SOUND INDUSTRIAL LTD v. KIM YI PROPERTY AGENCY LTD

DCCJ 3222/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION NO.3222 OF 2008

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BETWEEN

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JUDGMENT

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1.  The Defendant was a licensed estate agency. In 2007, the Plaintiff, through an introduction by the Defendant, entered into a tenancy agreement (“the Tenancy Agreement”) with Most Choice Investment Limited (“the Landlord”) for a term of 2 years for Shop No.1, Ground Floor, 124-126 Wan Chai Road, Hong Kong (“the shop”), at a monthly rent of $23,800, commencing on 1 October 2007. The Defendant acted as agent for both the Plaintiff and the Landlord.

2.  In December 2007, the Plaintiff, while operating a business for the sale of mobile telephones at the shop, received from the Buildings Department a building order dated 6 December 2007 (“the Building Order”), addressed to the Landlord, to demolish a structure or structures erected on the external wall at the front of the shop, being building works for which building plans had not previously been submitted to and approved by the Buildings Department.  The location of the unauthorised structure(s) was indicated on an attached plan, as an area hatched black – a rectangular area in front of the shop.

3.  It is the Plaintiff’s case that the Building Order related to (1) a structure (“the signboard structure”) which extended from the external wall of the building, erected over the front of the shop, whose purpose was to support the installation of a neon light signboard, and (2) a rectangular platform which extended from the floor of the shop at the front on to the pavement, which formed an extension of the floor of the shop (referred to as “the floor extension” during the trial).  At the entrance of the shop was a roller shutter which, when the shop was open for business, would roll up into the signboard structure; when the shop was closed, the shutter would come down, with the floor extension on the pavement side of the shutter.  The shop itself occupied quite a small area and therefore the floor extension gave the Plaintiff significantly more space to work with.  Therefore the demolition of the floor extension would significantly affect the usable area for the Plaintiff’s business.

4.  After the Plaintiff learned about the Building Order, the Plaintiff contacted the Landlord through the Defendant, and certain negotiations took place between the Plaintiff and the Landlord over the tenancy, which did not result in any agreement.  On the Plaintiff’s case, it remained in occupation of the shop but stopped paying rent until the rental deposit ran out, and then vacated the shop.  No proceedings have been taken by the Plaintiff or the Landlord against each other.

The Plaintiff’s Action

5.  Instead, the Plaintiff took out the present proceedings against the Defendant, claiming damages for loss suffered as a result of a breach of duty of care by the Defendant.  The Plaintiff’s pleaded case is that as an estate agent, the Defendant owed a duty to the Plaintiff to confirm that there were no unauthorised structures in relation to the premises to be let and to confirm that no part of the premises encroached upon Government land.  The Defendant should have advised the Plaintiff about the unauthorised structures, which it failed to do in breach of its duty: see paragraphs 4 and 6 of the Statement of Claim.  The Plaintiff claims damages essentially for wasted costs and expenses, including the estate agent fee, legal costs and disbursements in relation to the signing of the tenancy agreement and the cost of decoration of the shop.

6.  On the first day of the trial, the Plaintiff applied, with no objection from the Defendant, to make a minor amendment to the Statement of Claim, to include the actual amount of the cost of decoration, for which I granted leave.  Mr R Chung, solicitor acting for the Defendant, took the opportunity to draw my attention to the fact that no application was being made to amend the Statement of Claim to include a claim based on an alleged misrepresentation by the Defendant in respect of the floor extension which appeared in paragraph 3 of a witness statement of Mr Yiu Yau Pik filed on behalf of the Plaintiff.  Were such an application to be made, he would strongly oppose it.  Mr Victor K H Chiu, counsel for the Plaintiff, was aware of the state of the pleadings and with the limitations that he faced, confirmed that he was not making such an application.

7.  The Defendant in its Defence denies the existence of a duty of care, and puts the Plaintiff to strict proof of the existence of the unauthorised “structure” prior to the tenancy.  In the alternative, if such a structure had existed, the Plaintiff had duly inspected the shop and knew or ought to have known about it, and was negligent in failing to seek advice from its legal or architectural advisers. Further, the Defendant relies on clause 15 of the Tenancy Agreement, which provided that the Plaintiff was to rent the premises on an “as is” basis and accepted that the Landlord made no representation whether there were any unauthorised or illegal structures within or appertaining to the premises.

