MANY GAIN INVESTMENT LTD v. CHAN FAI HO

HCA 1448/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1448 OF 2011

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REASONS FOR JUDGMENT

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Introduction

1.  This is an action for breach of agreement for sale and purchase of property.  The defendant (“Defendant”) is the owner of a unit (the “Property”) in an old building in Kowloon (the “Lot”).  The plaintiff (“Plaintiff”) is a property developer who at the material time was negotiating with owners of other units in the Lot for the purchase of their units.  By a provisional sale and purchase agreement in writing dated 30 March 2011 (the “Agreement”), the Plaintiff agreed to purchase and the Defendant agreed to sell the Property subject to existing tenancies, but otherwise free from incumbrances, at a consideration of $4,775,500, with scheduled completion date on 31 May 2011.  The Agreement was subject to a condition that if the Plaintiff could not secure owners holding not less than 80% of the undivided shares of the Lot to enter into provisional agreement for sale and purchase of their units or to complete their sale on completion date, the Agreement shall be automatically void.

2.  In the usual course, deposit of $477,500 representing 10% of the purchase price was paid to the Defendant’s solicitors, Wong & Co (“WC”), title deeds of the Property were sent to the Plaintiff’s solicitors, Yam & Co (“YC”) and requisition was raised.  Then dispute arose as to whether the requisition was sufficiently answered.  In the meantime, the Defendant entered into another provisional agreement to sell the Property (the “Second Agreement”) to a third party, Sunny Palace Limited (“Sunny Palace”).  He also had a change of solicitors to K B Chau & Co (“KBC”).   Then the parties accused each other of repudiation of the Agreement.  On 26 August 2011, the Plaintiff commenced the present action.

3.  Subsequently, the Plaintiff acquired over 80% of the undivided shares in the Lot.  On 11 April 2012, it applied to the Lands Tribunal for compulsory sale and purchase of the remaining undivided shares. That application was scheduled to be heard on 11 November 2013.  Due to the urgency of the matter, I gave judgment but reserved my reasons.  Hereunder are the reasons for my judgment.

The background

4.  The Property was previously owned by Bo Kin Lum and William Lum in equal shares.  In March 2002, Bo Kin Lum died intestate in California, USA, survived by his widow, Margarita Lum and four children.  In 2006, Margarita Lum, as administratrix, assigned Bo Kin Lum’s half share in the Property to herself.  Then on 30 April 2007, she and William Lum jointly sold the Property to the Plaintiff.

5.  On 12 May 2011, YC raised requisition on the assignment of the half share of the Property by Margarita Lum to herself in 2006.  YC requested evidence that the beneficiaries of the estate of Bo Kin Lum had given consent to the said assignment.  In subsequent correspondences exchanged with YC, WC maintained that the administratrix as surviving spouse was entitled to vest the half share of the Property in herself in satisfaction of her entitlement to the estate of Bo Kin Lum. 

6.  On 17 May 2011, the Defendant signed a provisional agreement to purchase a property in Reclamation Street (“Reclamation Street Property”) subject to tenancy at a consideration of $4,160,000.

7.  On the scheduled completion date under the Agreement, ie 31 May 2011, the parties’ solicitors were still in dispute about the requisition.  YC wrote to WC putting on record that the Defendant had failed to answer the requisition satisfactorily and had failed to prove good title.  However, they agreed to extend completion for 14 days to 14 June 2011, subject to the requisition being satisfactorily answered.

8.  On the same day, WC wrote to the solicitors handling the said assignment for the Defendant, Tam Pun & Yipp (“TPY”), seeking evidence of consent by the beneficiaries. 

9.  On 7 June 2011, upon receipt of an affirmation of Margarita Lum from TPY, WC purported to answer the requisition by sending them to YC and requested for a draft assignment and undertaking letter for their approval.  However, YC maintained that a confirmatory assignment signed by the four beneficiaries was required.

