Tsui Ching Sang and Another v. Shiu Man On

HCA 9278/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9278 OF 1998

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JUDGMENT

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1. This assessment of damages follows interlocutory judgment in the plaintiffs' favour on the defendant's default as purchaser under a sale and purchase agreement . The property concerned was Flat D1, 8/F, Greenville Gardens, Shiu Fai Terrace with one car parking space, and the price was $12,350,000. The defendant appeared at the hearing without legal representation.

2. The defendant failed to complete the transaction by the due date of 31 March 1998, whereupon the plaintiffs accepted the breach and forfeited the deposit of $1,280,000. On 2 April 1998 the plaintiffs agreed to resell the property for $8,280,000 and this transaction was duly completed on 22 May 1998. After crediting the deposit, the plaintiffs claim damages of $2,790,000 reflecting the difference in price on resale, and additionally legal costs, interest on their existing mortgage to resale completion, and loss of use for the same period of the balance of the purchase price once the mortgage would have been repaid. The claim for agent's commission was abandoned.

3. It was the defendant's case that the resale at $8,280,000 did not reflect the true market value of the property. He relied on a valuation report from Mr. Denny Tam, a Chartered Surveyor and Managing Director of FMD Talents Surveyors Ltd, showing a value of $10,000,000 at the resale date of 2 April 1998. The corresponding evidence for the plaintiffs was a report from Mr. Phoenix Wong, a Chartered Surveyor and associate director in the valuation department of CB Richard Ellis Ltd, which produced a valuation of $8,300,000.

4. Mr. Tam's valuation was based on the resale date of 2 April, rather than on the intended completion date of 31 March. Mr. Tam said that this was according to his instructions and the two days difference would not affect his conclusions. I accept that this factor is of no significance to the court's findings.

5. For the plaintiffs, Mr. Wong said that the report was prepared by a colleague who was unavailable, however he had personally considered it at length and externally inspected the property and the comparables used. His own valuation would have been much the same, save for minor adjustments. He produced as exhibit P1 his own revised version of page 7 of the report showing only an adjustment to comparable 5 in the comparable table. He said that this probably reflected a clerical error in the original adjustment. The adjustment did not anyway affect the valuation of the subject property at $6,350 psf, as the revision was consistent with the report's conclusion to that effect. Mr. Wong said that he had enough information from the report and his inspections to adopt the valuation as his own.

6. Mr. Wong explained that adjustments in the comparables were made for the factors of time, floor level, and view aspect. The time adjustment reflected the overall drop in the property market since the beginning of 1998, so the later the transaction since then the greater the likely fall in price in a declining market. This is reflected in the comparable table by an upward adjustment (to reflect the lower market level) in transactions occurring after the intended completion date in this matter, and by a downward adjustment (to reflect the higher market level) in transactions before that date. The dates of the various comparable transactions appear at page 6 of the report, and the time adjustments on the above basis appear at exhibit P1 - the revised page 7.

7. The five comparables used were all in the same development as the subject premises, and Mr. Wong did not make adjustment for size or facilities. He said that the sizes of all comparables were very close to the 1312 sf of the subject property, and his experience showed that flats of over 1000 sf with a difference of no more than about 200 sf did not require adjustment. Mr. Denny Tam for the defendant disagreed on this point and said that an adjustment for size should be made. My own experience of considering valuations in similar cases is that size adjustments are usually made in assessing comparables, and I favour Mr. Tam's opinion in this regard.

8. Mr. Wong similarly declined to make adjustments for the relative ages of the comparables and the subject property. Although there was an age difference of about five years between certain blocks in the development, he said that his colleague had been unable to find evidence to substantiate the precise dates of completion. Moreover, Mr. Wong said that the external appearance of the blocks was not substantially different, and a 4 to 5 year age difference in a development over 20 years old was not a significant factor. Bearing these circumstances in mind, he said that he would not make any adjustment for age.

