CENTRAL WEST DEVELOPMENT LTD v. GOLDEN HORSE RESTAURANT LTD

HCA 2726/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2726 OF 2004

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J U D G M E N T

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1.  Central West Development Limited contracted with Golden Horse Restaurant Limited to purchase commercial property; namely, the ground and 1^st floors in a building of 9 floors situated at nos. 28 and 30 Argyle Street, Mongkok.  But on the date of completion it found it was not getting all that it had bargained for; Golden Horse withheld from it possession of a small part of the ground floor, called in the pleadings the Soffit Space.  When that refusal persisted, Central West brought this action, its primary claim being for a declaration that it has since the date of completion been entitled to vacant possession of the Soffit Space.

2.  An unusual feature of the case is that at no time has Golden Horse had title to the Soffit Space, for it is located beneath a flight of stairs and landings leading to the upper floors of the building, and is thus a part of the common parts of the building.  However at a point in time it was enclosed with partitioning with entrance through a lockable door from the ground floor lobby.  From that time on the Soffit Space was used as a storeroom.

3.  It is a vital ingredient of Central West’s case that at and prior to the parties committing to the sale and purchase it was used by the vendor, Golden Horse, to store cleaning equipment and other sundry materials for use in the Golden Horse Restaurant, which was run from premises whose entrance was immediately adjacent; thus, that Golden Horse had possession of the Soffit Space.  It is Central West’s case that by construction of the agreements the parties entered into, included in the sale was the passing of possession of the Soffit Space to Central West.

4.  The significance of this is that Central West has been prevented from renting out the Soffit Space, whose market rental the parties agree is $18,000 per month.

5.  For its part Golden Horse denies that it was in possession of the Soffit Space and denies that it was committed to pass possession to Central West. 

6.  I come next to describe the building, the premises bought and sold and the Soffit Space.

Nos. 28-30 Argyle Street

7.  The building of 9 floors has no. 28 on the right hand side and no. 30 on the left.  Between the two is the entrance to the staircase lobby leading to the upper floors.

8.  There has since been some redevelopment, but as at the time of commitment by the parties the premises of Golden Horse occupying all of the ground and 1^st floors, were then subdivided into two unequal parts.  At no. 28, thus on the right, was the entrance to Golden Horse Restaurant.  This designated area extended back into the building approximately one third of the depth.  Inside there was an internal staircase which took patrons to the restaurant’s dining area, that occupying all of the building’s 1^st floor.  The kitchen of the restaurant was located at the rear of the ground floor spanning parts of 28 and 30, with some form of direct internal access to the dining room above it.  Next door to the restaurant’s entrance, on the left of the lobby at no. 30, was a shop which was leased to a company called Jade Dragon Trading Company, carrying on business as a leatherwear shop.  It occupied all of the remaining space at nos. 28 and 30 on the ground floor.

9.  The Soffit Space was then, as it still is, in the ground floor lobby.

10.  If one were to enter the lobby one faces a short flight of stairs on the left.  To head for an upper floor one would mount these and come to a landing, the first one, turn right then right again and climb the second flight, this time on the right and alongside a wall separating the stairs from what was the restaurant, to arrive at the second landing.

11.  The Soffit Space is located beneath the second landing, the second flight of stairs and the first landing.  Access to it is by a lockable door located in a partition immediately inside the lobby on the right as one enters from Argyle Street. 

12.  Given its position under the landings and stairs a significant feature is the variable height, floor to ceiling.  At the entrance there is full headroom, some 7 feet, this being under the second landing.  But further into the space it shrinks because it is then beneath the second flight of stairs, down to 3 feet under the first landing.  The floor area is about 67 square feet, but only about 20 square feet has proper headroom.  In short, it has the appearance and practicability of the “cupboard under the stairs” found in most homes of two storeys.

13.  At the material time, Golden Horse also owned the 2^nd floor of the building; indeed, as it happens, there was a contemporaneous sale of these premises to an associate company of Central West.  It was at the time rented to a tenant who ran it as a hotel called Fu Shing Hotel.  That has no particular bearing, save that at the material time the front wall of the Soffit Space which fronted on to Argyle Street had affixed to its exterior neon lit signs promoting both the Golden Horse Restaurant and the Fu Shing Hotel.  The electrical cabling to these signboards came from the restaurant’s meter board and through the Soffit Space, thence to the signboards.

