GREEN PARK PROPERTIES LTD. v. DORKU LTD.

CACV205/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 205 OF 2000

(ON APPEAL FROM HCA 8564 OF 1998)

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J U D G M E N T

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Hon Le Pichon JA :

1. This appeal and cross-appeal arise out of a Provisional Agreement for Sale and Purchase ("the agreement") entered into on 14 April 1998 between the defendant ("the vendor") and the plaintiff ("the purchaser") for the sale and purchase of property described in the agreement as "Ground Floor Shops, No.566 Nathan Road, Kowloon" ("the property") for $54 million. The deposit of $10.8 million was paid to the vendor's former solicitors as stakeholders. The judge held that there was no defect in title but that the purchaser was entitled to rescind the agreement on the basis of misrepresentation.

The facts

2. The vendor was the registered owner of the property which was partitioned into two portions, namely portions A and B, both of which were rented out to tenants. Portion B was much smaller in size and considerably less deep with a frontage on Nathan Road. In early April 1998, the vendor put the property up for sale through estate agents. The agents contacted Mr Leong of the purchaser and took Mr Leong to inspect the property. The tenant of portion A was having decoration work carried out at the time. The parties inspected the property and from the photographs which were taken within a month of the agreement, it can be seen that a pair of wooden swing doors led out to a yard at the rear. There were toilets situated on the left and the right of the yard, access to them being through the swing doors and the yard. A scavenger lane lay beyond the yard but that was not visible from portion A since a wall ran along the lane between the two toilets on either side of the yard although access to the lane could be gained through a pair of metal doors. At the time of this first inspection, a worker was putting on wall tiles in the yard. It is common ground that during this first inspection, representatives of both the purchaser and the agent went into the yard. Access to the yard could only be gained through portion A.

3. There was a second inspection of the property after which the purchaser raised a question concerning the size and position of two columns within portion A. The judge found that the purchaser was shown a copy of the tenancy plan at the time, rejecting the evidence of the agent who had asserted that the tenancy plan was only produced on a date subsequent to the agreement.

4. The vendor did not own the yard which was part of the common area of the building. However, the tenancy plan indicated that the yard was part of portion A. Within a day or so after the second inspection, the parties entered into the agreement.

The appeal

5. On those facts, the judge held that there was a misrepresentation by the vendor that the yard was part of the property to be sold to the purchaser. He found that the misrepresentation was made in two ways : first, by showing the property to the purchaser, and secondly, by showing the tenancy plan to the purchaser.

6. Counsel for the vendor submitted that two issues arise in this appeal :

7. Counsel for the vendor submitted that an agent showing premises does not thereby make any representation as to rights over particular parts of the land. No one raised any questions at the two inspections as to whether the yard was part of the property. The general rule of caveat emptor applied and the vendor was under no obligation to disclose the fact that the yard was not part of the property to be sold. Mr Mok submitted that to hold a person guilty of misrepresentation by conduct, there had to be an intention on the part of the representor to induce the other party to believe in a certain state of facts. As the agent was not himself aware of the fact that the property did not include the yard when he took the purchaser to inspect the property, the relevant intention was not present. The passage in Chitty on Contracts at para.6-014 to which Mr Mok referred reads :

I do not read that passage as requiring any subjective intent on the part of the representor when making the representation. In my judgment, an objective test is to be applied in ascertaining whether or not, having regard to the conduct in question, there was a representation. See also Chitty on Contracts at 6-042.

8. In the present case, the purchaser was taken to view the property. The purpose was plainly to show the purchaser what was for sale. Portion A had previously been used as a restaurant and was being renovated. Work was being carried out at the time. During the inspection, the parties went into the yard which, though open in the sense of not having a roof, was enclosed by a wall. In order to gain access to the toilets at the rear, one had to go through the swing doors into the yard. The natural boundary of the property was the end wall with the metal doors which separated the property from the lane. Given the physical characteristics and layout of the property, the overall impression conveyed was that the property included the yard. When asked why he thought the yard was included as part of the property to be sold, Mr Leong replied :

The judge was justified in concluding that there was a representation by conduct that the yard was part of the property to be sold.

9. Turning now to the tenancy plan, as the judge observed, it showed the outline of the property and the area occupied by portion A. Portion A was shaded and the shaded part extended to the boundary with the lane. The judge came to the view that "the tenancy plan clearly gave the impression that the yard, which was located at the back of the property, was included in the property as well."