8.  It was also the contention of the Defendant at trial that the Building Order related only to the signboard structure and not to the floor extension.  Therefore, even if the alleged unauthorised structures had existed before the Tenancy Agreement, the Building Order would not have hindered the Plaintiff’s use of the floor extension.

Evidence

9.  Mr Yiu Yau Pik gave evidence for the Plaintiff.  In August 2007, he was the manager of the Plaintiff and he was looking for suitable premises for opening a shop for the sale of mobile telephones in Wanchai.  He wanted to find a shop in the vicinity of other mobile telephone outlets.  He contacted Miss Ng Sau Ling of the Defendant.  Accompanied by Miss Ng, he went to take a look at the shop.  A representative of the Landlord was also present.  He saw a roller shutter which was closed and outside the shutter was a structure – the floor extension.  He then asked Miss Ng, pointing at the floor extension, “Is that a problem?”  Miss Ng looked at the Landlord’s representative and then said to Yiu, “No problem. It’s always been like this.”  His understanding was that the floor extension could be used and all along it had been used like this.

10.  During that visit, he used his own mobile telephone to take a video of the shop, which he produced at the trial (“the first video”).  The first video shows that a bulkhead over the front of the shop already existed – that is, the signboard structure; and facing Wan Chai Road was a signboard with the Chinese character 東, left by the previous tenant.  One can also see the floor extension in the video – a white structure all the way across the front of the shop.  He estimated that the area of the floor extension was about half the size of the shop area.

11.  After the Plaintiff agreed to take up the tenancy, the Plaintiff had the floor extension tiled.  In relation to the bulkhead, the signboard structure, the Plaintiff had new acrylic plates and lights put on it in place of the old signboard.  That was the extent of the works done by the Plaintiff to the 2 structures. Otherwise the 2 structures were retained as they were.  For the shop itself, the Plaintiff had a movable counter built, part of which would sit on the floor extension.  The movable counter would be moved inside when the shop was closed.

12.  Yiu took another video of the shop after the renovation, using his mobile telephone again, which he also produced (“the second video”), in which the movable counter can be seen resting on the floor extension.

13.  On or about 6 December 2007, the Building Order, which was in Chinese, was served at the shop.  It came with a letter, also in Chinese, issued by an architects’ firm Fotton Ela Architects Limited, described in the letter-head as “Buildings Department’s Contract Consultant”.  When Yiu arrived at the shop, a representative of the Buildings Department was still there, with whom Yiu had a conversation, in which, according to Yiu, it was explained to him that the Buildings Department requested the demolition of the signboard and the structure on the floor.  He specifically asked which area occupied the pubic area, and the reply was that all protruding parts remaining on the outside of the roller shutter after it was pulled down had to be demolished, including the bulkhead and the floor extension.

14.  Yiu then contacted the Landlord through Miss Ng of the Defendant.  The Plaintiff was hoping to terminate the tenancy with the agreement of the Landlord, but the Landlord refused.  The Plaintiff then stopped paying rent and vacated the premises after they used up the rental deposit.

15.  Under cross-examination, Yiu denied that it was the Plaintiff who put the illegal structures there.  When it was put to him that he told Miss Ng over the telephone that the Plaintiff had been suffering a big loss from the business, and that he would like to exploit the opportunity given by the Building Order to get out of the tenancy, he replied that he was not sure if he said it, but even if he had said it, he would have done it jocularly only.  He added that although the Plaintiff was suffering a loss, it had been the Plaintiff’s strategic plan to sell mobile telephones in Hong Kong and it had expected to suffer a loss for 10 years.  I should add, however, that by the time of the trial, the Plaintiff or the group of companies to which it belonged was no longer selling mobile telephones in Hong Kong, although it still did in some other Southeast Asian countries.

16.  When asked about clauses 11 and 15 of the Tenancy Agreement dated 18 October 2007 (to which the Defendant was not a party), which concerned the letting of the shop on an “as is” basis, Yiu answered that he himself had not seen a copy of the Tenancy Agreement before it was signed by his boss, a Mr Shum.  Nor had he seen a copy of a plan for the shop (which was included in the Tenancy Agreement) before the agreement was signed.  He denied that a copy of the plan had been given to him by Miss Ng before their first visit of the shop together, which would have indicated that the shop area would not include the floor extension.

