WIDE LINK LTD. v. TAM SING CHEONG AND OTHERS

CACV 151/1999

HEADNOTE

Property law

Claim by purchaser for recission of a provisional sale and purchase agreement on the ground that the "bargain" it incorporated was not fully provided.

Held: allowing the vendors' appeal against judgment for the purchaser -

(i) The vendors were in a position to compel the tenant and sub-tenant of the property to execute a necessary surrender and re-grant. They were therefore in a position to enforce the agreement (Elliott and Elliott (Builders) Limited v Pierson [1948] 1 Ch 452 followed).

(ii) There was substantial performance by the vendors, who were in a position to provide good title, which could be forced upon the purchaser by way of specific performance (Goldful Way Development Ltd v Wellstable Development Ltd [1998]4 HKC 679 followed).

(iii) Immaterial features were relied upon the purchaser to assert repudiation by non-performance of the agreement by the vendors.

CACV 151/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 151 OF 1999

(ON APPEAL FROM HCMP NO. 1102 OF 1998)

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J U D G M E N T

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Nazareth V-P:

Introduction

1. This is an appeal by the vendors against the order of Beeson J declaring that the plaintiff purchaser was entitled to rescind its sale and purchase agreement with the defendants and ordering the defendants to repay deposits totalling $5m.

The facts

2. The property involved was a commercial property known as Ground Floor, 138 Wan Chai Road, Hong Kong ("the property"). The vendors were the registered owners of the property as tenants in common.

3. They had leased the property for a term of five years from 1 May 1995 to Grandtide Management Limited ("Grandtide"). Grandtide was simply a nominee and service private company wholly owned by the vendors to hold the property for tax purposes. Grandtide sub-let the property to Geewing Company Limited ("Geewing") for a term of three years from 7 May with an option to renew for two years at monthly rentals of $128,000 and $157,000 respectively. Geewing used it to operate the dumpling shop.

4. Around 10 September the purchaser through its own agent, Midland Realty, learned about the property, "that it was let to a dumpling shop and that the owner was receiving rent of $128,000 per month which would be increased to $157,000 per month from May 1998 onwards". A director of the respondent, Lau Hok Tung ("Lau"), went to inspect the property and saw that the dumpling shop was in operation. He had, in fact, been studying the price and rental returns of property in the Wan Chai area for several months. Lau instructed Midland Realty to make an offer to purchase. It did so by filling in each clause of its standard proforma Provisional Agreement ("the Provisional Agreement") including the following insertion as Clause 15(A), (B) and (C) which, as completed, read as follows:

The Provisional Agreement was in Chinese. The foregoing English translation was used by the judge and accepted by the parties before us for the purposes of the appeal. The Provisional Agreement was upon completion handed to the vendors for acceptance.

5. The vendors signed the Provisional Agreement and amended the selling price of the property from the original offer of $31,500,000 to $32,300,000 and required $5,000,000 as a deposit. The Provisional Agreement was then handed back to the purchaser who accepted the amendments.

6. Clause 2 of the Provisional Agreement, which was dated 15 September 1997, reads as follows:

7. For the purpose of concluding the Formal Agreement, the parties each instructed their own solicitors. The vendors continued to be represented by Messrs B.C. Chow & Co., its original solicitors. The purchaser was first represented by Messrs T.S. Tong & Co. The material correspondence between the parties, which was marked "subject to contract" by the purchaser's solicitors, commenced a few days after the signing of the Provisional Agreement. Good progress towards conclusion of the Formal Agreement was made. A draft Formal Agreement was sent to the vendors' solicitors and returned on 29 September duly approved with a request for a copy of the tenancy agreement. On 30 September 1997 the vendors' solicitors further amended the 1st Schedule to the draft Formal Agreement to include their undertaking to procure a surrender of the lease and sub-lease and enter into a new tenancy. They provided copies of the lease and the sub-lease for the purchaser's perusal. These and the amended 1st Schedule must have made the existence of the sub-lease and its terms perfectly clear. On receipt of the draft and those copies very promptly that same day, 30 September 1997, the purchaser's solicitors sent cheques for the payment of the further deposit in the total sum of $2,230,000. On 3 October 1997 the vendors' solicitors returned the draft Agreement with their amendments and asked the purchaser's solicitors to re-engross the Formal Agreement and return it as soon as possible. On 6 October 1997 the vendors' solicitors sent the draft deed of the surrender of the sub-tenancy and the draft tenancy agreement to the purchaser's solicitors. The latter sent their suggested amendments to these to the vendors' solicitors and asked for the draft deed of surrender of the principal lease on 9 October 1997. The latter was sent to them on 15 October. On 20 October 1997 the purchaser's solicitors confirmed their approval of the draft deed of surrender of the principal lease without amendment and asked that the signing of the Formal Agreement be done as soon as possible. On 1 November the purchaser's solicitors again pressed for signing of the Formal Agreement. On the same day, the vendors' solicitors sent to the purchaser's solicitors, the re-engrossed Formal Agreement in duplicate for execution. On 11 November the purchaser's solicitors asked for instructions as to a split cheque for payment of the further deposit of $1,770,000, marking their letter "Urgent". On 15 November the purchaser's solicitors, T.S. Tong & Co., paid the further deposit of $1,770,000 and added that the draft Formal Agreement would be returned duly signed by the purchaser in due course. On 15 December 1997, the purchaser changed its solicitors and retained Baker & McKenzie, its present solicitors. On the same day, their new solicitors sent a letter alleging misrepresentation. This, the vendors' solicitors, denied.