9. Mr. Tam for the defendant again disagreed. He said that a 4 to 5 year age difference at an age of around 20 years was not to be ignored and should be factored into the adjustment. He also gave unchallenged evidence of the completion dates of the four blocks in the development as 1974, 1975, 1980, and 1980 for blocks A,B,C & D respectively. The subject premises is in block D, whereas the plaintiff's comparable 3 is in block A, giving an age difference in favour of the subject premises of 6 years out of 18 at the date of valuation. I cannot regard this as insignificant and accept Mr. Tam's upward valuation of +3% as against comparable 3 for this factor

10. Mr. Wong explained that comparables 1,2,4 and 5 were all consistent with each other as to adjusted market rate. Comparable 3 however was considerably higher and was therefore given less weight (in fact no weight at all) as being out of tone with the market. This resulted in Mr. Wong's valuation being below the average of all five comparables, as appears in his explanation at the foot of exhibit P1. I note however that comparable 3 was the closest in time of the transactions to our intended completion date, being only 13 days earlier. I do not therefore find it correct to disallow its weight merely because Mr. Wong finds it "out of tone" with the market. It does itself form 20% of the "market" considered by Mr. Wong, and its proximity in time is good reason for attracting more weight, rather than less.

11. Mr. Wong said in cross-examination that it was uncertain whether, since the start of 1998, the market was in a straight line decline or was fluctuating within a declining trend. He also agreed that valuation in a downturn is more difficult due to lack of transactions and hence fewer useful comparables. He said there was a slight rebound in the market in February, whereafter the decline resumed with another slight rebound. Mr. Wong also agreed in response to a question from the court that in a volatile or steeply declining market it was particularly important to find comparables closest in transaction time to the subject transaction.

12. I take notice that markets such as the property market fluctuate within an upward or downward rend, rather than travel smoothly in either direction. The gentle line drawn later on the graph generally represents a simplification of more dramatic progress at the relevant time. Closeness in time to the subject transaction therefore, as Mr. Wong agreed, assumes a greater significance when considering a market in a sustained decline than it would in more peaceful times. This conclusion reinforces my view that Mr. Wong was not correct in declining to accord comparable 3, as the closest in time to our present completion date, at least its full weight.

13. A point of contention between the parties and their respective valuers was the difference in approach as to the dates of the chosen comparable transactions. Mr. Wong for the plaintiffs included transactions (comparables 1 and 2) occurring after the date of our intended completion. He explained that the exercise of relating back from later transactions showed the market trend at the valuation date, which was useful evidence with the dearth of comparables in declining market conditions.

14. Mr. Tam's valuation on the other hand used only comparables with transaction dates within six months prior to the valuation date. These ranged from 27 October 1997 through two in November, three in December, and finally his comparable 1, the same as the plaintiffs rejected comparable 3, with a date of 18 March 1998. Mr. Tam criticised the use of comparables occurring after the subject date, claiming that they were useful only in a market analysis and not in regard to an individual valuation at a particular date. He also criticised the practice in the plaintiff's report of reaching an average adjusted unit rate per square foot as a basis for the valuation.

15. I find it difficult to evaluate Mr. Tam's criticisms, in particular because Mr. Wong gave evidence first and was unable to offer detailed comment in response. It does however seem incorrect to disregard the plaintiff's comparable 3 when seeking a valuation by way of an average adjusted unit rate. The essence of an averaging exercise is that all chosen samples are included, as the market trend will necessarily dominate over the eccentric transaction. To exclude the "out of tone" comparable 3 from an averaging exercise which would anyway undermine its individual effect is therefore wrong in principle. To this conclusion must be added the point that an averaging exercise ignores the factor of each comparable's proximity to the subject transaction date. In a declining market, this proximity is of particular significance and should produce a corresponding favourable weighting, as I have said elsewhere.

16. All Mr. Tam's comparables, like Mr. Wong's, were from the same development, however Mr. Tam's report also noted differences in the relative size and age of each of the comparable flats. Also, unlike Mr. Wong's report, the defendant's valuation chose comparable 1 (the same as the plaintiffs' comparable 3) as the best comparison because of closeness in time, similar aspect, and lack of other transactions in the January - February period. I find it entirely logical that this comparable should be given greater weight because of the proximity of the transaction date.

17. Although the various factors of difference in the defendant's comparables were noted in Mr. Tam's report in terms of date, level, size, aspect and age, the valuer made adjustments only for comparable 1 - the 18 March transaction. He made no adjustment for the time difference of 13 days, allowed +8% for the higher level of the subject premises, -2% for the larger size of the subject premises, and +3% for the fact that the subject premises were built six years later, giving a total adjustment of +9%. Mr. Wong's corresponding adjustments for the plaintiffs are -2% for time, +2% for level, with the factors of size and age ignored.