17.  When questioned what sort of problem he had in mind when he asked Miss Ng about the floor extension, he answered that since the floor extension was lying outside the roller shutter, the question was whether it was outside the shop space, and his concern was that the Plaintiff might be prosecuted by the Government.

18.  Mr Benson Wong Sai Ning, a building surveyor who gave expert evidence on behalf of the Plaintiff, gave evidence that in his opinion, both the bulkhead and the floor extension would have been unauthorised structures, as they did not form part of the approved building plans for the building.  Although by the time he was instructed, the structures no longer existed, he relied on the instructions given to him as to the description and location of the structures.  In evidence, he was shown the videos taken by Yiu which showed the bulkhead and the floor extension, and he confirmed his previous opinion.  He was also of the opinion that the Building Order would have covered both the bulkhead and the floor extension, as both were unauthorised structures and fell within the area hatched black on the plan attached to the Building Order.

19.  In cross-examination, he agreed that the Building Order, which was in Chinese, did not state whether it was only one or more than one unauthorised structure.  He was shown a copy of a letter from the Buildings Department which was written in response to letters of inquiry from the Defendant’s solicitors, sent after these proceedings had commenced, asking the Buildings Department about the nature and location of the “illegal structure” referred to in the Building Order, and whether it referred to the structure on the floor or the structure on the external wall above the front entrance of the shop.  The said letter from the Buildings Department, dated 11 November 2008, stated that the unauthorised building work was the bulkhead attached to the external wall of the shop.  Mr Benson Wong gave evidence that he had not been shown a copy of the said letter previously.  However, he still took the view that despite the subsequent letter from the Buildings Department, both the bulkhead and the floor extension would have been subject to the Building Order, as both were unauthorised structures and both fell within the area hatched black on the plan accompanying the Building Order.

20.  Miss Ng of the Defendant gave evidence that in relation to the question which Yiu said he asked of Miss Ng (about the floor extension) when they went to view the shop together for the first time, she did not hear the question, and she did not give the answer Yiu said she gave.  As to whether the bulkhead and the floor extension had existed when they first went to view the shop, she said that she did not have a good recollection.  She said that she had given a copy of a plan of the shop (like the one attached to the Tenancy Agreement) to Yiu by fax before they went to view the shop.

21.  She also gave evidence that she had personally handed a copy of the Confirmation of Tenancy dated 17 September 2007, and a copy of the Tenancy Agreement, to Yiu at his office at Star House in Tsimshatsui, before they were respectively signed.  I note, however, that this was never put to Yiu in cross-examination.  She confirmed that after the Plaintiff learned of the Building Order, she was contacted by Yiu, who told her that the business was suffering a big loss, and he would like to take the opportunity to quit the tenancy and asked her to contact the Landlord.  Her reply to Yiu was that there was a contract to perform, but in any event she contacted the Landlord, who told her that the Plaintiff had already been in arrears with the rent, and that they would not agree to an early termination of the tenancy.

22.  In cross-examination, she explained that she had had a few years’ experience as an estate agent before working for the Defendant.  She confirmed that in this transaction, she was agent for both the Landlord and the Plaintiff.  She understood that her duties included understanding the tenant’s requirements about the premises he was looking for, looking for information for him, finding a landlord for him, obtaining relevant information from the landlord, and relating such information back to the tenant to see if the premises would be suitable to the tenant, and if so, making an appointment to view the premises.

23.  Despite having seen the videos, she was still vague in her evidence about the existence of the bulkhead and the floor extension during their first viewing, although in the end, she agreed that the bulkhead and the floor extension had existed.  She added, however, that if there was a structure on the floor outside the shop, it would usually be movable.  However, she did not check whether the floor extension at the shop was fixed or movable, because it was not her duty to do so, but said that whether it was fixed or movable, it could still be made the subject of a building order.  She confirmed that she had looked at the plan which she claimed she had given to Yiu.  When asked why she never mentioned in her witness statement that she had faxed a copy of the floor plan of the shop to Yiu, she said she did not think it was important.  She agreed that according to the plan, the area of the shop did not include either the bulkhead or the floor extension, but she never asked the Landlord about these structures.  When asked why not, she said her job was merely to introduce the parties to each other.  She also confirmed that she did not remind Yiu that the shop area to be let did not include the bulkhead or the floor extension.

