LO LEE, MARILYN (also known as MARILYN LEE) v. GOEL ARUN KUMAR

DCCJ 3608/2015

CIVIL ACTION NO 3608 OF 2015

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JUDGMENT
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1.  There are two summons before me today both taken out by the plaintiff: one is for summary judgment; the other for striking out the defendant’s counterclaim.

2.  The plaintiff’s case is fairly straightforward.  There was a tenancy agreement dated 24 April 2015 whereby the plaintiff as landlord let a certain premises to the defendant as tenant for a term of four months commencing on 1 April 2015 and ending on 31 July 2015 at a monthly rent of $18,000.

3.  It is the plaintiff’s case that the tenancy agreement has expired by effluxion of time and the defendant wrongfully refused to yield up vacant possession of the premises and now stays on as a trespasser.

4.  In his defence, the defendant says the tenancy agreement was actually a breaching agreement and an essential part of the consideration for the purchase of the premises.  So the defendant’s case is that there is or was an underlying contract for sale and purchase of the premises.  The defendant does not dispute the signing of the tenancy agreement.  It is said in the defence that the defendant and the plaintiff actually were the tenant and the landlord respectively under a two‑year tenancy which expired on 31 March 2015. 

5.  The defendant was required by the plaintiff to deliver vacant possession of the premises on or before 7 April 2015.  However, the defendant and the plaintiff’s husband, Mr Eric Lo, had a meeting on 8 April 2015 with the husband acting as an agent of the plaintiff.  During the meeting, the parties to the meeting agreed to the sale of the premises and the oral sale and purchase agreement was communicated to the plaintiff by the husband over the phone and in the presence of the defendant during the meeting.

6.  According to the defendant, the terms of the oral agreement were as follows:

(a) There shall be a breaching tenancy of the premises from 1 April 2015 up to 31 July 2015 or until the date of completion of the sale and purchase of the premises, plus monetary consideration of HK$7.9 million.  As the matter of fact, the parties did enter into a tenancy agreement as aforesaid.

(b) The defendant shall pay 10 per cent of the purchase price by way of deposit.  (It is not in dispute that the defendant did give a cheque for half a million dollars to the plaintiff as initial deposit and subsequently paid another HK$290,000 as a further deposit for the sale and purchase of the premises.)

(c) There is an option on the defendant’s part to complete the transaction any time earlier by giving one month’s written notice to the plaintiff.

(d) Each party shall appoint their own legal representative to attend to the transaction; and

(e) The defendant’s wife will sign as a registered owner.  (This is conceptually wrong but this is what the defence says.)

7.  By way of background facts, it is not in dispute that the defendant stayed on in the premises together with his family after the expiry of the old tenancy and before the commencement or the signing of the breaching tenancy agreement on 24 April 2015, and has remained in possession of the premises up to now.

8.  It is also not in dispute that the plaintiff’s solicitors had, on 28 April 2015, sent a draft agreement for sale and purchase to the defendant’s solicitors under cover of a letter expressly stated to be subject to contract.

9.  Subsequently, the defendant through his solicitors tendered a cashier order for the balance of the 10 per cent deposit as well as returning the draft agreement for sale and purchase signed by the defendant’s wife.  The defendant made no amendment to the plaintiff’s draft agreement for sale and purchase.

10.  On 14 May 2015, however, the plaintiff through her solicitors returned both the cheque and the cashier order to the defendant’s solicitors, and no transaction for sale and purchase of the premises was completed.

11.  It is the defendant’s case that the four month tenancy agreement is “renewable and/or extended up to the date of the completion of the Premises Sale Agreement” and that the defendant and his wife are in possession of the premises lawfully and are entitled to specific performance of the oral sale and purchase agreement.

12.  By consent, the defendant has been paying to the plaintiff mesne profit of HK$18,000 per month until the determination of these proceedings, and the defendant says the sum of $18,000 is higher than the fair market rental value of the premises.

13.  The defendant is also relying on the signing of the four month tenancy agreement as a part performance of the oral sale and purchase agreement.

14.  The defendant counterclaims against the plaintiff for either specific performance of the oral sale and purchase agreement or alternatively payment of 10 per cent of the purchase price less any mesne profit unpaid as liquidated damages for breach of the oral sale and purchase agreement.

15.  In support of her summary judgment application and strikeout application, the plaintiff says there is no written contract for sale and purchase of the premises nor was there any oral contract for the same purpose or, alternatively, if there was an oral contract for the sale and purchase of the premises, it is not enforceable because of non-compliance with section 3 of the Conveyancing and Property Ordinance, Cap 219 (“CPO”).