10.  On 15 June 2011, WC faxed a letter dated 14 June 2011 insisting that as the affirmation of Margarita Lum had stated that she was the only person entitled to the estate of Bo Kin Lum and as the affirmation was accepted by court resulting in the grant of letters of administration, the subsequent assignment should be beyond challenge.  Later the same day, WC fax a second letter reiterating that the requisition had been satisfactorily answered, demanding completion within five days, and threatening to annul the sale if the Plaintiff should insist on any objection or requisition as to title.

11.  On the next day, 16 June 2011, things took a turn.  The Defendant entered into the Second Agreement with Sunny Palace to sell the Property for $5,500,000 with completion on 28 December 2011.  Under clause 5(c) of the Second Agreement, the Defendant undertook to cancel the Agreement and to return the deposit to the Plaintiff.  Under clause 5(f), he and his mother agreed to act as guarantors and to charge the Reclamation Street Property to secure his performance of the Second Agreement.  He instructed KBC in place of WC.  Immediately KBC sent a letter to YC stating as follows:

“Since time for completion has expired and title not proved, we have now instructions from client to confirm that our client would refund the deposit to you against your undertaking to vacate registration of the Provisional Agreement and the signing of a Cancellation Agreement.”

That letter reached YC on 17 June 2011.

12.  On 20 June 2011, ie the last day of the second extended completion date, YC informed KBC that the requisition was withdrawn and requested completion to take place on 22 June 2011.  KBC replied that the Defendant had exercised his right to rescind and there was no outstanding offer.  The parties entered into a deadlock.

13.  On 5 August 2011, the Defendant completed the purchase of his Reclamation Street Property.  On 22 September 2011, Sunny Palace registered a legal charge against that property, pursuant to the terms of the Second Agreement.

14.  Counsel raised numerous issues.  Some are abandoned or conceded, for example, whether the parties agreed to extend completion to 14 June 2011 and whether WC had authority from the Defendant to issue the letter of 15 June 2011 demanding completion on 20 June 2011.  Some are irrelevant.  Counsel spent much time arguing whether the requisition was one which was reasonable to make and whether it was satisfactorily answered.  By answering the requisition, it was no longer open to the Defendant to dispute if it was properly raised.  Whether the requisition was sufficiently answered is beside the point as it was withdrawn.  And as Ms Lan, counsel for the Plaintiff, rightly submitted, the only issue was how the answer given affected the completion date.  Ultimately, the real issue in this case is which party was in breach of the Agreement.  The key to that question is when was the completion date and whether the time of completion is of the essence of the Agreement.

Credibility of witnesses

15.  The Plaintiff called one witness, Simon Wong, who was the YC’s conveyancing clerk responsible for handling the transaction under the Agreement. His testimony was mainly about the factual background as set out above, which is not subject to any serious dispute.  He also refuted an allegation in KBC’s letter dated 16 June 2011 of having had an unspecified telephone conversation with May Leung of KBC on that day.  May Leung did not testify and nothing turned out from that allegation.  I find Simon Wong credible and accept his evidence.

16.  The Defendant testified as to his reasons for entering into the Second Agreement.  He said he needed cash to complete the purchase of the Reclamation Street Property; and as he doubted the Plaintiff’s intention to complete the Agreement, he had to enter into the Second Agreement for his protection.  He denied that he did so because of the higher price offered by Sunny Palace.  He said if the Plaintiff would complete, he would sell to the Plaintiff and pay damages to Sunny Palace.  His evidence is hardly credible for four obvious reasons.  First, his purchase of the Reclamation Street Property was scheduled to complete on 5 August 2011, four months before funds would become available from the sale under the Second Agreement to pay the purchase of the Reclamation Street Property.  Second, he did not even wait for expiry of the five days period to see if the Plaintiff would complete before entering into the Second Agreement.  Third, he specifically instructed KBC to reject completion on 22 June 2011 which would have put him in funds to complete the purchase of the Reclamation Street Property.  Fourth, he had much to risk by having himself and his mother to act as guarantors and to charge the Reclamation Street Property as security for his performance of the Second Agreement.  The whole arrangement did not make sense.  He obviously had other financial means to pay for the purchase of the Reclamation Street Property and he entered into the Second Agreement for an untold reason.  He was far from telling the truth.  However, for the purpose of this action, his intention and motive in entering into the Second Agreement is irrelevant.

