CHAN CHI NGONG v. TONG YIU TUNG

HCA183/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.183 OF 1998

----------------------

---------------------

J U D G M E N T

---------------------

1. This is an action by the plaintiff, Mr Chan, who purchased a property, being House Type 4A, No.10 of Gmelina Path, Palm Springs, Phase 1C in the New Territories ("the Property") for return of his deposit. The Property was purchased by Mr Chan from the defendant under a provisional agreement dated 20 September 1997. September 1997 was the height of the Hong Kong property market.

2. The Property was purchased for $12.18 million. It was purchased in rather unusual circumstances because two days before 20 September 1997, Mr Chan gave a cheque in the amount of $300,000 with payee left blank, signed by Mr Chan together with a blank signed provisional agreement, and these two documents were given by Mr Chan to Mr Wong, who was an estate agent. The property market at that time in Hong Kong was 'hot'. Sellers were unwilling to sell and buyers who were certain to make money, because everyday prices were going up, were desperate to buy. Many of the speculators of Hong Kong, including as I find in this case, Mr Chan, gave blank cheques and blank signed provisional agreements to estate agents in the hope that they could buy in a property which could then quickly be resold for a substantial profit. The instruction or limitation given by Mr Chan to Mr Wong was that a property was to be purchased for not more than $13 million and the size was to be not less than 2000 sq. ft. That was the evidence of Mr Wong which I accept as being the evidence from a truthful witness.

3. The Agreement was signed by the vendor/defendant on 20 September 1997 as a result of the initiative of Mr Wong by cold calling at the premises at the office of the defendant with offer to buy the suit premises at a good price and with the offer of the immediate cheque of $300,000. Mr Wong was obviously very good in his job and managed to persuade the defendant to sell at the price, as I indicated earlier, of $12.18 million. However, at the time that the provisional agreement was signed by the defendant, Mr Chan had not yet seen the Property because as a speculator he was not terribly interested in seeing the property before he purchased it. That apparently, according to Mr Wong, was the standard way that all the speculators in Hong Kong at that time were buying properties.

4. The next day, Mr Chan together with his wife and another lady who was possibly either his mother or the wife's mother, went to see the property together with Mr Wong. They saw the garden which was said to be small, they saw the various parts of the house including, in particular, the roof. On the roof there was a structure made by fibre glass which was said to be about 6' X 8' and, as can be seen from a picture in the Bundle, was certainly a substantial structure. The evidence is clearly that both Mr Wong as well as Mr Chan knew that this was a structure which had not been authorised by the manager of the building and that there was a possibility that the structure might be removed by the manager, although the evidence from Mr Wong - which he tried not to highlight too strongly - was that he said he did not think there would be a problem with the structure. What, however, was interesting is that Mr Chan who himself also occupied a house in the same compound, i.e. in Palm Springs, of course knew of the existence of the Deed of Mutual Covenant. The relevant provision of the Deed of Mutual Covenant which is clause 5.13 said :

"No unauthorised structure

No Village Owner of a Residential Unit shall erect anything on his roofs, flat roofs, terraces or gardens nor shall any gates, doors, or partitions be erected thereon without the consent in writing of the Manager whose decision shall be final."

It is therefore quite clear to me that Mr Chan, at all material times, knew that the structure on the roof, being a substantial structure as we have seen in the picture, was erected without permission of the manager and was therefore liable to be removed.

5. At the inspection on 21 September 1997, Mr Chan expressed a strong desire that the structure should be retained. Mr Wong offered to take it away possibly for personal reasons because Mr Wong wanted to put it up on his own roof, but that offer was declined and in fact a number of items were looked at, and an inventory was taken and all of these items were to be retained for the purchaser. A document at p.206 of the Bundle sets out this desire of Mr Chan to retain all these items. A supplemental agreement dated 8 October 1997 was signed by the vendor as well as by the purchaser's wife (on behalf of the purchaser) whereby this fibre glass structure on the roof was agreed to be retained so that it could be handed over on the date of the completion.

6. In fact, the matter went a little bit further because after the document on p.206, there came a time when Mr Chan, as a speculator, wanted to resell the house for quick profit, and the house was being marketed from late September onwards at $13.5 million. As there were so many people going to see the house, the vendor decided that this was not acceptable and required a document to be signed whereby the purchaser would agree to be given the keys and be responsible for all the outgoings - this is the document that we see at p.207. It was also agreed that in all respects, the purchaser was satisfied with the conditions of the property and accepted them.

7. When the market came down substantially, the purchaser Mr Chan wished to find a way to escape from an obviously unfavourable transaction. The evidence of Mr Wong was that the market had been coming down by 10% every month from October onwards. So by January, the market price for the house would probably be around the $9-$10 million figure.