18. Mr. Tam's adjustment of +8% for the level of the subject premises as against that of his comparable 1 (the plaintiff's comparable 3) reflects the higher level of block D than block A. Although both are on the same floors of their respective blocks, not only is block D situated in a higher position, but Mr. Tam said that it is built above 6 floors of carpark, as opposed to 3 floors of carpark beneath block A. Mr. Tam suggested that the difference in height between the same floors on the two blocks could be equivalent to about 10 floors. He admitted that this was a very rough estimate, but emphasised that block D was in a noticeably superior position to block A. I find no reason to doubt Mr. Tam's evidence on this point, which has not been seriously challenged. Erring on the side of caution I therefore find appropriate an adjustment of +6% in favour of the subject premises as against Mr. Wong's comparable 3.

19. As to the other individual adjustments to this comparable, I accept a compromise between the two findings of -1% for time, and I accept that there should be adjustments for size and age as they are typically taken into account in these exercises. In the absence of contrary evidence, I therefore accept the defence adjustments of -2% and +3% for these respective factors.

20. Applying these adjustment factors from the 18 March comparable to the subject premises gives an overall adjustment factor of +6%. On the defence figures for the two properties (slightly but not significantly different from those of the plaintiffs) this will give an adjusted unit rate for the subject premises of:

21. $7,008 + (7,008 x 6%) = $7,428.48. This figure applied to the square footage of the subject property will realise a notional value of $9,850,164.48. Although I accept that this comparable is the best available, I do not however accept Mr. Tam's conclusion that it should be considered in isolation for calculating the valuation.

22. Mr. Tam was asked to comment on the adjustments to comparables 4 and 5 in the plaintiff's report. He said that a time adjustment of -15% for transaction date was too high, and suggested from 3% to 5%. Although it is accepted that the market was declining, it has not been shown that there was a decline of as much as 15% in the roughly 3 - 3 1/2 months between those transactions and 31 March. I find that -15% is too large an adjustment by Mr. Wong in reaching his adjusted unit rate. If I conservatively take a 10% decline as a median between Mr. Wong's figure and the 5% upper figure of Mr. Tam's range, this would already produce noticeably higher adjusted unit rates per square foot; - $6661 for the plaintiff 's comparable 4, and $6657 for comparable 5.

23. This exercise alone, by averaging between two expert opinions, shows that the adjusted rates for the plaintiff's comparables 4 and 5 may not be not so far removed from that of Mr. Wong's "out of tone" comparable 3. Mr. Tam also disagreed with Mr. Wong's adjustments for the factor of level for both comparables, and for the factor of view for comparable 5 only, and further emphasised that Mr. Wong's adjustments had ignored the factors of size and (for comparable 4) age. If an average adjustment between the experts were also applied for these factors, the adjusted unit rates of the plaintiffs' comparables 4 and 5 would be yet closer to that of comparable 3.

24. In discussing his own comparables other than his chosen comparable 1, Mr. Tam agreed he had not used them for calculating his valuation. He said he had made reference to them for purposes of assessing the market tone and agreed that it would have been better to show the individual adjustments for each comparable. His comparables 2 and 3 are anyway the same as the plaintiff's 4 and 5, and four others remain which I am unable for lack of evidence to evaluate. They are however progressively further away in time from the subject transaction than his first three comparables and would attract correspondingly less weight.

25. A professional valuation is a necessarily subjective exercise, given that it seeks to apply an adjustment value to such apparent imponderables as time and view. I have also noted in similar cases a human tendency in valuers to discount comparables which may be "inconvenient" to their client's case. Doing the best I can here, I agree with Mr. Tam that his comparable 1 (the plaintiffs' comparable 3) is the best available by reason of proximity in time to the subject transaction and is not out of tone with the market. From there I conclude that the plaintiffs' valuation is substantially lower than it should be.

26. I do however also have difficulty in accepting Mr. Tam's valuation of $10 million.

27. His comparable 1 produces an adjusted value of some $9.8 million, however his comparables 2 and 3 (the plaintiffs' 4 and 5) produce only some $8.8 million each, even using the court's adjusted unit rate amended by the reduction in the percentage allowance for time of transaction.

28. Moreover, I am unable to use Mr. Tam's other comparables which he did not adjust, and I also decline to rely on the plaintiffs' comparables transacted after the date of the subject transaction in a volatile and declining market. Bearing in mind the overall evidence remaining I find a fair market value of the property as at 31 March 1998 to be $9 million.