Legal principles

16.  The legal principles for summary judgment is not in dispute, and I would simply adopt paragraph 9 of the submission of Mr Lau for the plaintiff and would not repeat the same.  It is, of course, pertinent also to refer to section 3 of CPO which reads by way of excerpt. 

“ (1) ...no action shall be brought upon any contract for the sale or other disposition of land unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged or by some other person lawfully authorised by him for that purpose.

(2) This section applies to contracts or other dispositions whenever made and does not affect the law relating to part performance or sales by the court.”

17.  In other words, a contract for the sale and purchase of a landed property is not enforceable by action unless:

(a) It is in writing;

(b) It is oral but there are some written memorandum or a note signed by the party to be charged or by some other person lawfully authorised by him for that purpose; or

(c) It is oral but there is part performance.

18.  So the issues for my determination is, first, whether there was a written contract for sale and purchase of the premises.

19.  Mr Lau, for the plaintiff, helpfully draws my attention to the case of Well Lock Limited v Reserve Investments Limited (DCCJ2111/2011), unreported, 31 May 2013 whereby his Honour Judge Wilson Chan stated the well-established principle that the phrase ‘subject to contract’ means subject to exchange of formal contract. 

20.  Mr Lau further refers me to the judgment of Templeman LJ (as he then was) in Sherbroooke & Anor v Dipple & Anor (1980) 41 P&CR 173 where the learned judge said at page 177 as thus:

“ Accordingly, in my judgment, the learned judge, with great respect, fell into the error which was adumbrated by Brightman J, namely of thinking that because parties got near a contract or conveyance, because parties assumed that they would go happily on until matters had become binding, therefore the ‘subject to contract’ qualification either ceased to have effect or was replaced by a new contract. That, in my judgment, is not the position. It is always the case that in ‘subject to contract’ negotiations one side or both from time to time speak as though there was a contract or would be a contract, and that is because everybody looks on the bright side and thinks a sale is going to take place. The fact of the matter is that for very good reasons the ‘subject to contract’ formula enables one to see at once whether there is or is not a contract - either a contract exchanged or conveyance executed or delivered – or whether parties are in the negotiations stage. Once one gets away from principle, then all is difficulty, and reliance on odd conversations and letters produces uncertainly in law.”

The plaintiff’s case

21.  Here, Mr Lau submits, not only was the plaintiff’s solicitors’ letter marked ‘subject to contract’, it was specifically stated at the bottom of the letter that “nothing herein contained shall be binding on our client unless and until the formal agreement for sale and purchase has been signed by our client”.

22.  The intention of the parties was therefore clear.  That is, the draft sale and purchase agreement was not binding unless and until it was executed by both sides.  There was, therefore, no written sale and purchase agreement of the premises in the present case.

23.  Mr Lau addresses the issue of whether there was an oral contract for the sale and purchase of the premises.  The key question is, Mr Lau submits, that there must be either a memorandum or a note or part performance in order for an oral contract for sale and purchase of landed property to be enforceable.  So the question is whether the plaintiff’s solicitors’ letter to the defendant’s solicitors, sending the draft agreement for sale and purchase could amount to a sufficient memorandum for the purposes of section 3, CPO.

24.  Mr Lau refers to the case of Tiverton Estate Limited v Wearwell Limited [1975] Ch 146 in support of the proposition that it is not enough for a memorandum to set out the terms of an oral contract.  It is also necessary for the memorandum to acknowledge the existence of an oral contract for the sale and purchase of landed property. 

25.  In Tiverton, the English Court of Appeal unanimously held that in order to be a sufficient memorandum there must be a signed admission that there was a contract and a signed admission of what that contract was. 

26.  In this regard, it is pertinent to note the comment of Lord Denning MR on the effect of ‘subject to contract’ and memorandum (at page 159H):

“ Law v Jones has sounded an alarm bell in the offices of every solicitor in the land. And no wonder. It is everyday practice for a solicitor, who is instructed in a sale of land, to start the correspondence with a letter ‘subject to contract’ setting out the terms or enclosing a draft. He does it in the confidence that it protects his client. It means that the client is not bound by what has taken place in conversation. The reason is that, for over a hundred years, the courts have held that the effect of the words ‘subject to contract’ is that the matter remains in negotiation until a formal contract is executed…But Law v Jones has taken away all protection from the client. The plaintiff can now assert an oral contract in conversation with the defendant before the solicitor wrote the letter and then rely on the letter as a writing to satisfy the statute, even though it was expressly ‘subject to contract’…If this is right, it means the client is exposed to the full blast of ‘fraud and perjuries’ attendant on oral testimony. Even without fraud or perjury, he is exposed to honest difference of recollections leading to law suits, from which it was the very object of the statute to save him.”