The first misrepresentation complaint

8. The letter alleging misrepresentation, which was dated 15 December 1997, is instructive. It included the following:

The alleged misrepresentation from this first letter was apparently the statement that the property was "subject to an existing tenancy where the monthly is HK$128,000, etc., i.e., terms similar to those of the Sub-Lease".

9. The misrepresentation was further clarified in the affidavit of Mr Lau made in support of the purchaser's originating summons. He deposed that during the negotiations, in the course of which he made his offer of $31,500,000, Mr Cheung, a senior property consultant of Midland Realty, confirmed that "the existing rental of the property was HK$128,000 per month and that the tenancy had existed for some time". The only difference here from that in the foregoing first letter is the suggested previous existence for some months of the tenancy. Some minor point was sought to be made of it in argument, but I find nothing of significance in it.

Misrepresentation - the judge's findings

10. As to the representation, the judge found that the purchaser's real estate agent, Midland Realty, reported that "the property was let to a dumpling shop ... at a rental of $128,000.00 p.m. which would be increased to $157,000.00 p.m. from May 1998". Addressing that representation in the context of Clause 15(A) and (B), the judge found that

She went on to find that because "the speculative nature" of what was to be the purchase for investment, the information about the tenancy contained in Clause 15(A) and (B) must be taken as material statements. And that the fact they were untrue was sufficient ground for rescinding the contract. She accordingly found for the purchaser.

The appeal

11. The main thrust of the purchaser's case below was its misrepresentation claim, which was accepted by the judge. Powerful challenges were mounted against that acceptance in the grounds of appeal and in the submissions of Mr Edward Chan SC who, with Mr Stanley Siu, appeared for the vendors. Nonetheless, misrepresentation remained the main thrust of the purchaser's case until Mr Denis Chang SC, who appeared for the purchaser with Mr Horace Wong at the hearing of this appeal, came to make his submissions. He, in effect, elected not to pursue the misrepresentation plea and invited the Court to assume everything in respect of the misrepresentation issue against the purchaser. Instead, he relied primarily upon the purchaser's other point below. This was put by the judge in the following way:

Mr Chang pursued this as his main point somewhat altering its formulation. The parties, he submitted, had come to a bargain, and what the purchaser was being given, was not that which had been agreed under the bargain. As to that which he contended was to be received under the bargain (and was unavailable), this appears to be defined only in terms of the misrepresentation. It is for that reason that although in effect abandoned, I have found it necessary to describe the misrepresentation. The remaining claim for recission was placed in the purchaser's pleading solely upon:

12. Mr Chang put his submission this way. The purchaser's bargain was for the property subject to a tenancy, moreover, a tenancy that was of a term of three years with an option to renew for two years, although not an absolute option. What was ultimately offered was a tenancy for the remainder of the cumulative total of five years. The option had been eliminated by the voluntary act of the vendors after it had been agreed by the vendors that they would not effect any changes prior to the signing of the formal sale and purchase agreement. As a result, and without the potentially advantageous possibilities inherent in an option, the property became subject to a lease certain of two years plus. The original sub-tenant might not have exercised the option to renew; the lease might have been surrendered or determined prematurely. Moreover, there were covenants for removal of unauthorised alterations and for restoration, fair wear and tear excepted. The owner's rights in this respect under a lease dating back to five years could be rather more extensive than those under Geewing's new lease of two years and seven months.

13. These and other aspects of the matter present a number of points; in addition others arise from Mr Chan's response on behalf of the vendors. To those matters I now turn. In legal terms it is breach of Clause 15(A) and (B) of the Provisional Agreement upon which the purchaser must rely. No other cause of action or legal basis of claim has been pleaded. The several points mentioned are relied upon in support of the claim founded upon breach of the Provisional Agreement. I shall return to touch upon those points. It is convenient however to mention some of them here, e.g. the much later date of Geewing's new lease and its claimed unfavourable effect upon the tenants' or sub-tenants' obligations to reinstate or to restore, the effect of the new lease which it is claimed would attract the application of Part V of the Landlord and Tenant Ordinance, likely to be anathema to developers and investors, the potential loss from the elimination of the two year option, and Geewing being presented as already the tenant for the renewed lease period.