Findings

24.  I find that the bulkhead and the floor extension had both existed before the Plaintiff took up the tenancy.  I accept that the first video was taken on the occasion of the first viewing of the shop, and it shows that the 2 structures in question were already there.  The Defendant has provided no concrete evidence that it was not the case, and I can find no basis for not accepting Mr Yiu’s evidence on this matter.

25.  On the issue as to whether Yiu asked Miss Ng whether there was a problem with the floor extension, and as to the answer she gave, as I noted earlier, there was no application to amend the Statement of Claim to include a specific claim based on this alleged conversation, but I shall proceed to make my finding in any event.  I also accept Yiu’s evidence on this issue.  As Mr Chiu for the Plaintiff submits, given that the floor extension formed a substantial part of the usable area of the shop, it was reasonable for him to have made enquiries about it.  Yiu was also frank enough to admit that he himself was aware of a potential problem with the floor extension, although in his own mind, he thought that the Plaintiff might be prosecuted by the Government – although he never consulted any professional help afterwards on this particular issue.  On the other hand, Miss Ng was evasive throughout her evidence.  She was reluctant even to admit that the structures had existed on the first viewing of the premises.  Her evidence, that even if there was a floor extension, it would usually be a movable type, was a vain attempt to avoid the truth that a floor extension had always been there.  Although she insisted that she never heard Yiu ask her the relevant question about the floor extension, she also gave evidence under cross-examination that she had mentioned to Yiu once, though not at the shop, that for those protruding parts (i.e. protruding outside the shop), if they were movable, Yiu could retrieve them (i.e. back to the shop). She never explained why she would volunteer that information if she was not even aware that there was a floor extension.  I do not find her a credible witness on this issue.

26.  I also do not accept Miss Ng’s evidence that prior to the first visit, she had faxed a copy of the floor plan (same as the one attached to the Tenancy Agreement) to Mr Yiu.  This was never mentioned in her witness statement, and a copy of such a floor plan never found its way to the Defendant’s three Lists of Documents for the purpose of discovery.

Submissions

27.  Mr Chung, solicitor for the Defendant, submits that the Plaintiff’s pleaded case has not pleaded the scope of service agreed between the Plaintiff and the Defendant. Indeed there was no written contract between them in this case.  The only document was a debit note issued by the Defendant to the Plaintiff in respect of “professional services rendered in leasing the premises”, for the sum of $11,900.  He submits that when it comes to “leasing”, the Defendant’s task was merely to introduce the tenant to the landlord, take the parties to view the actual state of the premises, and then to arrange for the execution of the agreement between the landlord and the tenant.  That, he submits, is the scope of the estate agent’s duty.

28.  Mr Chung relies on clause 15 of the Tenancy Agreement, and the plan attached thereto.  In summary, clause 15 provides that the premises are let on an “as is” basis, and the Landlord makes no warranty or representation whether there are any unauthorised or illegal structures within or appertaining to the premises, and that the tenant waives any right to claim against the Landlord in respect of any loss which the tenant may suffer as a result thereof.  Likewise, clause 16 of the Confirmation of Tenancy dated 17 September 2007 (commonly called a provisional tenancy agreement) provides that the tenant shall lease the premises on an “as is” condition.

29.  He further submits that the Landlord never purported to let the floor extension to the Plaintiff.  The floor plan attached to the Tenancy Agreement makes it plain what was being let to the Plaintiff.  The shop area, i.e. the area to be let, was of a triangular shape, which clearly did not include the floor extension. Although the Defendant was not a party to either the Confirmation of Tenancy or the Tenancy Agreement, these documents showed what the landlord and the tenant intended as the area being let.  The Defendant knew that the shop premises did not include the floor extension.  Mr Chung also invites the court to look at the matter realistically, that anyone who saw the floor extension would have realised that it would be encroaching upon what was obviously a public pavement.  Yiu, with his business experience, would have realised it too.  He was well aware of the potential problem but he made a commercial decision to take the premises.