27.  Thus, it was found by the Court of Appeal that the vendor’s letter enclosing a draft contract which refers to the buyer’s ‘subject to contract’ letter bore no recognition or admission of the existence of a prior oral contract and was not sufficient memorandum for the English statute.

28.  Here, Mr Lau submits, the case is even clearer than Tiverton.  First, the letter is not just marked ‘subject to contract’ but expressly stated that no binding contract unless and until both parties have signed the agreement for sale and purchase.  Secondly, the letter makes no reference to any prior oral contract and, therefore, bears no recognition or admission of the existence of a prior oral contract.

29.  Mr Lau goes on to submit that the solicitors who sent the letter cannot be someone lawfully authorised by the plaintiff for the purposes of section 3, CPO.  For one thing, the phrase “for that purpose” in section 3, CPO refers to the setting out of the terms of an oral contract.  It has long been recognised that where the vendor’s solicitor sent a letter enclosing a draft contract, the authority given to the solicitor was not to write a letter containing the terms of an oral contract, if any, but merely to prepare a formal draft contract to be sent to the other side for perusal and approval, and when perused and approved, to be signed by the parties themselves.  That being so, the solicitor was not a person authorised for the purpose of section 3, CPO: see Well Lock Limited at paragraphs 28 to 32.

30.  In the circumstances, the memorandum relied on by the defendant as evincing the terms of the oral agreement is insufficient for the purpose of section 3, CPO.

31.  The next question is whether there was any part performance of an oral agreement for sale and purchase of the premises, if any.  My Lau relies on the case of Steadman v Steadman [1976] AC 536 at 541 where Lord Reid said as follows:

“You must not first look at the oral contract and then see whether the alleged acts of part performance are consistent with it. You must first look at the alleged acts of part performance and see whether they prove that there must have been a contract and it is only if they do so prove that you can bring in the oral contract.”

32.  This principle was adopted and restated in the Court of Final Appeal case of World Wood Fair Limited v Hong Kong Island Development Limited [2007] 1 HKLRD 498.  There Ribeiro PJ stated at paragraphs 27 to 29 that:

“ In my view, there is circularity inherent in the Court of Appeal’s approach. In regarding payment of the deposit and the giving of possession for fitting out works as ‘performance’ which decisively proved the existence of a concluded contract, the Court of Appeal implicitly assumes that there existed a concluded contract of which such acts constituted ‘performance’ which ‘performance’ is then relied on to prove the existence of that very contract.

Such acts are no doubt consistent with the existence of a concluded contract but they do not prove its existence. They are no less consistent with being acts done in anticipation of a legally binding agreement which the parties confidently expected to enter into but which never materialised - which is what the judge found was the position in the present case.

It is not uncommon for the parties in the course of negotiations which are still incomplete or subject to contract to pay deposits or to allow builders access to the premises.  Such acts are no doubt done with a view to commercial advantage but they involve the risk that the other party may decide to withdraw from the deal without any contract coming into being.”

33.  The proper question to be asked by this court, Mr Lau submits, then is whether the acts relied on by the defendant by themselves prove the existence of a contract, the court not being able to assume the existence of an oral agreement.

34.  So the plaintiff looks at the defendant’s acts.  First, the plaintiff says the tendering of the cheque for the initial deposit by the defendant does no more than to show sincerity and not pursuant to any contract.  The same applies to the cashier order for the balance of the initial deposit which was tendered in anticipation of a legally binding agreement. 

35.  As to the submitting of a signed formal agreement along with the cashier order, this can only be action preparatory to a contract and not part performance thereof.  Mr Lau relies on the case of Distinct Fortune Limited v Hyndland Investment Company Limited [2011] 1 HKLRD 817.  Mr Lau further refers to paragraph 33 and 34 in Well Lock Limited where the learned judge held that:

“ ...a mere tendering of payment by the parties seeking to enforce an oral agreement cannot amount to part performance. Otherwise, the requirements of section 3(1) of CPO can always be overcome by tendering payment.”

36.  The plaintiff, therefore, concludes that in the instant case there was no binding written contract between the parties nor was there, or is there, any memorandum or note for the purpose of section 3, CPO, or any part performance for enforcing any oral agreement for sale and purchase of the premises.  There is, therefore, no triable issue or arguable defence on the defendant’s part.

