ALLCOM LTD v. LEUNG CHUN BONG

HCA 1749/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1749 OF 2010

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REASONS FOR JUDGMENT

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1. On 10 July 2013 at the conclusion of the trial of this action I dismissed the plaintiff’s claims against the defendant. I also made an order that the costs of the action be paid by the plaintiff to the defendant such costs to be taxed, if not agreed. I indicated at the time that reasons in writing would be provided. This I now do.

Background

2. The background facts are undisputed.

3. The plaintiff is a limited company incorporated in Hong Kong. It is, and was at all material times, a developer of land.

4. At all material times the plaintiff was the developer of the land development project in Lot No. 999 in Demarcation District 214 (“the Lot”) known as Colour by the River, No. 500 Nam Wai, Sai Kung in the New Territories which consists of, inter alia, 7 houses (“the development”).

5. At all material times the plaintiff was the registered owner of the premises known as All That House No. 1, with car parking space nos. H1-1 and H1-2 of Colour by the River (“the property”).

6. By the Permission Letter dated 20 August 2007 registered in the Land Registry by Memorial No 08012201330031 on 22 January 2008 (“the Permission Letter”) the plaintiff was granted permission by the District Lands Office, Sai Kung to enter into that portion of Government land mentioned therein for the purpose of slope upgrading works for the development of the Lot upon the terms and conditions contained in the Permission Letter.

7. Condition (12) of the Permission Letter provided that:

“(12) Notwithstanding the issue of an Occupation Permit or Certificate of Compliance with the New Grant under which the Lot is held, you shall not assign, mortgage, charge, demise, underlet, part with the possession or otherwise dispose of the Lot or any undivided share or any interest therein or any building or part of any building thereon or enter into any agreement so to do unless and until you have entered into a modification of the lease of the Lot and by your execution of the acceptance of these conditions you formally agree that the said Government Lease shall be modified to that extent only and until the said document has been completed and executed by you and registered in the Land Registry.”

8. The plaintiff entered into an agreement on 3 May 2008 for the sale by the plaintiff and the purchase by Escala Investments Ltd (“Escala”) of the property at the price and on the terms and conditions contained therein (“the Escala agreement”).

9. As the plaintiff had not entered into a modification of the lease of the Lot at the time of the Escala agreement, the plaintiff was in breach of condition (12) of the Permission Letter.

10. The occupation permit in respect of the development was issued on 5 May 2008.

11. By a letter dated 14 October 2008, the Director of Lands informed the plaintiff’s solicitors Messrs. Huen and Partners (“Huen”) that the proposed amendments to the Deed of Mutual Covenant and Management Agreement in respect of the Lot were approved.

12. By a letter dated 17 November 2008 from the District Lands Officer, Sai Kung to the plaintiff, the plaintiff was informed that the Government had approved a modification of the lease of the Lot.

13. The Escala agreement was subsequently determined as evidenced by the Memorandum of Determination dated 22 July 2009.

14. According to the said Memorandum of Determination, Escala, as the purchaser, failed to pay the balance of the purchase price in accordance with the terms of the Escala agreement. Despite being called upon by the plaintiff to make good the default, Escala failed to do so whereby the plaintiff exercised its right to determine the agreement with Escala. The Escala agreement was, therefore, determined

15. By a provisional sale and purchase agreement dated 8 August 2009 (“the provisional agreement”) the plaintiff agreed to sell and the defendant agreed to purchase the property at the price of HK$29,000,000 upon the terms and conditions contained therein.

16. Pursuant to the terms of the provisional agreement the defendant paid an initial deposit of HK$1,450,000 to the plaintiff on the signing of the provisional agreement.

17. Also pursuant to the terms of the provisional agreement the plaintiff and the defendant entered into the formal agreement for the sale and purchase of the property on 17 August 2009 upon the terms and conditions contained therein (“the formal agreement”).

18. The defendant paid a further deposit to the plaintiff in the sum of HK$1,450,000 on the signing of the formal agreement.