30.  Mr Chung also relies on the letter from the Buildings Department dated 11 November 2008. Only the bulkhead was made the subject of the Building Order, and therefore the Plaintiff’s case, that the Building Order, with the anticipated removal of the floor extension, would make the remaining area unusable as a shop, fell apart. Even if the Building Order included the floor extension, that would be the responsibility of the Landlord, not the Plaintiff’s.  All it meant was that the Building Order would form an encumbrance on the premises but it would not affect the Plaintiff’s use of the shop.  Enforcement would inevitably take time.  Even an actual removal of the floor extension would not adversely affect what the Plaintiff had bargained for under the Tenancy Agreement.  The Plaintiff was merely using the Building Order as an excuse to get out of the tenancy when its business was not going well.

31.  Mr Victor Chiu, counsel for the Plaintiff, submits that it is not the Plaintiff’s case that an estate agent has a duty to advise his client of each and every unauthorised structure which may be present in the premises to be let.  However, in this case, the Defendant did have a duty to advise the Plaintiff about the 2 structures.  On the Defendant’s own submission, the possibility that the floor extension was an unauthorised structure was obvious, and therefore it behoved the Defendant, as a professional estate agent, to advise the Plaintiff.  Yet Miss Ng, on her own evidence, never alerted Yiu to this possibility.  Mr Chiu refers me to Miss Ng’s evidence in which she time and again emphasised the importance for a tenant to look at the actual state of the premises, and he submits that the fact of the matter is that the actual state of the premises included the floor extension which occupied a substantial area.  Therefore it was all the more important that the Defendant should have raised the issue with the Plaintiff.

32.  On the scope of the Building Order, Mr Chiu submits that one must look at the Building Order itself, and the subsequent letter from the Buildings Department, issued after the present proceedings had commenced, does not assist.  Mr Benson Wong’s expert evidence makes it clear that the Building Order would have covered both the bulkhead and the floor extension, as neither formed part of the approved building plans, and both lay within the area hatched black on the plan attached to the Building Order.  Even if the Building Order did not include the floor extension, it was still incumbent on the Defendant to advise the Defendant about the unauthorised nature of the floor extension, in the circumstances of this case.

33.  Mr Chung has not cited any authorities, but Mr Chiu has referred me to a number of them.  In Barrett v J R West Limited [1970] NZLR 789, an estate agent, when asked by a prospective purchaser about a mushroom object on the back lawn of a house as to whether it was a septic tank, answered that the house used to be on a septic tank but was now on mains sewerage.  The plaintiffs bought the house.  The estate agent was aware that he was being trusted and relied upon, but he never checked the accuracy of his answer.  The house in fact was not connected to the main sewerage system and its only means of drainage was a septic tank.  It was held that even though the estate agent did not have special knowledge in relation to the information sought, he was aware that he was being relied upon but did not take reasonable care to check the information he gave and was therefore liable in damages.

34.  In Shum Kong v Chui Ting Lin Teresa (HCA 16227/1999, unrep, 6 June 2001, Deputy Judge Muttrie), the purchaser of a house was taken by an estate agent to view a house in Sai Kung, which appeared to include a substantial garden area, on two occasions.  The property did not in fact include the garden area, but neither the estate agent nor the vendor told the purchaser that the garden would not be included.  After the provisional sale and purchase agreement was signed, the purchaser discovered the issue with the garden area, and sought rescission of the contract and the return of the deposit against the vendor, and for damages against the estate agent.  It was held by Deputy Judge Muttrie that the vendor and estate agent had by conduct misrepresented to the purchaser that the property included the garden area, and that the estate agent failed to make reasonable inquiries, as a simple land search would have revealed that the garden was not part of the property.

35.  In Jopard Holdings Ltd v Ladefaith Ltd [2005] 1 HKLRD 317, a purchaser asked an estate agent whether there was anything usual or weird about the flat he was viewing, and the agent replied in the negative.  After signing the provisional sale and purchase agreement, the purchaser found out that the vendor’s son had earlier plunged to his death from the flat.  Recorder B. Yu, SC found that the estate agent had no knowledge of the suicide but was negligent in giving the definite answer that he did to the purchaser, without having first checked the accuracy of his answer.  The agent was therefore liable to pay the purchaser the amount of the deposit which had been forfeited by the vendor.

