CHAN YIU KIT AND ANOTHER v. HOMEAST DEVELOPMENT LTD.

HCA 12520/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12520 OF 1998

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J U D G M E N T

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The facts:

1. The defendant is a property developer, whose business is to acquire land in the New Territories and build small houses for sale. On 1 February 1992, it entered into a development agreement with the owners of a piece of land in Demarcation District No. 375. The land consisted of two lots, Lot Nos 600 and 649 which was carved out into six sub-lots, namely Lot Nos 600A, 600B, 600C, 649A, 649B and 649C, for the purpose of building one small house on each sub-lot. Two of the houses to be built on Lot Nos 600B and 600C will be allocated to the original land owners, while the other four houses to be built will be allocated to the defendant. The application for building licences has been processed by the District Lands Office of Tuen Mun since 1992.

2. In February 1997, the defendant appointed several estate agents to promote a pre-sale of the four houses. These four houses were identified as Block A, B, C and D and they were to occupy the land at Lot No 600A, 649A, 649B and 649C respectively. At the time, building licences had not been issued and the construction work for the houses had not begun.

3. The plaintiffs were introduced to these houses by Miss Tsang of Wai Shing Properties Consultant Company (hereinafter called "Wai Shing"). Miss Tsang and the plaintiffs inspected the site together. It was then an open piece of land with no demarcation and with no houses in the course of construction. The house to be built and sold was identified as Block A. The plaintiffs were told that the defendant would build a three storey house of 700 square feet on each storey. The price for the property was $4,250,000.00 and the house will be built in about 9 months. The plaintiffs were satisfied with the offer and went to the office of Wai Shing to sign the preliminary agreements.

4. At the office of Wai Shing, the plaintiffs signed a provisional sale and purchase agreement (Exhibit P-1) and a subscription agreement (Exhibit P-2). The property to be purchased was described as "DD375 (Lot No. 649D) Block A" in Exhibit P-1 and as "DD375 (Lot No. 649D)" in Exhibit P-2. Mr Chan of the plaintiffs saw Mr Siu, a director of the defendant and paid him $212,500.00 as deposit. The plaintiffs paid a further deposit of $212,500.00 on 15 May 1997.

5. Lot No. 649 has not been sub-divided into more than three lots and there is no such a lot known as "Lot No. 649D". The house identified as Block A is to be built on Lot 600A. That house has not been built as building licence has not been issued even as at the date of hearing.

6. Since July 1997, Mr Chan has been making enquiries with Miss Tsang of Wai Shing and Mr Siu of the defendant about the progress of the construction of the house but was told that the construction works had not begun as the building licence had not been issued. On 26 June 1998, the plaintiffs' then solicitors wrote to the defendant requesting for details as to the date of completion of the property, but the defendant did not respond. On 22 July 1998, the plaintiffs' solicitors demanded return of the deposit.

7. The defence is that the property to be sold has been mis-described and should be described as "Lot No. 600A" instead. The defendant's representative, Mr Siu, who signed the two agreements in a hurry failed to notice the mis-description. The defendant aver that it is an implied term of the subscription agreement that the sale and purchase shall be completed after the defendant has completed the procedure for payment of premium to the Government; and that the time for completion has not yet arrived as at the date of issue of the writ. They further aver that by instituting the present action, the defendant is entitled to forfeit the plaintiffs' deposits under clause 11 of the subscription agreement and counterclaim for damages.