19. Under the terms of the formal agreement completion of the sale and purchase of the property was to take place on or before 8 December 2009.

20. It was also provided in the formal agreement that time should in every respect be of the essence of the formal agreement.

The Requisition

21. By a letter dated 27 August 2009 from Messrs DLA Piper (“DLA”), the defendant’s solicitors, to the plaintiff’s solicitors, Huen, DLA raised, inter alia, a requisition in respect of the Escala agreement.

22. The requisition that was raised was contained at the paragraph numbered 4(a) of the said letter dated 27 August 2009 (“the requisition”) as follows:

“4. Permission Letter Memorial No. 08012201330031

(a) According to clause (12) of the Permission Letter, the Grantee shall not assign, mortgage, charge, demise, underlet, part with possession or otherwise dispose of the Lot or any undivided share or any interest therein or any building or part of any building thereon or enter into any agreement so to do unless and until the Grantee has entered into a modification of the lease of the Lot.

Despite the said clause 12, an Agreement for sale and purchase dated 3 May 2008 Memorial No. 08060200180240 was entered into prior to the Modification Letter dated 17 November 2008 Memorial No. 08111901330019.  Please produce documentary evidence to show that such breach of the Permission Letter is tolerated or waived by the District Lands Officer, Sai Kung.”

23. By their letter dated 12 November 2009 to DLA, Huen replied as follows:

“4(a) As the Occupation Permit has been issued and the Deed of Mutual Covenant and Management Agreement have been approved by Lands Department, they are the documentary evidence to prove that such breach of the Permission Letter is deemed to have been tolerated or waived by the District Lands Office, Sai Kung”

24. By their letter dated 13 November 2009 from DLA to Huen, DLA took the view that the requisition was not satisfactorily answered by Huen.

25. There was further correspondence between the solicitors in relation to the requisition which correspondence shows that the solicitors were unable to agree as to whether the requisition had been satisfactorily answered.

26. By a letter dated 13 November 2009, DLA wrote to the District Lands Office, Sai Kung (“DLO”) asking for confirmation as to whether the breach of the Permission Letter by the plaintiff by the entering into of the Escala agreement was tolerated or waived by the District Lands Office, Sai Kung.

27. By a letter dated 25 November 2009 (“the DLO’s letter of 25 November 2009”), Ms M K Li (“Li”), on behalf of the District Lands Officer, Sai Kung, replied to DLA stating, inter alia,

“I regret to inform you that I am not in a position to confirm whether there is any breach of the said Permission Letter’s conditions. Notwithstanding this however, Government reserves the right to take enforcement action under the General and Special Conditions of the Lot should any breach or failure to observe any of the Conditions exist at the date hereof or be detected thereafter.”

28. As there was a dispute between the parties as to whether the requisition had been satisfactorily answered by Huen, the parties resolved this by entering into a supplemental agreement as contained in paragraph b. of the letter from DLA to Huen dated 8 December 2009, the date of completion (“the supplemental agreement”).

29. By the supplemental agreement the plaintiff and the defendant, through their solicitors, agreed that DLA should keep the sum of HK$2,900,000

“being the security money for sending a letter of waiver or tolerance by District Lands Office, Sai Kung to the Vendor regarding the breach of the Permission Letter Memorial No. 08012201330031 on or before 7 June 2010. Should the Vendor’s solicitors fail to produce the said letter of waiver or tolerance or a letter having any other wordings to such effect that the District Lands Office may not take any immediate action in relation to the breach of the Permission Letter to the Purchaser’s solicitors on or before 7 June 2010, a sum of HK$1,450,000 shall forthwith be forfeited by the Purchaser as compensation and the balance of HK$1,450,000 shall forthwith be returned to the Vendor.”

30. There is no dispute that by the supplemental agreement it was agreed that on completion DLA was to retain HK$2,900,000 as security for Huen to send to DLA on or before 7 June 2010 a letter by the District Lands Office as set out in the supplemental agreement and that should Huen fail to produce the letter on or before 7 June 2010, a sum of HK$1,450,000 shall forthwith be forfeited by the defendant as compensation and the balance of HK$1,450,000 shall forthwith be returned to the plaintiff.

