CHAN WAI HUNG AND ANOTHER v. NG CHOR FONG t/a GAMWAY PROPERTY AGENCY AND ANOTHER

[English Translation – 英譯本]

HCSA 38/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 38 OF 2006

(ON APPEAL FROM SCTC NO. 41034 OF 2005)

_________________

_________________

_________________

JUDGMENT

_________________

Background

1. On 5 June 2005, the respondents, the appellant (as an estate agent) and a vendor entered into a provisional agreement for the sale and purchase of a property (“the provisional agreement”), by which the respondents agreed to purchase a Home Ownership Scheme flat (“the property”) from the vendor at a price of HK$1,190,000. The respondents paid an initial deposit of HK$50,000.

2. The provisional agreement stipulated that the purchaser and the vendor had to sign a formal agreement for sale and purchase before 20 June 2005 and that completion was to take place on or before 15 July 2005. Further, if the purchaser failed to complete the purchase in accordance with the provisional agreement, the vendor would be entitled to forfeit the deposit and the purchaser would pay the appellant agent HK$23,800 as compensation.

3. Clause 17 of the provisional agreement stipulated:

The purchaser shall be responsible for paying the premium, the premium fees [in] another sale and purchase agreement No. 6748.

4. The sale and purchase agreement No. 6748 was in fact the HOS flat sale and purchase annexure signed on the same day by both parties and numbered 6748 (“the sale and purchase annexure”). The sale and purchase annexure stipulated as follows:

1.         Both parties are aware that the property is a property under (the Home Ownership Scheme) and is subject to the restrictions on alienation under the Housing Ordinance.

2.    The purchaser shall be responsible for paying premium assessed pursuant to the Housing Ordinance and such sum shall be paid to the Housing Department on the date of completion but prior to the execution of the formal property deed. However, the purchaser must deliver the balance of the purchase price and the amount of premium to the solicitors for the vendor by 12:00 noon on the date of completion.

3.    The vendor declares that the vendor has applied or will apply within seven days of this agreement to the Housing Department for an assessment of premium difference. If the vendor fails to receive a notice of assessment of premium on or before the date of completion, both parties agree that the date of completion will be changed to within 14 working days from the date of receipt of a notice of assessment of premium by the vendor.

4.    The vendor shall provide a specific undertaking of his/her solicitors, guaranteeing that a certificate of full payment of premium difference issued by the Housing Department will be provided to the purchaser within 21 days from the date of formal completion.

5. Since the parties did not specify in the provisional agreement the actual amount of premium payable, the bank which the respondents approached, in approving the mortgage, only worked out the amount of the mortgage on the basis of the purchase price of HK$1,190,000 and refused to take the premium into account. It turned out that the respondents could not afford the amount of the premium and had no alternative but to forgo completion before the signing of the formal sale and purchase agreement, as a result of which the deposit of HK$50,000 was forfeited by the vendor.

The action

6. On 6 July 2005, the respondents initiated proceedings in the Small Claims Tribunal against the appellant and her employee, claiming that they had been negligent in failing to perform their obligation to give advice regarding the respondents’ mortgage application and to remind them to include the amount of premium in the purchase price so that the bank would also take that amount into account when considering the mortgage application.

7. After trial, the adjudicator found that the appellant and her employee had no duty to advise the respondents on their mortgage application. The adjudicator pointed out that the crucial question was whether the provisional agreement contravened the Housing Ordinance and was therefore void.

8. The adjudicator said in his Reasons for Decision:

11.       The 1^st and 2^nd claimants entered into an agreement to purchase a HOS flat. It is common ground between the parties that 5 years has elapsed since the HOS flat’s first purchase by the vendor from the Housing Authority. Section 17A of the Housing Ordinance provides that the Housing Authority may fix the conditions on which such flats may be sold. Section 17AA stipulates that, by notice in the Gazette, the agreement for sale and purchase and deed of assignment of flats sold under section 17A shall be subject to the various conditions mentioned in the Schedule to the Housing Ordinance. When the vendor of the HOS flat in the present case purchased the flat, the deed of assignment contained all the conditions mentioned in the Schedule to the Housing Ordinance. As 5 years has elapsed since the vendor purchased this HOS flat, the vendor, in accordance with the law, is free to sell the flat in the open market, subject to the condition precedent that the vendor must pay the amount of premium to the Housing Authority (see paragraph 1 of the said Schedule). This condition precedent is in turn subject to an exception which allows the vendor to enter into an agreement for sale and purchase with the purchaser prior to paying the amount of premium, provided that the agreement for sale and purchase meets the following requirement (see paragraph 4(b) of the Schedule):