Mis-description:

8. Mr Ching on behalf of the plaintiffs submitted that there was no property by the description of Lot No. 649D, though that description was used in the provisional sale and purchase agreement, subscription agreement, receipt by Wai Shing and receipt signed by the defendant (Exhibit P-6). However, my view of the receipt signed by the defendant is that the property was described as "Lot No. 649(A)", yet another mistake. Mr Ching did not seek to base his case on frustration because of non existence of subject matter, but on mis-description. He referred to In re Puckett and Smith's Contract [1902] 2 Ch. 258, Jacobs v. Revell [1900] 2 Ch 858, Charles Hunt Ltd v. Palmer [1931] All ER 814 and Watson v. Burton [1957] WLR 19, which are cases concerning mis-description of the physical condition of the properties. He submitted that the mis-description in the present case is far more serious than those in the cases he cited as the property by the description of Lot No. 649D does not exist. In my view, the description of a property by way of lot numbers goes to the identity of a property. It is not the same as the description of the property as to its physical condition and dimension etc. The present case is not one of mis-description, but whether the subject matter existed or not. However, while seeking to argue that the property does not exist, Mr Ching specifically refrained from arguing his case on the basis of frustration. I do not think he could build a case on mis-description.

9. On the other hand, Mr Wan for the defendant submitted that this is not a case of mis-description but of mutual mistake. According to Mr Chan, he was shown a location map in the office of Wai Shing and told where the property was. He viewed the property at the site. Though he could not make out which lot was which, in the absence of fraud on the part of the defendant or Wai Shing, I think the parties were negotiating about the sale and purchase of a particular lot allocated for the purpose of building Block A in the development consisting of six houses in Lot Nos 600 and 649. I find that the parties had no mistake about the parcel of land that formed the subject matter of the sale and purchase agreement, but that it was given a wrong description for one reason or another. For the purpose of interpreting the provisional sale and purchase agreement as well as the subscription agreement, it is open to me to correct the obvious mistake in the written agreements so as to give effect to the common intention of the parties. Accordingly, I interpret the words "Lot No. 649D" to mean "Lot No. 600A". The rights and liability of the parties then fall to be determined on the basis of the subscription and provisional sale and purchase agreements they signed.

Clause 18: Time for completion:

10. The plaintiff's case is that according to Clause 18 of the subscription agreement, the construction of the house will commence in March 1997 and be completed in about 9 months. As more than 15 months have lapsed by the date of issue of the writ and the building work had never commenced, the plaintiffs are entitled to rescind the two contracts.

11. Mr Wan submitted that the date and time for completion in Clause 18 were mere estimates only and were not binding as the remarks at the end of the agreement show. In view of the phraseology used, he must be right. But that does not mean the plaintiffs were to wait endlessly for completion. While, in the circumstances, time cannot be of essence, the construction work must commence within reasonable time after March 1997 and the house must be completed within reasonable time after early 1998.

Condition precedent - Building licence:

12. Next, Mr Wan argued that according to Mr Siu, there was a condition precedent under the subscription agreement that construction work could only commence after the building licence has been issued by the District Lands Office. Hence, he submitted that the time under Clause 18 does not start to run until the issue of the building licence and that time has not started to run as the licence has never been issued.

13. On the evidence, Mr Chan denied that he was ever told about this condition precedent. He did not know anything about building licence. He bought because he was told that the house will be completed within 9 months. His evidence is of course contrary to Mr Siu's. I consider Mr Chan an honest witness and accept his evidence.

14. Mr Siu entered into the development agreement with the owners of the two lots of land on 1 February 1992. On 10 August 1992, he procured an indigenous villager known as Li Ngau to assign his title and right for applying for a building licence to build a small house on Lot No. 600A, which is the subject property. Yet, on his evidence, the building licence has not been issued in respect of this lot, though building licences in respect of the other five lots have been issued. He was extremely evasive when cross examined about the progress of the application for the building licence for Lot No. 600A. He was unable to recall when was the last time he approached the District Lands Office about the application and he did not know why the application has not been processed during all these eight years. He was unable to say what he has done in applying for the building licence and expediting its issue. He was evasive and not telling the truth. I do not accept his evidence.