Historical Background

14.  Golden Horse Restaurant Limited was incorporated in 1972 and began operating on site that year.  Its founder was Mr Cheung Kee Yew who had bought in his name the ground and 1^st floors of the building two years before.  Golden Horse bought the 2^nd floor in 1985 and in 1989 the 4^th floor.  In 1995 Mr Cheung sold the ground and 1^st floors to Golden Horse.  He has since died, but is survived by his widow Madam Tong Sin Lan and sons Cheung Cheuk Bun, Cheung Hoo Che, Cheung Chin Leung and Cheung Chiu Lap who now own the shares of Golden Horse.  The four brothers are its directors.

15.  Golden Horse having now sold its interests on the ground, 1^st and 2^nd floors, still has the premises on the 4^th floor which all along have been used as its office.

16.  It is the evidence of Cheung Cheuk Bun, the oldest of the brothers, that many years ago his father “trespassed” on the ground floor lobby, by partitioning and thus building the room comprising the Soffit Space.  How it was utilised thereafter and up to this sale is a contentious issue, to which I shall return.

The Sale and Purchase

17.  The Board of Golden Horse having decided to sell the premises, Mr C B Cheung engaged a real estate agent of his acquaintance called Ms Kwong Suk Fun to promote the same.  She in turn spoke to a Mr Lai Wing To, a property investor on her company’s books.  He through Ms Kwong negotiated with Golden Horse; her contact throughout was Mr C B Cheung.  The upshot was a deal, made between Golden Horse as vendor and a company of Mr Lai called Surplus Dragon Limited as purchaser, with a right for Surplus Dragon to nominate the ultimate buyer.  In the event it nominated Central West. 

18.  The parties entered into a provisional agreement for sale and purchase dated 1 May 2004.  The property to be bought and sold was described thus:  “Ground floor and the rear backyard on no. 28-30 Argyle Street and 1^st floor and the rear flat roofs level with and adjoining the 1^st floor no. 28-30 Argyle Street Kowloon.” The price was $108.8 million.  The completion date was 1September 2004.

19.  The deal struck was that Golden Horse was to close down the restaurant and vacate its premises thus to give vacant possession of that part of the property.  The premises leased to Jade Dragon, the leatherwear lessee, were to be bought and sold subject to the tenancy, but Golden Horse was obliged to serve a notice to quit in order to give vacant possession to the new owner shortly after completion.

20.  What Central West regards as significant is clause 5 of this agreement, dealing with the vendor’s obligation to give vacant possession of the restaurant, which described that part as:  “No. 28 front shop with no. 28-30 1/F, current address of Golden Horse Restaurant”.

21.  In the usual way the provisional agreement was superseded by a formal agreement for sale and purchase which began life as a draft in various forms until the solicitors for both sides had agreed to the forms of all the clauses.  This was signed on 22 May.  I shall call this the Agreement.

22.  By clause 1 it was agreed that the property bought and sold was that described in the 3^rd schedule.  The 3^rd schedule reads:

“THE THIRD SCHEDULE ABOVE REFERRED TO

The Property:-

ALL THOSE 4 equal undivided 18^th parts or shares of and in ALL THAT piece or parcel of ground registered in the Land Registry as THE REMAINING PORTION OF KOWLOON INLAND LOT NO.1567  And of and in the messuages erections and buildings thereon known at the date hereof as Nos.28 and 30 Argyle Street (“the Building”) TOGETHER with the right to the exclusive use occupation and enjoyment of FIRST ALL THOSE the whole of the Ground Floors of the Building as shown on the No. 1 Plan annexed to an Assignment registered in the Land Registry by Memorial No.354761 (“the Assignment”) and thereon coloured Pink and the whole of the Rear Back Yards on the Ground Floor level of the Building as shown on the said No.1 Plan and thereon coloured Brown AND SECONDLY ALL THOSE the First Floors of the Building as shown on the No.2 Plan annexed to the Assignment and thereon coloured Pink and the Rear Flat Roofs level with and adjoining the said First Floors as shown on the said No.2 Plan and thereon coloured Brown.

