formal sale and purchase agreement for this transaction (“the Sub-SPA”) was executed on 31 October 2012.

6.3.  Completion for both transactions was to take place on 15 January 2013. 

6.4.  Therefore, simply looking at the relevant dates, on completion date 15 January 2013, the tenancies of C1 and C3 would have expired by effluxion of time on 30 November 2012, and the tenancy of C2 would be subsisting as the term of tenancy was until 28 February 2015.  The parties dealt with this state of affairs in the following way.

Principal SPA

7.1.  In the Principal SPA, clause 17(a) provided as follows:

“(a) The Property is sold subject to the existing letting and tenancy (‘the Tenancy’) particulars of which are set out in Part VIII of the Schedule hereto and copies of the two relevant Tenancy Agreements both dated 1^st November 2010 and one relevant Tenancy Agreement dated 16^th February 2012 have been supplied to the Purchaser [ie the Confirmor] prior to the signing hereof (‘the Tenancy Agreement’)”.

7.2.  Part VIII of the Schedule set out “Particulars of Tenancy” as follows:

“Room C1

Amount of Rental: HK$3,500.00 per month

Amount of Rental deposit: HK$7,000.00

Other Terms:-

Please refer to the attached copy of Tenancy Agreement dated 1^st November 2010.

Room C2

Amount of Rental: HK$3,700.00 per month

Amount of Rental deposit: HK$7,400.00

Other Terms:-

Please refer to the attached copy of Tenancy Agreement dated 16^th February 2012.

Room C3

Amount of Rental: HK$1,900.00 per month

Amount of Rental deposit: HK$3,800.00

Other Terms:-

Please refer to the attached copy of Tenancy Agreement dated 1^st November 2010”.

Sub-SPA

8.1.  In the Sub-SPA, clause 29 provided as follows:

“(a) The Property is sold subject to and with the benefit of a tenancy agreement as set out in Part IV of the Schedule hereto (‘the Tenancy Agreement’). The Vendor [ie the Confirmor] shall, on completion of the sale and purchase herein, procure Head Vendor to account and transfer to the Purchaser the rental deposits (‘the Rental Deposit’) as set out in Part IV of the Schedule hereto which are being held by the Head Vendor as the landlord of the Property. Provided That the Purchaser shall execute an Indemnity in the form as set out in Part V for the transfer of the Rental Deposits to the Purchaser (without any deduction).

(b) The Vendor shall inform the Purchaser of any change in the disclosed terms and conditions of the Tenancy Agreement dated. [sic]

The above sub-clause (b) shall not entitle the Vendor and/or the Head Vendor to agree or permit any change in the terms and conditions of the Tenancy or its termination”. (Emphasis added).

8.2.  Part IV of the Schedule set out “Particulars of Tenancy” as follows:

“Room C1

Tenancy Agreement Date: 1st November 2010

Rent: HK$3,500.00 per month

Rental Deposit: HK$7,000.00

Room C2

Tenancy Agreement Date: 16th February 2012

Rent: HK$3,700.00 per month

Rental Deposit: HK$7,400.00

Room C3

Tenancy Agreement Date: 1st November 2010

Rent: HK$1,900.00 per month

Rental Deposit: HK$3,800”.

8.3.  The Sub-SPA did not annex the Tenancy Agreements, but they had already been annexed to the preliminary SPA.

9.1.  Pausing there, it would be noted that in the clauses quoted above in both the Principal SPA and the Sub-SPA, the singular and plural forms are apparently used inter-changeably with no discernible reason.  And in the Sub-SPA, clause 29(b) has even been left incomplete. 

9.2.  I would echo with respect the sentiments of the judge when he remarked that “it is apparent that the Sub-SPA was drafted based on certain standard template without great attention to the peculiarity of the transaction” (para. 4, Judgment).  I regret to have to say that the lack of care shown in this case by those involved in the drafting of the conveyancing documents, presumably professionally qualified persons, is quite unacceptable.