‘providing it is a condition of such agreement that the premium as assessed by the Director be paid to the Authority prior to assignment and within 28 days of the date of the agreement or within such period as may be otherwise stipulated by the Director;’

12.       The provisional agreement for sale and purchase obviously does not meet the aforesaid requirement and is therefore void under section 17B(1)(c) of the Housing Ordinance.

13.       The defendants cited the case of HKSAR v. Pang Ko Fai, HCMA 1230 & 1178/98 and submitted that, in light of what was said in that case, the provisional agreement for sale and purchase in the present case is lawful. In Pang Ko Fai, the facts showed that the agreement for sale and purchase stipulated that it was ‘subject to the terms and conditions contained in the schedule’. That is to say, the agreement for sale and purchase in that case expressly stated that the conditions set out in the Schedule to the Housing Ordinance formed part of the agreement.

14.       What then is the position in the present case? Clause 1 of the sale and purchase annexure stated, ‘Both parties are aware that the property is a property under (the Home Ownership Scheme) and is subject to the restrictions on alienation under the Housing Ordinance.’ This merely shows that in the agreement, both parties agreed that they were aware of the relevant alienation restrictions (while in fact neither party was clear about the restrictions) and were also aware of the conditions mentioned in the Schedule to the Housing Ordinance (but the agreement did not state that all the conditions listed in the Schedule to the Housing Ordinance were incorporated into the provisional agreement for sale and purchase in this case; nor did it state that both parties agreed to comply with the conditions listed in the said Schedule).

15.       Therefore, the provisional agreement for sale and purchase in the present case does not satisfy the requirement under paragraph 4(b) of the Schedule to the Housing Ordinance. This provisional agreement for sale and purchase is void.

9. Finally, the adjudicator ruled that the appellant’s employee was relieved of any liability but the appellant was liable to the 1^st respondent1:

17.       In my view, the 1^st defendant is liable to the 1^st claimant. The 1^st defendant was contractually obliged to supply service to the 1^st claimant with reasonable care and professionalism (see section 5 of the Supply of Services (Implied Terms) Ordinance). The service supplied by the 1^st defendant failed to meet this requirement. The 1^st defendant was negligent. Furthermore, the 1^st defendant had impliedly guaranteed to the 1^st claimant that the provisional agreement for sale and purchase was lawful and binding while in fact it was not.

18.       As a result of the 1^st defendant’s breach of contract, the 1^st claimant had wasted legal costs of $4,300, and the deposit of $50,000 was forfeited by the vendor. In my view, there was a causal connection between the 1^st defendant’s breach of contract and the forfeiture of the deposit even though the 1^st and 2^nd claimants did forgo completion on account of their failure to obtain a mortgage loan.

Appeal

10. The appellant now appeals against the above rulings on the following three grounds:

(1)           The requirement in paragraph 4(b) of the Schedule to the Housing Ordinance only applies to formal agreements for sale and purchase but not provisional agreements for sale and purchase.

(2)           Even if the validity or otherwise of the provisional agreement was indeed dependent upon its compliance or otherwise with the requirement in paragraph 4(b) of the Schedule to the Housing Ordinance, the adjudicator erred in ruling that the sale and purchase annexure did not meet the relevant legal requirement.

(3)           Even if the provisional agreement was rendered void for failing to comply with the requirement in paragraph 4(b) of the Schedule to the Housing Ordinance, the appellant was not legally liable to compensate the 2^nd respondent.

Applicable provisions in the Housing Ordinance

11. The 1^st and 2^nd grounds of appeal concern the interpretation of those provisions in the Housing Ordinance that apply to the present case.

