WELLTECH INVESTMENT LTD. v. EASY FAIR INDUSTRIES LTD.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(ACTION No. 5853/1994)

--------------

--------------

-------------------------

J U D G M E N T

-------------------------

Le Pichon, J.:

1. This action arises out of an agreement relating to the sale and purchase of premises situated on the ground floor of Nam Lo Mansion, No. 334 Un Chau Street, Kowloon, Hong Kong entered into between Welltech Investment Limited ("the Purchaser") and Easy Fair Industries Limited ("the Vendor"). The sale was subject to and with the benefit of a lease dated 7 September 1992 between the Vendor as landlord and Generale Belgian Bank ("the Bank") as tenant. The lease was for a term of 3 years commencing 1 September 1992 at the monthly rental of $65,000 and was renewable for a further term of 3 years.

2. It is common ground that the Bank occupied Shop Nos. 6, 7, 8, 9, 10, 11, 13 and 14 as well as a common corridor which is shown coloured green ("the green area") on the plan attached to the Sub-Deed of Mutual Covenant as a single undivided unit. The green area runs through the length of the property. Shop Nos. 6, 7, 8, 9, 10 and 11 are situated on one side of the green area. Shops 13 and 14 are on the other side of the green area opposite Shops 10 and 11. The rest of the length of the green area on the side where Shops 13 and 14 are situated as well as the top end of the green area which divides Shops 10 and 11 from Shops 13 and 14 have been walled-in so that the property comprises a single undivided unit and is occupied as such by the Bank.

3. The dispute between the parties centers on whether the Purchaser was induced to enter into the Agreement by representations made on behalf of the Vendor relating to its rights over the green area.

Title to the green area

4. The green area is part of a larger original green area included in the common parts of the building. This appears from Clause 4(o) of the Deed of Mutual Covenant ("DMC") dated 7 May 1981. The right to pass and re-pass over this original green area was reserved to the owners of Shops 4 to 14 inclusive of the ground floor and the shops on the first and second floors by Clause 18 of the DMC. The use of the common parts is restricted under the terms of Clause 4(l)(vi). For example, the placing and storing of furniture or other things thereon is prohibited.

5. On 17 October 1991, under the Sub-DMC, the owners of Shops 4, 5, 12A and B on the ground floor relinquished their rights to pass and re-pass over the green area and the right to pass and re-pass over the green area was thus reserved to Aceknown the then owner of Shops 6, 7, 8, 9, 10, 11, 13 ,14, 15, 16, 17A and B, 18, 19, 20 and 21 on the ground floor and all of the shops on the first and second floors. By an assignment dated 18 July 1992, part of the shops owned by Aceknown were assigned to the Vendor, namely Shops 6, 7, 8, 9, 10, 11, 13 and 14 on the ground floor. This assignment was subject to and with the benefit of the DMC and the Sub-DMC. Because there was no specific grant of the right to pass and re-pass over the green area from Aceknown, the Vendor's predecessor-in-title, to Aceknown's exclusion in favour of the Vendor, both Aceknown and the Vendor continued to enjoy this right: Aceknown as owner of Shops 15, 16, 17A and B, 18, 19, 20 and 21 on the ground floor and all of the shops on the first and second floors and the Vendor as owner of the shops on the ground floor that are the subject of the sale to the Purchaser in this case. The right remains a right to pass and re-pass only, the restriction as to user contained in the DMC still applies. Exclusive user of the green area would thus require consent from:

(a) the owners for the time being of Shops 15 to 21 on the ground floor and all of the shops on the first and second floors; and

(b) the consent of other co-owners of the building and/or the manager to the use of the green area other than for the purpose of passing and re-passing,

which consents must also be binding on their successors-in-title for the benefit of the Purchaser's successors-in-title. That exclusive user of the green area would otherwise be open to challenge is plain from The Incorporated Owners of Chungking Mansion v. Shamdasani 1991 Civ. App. No.199. It is not disputed that the Vendor did not have and never had any exclusive right to use the green area.

Events leading up to the Provisional Sale and Purchase Agreement

6. Lee Sik Chun, a director of the Plaintiff company gave evidence on its behalf. He saw an advertisement in the Chinese press in December 1993 in which bank premises of 1,200 sq. ft., with an annual rental of $780,000 were being offered for sale for $13 million. Upon enquiry, he was informed by the estate agent who had placed the advertisement where the property was located as well as the identity of the tenant. Mr Lee said he was told that the property had a frontage to Un Chau Street of about 19 ft. He went and carried out an inspection and saw one big area or space with no discernible passageway or corridor within the Bank itself. The property appeared to meet the objectives of the Plaintiff in that it was looking for long term investments with major reputable tenants. But as Mr Lee's wife was too busy to view the property at the time, matters did not progress further.