17.  This is the type of case where little turned on the testimony of the witnesses.  The factual background is not in dispute.  The Defendant’s motive or intention in entering into the Second Agreement is irrelevant.  The material and relevant evidence is documented.  This case is essentially one of construing the documents and applying legal principles to the incontrovertible facts.

Whether time was of the essence at the inception of the Agreement

18.  Under the Agreement, completion was scheduled to be on 31 May 2011, but time was not expressly stated to be of essence.  However, Mr Hu, counsel for the Defendant, submits that in relation to sale and purchase of landed properties in Hong Kong, time is generally of the essence; and even if it was not expressly provided in the agreement for sale and purchase, such a term could be implied.  In the present case, the Property was sold for redevelopment purpose and not for occupation.  It was sold subject to tenancy and the Defendant was not required to deliver vacant possession.  Under the circumstances, the absence of any provision in the Agreement making time of the essence is significant. 

19.  The Defendant’s pleaded case is that time was of essence for the following reasons.  First, the transaction was a conditional sale contingent on the Plaintiff acquiring not less than 80% of the undivided shares of the Lot by 31 March 2011.  Second, by relying on the Plaintiff’s obligation to complete on 31 May 2011, the Defendant entered into the agreement to purchase the Reclamation Street Property.  Third, on or about 30 May 2011 the Defendant had, through WC, made known to YC that he had to use the purchase price of the Property to complete the purchase of the Reclamation Street Property.

20.  I am wholly unable to see how a condition that the Plaintiff could secure the agreement of owners holding 80% of the undivided shares of the Lot to sign sale and purchase agreement or complete their sale on 31 May 2011 could have the effect of making time of the essence of the Agreement.  This is especially so as the condition could be met by a sufficient number of owners either signing the sale and purchase agreement or completing the sale.  Completion was not the only way that condition could be met. 

21.  I also fail to see how the Defendant’s conduct after entering into the Agreement could affect the nature of the completion date of the Agreement or could make completion date of the essence when it was not. 

22.  As for the third reason, it is premised on incorrect factual basis.  The Defendant pleaded a case but chose to prove it only by his evidence of hearing what Andy Cheung of WC told YC on his instruction, instead of calling Andy Cheung himself.  While as a matter of evidence, this is not impermissible, the problem of the Defendant is that he has proved himself to be an unreliable witness.  On the other hand, though Simon Wong admitted that Andy Cheung had told him about the Defendant’s purchase of the Reclamation Street Property, he said Andy Cheung did not tell him that the Defendant needed the proceeds of sale of the Property to complete his purchase of the Reclamation Street Property and still less that the Defendant had intimated that as a result completion date was made essence of the Agreement. 

23.  In conclusion, I accept Ms Lan’s submission that time of completion is not of the essence of the Agreement.

Whether WC’s letter of 15 June 2011 had the effect of making time of the essence of the Agreement

24.  Quoting United Scientific Holdings Ltd v Burnley Borough Council[1], Mr Hu rightly submits that even if time of completion was not of the essence, a party may make time of the essence by giving the other party notice to complete within a certain time, provided that the time is reasonable.  He argues that by the Defendant’s letter of 15 June 2011, the Defendant gave the Plaintiff notice to complete on 20 June 2011 thus making time of completion of essence.  In that letter, WC wrote:

“As all of your requisitions have already been satisfactorily answered by us, we are instructed by our client to demand for completion of the sale and purchase of the above property within 5 days from the date hereof and give you notice that if your client shall insist on any objection or requisition as to title or any matter appearing on the title deeds, our client shall on the expiration of the aforesaid 5 days’ period annul the sale and to return to your client the deposit previously paid to client but without interests, costs or compensation.”

(Emphasis added)

25.  YC read this letter as giving the Plaintiff five days to consider whether to withdraw the requisition and not as a notice making time of the essence.  This letter has to be construed according to the ordinary principle of construction of documents.  Construction of document or contract is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: Investors Compensation Scheme Ltd v West Bromwich Building Society[2] and Jumbo King Ltd v Faithful Properties Ltd & Ors[3].  The letter has to be construed against the factual matrix. 