Events close to termination of the tenancies of C1 and C3

10.1.  As mentioned earlier, the expiry date of the tenancies of C1 and C3 was 30 November 2012.  On 28 November 2012, the Confirmor’s solicitors wrote to the Sub-Purchaser’s solicitors asserting that the Sub-Purchaser had agreed that the tenancies would be renewed, enclosing two draft Tenancy Agreements.

10.2.  On 30 November 2012, the Sub-Purchaser’s solicitors replied, stating that she had not agreed to renew the tenancies, and referring to clause 29 which stated that the Head Vendor and the Confirmor were not entitled to agree to any changes in the terms of the tenancies including renewals.  On the same day the Confirmor’s solicitors apparently wrote to the Head Vendor’s solicitors objecting to renewal of the tenancies.

11.  However, C1 and C3 remained in the occupation of the tenants beyond the expiry date.  It is common ground that there was no renewal of the tenancies. 

Requisition and answers

12.1.  On 27 December 2012, the Sub-Purchaser’s solicitors sent a list of requisitions to the Confirmor’s solicitors.  Requisition no.4 sought confirmation that the tenants of C1 and C3 had moved out and that vacant possession would be delivered on completion.    

12.2.  On 8 January 2013, the Confirmor’s solicitors answered:

“According to the [Sub-SPA], the [Sub-Purchaser] shall purchase the Property subject to the existing tenancy. All terms and conditions and the rights and obligations of the Landlord shall be succeeded by your client upon completion.

As to whether the vacant possession of C1 and C3 be delivered to our client, we shall take client’s instructions to you and revert”.

12.3.  That answer was ambiguous and unhelpful.  On 10 January 2013, the Sub-Purchaser’s solicitors repeated the requisition.

13.1.  On 11 January 2013, the Confirmor’s solicitors replied saying:

“We are given to understand by the solicitors of the Head Vendor verbally that the properties (Room C1 and C3) will be subject to monthly tenancy between the Head Vendor and the Tenants thereof in the same terms and conditions of the respective tenancy agreements. (Emphasis added).

Your client as the Purchaser of the property shall purchase the said property subject to the [Principal SPA] between the Head Vendor and our client and also subject to the said tenancy agreements, in particular, all rights and obligations thereof”.

13.2.  This answer was rejected by the Sub-Purchaser’s solicitors on the same day.  They reiterated that under clause 29 of the Sub-SPA, the Head Vendor and the Confirmor were not entitled to agree to any change in the terms and conditions of the tenancy or its termination.  

13.3.  The Confirmor’s solicitors replied by a 2^nd letter of the same day saying:

(1) they did not know why the tenants did not tender vacant possession to the Head Vendor on expiry of the tenancies;

(2) however as the Sub-Purchaser purchased the Property “subject to the existing tenancies thereof”, the Sub-Purchaser would “inherit” the rights of the Head Vendor, including “a right to institute actions or claims against the existing tenants for [mesne] profits or failure to tender vacant possessions to yours upon expiry of the said tenancy agreements”;

(3) in any event, there was no term in the [Sub-SPA] that the Confirmor would deliver vacant possession of C1 and C3 to the Sub-Purchaser on completion, and the Confirmor was only obliged to sell the Property “subject to the existing tenancies”. 

Correspondence between Confirmor’s solicitors and Head Vendor’s solicitors

14.1.  On the same day however, the Confirmor’s solicitors wrote to the Head Vendor’s solicitors taking the opposite position it took with the Sub-Purchaser’s solicitors and demanded vacant possession of C1 and C3.

14.2.  The following day (12 January 2013), the Confirmor’s solicitors again wrote to the Head Vendor’s solicitors, asking for full particulars and circumstances of the occupation of C1 and C3 after the expiry date of the tenancy agreements.