12. Under sections 17A and 17AA of the Housing Ordinance, the sale of the property shall be subject to the terms, covenants and conditions mentioned in the Schedule to the Ordinance. Any breach thereof shall render the relevant agreement for sale and purchase void: see section 17B.

13. More than five years elapsed from the date of the first purchase of the property from the Housing Authority by the vendor to the date of the signing of the provisional agreement by both parties. Therefore, the following terms in the Schedule to the Housing Ordinance apply:

1.   Subject to paragraph 4 of this Schedule, the purchaser shall not at any time alienate, convey, charge or part with possession or purport to alienate, convey, charge or part with possession or enter into any agreement to alienate, convey, charge or part with possession of the land sold other than to the Authority, or such person as the Authority may nominate, unless ―

(a)   either ―

(i) a period of 5 years has elapsed from the date of the first assignment of the land ― …

(A) from the Authority to any purchaser; or

(B) to any purchaser nominated by the Authority,

whichever is the earlier; or

(ii) before that period has elapsed, the purchaser has offered to assign the land to the Authority and the Authority or its nominee (other than a prescribed nominee) has declined to accept the assignment; and

(b) the purchaser has first paid to the Authority the amount of the premium calculated under the following formula ―

…

4.   Notwithstanding that the purchaser has not paid the premium mentioned in paragraph 1 of this Schedule, he may, in relation to the land ―

…

       (b) where ―

(i) before the expiry of 5 years from the date of the first assignment of the land ― …

…

(ii) 5 years has elapsed since the date of the first assignment of the land ― …

(A) from the Authority to any purchaser; or

(B) to any purchaser nominated by the Authority,

whichever is the earlier, enter into an agreement for sale and purchase of the land providing it is a condition of such agreement that the premium as assessed by the Director be paid to the Authority prior to assignment and within 28 days of the date of the agreement or within such period as may be otherwise stipulated by the Director;

…

5.   Where a purchaser applies for an assessment of premium to be calculated in accordance with paragraph 1(b) of this Schedule ―

(a)  the purchaser shall pay to the Authority at the same time as he submits his application for the assessment, an administrative fee set and published by the Authority;

(b)  upon completing the assessment of premium, the Director shall give notice, in writing, to the purchaser of the prevailing market value, the amount of premium and the date, being not less than 28 days from the date of the notice, on or before which the premium must be paid to the Authority;

(c)  if the purchaser pays the premium as assessed by the Director to the Authority within the time notified under subparagraph (b), the Authority shall deduct an amount equivalent to the administrative fee paid under subparagraph (a) from the premium as assessed;

…

12. If the purchaser does not pay the premium in full to the Authority ―

(a) within the period notified under paragraph 5(b) of this Schedule, unless an appeal has been lodged with the Lands Tribunal and such appeal has not been discontinued or lapsed;

…

the assessment of the premium shall lapse.

First ground of appeal

14. Mr. Au-Yeung, Counsel for the appellant, argues that the requirement in paragraph 4(b) of the Schedule to the Housing Ordinance applies only to formal agreements for sale and purchase and not to provisional agreements for sale and purchase. The reason is, had paragraph 4(b) been intended to cover provisional agreements for sale and purchase, the provision would, instead of using the term “agreement for sale and purchase of the land”, certainly have used the term “provisional agreement for sale and purchase” as in paragraph 4(c)2. Mr. Au-Yeung also prays in aid of the case of Chan Chi Hung v. Tse Ying Piu [1996] 4 HKC 763 and points out that in construing paragraph 4(b), the court had in mind formal agreements for sale and purchase rather than provisional agreements for sale and purchase.

15. Neither the Housing Ordinance itself nor the Schedule thereto define the term “agreement for sale and purchase of the land” under paragraph 4(b). I have been informed by Counsel for both parties that there is to date no judicial precedent which provides an interpretation of the term. Both the case of Chan Chi Hung and the case of Wong Kwai On & Others v. Leung Wing Cheong [1999] 2 HKLRD 779, cited by Mr. Suen for the respondents, are not of real assistance in the present case because the courts in those two cases did not provide any interpretation of the term “agreement for sale and purchase of the land” under paragraph 4(b). These cases can only be regarded as specific instances in which the vendor and purchaser had applied paragraph 4(b) to a provisional agreement for sale and purchase and a formal agreement for sale and purchase.