Deeds and Instruments:-

Subject to and with the benefit of the Deed of Covenant registered in the Land Registry by Memorial No. 354762.”

23.  The areas coloured pink to designate the property purchased on the ground floor did not include the lobby on the ground floor; in particular, did not include the area occupied by the Soffit Space.

24.  The Deed of Covenant referred to as an encumbrance and beneficial interest is the usual deed of mutual covenant (DMC) which binds owners in a multi-ownership tower block giving them exclusive rights and responsibilities in respect of those parts they have bought, and defining common areas.  In this DMC these include “the entrance hall staircases landings and passages”; thus to include that part of the ground floor lobby occupied by the Soffit Space.

25.  The parties’ solicitors caused the issue of vacant possession of part of the premises to be incorporated at clause 6(a):

“6.   (a)  Portion of Ground Floors of the Property as shown on the Plan annexed to Tenancy Agreement dated 14^th June 1999 and thereon coloured Blue (‘the Rented Portion’) is sold subject to such tenancy as set out in Part V of the Second Schedule hereto.  Vacant possession of the remaining portion of the Property (‘the Vacant Portion’) shall be given to the Purchaser on completion.”

26.  There is no dispute that that part coloured blue depicted the area leased by Jade Dragon, the leatherwear proprietor.

27.  At clause 22 was the familiar clause usually known as an entire agreement clause, in which the parties acknowledged that the Agreement set out the full agreement between the parties and superseded all previous agreements whether oral or in writing entered into by the parties or their agents.

28.  In the run up to the completion there was a hiccup when Jade Dragon refused to accept the notice to quit.  The dispute was resolved when both vendor and purchaser combined to “buy out” the lessee, with completion deferred to 12 October 2004.

Completion and the Aftermath

29.  On the date for completion Mr Lai called for the key to the Soffit Space.  Mr C L Cheung, having conduct of delivery of possession, declined to hand it over because possession of Soffit Space was not part of the deal.

30.  Notwithstanding, Mr Lai having engaged contractors to redecorate the area hitherto the restaurant, caused the front wall of the Soffit Space facing Argyle Street to be pulled down and replaced with a roller shutter.  There was intervention for or on behalf of the Cheung family and possession to Central West and/or its agents has been denied ever since.

31.  Central West issued this writ in December 2004.

The Case For and Against Central West

32.  It is contended that on a true construction of clause 6(a) of the Agreement, Central West was on completion entitled to possession of the Soffit Space; alternatively, that the Agreement when signed failed to incorporate a common intention of the parties, that being that possession of the Soffit Space was to be transferred as well. 

33.  This proposition is founded in clause 5 of the preliminary agreement for sale and purchase; that the Soffit Space having been utilized by the restaurant as a storage area of the restaurant and as such being in the possession of Golden Horse was part of the “current address” of the restaurant for passing of vacant possession.

34.  The counter to this is that the “property” as defined was properly and completely described in the Agreement; that on no construction could it be said to include possession of the Soffit Space.

35.  Further, that nothing is missing from the Agreement as warrants rectification of it.  There was no common intention to pass possession of the Soffit Space.  Clause 5 of the provisional agreement does not assist.  The Soffit Space was not used by the restaurant and could not have been included in the description “current address” of the restaurant.

The True Construction Ground

36.  This can be shortly dealt with.  Clause 6(a) of the Agreement is of no assistance to Central West.  Clause 1 and schedule 3 define the property that was bought and sold.  The Soffit Space was not included.  Clause 6(a) subdivides that property being bought and sold into that which was subject to tenancy and that which was to pass with vacant possession.  It does not extend the property being passed.  It does not, somehow, incorporate the passing of possession in the Soffit Space. 

37.  Central West fails on this ground.

The Rectification Ground

38.  To deal with this alternative I have to resolve issues of fact.  These include:

(a)     How and by whom has the Soffit Space been utilized over the years and, in particular, during the period prior and up to the date the Golden Horse Restaurant closed down;

(b)    if it was principally used by Golden Horse Restaurant, whether on a proper reading and construction of the preliminary agreement, in particular clause 5, there was a mutual intention by the parties that the Soffit Space was part and parcel of the “current address” of Golden Horse Restaurant;

(c)     if so, whether the parties signed the Agreement under the mistaken belief that it incorporated the passing of possession of the Soffit Space from vendor to purchaser.