14.3.  On 14 January 2013, the Head Vendor’s solicitors replied to the Confirmor’s solicitors saying that the Head Vendor had not entered into any renewal agreement with the tenants of C1 and C3, “but they have not moved out of the C1 and C3 upon the expiry of the relevant tenancy agreements”.  However, they claimed that under clause 17 of the Principal SPA, the Head Vendor had “never agreed to deliver vacant possession of the Property or any part thereof” and it was not obliged to do so. 

15.  This letter was forwarded by the Confirmor’s solicitors to the Sub-Purchaser’s solicitors who replied on the same day asserting that as far as the Sub-SPA was concerned, the refusal on the part of the tenants of C1 and C3 to move out after expiry was a blot on the title, and the Confirmor was obliged to deliver to the Sub-Purchaser vacant possession of C1 and C3 and not a lawsuit.

Completion day

16.  On completion day, the Sub-Purchaser rescinded the Sub-SPA on the ground that the Confirmor had breached clause 29 and her obligation to give good title.

Proceedings

17.  On 6 March 2013, the Sub-Purchaser issued the present proceedings.  The parties were content to proceed on the basis of affirmation evidence only.

Judgment

18.  On 17 September 2013 the judge gave judgment.  Put briefly, his reasons were as follows. 

19.  First, there being no express provision in the Sub-SPA for vacant possession, such a term should not be implied, as the judge could not see “why the Implied Term is necessary to make the Sub-SPA work”.  In so doing, he sought to distinguish the case of Strong Beauty Ltd v Gain Legend Industries Ltd [2008] 1 HKLRD 570, Recorder A Ho SC, affirmed on appeal in CACV 337/2007, 25 February 2008, unrep.

20.1.  Secondly and in any event, as a matter of construction, he found that clauses 29(a) and 37 of the Sub-SPA were “inconsistent” with an intention that the Sub-Purchaser should obtain vacant possession of C1 and C3 on completion. 

20.2.  Clause 29(a) has been set out in para.8.1 above.

20.3.  Clause 37 provided:

“買方不能以租客退租而作為不能成交之理據，一切以現有租約為準，租金之按金由律師樓交收及對數”。

(“The purchaser shall not refuse to complete on the ground that the tenant/s terminated the tenancy/tenancies, everything shall be in accordance with the existing tenancy/tenancies, the rental deposit/s will be received and apportioned by solicitors”).

20.4.  This followed clause 33 of the Principal SPA which was also in Chinese.  As indicated in the translation above, as a matter of language, the Chinese words “租客”, “租約” and “按金” could be singular or plural.

Discussion

21.  The judge first refused to imply vacant possession because he thought it was “not necessary to make the Sub-SPA work”, ie he applied the business efficacy test.

22.1.  With respect, that was the wrong test.  It is well-established that in a sale and purchase of property, vacant possession is implied as a matter of law unless there is a contrary provision in the agreement.

22.2.  In Cook v Taylor [1942] 1 Ch 349, Simonds J held (at p352):

“... is there, according to the general law, here to be implied a contract of sale with vacant possession? I think the answer to that is in the affirmative. That is, I think, in accordance with the statement in Williams on Vendor and Purchaser, 4^th ed., p.201, where the learned author ... cites a number of cases which appear to support the view that where a contract is silent as to vacant possession, and silent as to any tenancy to which the property is subject, there is impliedly a contract that vacant possession will be given on completion. I may add that that appears to me to be common sense, for it would be strange if, the vendor saying nothing about the matter which lay within his knowledge and not within the knowledge of the purchaser, the purchaser were to find himself purchasing a property subject to a tenancy of which he could know nothing. Therefore I hold that as a matter of law, on a contract of this character, there is the implied term that vacant possession shall be given on completion”. (Emphasis added).

22.3.  In his written submissions, it would appear that Mr Tony Ko, counsel for the defendant, sought to argue that that decision was confined to a situation where the property was vacant when inspected.  However the proposition that vacant possession is implied as a matter of law in the absence of a contrary provision is well-established (see the textbooks listed by Recorder Ho in Strong Beauty para.13), and is not restricted to situations where the property was vacant on inspection (see eg Re Crosby’s Contract [1949] 1 All ER 830, where Romer J accepted the above passage from Cook v Taylor as “guidance of that statement of the general law”, in a case where the property was occupied when the deal was struck).  