16. In my view, the above term should receive such an appropriate interpretation as would best ensure the attainment of the object of the Housing Ordinance and its Schedule according to their true intent, meaning and spirit: see section 19 of the Interpretation and General Clauses Ordinance.

17. Under paragraph 1 of the Schedule, the prospective vendor of a HOS flat shall not enter into any agreement to “alienate, convey or part with possession of” the flat unless he has first paid to the Housing Authority a premium (commonly known as “payment of land premium”). The term “agreement” as used here has a very broad meaning, encompassing both provisional and formal agreements for sale and purchase. Even if the prospective vendor of a HOS flat has not paid land premium, he can still act in accordance with paragraph 4(b)­ – he may enter into an agreement for sale and purchase of the land providing it is a condition of such agreement (“the condition”) that the premium as assessed by the Director of Housing be paid to the Housing Authority prior to assignment and within 28 days of the date of the agreement or within such period as may be otherwise stipulated by the Director of Housing.

18. Whether acting in accordance with paragraph 1 or paragraph 4(b) of the Schedule, the prospective vendor of a HOS flat must pay land premium to the Housing Authority. The reason is obvious: the HOS flat was previously sold by the Housing Authority at below the market price, and if the owner of the flat now intends to resell it at the market price, he has to pay to the Housing Authority a reasonable price difference as compensation.

19. The focus of the term “agreement for sale and purchase of the land” under paragraph 4(b) of the Schedule is not on whether the relevant agreement is provisional or formal, but rather on whether it is a binding agreement under which the prospective vendor of a HOS flat must sell the flat. If this is the case, he must act in accordance with paragraph 4(b) to ensure that the Housing Authority receives the premium. Accordingly, the term “agreement for sale and purchase of the land” covers any binding agreement for sale and purchase. A provisional agreement for sale and purchase is immediately binding on the parties thereto upon execution by the parties (see paragraph 4 of the Court of Appeal’s judgment on 15 December 2005 in See To Keung & Another v. Sunny Way Limited, CACV 25/2006). Therefore, paragraph 4(b) is applicable to provisional agreements for sale and purchase.

20. With respect, I cannot accept the submission of Mr. Au-Yeung because:

(1)           It is true that paragraph 4(c) of the Schedule uses the terms “provisional agreement for sale and purchase” and “agreement for sale and purchase” to provide for different circumstances. However, I cannot accept Mr. Au-Yeung’s submission that the term “agreement for sale and purchase of the land” under paragraph 4(b) can only refer to a formal agreement for sale and purchase and cannot include a provisional agreement for sale and purchase.

(2)           If, as submitted by Mr. Au-Yeung, paragraph 4(b) were not applicable to provisional agreements for sale and purchase, then the term “agreement” in paragraph 1 would only mean a formal agreement. This would obviously be inconsistent with the legislative intent: see paragraph 17 above.

21. For the above reasons, the first ground of appeal fails.

Second ground of appeal

22. Regarding the second ground of appeal, Mr. Suen supports the adjudicator’s view that Clause 1 of the sale and purchase annexure only stated that both parties were aware that the property was subject to the alienation restrictions under the Housing Ordinance and did not mean that they agreed that all the conditions in the Schedule would form part of the provisional agreement. Mr. Suen submits that Clause 1 was merely a recital which stated that both parties were informed that the transaction was subject to the alienation restrictions under the Housing Ordinance and which was not legally binding.

23. Both parties agree that it is not necessary for the provisional agreement to reproduce the original wording of the condition before it will satisfy the requirement in paragraph 4(b) of the Schedule. Suffice it that the agreement expressly: (1) states that both parties shall comply with the condition (see HKSAR v. Pang Ko Fai [1999] 2 HKC 395), or (2) incorporates the condition as a term of the agreement.

24. As both parties were aware that the sale of the property was subject to the alienation restrictions under the Housing Ordinance, they would in the normal course of events comply with the relevant statutory provisions since otherwise completion could not take place. However, judging from the wording of the sale and purchase annexure, their contractual intent was not entirely in line with the condition.