26.  The Agreement was an agreement for sale and purchase of the Property for redevelopment in which, as I have found, time was not of the essence.  Redevelopment was still a long way ahead.  What was important at that early stage was to secure agreements for sale and purchase from owners holding not less than 80% of the undivided shares in the Lot.  There was no hurry to complete.  This must have been the understanding which the Plaintiff, the Defendant and their legal teams were working on at the time.  To change this understanding requires clear language.

27.  Withdrawing a requisition or accepting a defect in title is one thing.  Proceeding to completion is another.  If a purchaser does not accept the defect, then the agreement would be annulled.  That must be the end of the agreement.  But he may accept a defect or withdraw the requisition on being satisfied with proof of title; and take time to proceed to completion, if time is not of the essence.  In the present case, there was not the least mention in WC’s letter that time was made of the essence.  Read against the above background, I do not think the language of that letter has the effect of making time of the essence, such that the Plaintiff had to complete within that time limit.  I find that the letter was only a demand requiring the Plaintiff to determine within five days whether to withdraw the requisition and to proceed with completion, but not a notice making time of the essence of the Agreement.

Whether the time allowed for completion under WC’s letter of 15 June 2011 was reasonable

28.  The above is sufficient to dispose of this dispute.  However for completeness, I shall consider the alternative scenario assuming, as Mr Hu submitted, that WC’s letter of 15 June 2011 was a notice to make time of the essence of the Agreement.  For such a notice to be effective, the time allowed for completion must be reasonable.  What is a reasonable time depends on all the circumstances.  Completion involves two matters: considering the requisition and putting in place the mechanism to effect payment.  The first matter is one solely for the purchaser.  The second matter may be one jointly for the purchaser and vendor, especially where the property to be sold is subject to an incumbrance, such as a mortgage.  If the property is free from incumbrance, it would only be a matter of the purchaser arranging for payment of the purchase price.  But, if the property is subject to a mortgage, the mortgage would have to be discharged before completion.  Usually, this is done simultaneously on completion date by the parties’ solicitors arranging to apply part of the proceeds of sale to discharge the mortgage and paying the balance to the purchaser.  Such split payment arrangement would require the mutual collaboration of the parties’ solicitors.  The vendor’s solicitors would have to provide information about the outstanding mortgage to the purchaser’s solicitors so that split cheques in payment of the outstanding mortgage and balance of the proceeds could be arranged.  Such arrangement has to be taken into account in considering what would be the reasonable time for completion.

29.  Returning to the instant case, Mr Hu submits that the original completion date of 31 May 2011 had long gone and had been extended twice; that the requisition had been dealt with extensively; and that the Plaintiff knew the Defendant needed the proceeds for purchase of the Reclamation Street Property.  It was therefore reasonable for the vendor to put the purchaser on the spot and impose a deadline for the purchaser to decide whether to go ahead or not.  He submits that the requisition had been answered by WC’s letter dated 7 June 2011 and five days from the date of WC’s letter of 15 June 2011 was a reasonable period for the purchaser’s solicitors to consider and advise and, if so minded, to prepare for completion.

30.  Ms Lan submits that a period of at least fourteen days from WC’s letter of 7 June 2011, which was received on 8 June 2011, would be a reasonable time for the Plaintiff to consider the answer.  The Plaintiff should have up to 22 June 2011 to decide.  Hence, to make time of the essence, the Defendant had to allow completion at the earliest on 22 June 2011. 

31.  On the matter about deciding on the requisition, YC raised the requisition on 12 May 2011 and was appraised of the issue since.  WC faxed the letter from TPY and Margarita Lum’s affirmation at 7:55 pm on 7 June 2011.  For all intents and purposes, the letter and affirmation must be taken to have been received by YC on 8 June 2011.  YC maintained that the answer was unsatisfactory.  Negotiation continued. Then on 15 June 2011, WC gave the Plaintiff five days, until 20 June 2011 to complete.  But on the following day, KBC wrote saying that the Agreement was cancelled.  In my view, five days from 15 June 2011 would be ample, and probably more than sufficient time for YC to make up its decision about the requisition, which it did.  But it asked for two more days to enable completion.