14. Reverting then to the claimed breach of Clause 15(A) and (B) of the Provisional Agreement, Mr Chang conceded that Geewing's new tenancy provided all that the former tenancy and sub-tenancy did.

15. In any case, as the vendors were clearly in a position to compel Grandtide and Geewing to execute the necessary surrender and re-grant; they had a right to enforce the performance of the Provisional Agreement. The purchaser never had a right to repudiate (Elliott and Elliott (Builders) Limited v Pierson [1948] 1 Ch 452). Nor could the vendors be said to have repudiated the Provisional Agreement, which the purchaser claims to have accepted. There is, therefore, nothing of substance in the complaint that the purchaser had not been provided with that which was specified in Clause 15(A) and (B). Clearly, the vendors are entitled to succeed in their appeal. However, in deference to counsel's strenuous submissions, I proceed to address briefly the vendors' plea of substantial performance, the points mentioned and some other minor respects in which counsel seek to derive support for their competing submissions.

Possibility of early determination of the tenancy

16. As to the possibility of the option to extend not being exercised and the lease being surrendered or determined prematurely, on the facts this has to be wholly discounted. The parties remain exactly the same, and there is not the slightest indication that Geewing would have wished for anything other than to extend the sub-tenancy.

Possible application of Part V, Landlord and Tenant Ordinance

17. This matter, that I have already touched upon, as Mr Chan submitted, is of no significance particularly as the statutory protection objected to by the purchaser could be displaced by notice under Part V.

Diminution of original tenant's restoration and reinstatement obligations

18. Since the "tenant" would in any case be Geewing, it is difficult to see what obligation it would escape, as the purchaser apparently fears. It was the tenant or sub-tenant at the beginning of the cumulative lease period and it will remain so at the end. Fair wear and tear excepted, any other dilapidations or unauthorised alterations would, so far as the purchaser is concerned, have to be made good to the same extent whether or not the surrender and re-grant had been effected.

The purchaser's acceptance of the vendors' repudiation

19. It was argued for the purchaser that since what was proffered by the vendors was not what the purchaser had bargained for, the vendors were in repudiation of the agreement and that as the vendors had kept the contract open even to the commencement of the trial, the purchaser was entitled to and did repudiate the agreement at the trial. Given my conclusion that there was in effect tender of what was contracted for and indeed, substantial performance of the contract, it must follow that there is nothing in this submission of the purchaser.

"Subject to contract" negotiations

20. The purchaser's submission as to the "subject to contract" qualification of the negotiations does not have to be addressed since it was apparently made in response to the vendors' reliance upon waiver and affirmation which Mr Chan for the vendors elected not to pursue. In any case, the purchaser's claim was founded upon the Provisional Agreement and not the subsequent negotiations designed to conclude the formal sale and purchase agreement.

Substantial performance

21. Mr Chang's main theme, going to pure contract seems to me to lose sight of the fact that this was an agreement for the sale and purchase of the property and that relief was sought by the vendors in the context of specific performance. The vendors were in a position to provide good title and such title could have been forced upon the purchaser in terms of specific performance. In that regard I adopt the conclusions of Yuen J in Goldful Way Development Ltd v Wellstable Development Ltd [1998]4 HKC 679 at 686C that:

This, it seems to me, of itself suffices to dispose of the purchaser's point that it did not receive what it had bargained for. It also disposes of the related subsidiary points which appear to have been relied upon only in support of the purchaser's foregoing main point, and would therefore not have come into play, not to mention, as already pointed out, that there was no substance to them.

Conclusions

22. In the result, it is clear that the judgment below cannot be sustained upon the claim of misrepresentation, which was abandoned. Nor, for the reasons given, can the claim succeed upon the basis of acceptance of any repudiation constituted by the vendors' breach, in the way contended for before this Court.

23. I would add that the probability in any case emerges clearly on the facts, in my view, that the purchaser's attempt to escape its obligation to purchase resulted from the substantial drop in the property market at end of 1997. There is on the facts simply no other credible explanation for the purchaser's sudden resort to immaterial features of the transaction to assert repudiation by non-performance of the contract by the vendors and thereupon acceptance on its own part.

24. I would accordingly allow the appeal, set aside the order below and enter judgment for the vendors, together with their costs below and in their appeal. Since the parties have not been heard upon the precise nature of the variable relief sought, I would direct that the matter he listed for early hearing if an agreed form of order is not submitted to the Court within three days of the handing down of this judgment.

Leong JA:

25. I agree.

Burrell J:

26. I also agree and do not wish to add anything.

Nazareth VP:

27. The appeal is accordingly allowed and the order of the judge set aside. Given the nature of the relief sought by the vendors, we do not feel able to make an order nisi to replace the judge's order. Unless the parties are able to agree the terms of the order to be made and submit them to the Court by 21 January 2000, the matter is, subject to any further directions, to be listed for hearing early the following week.