15. On the other hand, the subscription agreement is absolutely silent about the building licence. Clause 18, which provided for the date of commencement of construction work and completion, was not expressed to be subject to any condition precedent such as issue of building licence. On the contrary, it provided that construction work would commence in early March 1997. The property was marketed in early March 1997. The subscription agreement was also entered into in early March 1997. For the average consumer or investor with no knowledge about village houses in the New Territories, he would assume, reading the agreement, that everything was in order by early March 1997 when he entered into the agreement. This adds credence to Mr Chan's evidence that he was told that the house will be completed within 9 months and cast serious doubts on Mr Siu's evidence that he had informed Mr Chan that the timing under Clause 18 was subject to the issue of building licence.

16. For all these reasons, I accept Mr Chan's evidence that the issue of building licence as a condition precedent has never been mentioned when the subscription agreement was entered into. The defendant is deemed to have warranted that the indicated completion time of 9 months included the time necessary for application for building licence.

Whether defendant was in breach:

17. Having found that the time for completion was not subject to any condition precedent, I find that the sale and purchase should be completed within reasonable time after the indicated time for completion is due, i.e. at the beginning of December 1997. By 26 June 1998, when the plaintiffs' former solicitors enquired about completion, the plaintiffs have made time of the essence. The defendant did not respond. But of course, at that time and actually even by now, the building licence has not been issued. There was and there is no way that the house could be completed within reasonable time from 26 June 1998. By failing to obtain the building licence by 26 June 1998, the defendant have put it beyond their means to build the house and complete the sale and purchase within reasonable time from 26 June 1998. Time for completion has long lapsed. There is no point for the plaintiffs to wait indefinitely and endlessly for completion. The plaintiffs were entitled to rescind the agreement and demand return of their deposit plus damages. The defendant was clearly in breach of the subscription agreement. For the same reason, the defendant cannot rely on Clause 11 to forfeit the plaintiffs' deposit.

Quantum:

18. As a matter of law, the plaintiffs are entitled to return of their deposit paid in the sum of $425,000.00. In addition, they are seeking, under Clause 10 of the provisional sale and purchase agreement, liquidated damages equivalent to the amount of deposit, stamp duty and estate agent's commission paid. While the subscription agreement does not contain a liquidated damage clause, the other clauses in the subscription agreement providing for return of deposit are not inconsistent with Clause 10 of the provisional sale and purchase agreement. In fact, the subscription agreement does not contain any provision relating to non performance by the vendor. In the circumstances, as the parties entered into a parallel provisional sale and purchase agreement at the same time, I find Clause 10 of the provisional sale and purchase agreement equally binding on the parties.

19. It could be argued that in view of the drop in property price, the plaintiffs would only be entitled to nominal damages. However, forfeiture of deposit equivalent to 10% of the purchase price upon the purchaser's breach and compensation by an amount equivalent to deposit paid in the event of the vendor's breach have always been regarded by the courts as reasonable and genuine pre-estimates of loss suffered by the innocent party as a result of the other party's breach. I am satisfied that the compensation payable under Clause 10 of the provisional sale and purchase agreement is a genuine pre-estimate of loss and is not a penalty. Accordingly, I award the plaintiffs damages equivalent to the amount of deposit paid, i.e. $425,000.00, and the stamp duty paid on the provisional sale and purchase agreement in the amount of $105,000.00.

20. As for the estate agent's commission in the amount of $33,800.00, Clause 10 provided that apart from the compensation in an amount equivalent to the deposit in addition to the stamp duty paid, the purchasers are not entitled to any other claims. The estate agent's commission is less than 1% of the purchase price, whereas the liquidated damages is 10% of the purchase price in addition to stamp duty. I consider the estate agent's commission is well absorbed by the liquidated damages as part of the pre-estimate of loss. Hence, I dismiss this claim for commission.

21. Accordingly, I enter judgment in favour of the plaintiffs against the defendant in the amount of $955,000.00 (i.e. $425,000.00 + $425,000.00 + $105,000.00) with interest at half judgment rate with effect from date of filing of the writ until judgment and thereafter at judgment rate until payment. I also dismiss the defendant's counter claim. The defendant shall pay the plaintiff's costs, to be taxed, if not agreed.