25. The provisional agreement was signed on 5 June 2005 and the premium should be paid to the Housing Authority prior to completion and within 28 days. It appears from Clause 17 of the provisional agreement and Clauses 2 to 4 of the sale and purchase annexure that:

(1)        The purchaser, that is the respondents, was to be responsible for paying the premium;

(2)        The manner of payment was that the respondents would first deliver the premium to the solicitors for the vendor by noon on the date of completion, i.e. 15 July 2005, and the vendor would pay the sum to the Housing Authority prior to the signing of the property deed;

(3)        The date of completion would be postponed if the vendor failed to receive a notice of assessment of premium before the scheduled date of completion.

As the date of completion was 15 July 2005, which went beyond 28 days of the date of the provisional agreement, the date of payment of land premium would be beyond 28 days from the date of the provisional agreement. Such an arrangement did not completely satisfy the statutory condition in that, although it did require payment of the premium to be made on the date of completion and prior to the completion, it wholly disregarded the other requirement, namely that the premium was “be paid to the Housing Authority within 28 days of the date of the agreement or within such period as may be otherwise stipulated by the Director of Housing”.

26. It therefore appears that although both parties were aware that the property was subject to the alienation restrictions under the Housing Ordinance, they had neither acted in full compliance with the condition nor incorporated the condition into the provisional agreement.

27. For the above reasons, I accept Mr. Suen’s submission and hold that the second ground of appeal fails.

Third ground of appeal

28. Mr. Au-Yeung argues that even if the provisional agreement was void, the loss of the respondents was not caused by the negligence of the appellant. The forfeiture of the deposit by the vendor was due to the respondents’ failure to obtain a mortgage loan from the bank and it had nothing to do with the appellant.

29. According to the agreement (commonly called property viewing sheet) signed by the 2^nd respondent and the appellant on 24 May 2005, the appellant had to assist the respondents in entering into a binding agreement for sale and purchase with the vendor. As the provisional agreement was void, the appellant was in default and is therefore liable for the loss incurred by the 2^nd respondent as a result of the default.

30. The respondents have paid:

(1)           a deposit of HK$50,000;

(2)           legal costs of HK$1,300; and

(3)           an administrative fee of HK$3,000 for the application for assessment of the amount of premium.

31. In my view, the 2^nd and 3^rd items of expenses were wasted because the provisional agreement was void. The 2^nd respondent is entitled to full compensation in respect of these expenses.

32. As regards the 1^st item of expenses, the 2^nd respondent has to prove that it was caused by the appellant’s default. As a matter of law, the respondents may claim against the vendor for a full refund of the deposit. It is only when the vendor fails to make a refund or when a claim against the vendor will prove futile, which means the respondents suffer a loss, that 2^nd respondent can claim against the appellant for the loss.

33. In my judgment, it was inappropriate for the adjudicator to order the appellant to pay the full amount of HK$50,000 without carrying out a detailed and correct analysis of the causal connection between the appellant’s default and the loss of the deposit by the 2^nd respondent. Before determining the appellant’s liability to the 2^nd respondent for the loss and the amount of compensation, the adjudicator should have conducted due inquiries about whether the appellant’s default caused the loss of the HK$50,000 deposit by the 2^nd respondent and whether the 2^nd respondent has taken reasonable steps to mitigate her loss. It appears from the record of the hearing that the inquiries made by the adjudicator in this respect were not adequate or sufficient. As a result, his ruling cannot be sustained.

Conclusion

34. For the above reasons, I will make the following orders:

(1)           The ruling that the 2^nd respondent be paid HK$50,000 by the appellant is to be set aside and the relevant matter remitted to the Small Claims Tribunal for re-trial before another adjudicator; and

(2)           The appeal against the other rulings is to be dismissed.

35. As for costs of the appeal, in light of the outcome of the appeal and submissions from Counsel for both parties, I will order that the respondents be awarded half of the costs of the appeal and the remaining costs be in the cause of the re-trial.

1  In fact it should be the 2^nd respondent: see the order of the adjudicator and paragraph 29 below.

2 Paragraph 4(c) stipulates: (c) where 2 years has elapsed since the date of the first assignment of the land- …