7. On 5 January 1994, there was contact between Mr Lee and Rebecca Yeung Ching Han of C S & Associates, a firm of estate agents different from the one that had placed the advertisement. Although neither Miss Yeung nor her firm had closed any property transaction with either Mr Lee or his company, Miss Yeung knew that Mr Lee was active in the property market and owned properties with quality tenants in Un Chau Street. There is disagreement as to who took the initiative in contacting the other, although that is immaterial for present purposes. The property was mentioned during the conversation and according to Mr Lee, Miss Yeung told him that it was made up of three shop units, namely Nos. 6, 11 and 13; it had an area of 1,200 sq. ft. and a frontage of 19 ft. on Un Chau Street. Mr Lee who had inspected the property in December, was sufficiently interested to make an offer for the property. However negotiations came to nothing as on 26 January 1994, Mr Lee was informed that the property had been sold.

8. Contact was renewed in early March when Miss Yeung called to ask if Mr Lee was still interested in the property as the proposed sale had fallen through. Mr Lee took his wife to inspect the property and on 24 March, he telephoned Miss Yeung. Negotiations ensued and eventually on 28 March, a price of $11.8 million was agreed.

9. Up to that stage, Mr Lee had not met Miss Yeung. They had only spoken on the telephone and as of 28 March, what had been agreed was only the price and a 1% commission payable to C S & Associates upon completion. Miss Yeung then asked for the identity of Mr Lee's solicitors so that she could fax them her draft of the Provisional Sale and Purchase Agreement.

10. Mr Lee said that he received a call from Miss Yeung at 9 a.m. on the morning of 29 March. The Vendor had apparently told Miss Yeung that there were altogether six and not three units namely, Shop Nos. 6, 7, 8, 9, 10, and 11. Miss Yeung asked Mr Lee whether that would affect his decision to buy the property. So far as Mr Lee was concerned, it was the same property and it did not matter whether it was made up of three or six units. They therefore arranged to meet that afternoon at 4 p.m. at the office of C S & Associates.

11. Mr Lee said that upon his arrival, he was given the Provisional Agreement. Miss Yeung explained that in fact the property comprised eight and not six units. The additional units were Shop Nos. 13 and 14. There was a common corridor which separated these shops from the other units which were on the other side of the corridor. This was explained to him by reference to a plan which he saw for the first time. He was told that what was coloured pink on the plan was property that was being sold. The common corridor marked "Arcade" which was part of the property occupied by the Bank was not part of the sale. However the sale was with the benefit of the lease. Miss Yeung explained that the owner had enclosed the corridor and let all of it to the Bank; the Bank was thus occupying not only the eight units but also the corridor.

12. Mr Lee said that when he heard this, he was unhappy and upset. This was the first time any mention was made of a corridor by anyone. He had never seen the plan before. As far as he was concerned, it was illegal to enclose part of a common area and let it as a whole to the Bank. He was not going to buy such a property and stood up to leave when Miss Yeung gave the following explanation : (i) the owner had obtained the consent of all the other co-owners before enclosing the common corridor; (ii) all the co-owners had agreed that the owner of the property would have the exclusive right to use this common area; and (iii) proof of this is in the Deed of Mutual Covenant. She also told Mr Lee not to worry about the common corridor because what the owner had done was not in violation of any laws in Hong Kong or the Deed of Mutual Covenant. Moreover if the tenant which was a bank of international scale and reputation, had no queries regarding the condition of the property and had entered into a tenancy agreement, Mr Lee need not have any worries.

13. Mr Lee considered this explanation satisfactory and acceptable; it resolved his earlier worries. Nevertheless Mr Lee thought he needed to reconsider his position because he was now not buying 1,200 sq. ft. but only 700-800 sq. ft. of property. However, Miss Yeung continued to plead with him and ultimately he succumbed to her pleas and signed the Provisional Agreement.

14. His surname appears at the bottom of each page of the Provisional Agreement. It was also appended in two places on the plan as indicated by Miss Yeung. Mr Lee said he did not consider it necessary for the Provisional Agreement to specifically mention the green area as he was not buying it. So long as his tenants could continue to have exclusive use of the area, that was good enough. Mr Lee paid an initial deposit of $200,000 and left.