10. The contention was that even if there was a misrepresentation, it did not matter because it was not operative on the purchaser's mind. Mr Leong's concern at the time was with the position of the columns. In his examination-in-chief, Mr Leong said :

When cross-examined, he said :

The same points had been made in the court below and were rightly rejected by Cheung J for the reasons he gave. What was operative on the mind of Mr Leong was the shape of the property as depicted on the tenancy plan. Since the back of the property was represented by a straight line, that coincided with his visual inspection and it is hardly surprising that there was no reason for him to pay special attention to the yard.

11. In my view, the judge was correct in finding that there was misrepresentation by conduct which was actionable.

12. Once it is proved that a false statement was made which was likely to induce the contract, and that the representee entered the contract, it is a fair inference of fact (though not an inference of law) that he was influenced by the statement. See Smith v. Chadwick (1884) 9 App Cas 187, 196. In the present case the judge found that there was a misrepresentation which operated on the mind of the representee. Unless the judge was wrong in making that finding, the representee is entitled to rescind the contract.

13. The focus of Mr Mok's submissions was that the judge failed to apply section 3(2) of the Misrepresentation Ordinance and the principles set out in William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 106. Section 3(2) of the Misrepresentation Ordinance reads:

Section 3(2) does not impose any further requirement beyond establishing an actionable misrepresentation before the representee is entitled to rescind the contract.

14. Counsel for the purchaser submitted that it was not open to the vendor to invoke the court's discretion contained in section 3(2) because it was never raised in the pleadings and no relevant evidence as to valuation was before the court. As to the absence of valuation evidence, that of itself is no bar to relief in an appropriate case since the amount of damages can always be ordered to be assessed. See the William Sindall case at 1045E. What section 3(2) does is to confer on the court a discretion to declare the contract subsisting and award damages in lieu of rescission in certain circumstances. The exercise of the discretion is not dependant or conditional on a party expressly invoking it in the pleadings although that may be a convenient course.

15. As Hoffmann LJ observed in the William Sindall case (at 1036G), the discretion "is a broad one, to do what is equitable." It would follow that in considering what would be equitable, events that have occurred in the interim prior to the date of the hearing are also relevant. See the William Sindall case at 1045D.

16. It emerged during the course of the hearing that the property has been sold by the mortgagee to a third party and that at the date of the trial the bank had already entered into possession. The contract can therefore no longer be completed because of intervening events. That being so, where do the equities lie? How can it be equitable to declare the contract subsisting and award damages in lieu of rescission when it is already out of the vendor's power to carry out the contract? It would thus not even be necessary to go further to consider the three matters set out in section 3(2) to which the court must in particular have regard.

17. Even if it were still possible for the contract to be performed, the exercise of the court's discretion would not be any different. The vendor's case was that the judge did not correctly exercise his discretion under section 3(2) not to order damages in lieu of rescission. It was submitted that the misrepresentation was insubstantial, relating as it does to only 72 sq.ft. having regard to the overall size of the property, that the purchaser here was acquiring the property for investment purposes, i.e. the return, the fact that the rental that could be achieved would not be affected, and that having regard to the provisions of the deed of mutual covenant, in reality, none of the other co-owners would be in a position to use the yard so that there would be no meaningful restriction on the user of the yard by the owner of portion A.

18. I do not agree. What matters is not the diminution in the overall area of the subject-matter of the sale but the importance of the yard to the owner of portion A. If the yard were included, the owner would have exclusive control over access to the property from the lane. That is an important consideration so far as security is concerned. Further, as the judge held, an area is more valuable to the owner if it could be used exclusively by him and not shared by others in the same building. It would not be subject to restrictions. For example, an owner would be at liberty to erect an awning or a more permanent cover to render the yard weather-proof which would not be possible if it were a common area of the building. In William Sindall Hoffmann LJ was of the view that the misrepresentation in that case was something of minor importance given that the purchase price of the land was ￡5 million and the misrepresentation made there would have cost ￡18,000 to put right and was unlikely seriously to have interfered with the development or re-sale of the property. (See the report at 1036H.) In the present case, the misrepresentation was not capable of being remedied quite apart from the other considerations mentioned above. For those reasons the judge was correct in holding that the misrepresentation was not something of relatively minor importance.

19. Whilst it would appear that the judge was never informed that the bank was already in possession of the property as mortgagee so that he did not refuse to exercise his discretion on that ground, for reasons set out above, it is plainly a most material consideration. Had the matter been brought to the judge's attention, it alone would have entitled the judge to refuse to exercise his discretion.