The Law on Rectification

39.  The principle is set out in Chitty on Contracts, twenty ninth edition, at 5-092:

“Common mistake.  Rectification naturally only applies to contracts which have been reduced to writing.  It has long been an established rule of equity that where a contract has by reason of a mistake common to the contracting parties been drawn up so as to militate against the terms intended by both as revealed in their previous oral understanding, the court will rectify the contract so as to carry out such intentions so long as there is an issue between the parties as to their legal rights inter se.”

40.  It obviously follows that a “previous oral understanding” would be expected to include a previous written one, such as a preliminary agreement.

41.  At 5-094, the principle is explained in an extract from the judgment of Lord Romilly M R in Murray v. Parker (1854) 19 Beav. 305, at p.308:

“In matters of mistake the court undoubtedly has jurisdiction, and though this jurisdiction is to be exercised with great caution and care, still it is to be exercised, in all cases, where a deed, as executed, is not according to the real agreement between the parties.  In all cases the real agreement must be established by evidence, whether parol or written … If there be a previous agreement in writing which is unambiguous, the deed will be reformed accordingly: if ambiguous, parol evidence may be used to explain it, in the same manner as in other cases where parol evidence is admitted to explain ambiguities in a written instrument.”

42.  The burden on the party seeking rectification is that he must produce what has been described as “convincing proof” that the document to be changed did not, at the time of its execution, represent the parties intentions.  This is dealt with at paragraph 5.096:

“Proof of mistake.  The burden of proof is on the party seeking rectification.  He must produce ‘convincing proof’ not only that the document to be rectified was not in accordance with the parties’ true intentions at the time of its execution, but also that the document in its proposed form does accord with their intentions.  It is essential that the extent of the rectification should be clearly ascertained and defined by evidence contemporaneous with or anterior to the contract.  The denial of one of the parties that the deed as it stands is contrary to his intention ought to have considerable weight, and unless the other party can convince the court that the document does not represent both parties’ intentions at the time of execution, rectification will only exceptionally be ordered.  Indeed, it has been said that it is not sufficient that the written contract does not represent the true intention of the parties; it must be shown that the written contract was actually contrary to the intention of the parties.  Where it is sought to rectify a document in accordance with a prior agreement between the parties, it must be shown that the intention of the parties continued unaltered up to the time of the execution of the document.”

43.  There is a further analysis by the editors of Butterworth’s The Law of Contract, beginning at para. 4.117 with an excerpt from the judgment of Mustill J in The Olympic Pride [1980] 2 Lloyd’s Report 67 at p.73:

“4.117   ‘The Court requires the mistake to be proved with a high degree of conviction before granting relief.  There are sound policy reasons for this.  The Court is reluctant to allow a party of full capacity who has signed a document with opportunity of full inspection, to say afterwards that it is not what he meant.  Otherwise, certainty and ready enforceability would be hindered by constant attempts to cloud the issue by reference to pre-contractual negotiations.’

        Moreover, the more serious the character of the conduct involved, the heavier the burden of proof may be, although it is not necessary to establish the mistake beyond reasonable doubt.  Generally, the proof, which may take any form including oral evidence, must be ‘convincing proof’, and ‘the difficulty of obtaining the remedy to rectification is notorious’.  This is especially true ‘in the field of commerce, where certainty is so important’.

         What is necessary is some outward expression of agreement that can be proved to the court.  So, the court is unlikely to be satisfied with the suggestion that the term of the agreement, in accordance with which rectification is sought, was tacit or implied:  the clarity of proof that a court of equity requires is unlikely to be found in that way.  Commonly, reference must be made to documents preceding the document to be rectified, such as drafts, offer documents, promotional material issued to induce people to contract, or the standard contract terms of one of the parties to the contract.