37.  While in court, Mr Lau for the plaintiff has also addressed the defendant’s assertion that the defendant is entitled to remain in possession of the premises under the four month tenancy agreement, which I shall deal with in a while.  Mr Lau submits that even if there is an enforceable oral agreement for the sale and purchase of the premises, the defendant is nonetheless not entitled to remain in possession of the premises after the expiry of the four month tenancy agreement.

The defendant’s case

38.  In his submission on the defendant’s behalf, Mr Tang for the defendants has no dispute with the authorities citied by Mr Lau above.  He, however, submits that the authorities relating to the effect of ‘subject to contract’ are not applicable here because there is a binding oral agreement for the sale and purchase of the premises, and according to The Hong Kong Housing Authority v Hung Pui (HCA 403/1986), unreported, Godfrey J, 3 April 1987, a letter that mistakenly included the phase ‘subject to contract’ should be ignored when there is in existence a binding contract.

39.  In his submission, Mr Tang maintains that there is a binding oral contract for the sale and purchase of the premises.  He refers to the signing of the four month lease, as well as the payment by the defendant of the initial deposit as evidence of the oral agreement as well as part performance on the part of the defendant so as to make the oral contract enforceable.

40.  Mr Tang further refers to the fact that the defendant and his family were allowed to remain or stay in the premises without being demanded to vacate the premises until the signing of the four month tenancy agreement.  The only reason, Mr Tang submits, for this was to wait for the completion of the transaction under the oral contract.

41.  Mr Tang also refers to the defendant’s payment of the sum of $18,000 per month has part of the consideration for completing the transaction, and it is said this sum is higher than fair market rent of the property in question.

42.  This is being an oral contract, there must be a memorandum evidencing the same, and Mr Tang submits that the draft sale and purchase agreement constitutes a memorandum in writing for the purpose of section 3, CPO.  This is because the draft agreement specifically refers to the four month tenancy agreement in the Third Schedule.

Discussion

43.  In my view, the defendant’s case must fail. 

44.  First, in relation to the existence of an oral contract for the sale and purchase of the premises, I agree with the plaintiff’s submissions to the effect that there is no memorandum or note for the purpose of section 3 CPO in the present case.  I agree with Mr Lau that the solicitor’s letter and the draft sale and purchase agreement attached thereto do not constitute a sufficient memorandum or note for the purpose of section 3, CPO on the authorities Mr Lau has referred to.

45.  That being the case, there can be no enforcement of the oral agreement as alleged by the defendant. I also agree with Mr Lau that there is no written contract for sale and purchase of the premises in the present case as all correspondence by the plaintiff’s solicitors to the defendant’s solicitors were marked ‘subject to contract’, plus the inclusion of the statement at the bottom of such letters that nothing contained in the letter shall be binding on the plaintiff unless and until a formal agreement for sale and purchase is signed by the plaintiff.

46.  The only question that remains in this context would be the presence or otherwise of any part performance.  This question is perhaps intermingled with the question as to whether there was an oral agreement at all.  In this connection, one has to look at the acts or circumstances relied on by the defendant as constituting part performance of the alleged oral agreement.  I agree with Mr Lau’s submission that the court cannot presume the existence of a certain oral agreement in looking at the alleged acts of part performance and see if they could prove the oral contract.  So one should look at whether the signing of a four month tenancy agreement, which the defendant describes as a breaching tenancy, can constitute part performance. 

47.  In this regard, I agree with the plaintiff that this act of signing a short‑term tenancy agreement is either neutral or equivocal.  It does not necessarily point to the existence of an oral agreement.  More particularly, the short‑term tenancy itself makes no mention of any underlying sale and purchase of the premises concerned, nor does it say the tenancy is to last until the completion of the sale and purchase of the premises.  It is expressly stated in the tenancy agreement itself that it was for a fixed term up to the end of July 2015.  That being so, the lease must end by the end of July 2015 by effluxion of time unless replaced by a new agreement.

48.  Nor do I accept the payment of the 10 per cent deposit by the defendant as necessarily pointing to the existence of an oral contract.  On the authorities citied by Mr Lau, they can either be earnest money or pursuant to an oral contract and at best neutral and do not prove the existence of an oral agreement as per World Wood Fair.

49.  Nor do I think the fact that the defendant was or his family were allowed to stay on in the premises and did stay on in the premises until the signing of the four month tenancy agreement serves to prove the existence of an oral agreement.  As Mr Lau suggests, it could equally be a result of tolerance on the part of the plaintiff, and such occupation is equally neutral or equivocal for the purpose of proving an oral contract.