15. He signed the formal Agreement on 20 April when the balance of the deposit of $980,000 was paid by solicitors' cheque to the Vendor's solicitor as stakeholders. According to Mr Lee, sometime after 29 March and before 20 April, he informed his solicitors that he was also acquiring the exclusive right to use the green area. He was buying not only eight units of shop space but also the lease to the Bank, including an exclusive right of user of the green area that had been walled-in and used exclusively by the Bank.

16. Miss Yeung's account of events on 28 and 29 March was somewhat different. Her evidence was that on the day the Vendor agreed on the price, i.e. 28 March 1994, she obtained a copy of the Bank's lease from the Vendor. She was also given an up-to-date layout plan. Upon perusal, she discovered that the description of the units was wrong. Previously, she had told Mr Lee about Shop 10A but no such shop existed on the plan. She telephoned Mr Lee and told him about this. She allegedly also told him about a corridor, i.e. the green area, which formed part of the space occupied by the Bank on the same occasion. She made it clear that the sale only covered shop spaces but did not include the corridor.

17. According to Miss Yeung, in the late afternoon of 28 March, the draft Provisional Agreement as well as a copy of the plan was faxed to the Purchaser's solicitors although in her statement, she had said that the plan was delivered by hand with the Tenancy Agreement the following morning, i.e. 29 March. However Miss Yeung said that she did not personally fax the documents but that her colleagues had done so and she could not be sure about the plan.

18. Miss Yeung said that at the meeting with Mr Lee that afternoon, she explained very clearly that the only properties to be sold were those shown coloured pink on the plan. Having initially said in cross-examination that the sale was not to include the arcade, "but then the purchaser could use the arcade", she subsequently changed her answer and said she did not mean "purchaser" but "tenant". In response to a question as to the subject matter of the Agreement, Miss Yeung had replied that the Purchaser was "buying the shop spaces plus the tenancy agreement which allowed the sitting tenant to use this part of the Building." But when asked by Mr Lam to "clarify" whether the Bank was using that space under the tenancy agreement, she replied that the tenancy agreement only covered the shop spaces but that she had been told by the Vendor that the situation was as if various tenants had literally "carved up" the common areas of the building and were using these areas for themselves. That was the situation and nobody interfered in anybody else's "carving up", the Vendor having obtained consents from the other co-owners for the exclusive use of the corridor.

19. According to Miss Yeung, she told Mr Lee that he would be buying the shop spaces and also the right to use this part of the building as it was currently being used by this tenant, namely, the Bank, and only by this tenant. It was her evidence that she told Mr Lee that the Bank had the right to use the green area but when it came to a different tenant, it would be a different matter. Mr Lee apparently said that he was happy for the time being because the property was let to the Bank and that he would worry about it "when the future comes".

20. In re-examination, Miss Yeung appeared to retract some of her earlier answers insofar as she denied that the term "exclusive use" as distinct from "use" was mentioned by anyone.

The representations made

21. Were representations made as alleged by Mr Lee? As Mr Lee and Miss Yeung have given different versions, the question is whose recollection is the more accurate and reliable.

22. There are aspects of Miss Yeung's evidence that are unsatisfactory: these matters inevitably reflect on the accuracy and reliability of her evidence.