31. Formal completion of the sale and purchase took place on 8 December 2009.

32. By a letter dated 24 December 2009 from Huen to the District Lands Office, Sai Kung, Huen stated

“According to Special Condition No.12 of New Grant No.9696 of the Permission Letter, the Grant shall not assign, mortgage, charge, demise, underlet, part with possession or otherwise dispose of the Lot or any undivided share or any interest therein or any building or part of any building thereon or enter into any agreement so to do unless and until the Grantee has entered into a modification of the lease of the Lot.

However, an Agreement for Sale and Purchase of House 1 of the captioned development were entered into prior to the Modification Letter dated 17 November 2008 Memorial No.08111901330019 but the same was cancelled and terminated.

In this circumstance, we should be obliged if you would kindly confirm with such event will not have any impact or effects on the relevant Government Lease.”

33. By a letter dated 21 January 2010 (“the DLO’s letter of 21 January 2010”), Li, on behalf of the District Lands Officer, Sai Kung, replied to Huen as follows:

“I refer to your letter dated 24 December 2009 and would advise that I am not in a position to confirm whether there is any breach of lease conditions within the above lot. Notwithstanding this however, Government reserves the right to take enforcement action under the General and Special Conditions of the Lot should any breach or failure to observe any of the Conditions exist at the date hereof or be detected thereafter.”

34. By a letter dated 9 March 2010 from Huen to DLA, Huen sent a copy of the DLO’s letter of 21 January 2010 to DLA. Huen took the view that the plaintiff had complied with its obligation under the supplemental agreement and asked for the release of the HK$2,900,000 to the plaintiff which DLA had held as security.

35. DLA denied that the plaintiff’s obligation under the supplemental agreement had been complied with.

36. As regards the HK$2,900,000 security money held by DLA under the supplemental agreement, by a letter dated 8 June 2010, DLA informed Huen that HK$1,450,000 was forfeited under the supplemental agreement and returned HK$1,450,000 being the balance of the security money to the plaintiff.

37. The plaintiff disputes that the sum of HK$1,450,000 has been forfeited to the defendant under the supplemental agreement.

38. The background facts as set out above are undisputed.

The claims

39. The plaintiff claims the said sum of HK$1,450,000. Although there was also a claim for damages, Mr Chung, for the plaintiff, made it plain that the plaintiff was only seeking payment of the said sum of HK$1,450,000 with interest and costs.

The main issue

40. The main issue between the parties is whether the DLO’s letter of 21 January 2010 is a letter of waiver or tolerance or a letter having any other wordings to such effect that the District Lands Office may not take any immediate action in relation to the breach of the Permission Letter. 

41. The resolution of this issue will determine whether the plaintiff was entitled to forfeit the HK$1,450,000 which was held by DLA as security money on completion.

The subsidiary issue

42. There is also a subsidiary issue of fact as to whether the contents of the DLO’s letter of 25 November 2009 were read to Francis Tsang Tak Sing, the conveyancing clerk of Huen and whether the DLO’s letter of 25 November 2009 was sent by fax to Huen shortly after receipt of the same by DLA.

The witnesses

43. I heard evidence from Francis Tsang Tak Sing (“Tsang”) who was the conveyancing clerk at Huen at all material times dealing with the sale of the property on behalf of the plaintiff. I also heard evidence from Li of the District Lands Office, Sai Kung who signed the DLO’s letter of 25 November 2009 and the DLO’s letter of 21 January 2010.

44. On behalf of the defendant I heard evidence from Warren Yu Wai Kit (“Yu”) who was the legal executive at DLA assisting the supervising solicitor, Ms Chu Po King, in relation to the purchase of the property by the defendant.

