STRONG BEAUTY LTD v. GAIN LEGEND INDUSTRIES LTD

HCMP2565/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.2565 OF 2006

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J U D G M E N T

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1. This dispute concerned the sale and purchase of the property known as No.13 Eastern Street, Hong Kong (“the Property”).  The plaintiff was the vendor and the defendant was the purchaser. 

2. The Property is a five-storey building.  The unit on the Ground Floor is a shop.  The top unit comprises the 5^th Floor and the roof. 

3. The plaintiff and the defendant entered into a provisional sale and purchase agreement dated 19 June 2006.  The purchase price of the Property was agreed to be $10,800,000.  A sum of $540,000 was paid by the defendant as initial deposit under the agreement.

4. The parties subsequently entered into a formal agreement dated 12 July 2006 (“the Agreement”).  Clause 3 provided that completion was to take place on or before 31 August 2006, and on completion the plaintiff was to assign the Property “free from incumbrances subject only as hereinafter appears”.

5. Additionally, the Agreement contained the following material provisions :

“	9.	(a)	Save and except the Ground Floor and cockloft of the Property of which vacant possession will be delivered to the Purchaser on Completion, the Property is sold subject to the existing tenancies thereof particulars of which are set out in the Third Schedule hereto (“the existing Tenancy”).
		….
	12.	Time shall in every respect be of the essence of this Agreement.
	13.	If the Purchaser shall fail to complete the purchase in accordance with the terms of this Agreement (otherwise than due to the default of the Vendor) the deposit money paid hereunder shall be absolutely forfeited as liquidated damages (and not as penalty) to the Vendor who shall be at liberty if the Vendor sees fit …. to rescind this Agreement …. This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor’s rights hereunder or otherwise. ….
		….
	21.	The Property is and will be sold on an ‘as is’ basis and in the physical state and condition as they stand and no warranty or representation whatsoever has been given or is made by the Vendor or his agents regarding the physical state and condition thereof or of the building of which the Property forms part. ….”

6. The Third Schedule identified five existing tenancies, being in respect of the 1^st, the 2^nd, the 3^rd, the 4^th and the 5^th Floors respectively.  According to the particulars, the tenancy of the 5^th Floor was for a term of two years commencing from 7 October 2004.  That tenancy would therefore come to an end on 6 October 2006.

7. The defendant paid a further sum of $540,000 as further deposit and part payment of the purchase price. 

8. The parties, however, did not complete the sale and purchase on 31 August 2006.  Instead, they entered into a Supplemental Agreement (“the Supplemental Agreement”) which extended completion to a date on or before 31 October 2006. 

9. The Supplemental Agreement provided that :

“	1.	The Purchaser shall pay to the Vendor (i) a sum of HK$200,000 as further deposit and part payment of the purchase price of the Property and (ii) a sum of HK$129,600 as agreed interest for the postponement of the completion date, …… and the Vendor agrees with the Purchaser that the completion date as provided for in the Agreement be amended to be on or before 31st October, 2006.
	2.	It follows from Clause 1 above that the balance of purchase price payable by the Purchaser to the Vendor upon completion of the sale and purchase of the Property shall be HK$9,520,000.
		….
	4.	Save as herein supplemented, amended or varied, all the provisions contained in the Agreement shall continue to be of full force and effect, and the Agreement shall be deemed to be supplemented, amended and varied by this Supplemental Agreement.”

10. Pursuant to the Supplemental Agreement, the defendant paid $200,000 as further deposit and $129,600 as interest. 

11. Notwithstanding the extension of the completion date, the sale and purchase fell through eventually.  The parties accused each other of being in wrongful repudiation of the contract.

The Issues

12. Although a range of issues were raised in the skeleton submissions, at the hearing counsel of both sides were content to focus only on the following two issues :

(i)	whether, on a true construction of the Agreement, the plaintiff was under a contractual obligation to deliver vacant possession of the 5th Floor and the roof; and if so, whether the plaintiff had failed to do so and thereby repudiated the Agreement; and
(ii)	in the event of the court finding that it was the defendant who repudiated the contract, whether the three sums paid as deposits, totalling $1,280,000 and being 11.852% of the purchase price, were excessive in the circumstances of the present case and hence not subject to forfeiture.

Obligation to deliver vacant possession

13. The first question involves a construction of the Agreement.  To start with, as a general rule a purchaser is entitled to vacant possession of the property on completion in the absence of any contrary provision in the contract : see Barnsley’s Conveyancing Law and Practice, 4^th edition, p.157; Emmet on Title, 19^th edition, para.1.052 and Williams’ Contract for Sale of Land and Title to Land, 4^th edition, p.101.  Accordingly, prima facie the plaintiff would, on completion, be required to deliver vacant possession of all parts of the Property unless specifically identified otherwise.

14. It seems clear to me that Clause 9(a) of the Agreement was intended by the parties to reflect the prima facie position.  Save for the 1^st to the 5^th Floors (which were expressly identified as subject to tenancies extending beyond the original completion date), vacant possession was agreed to be given for the remaining parts of the Property — hence the reference to vacant possession of the Ground Floor and the cockloft.  It would be wrong, in my view, to construe Clause 9(a) in a manner as to confine the plaintiff’s obligation to delivering vacant possession only in respect of the Ground Floor and the cockloft.