23. First, on her own evidence, up until 28 March, she was under the impression that what was being sold was the property that was occupied by the Bank. Indeed in the file kept by C S & Associates, there was a plan showing a shaded area which corresponded to the area actually occupied by the Bank and that was what both sides thought was the subject-matter of the sale. It is simply not credible that she could have explained to Mr Lee on the telephone what the green area was when Mr Lee had never seen the plan depicting the green area. It is difficult to imagine how a prospective purchaser could take in such an explanation over the telephone without a plan in front of him. Second, the evidence does not support Miss Yeung's assertion that a copy of the plan was furnished to the Purchaser's solicitors in the late afternoon of 28 March or in the morning of 29 March. As appears from the agreed bundle, neither the draft Provisional Agreement nor the Tenancy Agreement respectively faxed to and delivered to the Purchaser's solicitors included a copy of the plan. Accordingly, the suggestion that Mr Lee entered into the Provisional Agreement with the full benefit of legal advice because all relevant documents had been provided to the Purchaser's solicitors by the morning of 29 March appears to be unfounded. Third, as is apparent from Miss Yeung's evidence summarised above, that evidence had an elusive quality about it in that earlier answers were frequently qualified or altered subsequently. Fourth, her evidence that Mr Lee was happy to proceed with the transaction on being told that only the Bank and no other tenant had the right to use the green area is inherently improbable when the lease had only 18 months to run, there being no certainty that the Bank would exercise its option to renew. It would not only be an inexplicably myopic view for an investor as seasoned as Mr Lee to take, it is inconsistent with the Purchaser's objective, which was unchallenged, that it was only interested in investing in top grade commercial space with quality tenants. The notion that Mr Lee would be interested in dividing the space into units of 100-150 sq. ft. and renting them out is at complete odds with the Purchaser's unchallenged investment objective. Fifth, Miss Yeung's denial of exclusive user was not convincing in that the Bank's user of the green area was de facto exclusive: the walling-in of the green area rendered its user exclusive. Sixth, it was not Miss Yeung's evidence that the Purchaser would get whatever rights the Vendor had under the DMC and the Sub-DMC. Rather, the representation was that such documents would be evidence of the Vendor's right to the exclusive use of the green area.

24. There is also the fact that correspondence from the date of the formal Agreement, and by that I mean correspondence commencing 21 April 1994 between the parties' respective solicitors up until 16 May 1994 support the Purchaser's version. For example, it was asserted that under the Sub-DMC, the other owners relinquished their rights to exclusive possession to the Vendor's predecessor-in-title. The Vendor's predecessor-in-title assigned the right to the Vendor and therefore it was "legitimate" for the Vendor to use the green area and that so far no objection had been received from either the manager or the other owners. Then on 16 May 1994, in its third answer to requisitions, the Vendor's solicitors asserted that:

(1) the exclusive right to use the green area would be assigned to the Purchaser;

(2) the exclusive right to use the green area has already been given to the Bank under the Tenancy Agreement;

(3) although no consent from the co-owners or the manager to the exclusive right to use the green area had been obtained, such consents were not needed.

25. Mr Lee's evidence was consistent and inherently believable. The purchase price had been agreed on the basis that the property being purchased was that occupied by the Bank and comprised an area of approximately 1,200 sq. ft. When it transpired that what was for sale was the property less the green area, representing some 25%-30% of the overall floor area, one would have expected some adjustment to the purchase price unless, as was Mr Lee's understanding, the acquisition of the shop units would carry with it an exclusive right to use the green area. In practical terms, so long as the entire area could be let, it mattered not that the green area was not to be conveyed. Even if the right to use was not expressed as an exclusive right, I find that such a representation was implied, having regard to the particular circumstances, namely, the Lease and the physical condition of the property. The ineluctable and most natural inference was that the user was exclusive: this is so because the enclosure of the common areas rendered the user exclusive in fact.

26. In fact, Miss Yeung admitted that when she said that no one interfered with the other's arrangement in carving up the common areas, she told Mr Lee that the Vendor had obtained consents from the other co-owners for the exclusive use of the corridor. She also told Mr Lee that such a big bank must have checked that the use of the green area was lawful. She also admitted saying to Mr Lee that after the sale of the shops, the Purchaser would get the right to use the corridor which right would not be challenged by anyone. Accordingly, on the facts, I find that she gave those assurances and that there was a representation made to Mr Lee that the acquisition of the shop units would carry with it an exclusive right to use the green area.

Authority of agent

27. The Vendor submitted that Miss Yeung was the Purchaser's agent because on completion of the transaction, Miss Yeung's firm would be entitled to a commission from the Purchaser. But as is clear from the evidence, the Purchaser had never been a client either of Miss Yeung or her firm, that he had not agreed to be on their client list, and that Mr Lee had been identified as a potential client by Miss Yeung's firm in that he was active in the property market and included in their mailing list because C S & Associates considered that he might be interested in acquiring properties. Rather, it was the Vendor who had chosen to instruct Miss Yeung's firm to offer the property for sale.

28. In cross-examination, Miss Yeung said that whatever information she gave Mr Lee in the course of the meeting on 29 March and whatever assurances she gave him in the course of that meeting was done by her on the instructions of the Vendor. This was not challenged and no evidence was adduced by the Vendor to the contrary. Miss Yeung was thus the Vendor's agent.

29. In any event, as counsel for the Purchaser submitted, on the evidence, Miss Yeung was clearly the agent of the Vendor at least for the purpose of passing on the misrepresentation to the Purchaser. See Chitty on Contracts 27th Edn., Vol. I at para. 6-014.