4.118     For rectification there must have been a prior common agreement in terms different from those recorded in the document to be rectified.  The prior agreement does not have to be binding in law.  Nor does the exact wording of that agreement have to be established.  It must, however, have been unchanged between the time of the agreement and the issue of the document to be rectified so as to suggest that the creation of the document in terms differing from the prior agreement was a mistake.

MISTAKE

4.119     For rectification there must have been a mistake in the document, i.e. a failure to record accurately the intention of both parties.  The mistake may be one of contradiction in which, for example, a negative has been added, or one of omission in which a word or a whole term has been left out, or one of erroneous inclusion or simply one of inaccuracy in that, for example, the wrong period of time has been stated for performance.  The kind of mistake susceptible to rectification also includes a mistake about the meaning of the words intentionally used in the document, as where ‘chalk’ is used in the mistaken belief that it is a kind of cheese, or a mistake about the significance of words, as where parties use words to express their agreement but words that are ambiguous: these can be rectified to achieve the necessary precision.

       Distinguish the case in which the parties had no common intention at all on the point because, for example, they overlooked it: rectification will not be ordered.  Distinguish also the case in which the parties have recorded the right terms in the document but those terms, identical in both document and in prior agreement, were adopted for the wrong reasons …”

44.  Finally, I draw upon an excerpt from Spry’s The Principles of Equitable Remedies, sixth edition at p.612, lest it be thought that the entire agreement clause in the Agreement, being clause 22, is fatal to rectification:

“Where a document contains a provision which states that the document sets out the entire agreement of the parties or which otherwise expressly negates the existence of terms not set out in it, that provision does not exclude rectification if rectification is appropriate under general equitable principles.  However it may affect the actual operation of those principles because, for example, it may tend to show that in fact no inconsistent governing intention has subsisted, and that hence no basis for rectification has arisen, because the parties have intended to be bound by the document in the material respects regardless of prior or other intentions.”

45.  And now for the evidence on what happened in the lead up.

The Evidence

46.  On his account Mr Lai inspected the premises unaccompanied.  He noticed the signboards, attached to the front of an enclosed space, the Soffit Space.  He stated in his witness statement:

“I took it that the Soffit Space was part of the existing premises of the Restaurant.”

47.  There was no elaboration of how or why.  He did not inspect it, nor ask to do so.  He said he did ask Ms Kwong who was using the Soffit Space.  He relied on her reply that it was used by the Golden Horse Restaurant.  He did not ask to what extent, or in what way.  More importantly, he did not ask the question:  “Is it included in the sale?”

48.  Mr Lai signed the preliminary agreement first as an offer.  When Ms Kwong took him through it she simply read out the clauses.  There was no discussion about the Soffit Space at all.  And then he signed.  Ms Kwong said she asked C B Cheung who was using the Soffit Space.  She said his response (which is denied) was that it was used by the restaurant for storage of miscellaneous items.  But when it was put to her: “Did you ask whether it was included in the sale?”, her response to that, given twice, was: “I can’t remember”.  She also conceded that in getting the provisional agreement signed by the parties, there was no discussion or reference to the Soffit Space at all.  Her interpretation of “the current address” was that it was included.  But she did not test that theory with the signatories.

49.  Mr C B Cheung gave a thumbnail account of how his father used the room once he had built it.  It was to store personal property not being utilized for the meantime.  The family of 7 or 8 lived in a small flat and space was always at a premium.  Over the years, various members of the family have similarly used it, when temporary storage was needed from time to time, right up to the completion date.  It was not used by the restaurant for any purpose at least to his knowledge.  And if it was, even for storage, that did not mean the restaurant or Golden Horse was in possession of it. 

50.  He denied having been asked by Miss Kwong about the usage, and the response she said he gave.  It was a topic that was not even once raised.  A key was held in the restaurant, but only for convenience.

51.  And as for the proposition that it was a common intention of the parties to transfer possession of the Soffit Space, he was adamant that there was no such common intention, having stated in his witness statement:

“‘The current address of Golden Horse Restaurant’ did not include the room under the staircase at the ground floor entrance of the building adjacent to the restaurant, that is the soffit space (‘the said room’) pointed out by the Statement of Claim of the Plaintiff.  The said room is not included in the ownership and title deeds of Ground Floor and 1^st Floor.  In the sale of Ground Floor and 1^st Floor, all the responsible persons of the Defendant company (including myself) had never agreed with and expressed to any person (including Miss Kwong) that the said ‘room was included in the property which was put up for sale’ and had never intended that the said sale included the said room.”