29. Mr. Ko for the plaintiffs however argued in his submission that the court should anyway ignore the market value of the property in assessing the plaintiffs' damages. Mr. Ko urged that it is the resale price which forms the basis for assessing the amount of loss suffered by the seller and adduced in his favour the case of Noble v Edwardes (1877) 5 Ch.D 379 as well as the New Zealand case of Williams v Kirk [1988] 1 NZLR 452.

30. The former case, and similar authority, was considered at paragraph 993 of the 16th Edition of McGregor on Damages, also cited by Mr. Ko. The author is firmly of the opinion that the market price is the relevant factor, rather than the resale price, and suggests that the preference for the resale price in most cases arises from its affording good evidence of the market price. He adds that the authorities discussed do not anyway disclose any difference between the resale price and the market price.

31. The New Zealand case does however seek to take the issue into the situation where the resale price is lower than the market value, as indeed it is in the instant case on my earlier finding. The judge cited the example of an intervening drop in the available price between intended completion date and actual resale, with the injured vendor acting reasonably in not selling immediately. If the resale were within a reasonable time the vendor should, he thought, be entitled to the difference based on the resale price. He referred to a passage in Halsbury to that effect.

32. We are perhaps in danger of elevating individual circumstances into legal principle. As McGregor suggests, the fundamental rule should be that the market value at completion date establishes the quantum. The market value is an objective, and therefore safe, basis for so doing and in most cases the resale price would reflect it. If however an injured seller behaves reasonably and with due regard to the likely market value, and despite his best efforts circumstances so conspire that he sells at a price proving to be below the market price at the earlier date of completion, then he should arguably be allowed to recover based on the resale price.

33. To that extent I accept Mr. Ko's submission. The burden on such a seller is however considerable to show that he has done all he can to sell at the highest available price, for the purchaser is not an insurer and is entitled to require strict proof of mitigation. Moreover, the larger the difference between the resale price and the market value the more difficult it may be to discharge his burden.

34. Relating this to the situation of the plaintiffs, Mr. Tsui Ching Sang described how he put the property on the market as soon as he knew the defendant would not complete. The agent called and said he had a keen buyer who had looked at the property before. Mr. Tsui had already bought another flat and needed the money urgently with no other means of raising it, so he agreed the price quickly. He did not check the market price at the time but said that he thought the sale price was the market price. As we have heard, the resale was only two days after the scheduled completion date.

35. The defendant's refusal to complete evidently placed the plaintiffs in a difficult situation, and to that extent the defendant should be liable for their direct and consequential losses. This proposition does not however relieve the plaintiffs from their strict obligation to mitigate their loss. With sympathy for the plaintiffs' position, I am nonetheless unable to find that Mr. Tsui made all reasonable attempts in the context to mitigate that loss.

36. The new purchaser was accepted immediately, apparently at his offer price and without enquiry as to the market price. He was a keen purchaser who had been interested earlier but not at the higher price. There is no evidence of Mr. Tsui's trying to bargain him somewhat higher, or to stall him even for a few days to seek another purchaser or to establish the market level. There is in short no evidence whatsoever of mitigation of loss other than a quick sale to the first purchaser at the first price offered. That is not enough, and the plaintiffs may not therefore rely on the resale price to establish their damages. They are bound by the market value.

37. The plaintiffs' direct loss from the repudiation and resale therefore amounts to $12,350,000 less the market value of $9,000,000, and less $1,280,000 representing the amount of the forfeited deposit. This realises the sum of $2,070,000, which is duly awarded.

38. Mr. Tsui also gave evidence of consequential losses which the defendant gave no indication of contesting and which I am satisfied have been established. The sum of $25,608 is therefore awarded for legal costs arising out of the failed transaction between the parties. Also awarded is the sum of $84,131 representing the extra mortgage interest payable by the plaintiffs and calculated from the original completion date to the eventual completion date on resale, when the mortgage was repaid. Finally there is $43,088.34 representing the plaintiffs' loss of interest on the balance of the purchase price over the mortgage redemption figure from the original completion date to the resale completion date. This sum is also awarded.

39. The total award is therefore $2,070,000 + $25,608 + $84,131 + 43,088.34, giving a figure of $2,222,827.34. Interest will run on this amount from writ to payment at the judgment rate and the plaintiffs are awarded their costs.