30. Mr Lam relied on Presser v. Caldwell Estates [1971] 2 NSWLR 471 and Richardson v. Norris Smith [1977] 1 NZLR 152 for the proposition that an agent has no authority to make representations on technical matters which were beyond the ordinary scope of knowledge of an agent in finding a purchaser. In Presser, the information supplied by the real estate agents was as to the geological structure of the subsoil of the land being sold. That of course is a far cry from the representations made in the present case which were not of a technical nature. Richardson is distinguishable because that is an entirely different case on its facts: in that case, the plaintiffs relied on the skill of the estate agent as an estate agent per se and not on him as the vendor's agent (at p. 160, lines 20-22). Neither of these cases is authority for the proposition that the representations made were not within the scope of Miss Yeung's authority, actual or ostensible, as the Vendor's agent.

Inducement

31. That the representations were made with the purpose of inducing the Purchaser to enter into the Sale and Purchase Agreement and that the Purchaser was influenced by the representations are beyond doubt. I accept Mr Lee's evidence that the first he heard of the corridor and was shown a plan was at his meeting with Miss Yeung on 29 March and not as Miss Yeung alleges in a telephone conversation that took place the day before. I also accept Mr Lee's evidence as to his reaction when he learnt about this. It is quite clear that he was not going to proceed with the transaction but was ultimately persuaded by Miss Yeung to listen to her explanation. Miss Yeung was endeavouring to effect a sale and conveyed the representations from the Vendor to the intent that Mr Lee should act upon those representations. I further accept Mr Lee's evidence that had the representations not been made, he would not have proceeded with the transaction.

Other defences

32. Although the DMC and the Sub-DMC were provided to the Purchaser's solicitors prior to 20 April 1994, the fact that the Purchaser had an opportunity of discovering the falsity of the representations is no defence. It has long been the law that where a person induces another to enter into a contract with him by a material representation which is untrue, it is no defence to an action for rescission that the person to whom the representation was made had the means of discovering, and might, with reasonable diligence, have discovered, that it was untrue: Redgrave v. Hurd (1881) 20 Ch.D.1. I reject the submission that it was in any way incumbent on the Purchaser to have asked for the perusal of the DMC and Sub-DMC or to have sought legal advice prior to signing the Provisional Agreement. It is not a defence that had he done so he would have discovered the falsity of the representations. Nor is it a defence to say that the misrepresentation was only one of several reasons as to why the Purchaser entered into the Agreement. See Edgington v. Fitzmaurice (1885) 29 Ch D 459 at 481.

33. Although in the defence filed, reliance was placed on Clause 8 of the formal Sale and Purchase Agreement as well as Clause 6 Part A of the Second Schedule to the Conveyancing and Property Ordinance, these defences were not seriously pursued at the hearing. Clause 8 has no application since what is in issue here is the exclusive right to use part of a property rather than the physical condition of that property. Counsel for the Vendor accepted that Clause 6 has no application because when the Vendor was making the representations, the true facts were within their knowledge. Moreover, it only applies to accidental slips and has no application in a case where there is a misrepresentation calculated materially to mislead the Plaintiff. Dimmock v. Hallett (1866) 2 LR 21 at 29 and 31.

34. The Vendor accepted that under Clause 6 (4) of the formal Agreement, the sale and purchase cannot be annulled or discharged if the mis-statement is material and compensation cannot be assessed or the property differs substantially from that which was agreed to be sold and the other party would be prejudiced by the difference. As counsel for the Purchaser submitted, the difference between the area with and without the green area and the difference between the right to pass and re-pass over the green area and the exclusive right to use and occupy the green area are substantial.

Remedies

35. Having found that the Purchaser had been induced to enter into the contract by representations that were untrue, it follows that the Purchaser is prima facie entitled to have the contract rescinded. As the parties can be restored to their original position, there is no bar to the remedy of rescission. Having reached this conclusion, it does not become necessary to consider the other submissions that had been made relating to rectification and/or estoppel by convention and relief from forfeiture.

36. Accordingly, I order that the contract be rescinded and the deposit of $1.18 million repaid to the Purchaser with interest as to $200,000 from 29 March 1994 and as to the balance of $980,000 from 20 April 1994 at 11% per annum until judgment and thereafter at judgment rate.

37. It follows that the Purchaser is entitled to the costs of this action and I make an order nisi to that effect.