32.  The Defendant’s obligation under the Agreement was to convey the Property free from incumbrances.  However, the Property was subject to mortgage.  Completion would require, on the one hand, the Defendant discharging the mortgage; and on the other, the Plaintiff paying the balance of the purchase price.  Apart from paying the balance of the purchase price, KBC had to approve the assignment and arrange for redemption of the mortgage such as enquiring from the mortgagee bank the up-to-date repayment amount.  The Plaintiff need to ascertain that the sale proceeds would be applied towards redeeming the mortgage.  No split cheque instruction had been given by KBC at any time before 20 June 2011.  As at 20 June 2011, none of the above steps required to be taken by the Defendant had been taken.  This is not a case where completion depends solely on the act of the purchaser, but on the mutual collaboration of the parties and their legal teams.  The Defendant not having performed his part in the completion, it was reasonable for YC to propose two days for the parties to set in motion all the necessary steps in order for completion to take place. 

33.  In conclusion, had the Defendant performed all the steps needed to be performed by him, I would have found five days up to 20 June 2011 a reasonable time for completion.  The Defendant had not and YC had to take the initiative to set in motion all the necessary steps for completion to take place.  I therefore find, in all the circumstances, a period of seven days from WC’s letter of 15 June 2011 was the least reasonable time required for the Defendant to make time of the essence of the Agreement.  Thus, even if WC’s letter of 15 June 2011 was construed as a notice to make time of the essence, that letter was not effective as the time allowed by the Defendant for completion was short of reasonable time.  Thus, under either scenario, WC’s letter of 15 June 2011 was not effective to make time of the essence of the Agreement. 

The party in repudiatory breach

34.  Under both scenarios, the Defendant had failed to made time of the essence of the Agreement.  The Agreement still remained on foot, though the Plaintiff was in breach for failing to complete on 20 June 2011. According to Simon Wong, whose evidence was not challenged, he telephoned KBC on 20 June 2011 and enquired about who was the handling clerk in respect of this Agreement.  He was connected to a female staff who declined to identify herself.  It should be recalled that at that juncture, KBC had written that it had instructions from the Defendant that the Agreement had been rescinded. Simon Wong told that female staff that the Plaintiff was prepared to withdraw the requisition and to complete on 22 June 2011.  The female staff did not protest or say anything to the effect that the Agreement had been rescinded. She did not give any information about split cheque arrangement.  She just told him to write a letter in, which YC did.  Then KBC responded on the same day saying that the Defendant had exercised the right to rescind and there was no outstanding offer.  It did not give split cheque instruction as to payment of the balance of the purchase price.  Thus, KBC put it beyond the Plaintiff’s means to complete on 20 June 2011.  While the Plaintiff was in breach in not completing on 20 June 2011.  That breach was not repudiatory.  It only entitled the Defendant to make time of the essence of the Agreement but not to annul it.  However, the Defendant did not take any steps to do so.  Instead, he took the view that the Agreement was already rescinded and refused completion by the Plaintiff.  In the circumstances, the Defendant was in repudiatory breach of the Agreement but the Plaintiff was not. 

Conclusion

35.  For the above reasons, I grant the Plaintiff an order for specific performance of the Agreement; and an order that the memorandum of rescission filed by the Defendant is null and void and of no effect and that its registration be vacated. 

36.  The Plaintiff has also sought various other related relief such as a lien over the Property for the deposits received by the Defendant, an injunction to restrain the Defendant from selling the Property to Sunny Palace Limited or any other entity, a declaration that the provisional sale and purchase agreement entered into between the Defendant and Sunny Palace Limited be void and of no effect; and for damages to be assessed.  Upon granting specific performance, those other relief sought is unnecessary.  Besides, there is no evidence of any damage suffered. 

37.  For the same reasons, the Defendant’s counterclaim is dismissed. 

38.  I also make a costs order that the Plaintiff shall have costs of this action.

39.  Lastly, I apologise for the time taken in delivering these reasons for the judgment and I thank the parties for their patience.