50.  By the same token, the payment of a rent said to be higher than the market rent is equally neutral or equivocal.  For one thing, there is no evidence as to this rate being higher than the market rent at the time.  For another, as Mr Lau submits, this can be a result of the parties freely agreeing to a rate other than market rate for a short-term tenancy.  Therefore, such payment cannot be evidence of any oral agreement. Therefore, none of acts relied on by the defendant can serve either to prove the existence of an oral contract or part performance of the same.

51.  I should also refer to Mr Tang’s reliance on the reference in the draft sale and purchase agreement to the four month tenancy agreement.  It is to be found in the Third Schedule of the draft agreement.  I agree with Mr Lau that the inclusion of this reference is neutral.  It merely says this sale and purchase of the premises was to be subject to the benefit of the four month tenancy agreement, as simple as that.  This does not and should not serve to elevate the draft sale and purchase agreement to one of a memorandum or note for the purpose of section 3 CPO.

52.  As to Mr Tang’s reference to the case of The Hong Kong Housing Authority v Hung Pui, I do not think this case applies because it refers to a letter mistakenly headed ‘subject to contract’.  Here, there is no question of the plaintiff’s solicitors mistakenly adding the phrase ‘subject to contract’ to their letters.  In this connection, Mr Lau draws my attention to Well Lock Limited at paragraph 25, that is, the burden is on the defendant to expunge the ‘subject to contract’ formula, and there is no evidence from the defendant that the ‘subject to contract’ formula should be expunged in the present context.  This I agree.

53.  The next question that I have to deal with is: even if my ruling on the existence of an oral agreement as alleged by the defendant is wrong and that there is actually an enforceable oral agreement for the sale and purchase of the premises, one still has to ask why the defendant should be allowed to stay on in the premises pending resolution of his counterclaim for specific performance of the alleged oral agreement.

54.  In my view, the answer to this question must be in the negative. 

55.  I first look at the four month tenancy agreement.  It is clearly stated in the agreement that it is to last only for four months and it has long expired by now.  The defendant says as an equitable owner under the alleged oral agreement he is entitled to stay on.  However, Mr Tang is unable to point to me any authority to that effect. He loosely refers to the difficulty that the defendant may experience if evicted from the property and the extra expenses that he may incur if evicted. But he is unable to say that the defendant, even as an equitable owner under the oral contract, is legally entitled to stay in the premises pending the resolution of his counterclaim.  Nor he is able to point to any inequity that may arise if he is to be ordered to move out pending the resolution of his counterclaim, assuming his counterclaim is a valid one.

56.  Mr Tang submits that a term can be implied into the written tenancy agreement so that the fixed term should be read to mean the term of the short-term tenancy is to last until completion of the sale and purchase of the premises or conclusion of these proceedings.  This suggestion must be rejected.  Under the parol evidence rule, the defendant is prohibited from introducing an oral term that contradicts the plain wordings of the tenancy agreement.  In any event, as Mr Lau submits, one cannot imply a term that contradicts a specific term of a written agreement.

57.  I further agree with Mr Lau that the defendant’s right, if any, under the alleged oral agreement, assuming there is an enforceable oral agreement, does not give him the right to stay on in the premises.  Even if the defendant is to be treated as an equitable owner and has the right to specifically enforce the oral contract, there is no collateral right for him to stay on when the short-term lease has expired.

58.  I should add that the defendant’s pleaded case is not that the short‑term tenancy has to be rectified so that the term of the tenancy was either up to 31 July 2015 or until completion of the sale and purchase of the premises, whichever is the latter, and in light of the analysis above, I can see no point in considering the possibility of the defendant being able to salvage the position by amending his pleadings.

59.  For the foregoing reasons, I am satisfied that this is a case for summary judgment in favour of the plaintiff, and I also agree that the defendant’s counterclaim should be struck out as disclosing no cause of action.  That being the case, no question arises as to whether the defendant’s counterclaim exceeds the District Court’s jurisdiction and should be transferred to the High Court.  And I so order.

(Discussion re costs)

60.  My order will be:

(1) There be final judgment against the defendant for possession of the premises and mesne profits in respect of the premises at the rate of HK$18,000 per month until delivery of possession.

(2) The defendant’s counterclaim be struck out. 

(3) The defendant do pay the plaintiff’s costs of this action, including this application, to be taxed if not agreed.