Findings

45. In my view, the requisition that was raised by DLA was a reasonable and proper requisition to raise.

46. Mr Dawes, for the defendant, referred me to Wong Kwok Yan v Pon Chi Lok [2009] 2 HKLRD 18 where there was a dispute as to whether good title had been shown by the vendor (“V”) of a property in the New Territories.

47. The facts in Wong Kwok Yan were that G was the grantee of a property subject to special conditions which prohibited alienation or dealing with the property, unless the grantee paid an additional premium to the Government. G mortgaged the property and later agreed to sell the property to V. The sale and purchase agreement was then cancelled by the parties. G paid the premium and the District Lands Office advised that the conditions would no longer apply, but reserved its rights “in respect of any breach or failure to observe any term or condition which may exist….or hereafter occur”. G then assigned the property to V and the cancellation agreement was later registered at the Lands Registry. Subsequently, the plaintiff (“P”) agreed to purchase the property from V. P raised requisitions regarding the apparent breaches of the conditions by V. V replied that there was no real risk of re-entry and/or encumbrance. P also made enquiries with the Lands Office which replied that legal advice was being sought and would be conveyed to the parties once available. It was held that good title was not shown.

48. In Wong Kwok Yan the letter from the District Lands Officer dated 18 April 2006 concluded with the paragraph:

“Please note that this letter is without prejudice to all or any rights of the Government whether under the captioned New Grant or otherwise in respect of any breach or failure to observe any term or condition which may exist on the date hereof or which may hereafter occur”.

49. As to that letter, Rogers VP said at paragraph 19 of his judgment

“…….far from expressly acquiescing in any breach, the District Lands Officer expressly reserved the rights of the Government in respect of any breach.”

50. As to whether good title was shown, Rogers VP said at paragraph 22 of his judgment

“22. In my view, there was a clear breach of special condition 5(a) by the mortgage in 1996 and also by the sale and purchase agreement in August 2005. In respect of the latter matter, of course, the defendant and the grantee attempted to rectify the situation by the cancellation agreement. On the facts known on this application it is not possible to say that the Government could not exercise its right arising particularly from the breach constituted by the creation of the mortgage. The fact that the advice of the senior solicitor is being sought demonstrates that the threat of re‑entry by Government cannot be excluded. Were the Government to re‑enter the lot, or were that to be threatened, and even if any such decision could be successfully challenged, that would, at least, involve a risk of litigation. Whilst the risk of Government re‑entry might be said to be low and, no doubt, many purchasers may be prepared to take that risk, it appears to me that it cannot be said that good title has been made out. The Court cannot compel a purchaser to take a title about which there is some doubt or which might involve the purchaser in litigation.”

51. I am not concerned in this case with the question of whether or not good title was shown at the time of completion. However, the decision in Wong Kwok Yan illustrates that the requisition that was raised by DLA in this case was a reasonable and a proper one to raise.

52. Yu claimed that he did read the contents of the DLO’s letter of 25 November 2009 to Tsang over the telephone shortly after it was received by DLA. He also claimed to have sent a copy of the said letter by fax to Huen at the time. These matters are denied by Tsang who gave evidence that Yu did not read the contents of the DLO’s letter of 25 November 2009 to him. He also said that Huen did not receive a copy of the said letter by fax from DLA at that time.

53. Although there are these issues of fact between the parties, it seems to me that whether or not the contents of the DLO’s letter of 25 November 2009 was read to Tsang shortly after it was received by DLA, and whether or not a copy of the same was faxed to Huen makes no difference to the resolution of the main issue.

54. The task of the court is to determine whether by the production of the DLO’s letter of 21 January 2010 to DLA before 7 June 2010 the plaintiff had complied with its contractual obligation under the supplemental agreement.

55. Be that as it may, on these issues of fact I prefer the evidence of Tsang to that of Yu. It seems to me that Yu may have been mistaken in his recollection that he did read the contents of the DLO’s letter of 25 November 2009 to Tsang over the telephone and that DLA did fax a copy of the DLO’s letter of 25 November 2009 to Huen shortly after DLA received it.