22.4.  Therefore the test is not whether vacant possession was “necessary to make the Sub-SPA work” as a matter of business efficacy, but whether there were any provisions in the agreement to the contrary.

23.1.  In the present case, clause 29 stated that the Property is sold “subject to and with the benefit of a tenancy agreement as set out in Part IV of the Schedule hereto (‘the Tenancy Agreement’)”.  Of course the C2 tenancy was subsisting at completion date.  However the judge noted that the particulars of tenancies of C1 and C3 were also attached.  He took the view that if the parties had intended that vacant possession of C1 and C3 would be delivered on completion, there would have been no need for these particulars to be attached as well, for the tenancies would have expired before completion.  Accordingly he concluded that this was a contractual provision which was inconsistent with vacant possession being implied. 

23.2.  With respect, I do not agree.  The Sub-Purchaser would still have to be informed of the particulars of the tenancies of C1 and C3, even though they would expire before completion date, because generally “as between the vendor and purchaser 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” (Rafferty v Schofield [1897] 1 Ch 937 quoted in Strong Beauty, C.A. at para.18). 

23.3.  Thus, eg if, pending completion, a tenant wished to renew the tenancy on the same or even different terms, the Head Vendor would have to consult the Confirmor, and the Confirmor would have to consult the Sub-Purchaser, for it was up to the Sub-Purchaser what she wished to do with the Property upon completion.  The Sub-Purchaser could not be expected to make a decision if she did not have the particulars of the tenancies.  Indeed, such an interest of the Sub-Purchaser was recognized in the correspondence between the parties’ respective solicitors discussing the subject of renewal prior to completion.  

23.4.  Therefore, there was clearly a good reason to attach the particulars of tenancies to the Sub-SPA (even though the tenancies of C1 and C3 would expire before completion) which is perfectly consistent with an intention that vacant possession should be given on completion.  

24.1.  The rationale in Strong Beauty is also instructive, although the facts are different.  In that case, the parties had originally agreed to a completion date, on which a tenancy of the 5^th floor was subsisting.  It was sold subject to that tenancy.  However the parties then agreed to postpone the completion date, by which time the tenancy of the 5^th floor had expired.  The court held that the vendor was obliged to give vacant possession of that floor.  

24.2.  Le Pichon JA referred to clause 5(5) of Part A of the Second Schedule to the Conveyancing and Property Ordinance Cap.219 which provides:

“(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”.

24.3.  What is instructive is the court’s explanation of the rationale for that clause.  Her ladyship held, after referring to Rafferty, that the clause conferred “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”.

25.  Accordingly and with respect, I do not agree with the deputy district judge when he held that the attachment of the particulars of the tenancies of C1 and C3 was inconsistent with vacant possession being implied.     

26.1.  The judge also held that clause 2 of the Tenancy Agreements meant that unless and until either the landlord or the tenant gave one month’s notice to the other, the tenancy would “continue” and would not be “automatically terminated after two years” (para.39, Judgment).  Accordingly, he held, this “should have alerted the [Sub-Purchaser] to the possibility that the premises may not be vacant when the two year term ‘expires’ on 30 November 2012, not to say the inherent possibility of a tenant refusing to move out even if the Tenancies have been absolutely terminated”.    

26.2.  Clause 2 of the Tenancy Agreements of C1 and C3 stated (where material):

“租約期滿，住客如繼續租賃或退租，須於壹個月之前以書面通知(續租則另訂新租約方生效力)，否則租客須補償一個月租金給業主。如業主須要收回樓宇，亦須要一個月前通知租客”。

It was translated in the Judgment as follows:

“Upon expiry of the tenancy, should the Tenant intend to renew or terminate the tenancy, one-month written notice shall be provided in advance (any renewal shall be taken as effective only upon entering of a new tenancy); otherwise, the Tenant shall compensate the Landlord by paying a sum of one month of rent. Should the Landlord intend to repossess the property, one-month notice shall be provided to the Tenant in advance”.