8. A provision of the formal sale and purchase agreement was the basis upon which the purchaser sought to rescind. The relevant clause is clause 23(a), the formal part of which reads :

"The Vendor hereby warrants and declares that the Vendor has not received and is not aware of there being any notice from the Government or any other competent authority or the Manager of the Building of which the Property forms part requiring the Vendor to demolish or reinstate any part of the Property. If it should be discovered that such notice existed prior to the date hereof or if any such notice shall be issued or served on or before the date for completion, the costs for such demolition or reinstatement shall be borne by the Vendor and the Purchaser shall have the option to rescind this Agreement by giving written notice to the Vendor on or before the date for completion whereupon the deposit/and the further deposit and all other monies paid hereunder prior to the date of such rescission shall forthwith be returned to the Purchaser by the Vendor in full but without any compensation, costs or interest and neither party shall have any claim against the other herein or against the Vendor's and the Purchaser's Solicitor and the parties hereto shall at their own Solicitors costs enter into and cause to be registered at the Urban Land Registry or the appropriate New Territories Land Registry (as the case may be) an Agreement for Cancellation."

Such a notice from the manager was in fact served for the removal of the fibre glass structure on the roof and the purchaser relied upon clause 23(a) and gave notice to rescind the agreement.

9. The short question for this court at this trial is whether the plaintiff, in the circumstances, is entitled to the remedy of rescission. Three grounds were canvassed as being valid reasons why the court should deny the remedy of rescission to the plaintiff. The first ground is that the plaintiff knew that there was an unauthorised structure and therefore could not rely on clause 23(a). Secondly, it was said that Document 206 prevents the plaintiff from relying on clause 23(a). Thirdly, it is said that the p.207 document also disabled the plaintiff from relying on clause 23(a). I would consider each briefly in turn.

10. The first and main issue and thus the principal issue that divides the parties is whether at the time the plaintiff knew of the "unauthorised structure" - I used that expression rather than "illegal structure" because that is an appropriate expression deriving from the Deed of Mutual Covenant. I have no doubt myself, and having regard to what I said earlier, that the reality is that Mr Chan knew very well, when he went to see the premises on 21 September 1997, that the fibre glass structure on the roof was an unauthorised structure and that it was only a matter of time if and when the manager should discover it, that it is liable to be removed.

11. The evidence of Mr Chan himself is that he himself had a smaller structure on his roof, but he had not received any notice from the manager, so therefore he thought it was alright. With respect, having heard and seen him, I do not believe him. I think he knew very well that what was on his roof was unauthorised and that so long as there was no notice from the manager, then he could continue to have the enjoyment of the structure, but that does not mean that he knew that this was permitted. It is quite clear in my mind that he knew what was on his roof was not permitted just as I am quite clear that he knew that what was on the roof of the suit premises was not permitted. Like a lot of people in Hong Kong, they would take a chance on the manager not finding out or not serving the appropriate notice.

12. So on the matter of knowledge, I find that he did know. It followed, therefore, that if he knew about this, he could not rely on clause 23(a). I do not think the cases cited to me by Ms Tsui about good title are really relevant in this context.

13. I turn now to the second issue. The second issue is in fact a more fundamental issue and is a greater obstacle to the success of the plaintiff's case. By the agreement contained in the document at p.206, the vendor had expressly agreed not to remove the fibre glass structure on the roof and to hand over the property together with that fibre glass structure at the time of completion. By that express provision at the insistence of the plaintiff, the plaintiff had, on whatever basis, disabled himself from relying on clause 23(a) and certainly could not rely on the existence of the fibre glass structure as a basis for asking rescission. It seems to me that the impact of the document at p.206 is such that it is fatal to the plaintiff's case.

14. The last point is as to the impact of the keys on rescission. What happened there was of course the parties took the most unusual step - I think even by Hong Kong standard it must be considered as unusual for the keys to be handed over before completion and for the purchaser to assume all liabilities of a owner, including paying all the outgoings from 1 November and that, of course, is before the date of the service of the manager's notice. By that document, the purchaser had assumed all responsibilities for the premises including the fibre glass structure on the roof. If the plaintiff wanted to, of course he could remove the glass structure himself, as he had, by having the keys, possession of premises. But the plaintiff clearly did not want to do that. The reason was simple, the plaintiff wanted to get out of the purchase agreement. For me, therefore, that afford a third reason for denying the remedy of rescission to the plaintiff.

15. This is an unfortunate case which shows the ugly consequences of the speculation fever of the Hong Kong property market where Mr Chan, as a speculator, bought in at the height of the market, was in an unfortunate position of still holding the Property in his hands when the market turned. And when it turned, it turned very quickly and went down very very fast. He could not find another buyer. The consequence is that he tried to get out of the purchase. What is unusual about this case is not that he tried to get out of the purchase, but he had the audacity to sue for the return of the deposit. The other unusual feature of this case is that the defendant, having lost quite a bit of money as a result of the downturn of the market, should have normally sued for damages for the difference, but has not pursued it at this trial.

16. As the defendant has not pursued the matter of the counterclaim for damages, as far as this court is concerned, the counterclaim must be dismissed with costs. The claim, however, must also be dismissed with costs. So the judgment of the court is that the claim and the counterclaim are both dismissed with costs.