20. For these reasons, I would dismiss the appeal with costs.

The cross-appeal

21. There is a cross-appeal by the purchaser on the judge's finding that the subject-matter of the agreement did not include the yard. The issue is whether the yard formed part of the subject-matter of the sale. Leading counsel for the purchaser submitted that the agreement must be construed against the matrix of facts and should be construed with reference to what was shown in the floor plans, the site visit and the tenancy plan.

22. In the agreement the subject-matter of the sale was described as "Ground Floor Shops, 566, Nathan Road, Kowloon". Clause 4 provided for the delivery of vacant possession of the property and the purchaser agreed to purchase the property "subject to the existing tenancy". Clause 15A provided that :

Attachment I was the tenancy agreement of portion A but the plan of the tenancy agreement of portion A was not attached to it. The judge held that clause 15A only referred to the tenancy details and was not for the purpose of delineating the property to be sold. He also held that as the whole of the property was being sold, there was no need to attach or supply the tenancy plan in order to delineate the property to be sold. In other words, he found the parcels clause to be a sufficient description of the property so that it was unnecessary to refer to the tenancy plan to see what was being sold.

23. I do not agree. The parcels clause in the agreement throws no light on where the boundary of the property was and specifically, whether or not the yard lay within the boundary of the property. One therefore has to look to see if other provisions of the agreement shed any light on the subject matter of the sale. In this connection clauses 4 and 15A are relevant since the property was sold subject to existing tenancies. In these circumstances, it would be permissible to refer to the tenancy agreement of portion A to see if it could shed light on the extent of the property.

24. The tenancy agreement described the property as "Part A, Ground Floor Shop, No.566 Nathan Road, Kowloon (as shown on the plan ...)". The plan itself was expressed to be "not to scale, for identification purposes only" rather than "more particularly delineated on the plan".

25. It is clear from the passage from Emmet on Title (19th Ed.) para.17.012 cited in the judgment that where a plan is "for identification purposes only" it may still be looked to for elucidation but not contradiction of, the verbal description. Wigginton Ltd v. Winster Ltd [1978] 1 WLR 1462 which was referred to in Emmet is clear authority for that proposition. The reasoning was succinctly stated in the judgment of Bridge LJ (at 1475G-H) as follows:

26. In the present case, the parcels clause of the agreement was insufficiently precise. Since the sale was expressed to be subject to the existing tenancy, the subject-matter of the tenancy agreement would assist in ascertaining the precise boundaries of the property. The parcels clause of the tenancy agreement was equally insufficiently precise. In those circumstances, the plan to the tenancy agreement though attached "for identification purposes only" could be looked at for elucidation. Unless the plan contradicts or is inconsistent with the verbal description, it should be taken into account in ascertaining the subject-matter of the sale. It matters not that attachment I referred to in clause 15A of the agreement did not include the plan. The whole point of reference to the plan was because of the inadequacy of the verbal description in both the agreement as well as the tenancy agreement.

27. When one looks at the plan, it is clear where the boundary of the property lay. In my judgment, the yard was intended to be included in the sale. Accordingly, I find that there was a defect in title.

28. The vendor sought to rely on substantial performance. This issue was never raised in either the correspondence between the parties or the pleadings. Indeed, the judge found that the vendor would not even consider any reduction in price when the problem was first raised. I agree with counsel for the purchaser that in those circumstances, it is not open to the vendor to take this point. Unlike an assessment of damages which can be made at a subsequent stage and relevant valuations obtained for that purpose, there was no relevant evidence before the judge or this court to support the contention of substantial performance.

29. In any event, even if it were still open to the vendor to take the point, there are insuperable obstacles given the conclusion I have reached that the misrepresentation was not something of relatively minor importance. Nor does the decision in Goldful Way Development Ltd v. Wellstable Development Ltd [1999] 1 HKLRD 563 assist the vendor because the facts are distinguishable. The issue there was whether the vendor could still be regarded as performing the contract if it assigned the property without the "greenhouse" which occupied part of the backyard. There was no question of any diminution in the area of the land conveyed. The only difference was that part of the area, instead of being a covered area, became an uncovered area.

30. For these reasons, I would allow the cross-appeal with costs.

Hon Stock JA :

31. I agree, and I too would dismiss the appeal with costs, and allow the cross-appeal with costs.

Hon Rogers VP :

32. I agree with the judgment of Le Pichon JA and there is nothing I can usefully add. The appeal will therefore be dismissed and the cross-appeal allowed. There will be an order nisi that the costs of both the appeal and cross-appeal will be to the Plaintiff.

Remarks:
Appeal by the Defendant to the Court of Final Appeal.  Appeal dismissed.  Please refer to the Appeal Judgment FACV000009/2001.