Discussion

36.  Under the Estate Agents Ordinance (Cap 511), an estate agent acting for a vendor (which includes a landlord) is now required to provide certain prescribed information about residential properties, including a statement by the vendor containing information within the vendor’s knowledge relating to structural additions or alterations to a building: section 36.  The same requirement has however not been extended to non-residential properties.  Whether at common law, the duty exists to provide any type of information will depend on the facts of each case and the nature of the information.

37.  In this case, the duty as pleaded in the Statement of Claim is a duty to confirm that there were no unauthorised structures in the entire shop space (paragraph 4 of the Statement of Claim).  That is pleaded as a general duty of an estate agent, as no special facts have been averred so as to give rise to such a duty on the particular circumstances of this case.  I am not prepared to hold that there is a general duty on the part of estate agents to advise a purchaser or tenant about the existence of an unauthorised structure in the property.  To impose on an estate agent a duty to confirm there are no unauthorised structures in a property would require the skills and expertise of a building surveyor or architect.  Even under section 36 of the Estate Agents Ordinance, as applied to residential properties, the duty of an estate agent is to pass on to a purchaser a statement made by the vendor containing information within the vendor’s knowledge relating to structural additions or alterations.  See Ricacorp Properties Ltd v Kan Yiu Wing Stuart DCCJ 5483/2003, unrep, 25 February 2006, Deputy District Judge W K Kwok.  The estate agent is also under a duty to be reasonably satisfied with the accuracy of such information relating to residential properties under section 36, but that is very different from a duty to confirm that there are no unauthorised structures in relation to a property.  See also Chiu Wai Ling v Chan Yau Chi [2002] 2 HKC 154, in which it was held that an estate agent is not under a duty to advise a client on a potential problem on title, a matter within the expertise of a legal adviser.

38.  The cases of Jopard (above) and Barrett (above) show that where an inquiry was made to, or information was sought from an estate agent by his client about the property, and the estate agent, knowing that he was being relied upon, chose to answer the inquiry or provide the information, the agent owed a duty to the client to take reasonable care in his answer, even though the subject of the inquiry might not be within his own area of expertise or knowledge.  However, given that no claim based on misrepresentation or breach of duty arising from the conversation between Mr Yiu and Miss Ng has been made, it is unnecessary for me to decide whether on the facts of this case, the Plaintiff might have had a valid claim for damages against the Defendant.  I would add, however, given the facts of this case, and the obvious location of the floor extension (being on a public pavement) on which both parties seemed to rely, it is doubtful whether the Plaintiff would have been in a position to prove any reliance by the Plaintiff on such alleged misrepresentation, even if such a claim had been included in the Statement of Claim.  If the unauthorised nature of the floor extension was so obvious as Mr Chiu has contended, then in all likelihood it would have been obvious to Mr Yiu himself, in which case, there is some force in Mr Chung’s argument that the Plaintiff was aware of the potential problem but took a commercial decision in accepting the premises.

39.  I should also add that in any event, the Plaintiff faced another hurdle in its claim.  The floor plan attached to the Tenancy Agreement shows the area of the shop which was to be made the subject of the lease.  The plan shows the premises to be let as a triangular area.  The floor extension, which jutted out from the triangular area, would clearly not be part of the leased premises.  Mr Chiu argues that the plan was not drawn to scale, and it was for identification purposes only. But in my view, that was exactly what the plan would do, to identify the confines of the leased premises.  In short, the subject premises which the Plaintiff agreed to take was the triangular area only, and did not include the floor extension.  Therefore, the Plaintiff knew, or must be taken to have known, that all that it had bargained for under the lease was the triangular area only.  Any misunderstanding on the part of the Plaintiff that it was entitled to use the floor extension would have been corrected, and would in any event have been immaterial.  The floor extension simply did not form part of the lease, and the Plaintiff was aware of it.  As a result, it is unnecessary to decide whether the Building Order included the floor extension or not, because even assuming that the Building Order did include the floor extension, it would not have affected the Plaintiff’s enjoyment of its rights under the lease, to the use of the triangular area.

Conclusion

40.  In the circumstances, I find that the Plaintiff has failed to prove the existence of the general duty of care as alleged in the Statement of Claim, and for the reasons above, I dismiss the action.  I also make an order nisi that the Plaintiff pay the costs of the action to the Defendant.