56. The fax transmission notification relied on by Yu (at page 566 of Bundle C) does not, in my view, support his evidence that the DLO’s letter of 25 November 2009 was faxed to Huen on 25 November 2009. In my view, it is highly likely that the said fax transmission notification was in respect of another document which was faxed to Huen by DLA on 25 November 2009 at approximately 11:33 hours. It is highly likely that the other document was a letter dated 25 November 2009 from DLA to Huen (at page 564 of Bundle C) where DLA put on record that the requisition had not been satisfactorily answered. The copy of the letter at page 564 of Bundle C indicates at the top that it was faxed on 25 November 2009 at 11:33:09 hours. In my view, Yu was mistaken in his recollection of these matters.

57. In any event, as I have said, it matters not whether the DLO’s letter of 25 November 2009 was read to Tsang or faxed to Huen on 25 November 2009 or shortly thereafter. What is abundantly clear is that the DLO’s letter of 25 November 2009 did not satisfy the defendant or his advisers. That being so, the plaintiff and the defendant, through their solicitors, entered into the supplemental agreement on 8 December 2009. Time was of the essence of the formal agreement and completion went ahead on 8 December 2009 with the parties entering into the supplemental agreement on that day.

58. It is clear that on a proper construction of the supplemental agreement what was required was for the plaintiff to produce to the defendant’s solicitors on or before 7 June 2010 a letter namely,

“a letter of waiver or tolerance or a letter having any other wordings to such effect that the District Lands Office may not take any immediate action in relation to the breach of the Permission Letter….”

59. Was the DLO’s letter of 21 January 2010 such a letter?

60. Mr Chung, for the plaintiff, did not persist in arguing that the DLO’s letter of 21 January 2010 was a letter of waiver or tolerance. In my judgment, plainly it was neither a letter of waiver nor a letter of tolerance.

61. Mr Chung submitted that the DLO’s letter of 21 January 2010 was a letter having wordings to such effect that the District Lands Office may not take any immediate action in relation to the breach of Condition (12) of the Permission Letter. He relied on the fact that the contents of the DLO’s letter of 21 January 2010 were similar to the contents of the DLO’s letter of 25 November 2009 and that in fact no immediate action had been taken by the District Lands Office in respect of the breach.

62. Li gave evidence that at the time of the DLO’s letter of 21 January 2010, the District Lands Office, Sai Kung was aware of the breach of Condition (12) of the Permission Letter by the entering into of the Escala agreement and that the Escala agreement was subsequently determined. She also gave evidence that at the time of the DLO’s letter of 21 January 2010 and thereafter the District Lands Office did not have an intention to take immediate action in respect of the breach.

63. Mr Chung further submitted that the DLO’s letter of 21 January 2010 indicated that the District Lands Office would not take immediate action in respect of the breach.

64. I am unable to accept Mr Chung’s submissions.

65. In my judgment, Li’s evidence does not assist the plaintiff.

66. The question to consider is not whether Government was going to take any enforcement action as a result of the breach be it immediate action or otherwise. The question to consider is whether the plaintiff had complied with its contractual obligation under the supplemental agreement.

67. The obligation on the part of the plaintiff was clear and unambiguous. It was obliged to produce on or before 7 June 2010 a letter of waiver or tolerance or a letter having any other wordings to the effect that the District Lands Office may not take any immediate action in relation to the breach of the Permission Letter. In my judgment, the DLO’s letter of 21 January 2010 was not such a letter. Nowhere in the letter does the District Lands Office say that it will not take immediate action in relation to the breach. There are no words in the letter suggesting this. On the contrary, it states expressly that the Government reserves its right to take enforcement action should any breach “exist at the date hereof or be detected thereafter”.

68. In my judgment, the plaintiff had failed to comply with its contractual obligation under the supplemental agreement and the defendant was entitled to forfeit the HK$1,450,000 as provided for in the supplemental agreement.

69. For the above reasons, I dismissed the plaintiff’s claims with costs to the defendant to be taxed, if not agreed, as costs should follow the event.