27.  With respect, I do not agree that this clause has the effect that the judge found.  It was obviously intended so that both parties (landlord and tenant) would know, a month in advance of the expiry date, what the other party’s plan was with regard to the premises, but that is not to say that failing such notice, the tenancy continued despite its termination by effluxion of time.  So,

- as far as the tenant’s plan was concerned, if he wished to renew the tenancy, he should inform the landlord a month in advance of the expiry date, so that the parties could negotiate terms during that month.  If the tenant wished to leave at expiry, he was also obliged to give the landlord a month’s notice, no doubt so that the landlord could start the market search for a new tenant within that month.  The liquidated damages for failure to give notice on the part of the tenant was one month’s rent, which could presumably be set-off from the rental deposit;

- as far as the landlord’s plan was concerned, if he did not wish to rent the premises to the tenant on expiry, he should inform the tenant a month in advance of the expiry date, no doubt so that the tenant could look for alternative premises.  As no liquidated damages were stipulated, the tenant would have to prove whether he suffered any damages as a result of a failure by the landlord to give the required notice. That would of course depend on whether the tenant had wished to stay and how quickly he could find suitable alternative premises.

28.  In my view, there is nothing in the clause which has the effect of somehow prolonging a fixed term tenancy.  As the learned authors of Megarry and Wade, The Law of Real Property, 8^th ed. put it: “Expiry is the default method of termination of a fixed term tenancy; at common law, the tenancy ends when the fixed term expires” (p.810, para.18-002). 

29.  As there is no evidence in the present case that the Head Vendor had given a month’s notice to the tenants of C1 and C3 a month before the expiry, that would simply mean that at most it (the Head Vendor) was exposed to a claim for damages (if any) from the tenants (which presumably could be set off against any claim for mesne profits should the tenants refuse to deliver up vacant possession on the expiry date). 

30.  In my view, once the Sub-Purchaser had stated that she did not wish to renew the tenancies, the Head Vendor and the Confirmor should have taken steps to evict the tenants with a view to delivering vacant possession on completion, and there is no ground for holding that the Sub-Purchaser was subjected to any “inherent possibility of a tenant refusing to move out even if the Tenancies have been absolutely terminated”. That is a risk for the vendor (be it the Head Vendor or the Confirmor), not for a purchaser who was entitled to vacant possession of those units on completion. 

31.  Further there is no question of the Sub-Purchaser being obliged to accept the situation of a monthly tenancy after expiry of the fixed term tenacies.  Clause 29 made it clear that the Head Vendor/the Confirmor was not entitled to agree to any change in the terms and conditions of the tenancies or their termination.

32.  Finally with respect I do not see anything in clause 37 of the Sub-SAP which assists the Confirmor.  This merely provided that if the tenant (ie of C2) moved out before the expiry of the tenancy agreement, the Sub-Purchaser would not be entitled to rely upon this as a ground for rescinding the agreement to purchase the Property.

Order

33.  In the circumstances I would allow the appeal, set aside the judge’s order and replace it with the order sought in the Notice of Appeal, and make an order that the plaintiff shall have the costs here and below, including the costs of the application for leave to appeal.

Reminder on orders giving leave to appeal

34.  Finally I would just like to mention that there was some uncertainty as to the scope of the appeal, because in the judge’s decision giving leave to appeal, he made a remark that he thought there was only one valid ground, but the sealed order did not limit leave to a specific ground.  As it turned out, in the present case it did not matter because the ground identified by the judge related to the obligation to deliver vacant possession where the purchaser had objected to renewal. However I would like to remind judges dealing with applications for leave to appeal that if they give leave on certain grounds but not others, the actual grounds in the draft Notice of Appeal for which leave is given should be specified in the order itself.

Hon Barma JA:

35.  I agree.

Hon Poon JA:

36.  I agree.