52.  Mr C L Cheung’s account of the use to which the Soffit Space was put matched that of his older brother.  Speaking of the family in general he said they had been storing their things there for years.  He cited personal examples; for instance there was a time about 10 years ago when he was staying for a while with his mother.  He did not wish to obstruct her home and thus used the Soffit Space to store effects not immediately needed.  Some 5 years later, having sold his flat, he spent some time in a hotel.  Again he used the Soffit Space for storage.  And he remembered his older brother moving some of his stuff in, when family came to stay and space was at a premium. 

53.  When he was asked if he would be surprised if staff of the restaurant had access to the Soffit Space and stored restaurant items there he responded:  “Of course I would.  They were not supposed to store items there”.

54.  When it was put to him that from the time the provisional agreement came to be signed it was his understanding that vacant possession of the Soffit Space was to be included he disagreed.  When it was suggested that it was within the power of Golden Horse to transfer possession of the Soffit Space, he responded “I did not think of this matter.  I was told by my solicitor we had a right to use it.  To transfer that right I am not sure”.

55.  There was other evidence adduced.  Mr Lai was given leave to inspect the interior of the Soffit Space but not until August.  This was well after the so-called common intention had been recorded in the preliminary agreement, and thus was of limited value.  He said inside were miscellaneous things of the restaurant, cleaning equipment, such as rags, mops, buckets and racks.  Later he said there was but 1 mop, 1 bucket and 1 rack.

56.  There was also the undisputed evidence that the lighting board advertising the restaurant was affixed to the outside of the front partition of the Soffit Space and that the wires of that occupied some part of the internal area. 

57.  There was also a raft of correspondence between the parties’ solicitors as they strove to agree the terms of the Agreement before it was to be signed.  On no occasion was there any mention of the Soffit Space.

Discussion

58.  Has Central West done enough to establish, with convincing proof, the common intention that the Soffit Space was to be conveyed?

59.  It has not, as I find, anywhere near done enough.  The most favourable interpretation on the evidence adduced is that staff of the restaurant had access to the Soffit Space and they may have made use of it from time to time; after all, the Cheung family were the directors of the company.  Mr Lai made scant enquiry about the Soffit Space prior to committing his company.  He did not even bother to inspect it.  That was insufficient to establish that Golden Horse was in possession, much less that it was transferring possession.

60.  The wording in clause 5 of the provisional agreement recording the current address of the restaurant was of no assistance.  To say that the intention was to include all of the space that comprised the restaurant is to beg the question: did that include the Soffit Space?

61.  The fact that there was a signboard on the outside of the Soffit Space could not by any stretch go to possession of the inside; the wiring passing through it was neither here nor there.

62.  Mr Lai’s visit in August was months after the two agreements had been signed and what he saw, for the first time, can have no bearing on the parties’ true intentions at the time they committed to the deal.  But notwithstanding that, the discovery of a mop and a bucket within can hardly be said to define the status of the Soffit Space; in particular to make it the restaurant’s storeroom.

63.  And if any further absence of proof is needed, it is the concentration of effort by the solicitors in the period of three weeks between the two agreements, to perfect the terms of the Agreement.  This was, after all, a $100 million plus conveyance.  It beggars belief that such an important feature as “what are we buying” was not dealt with.  And the entire agreement clause, whilst technically not a bar to a rectification application, patently in the circumstances of this case relegates Central West’s claim to a try-on.

64.  I find as a fact that the Soffit Space was not in the possession of Golden Horse. 

65.  There was no mutual intent as expressed in the provisional agreement that it was to be included in the sale between the parties.  There was no omission missed in the drafting, perusal and execution of the Agreement.

Conclusion

66.  Central West Development Limited has failed to make out a case for rectification as well.  Its claim fails; the summons is dismissed.

67.  Costs are nisi.  They are to Golden Horse Restaurant Limited, taxed if not agreed.