15. The Third Schedule of the Agreement made clear that the tenancy relating to the 5^th Floor would expire on 6 October 2006.  It follows therefore, that if completion was to take place at a time between the expiry of that tenancy and the last day allowed for completion under the Supplemental Agreement, the 5^th Floor and the roof would no longer be incumbered by any subsisting tenancy and vacant possession of those premises would be required to be delivered.

16. In the course of the argument, reference was made to Clause 21 of the Agreement which provided for the Property to be sold on an “as is” basis.  Insofar as it might be suggested that the expression “as is” has the effect of impinging upon the plaintiff’s obligation to deliver vacant possession on completion after expiry of the tenancy of the 5^th Floor and the roof, such contention in my view is untenable.  Whereas vacant possession relates to the defendant’s ability to enjoy of the right of unimpeded possession of the premises, the reference to the sale on “as is” basis concerns, as the context of Clause 21 makes clear, quite different matters such as the physical state and condition of the building and the Property and, where applicable, the quality of the fittings and finishes therein incorporated.  In my view, it would be taking the reference to “as is” basis out of its proper context if the expression were to be construed as having the effect of overriding the plaintiff’s obligation to deliver vacant possession.

The evidence

17. Both parties were content for me to have regard only to the evidence on affidavit and no oral evidence was adduced at the hearing. 

18. According to Mr Lau, a director of the defendant, on his inspection of the Property on 31 October 2006 (the last day allowed for completion), he noticed that the 5^th Floor premises were still being occupied.  He said “there was plenty of furniture neatly placed inside the flat and there was no sign of the occupant’s moving out”.  In addition, a couple of photographs show that there was miscellaneous furniture remaining on the roof.

19. In response, Mr Chan (a director of the plaintiff) twice said in his affirmations that he “confirms that they have possession of the 5^th Floor of the Property”.  Mr Chan added that on or about 25 October 2006, the keys to the 5^th Floor were delivered to the plaintiff’s solicitors to be handed over to the defendant on completion.  He denied that there were still people living in the 5^th Floor premises.  And as for the presence of the objects on the roof he explained that they were left there by the former tenant and did not belong to the plaintiff. 

20. First, while I have taken note of Mr Lau’s statement that during inspection “he noticed that there were still people living in the [5^th Floor] premises” (para. 6 of his 2^nd Affirmation), I find that statement ambiguous.  Mr Lau did not give details as to how many people were seen on the premises nor whether he had ascertained who they were.  My reading of his evidence is that he had noticed “plenty of furniture neatly placed inside the flat”, and from that he inferred that there were still people living in the premises and the tenant had not in fact moved out.  As will become apparent later, it is not necessary for me to draw the same inference.  I would proceed on the basis that the tenant was no longer staying in the 5^th Floor premises on 31 October and the plaintiff had indeed recovered the keys to those premises. 

21. The fact that the tenant was no longer living there does not mean that the plaintiff had fulfilled its obligation of delivering vacant possession.  It is clear from the totality of the evidence that Mr Chan was not in a position to dispute the fact that various objects and furniture remained present inside the 5^th Floor premises and on the roof.  Mr Chan’s reference to taking possession of the premises and the plaintiff’s readiness to deliver the keys is hardly an effective demurrer in the face of Mr Lau’s specific allegation that plenty of furniture remained inside the flat.   

22. The obligation to deliver vacant possession requires the plaintiff to hand over the relevant part of the Property in such a state that there would not be physical impediment to the defendant’s enjoyment of its use and occupation : see Cumberland Consolidated Holdings Limited v. Ireland [1946] KB 264; Grandwide Ltd v. Bonaventure Textiles Ltd [1990] 2 HKC 154 and Wealthy China Trading Ltd v. Huie Man Kit [1999] 3 HKC 832. 

23. The nature and extent of the impediment will have to be considered in the light of all the circumstances of any particular case.  In Cumberland Consolidated Holdings, in relation to a sale of a disused warehouse, it was held that vacant possession was not given when sacks of hardened cement were left in the cellars which rendered a substantial part of it unusable.  In Wealthy China Trading, it was held that the vendor had failed to deliver vacant possession of a ground-floor property when a wall-shop was found to be attached to the external wall of that property, which prevented the purchaser from using the external wall.

24. I have borne in mind the observation of Lord Greene MR in Cumberland Consolidated Holdings (at p.271) that the right to vacant possession was denied only when the impediment in question was substantial.  But having regard to the presence of the objects and furniture (described as plenty on the 5^th Floor, as well as the situation seen in the photographs of the roof), I do not think it can be said that the plaintiff had delivered vacant possession of those parts of the Property.  The presence of those items clearly interfered, in a substantial manner, with the defendant’s physical enjoyment of its right to the use and occupation of those parts.  It is irrelevant whether the objects belonged to the plaintiff or someone else.  Nor is it an answer to say that the defendant could easily have them removed.  In my view, it is wrong to cast upon a purchaser who is entitled to vacant possession the burden of deciding how to deal with the chattels left on the premises and incurring the expenses of their disposal, unless, of course, it can truly and properly be described as de minimis (which is not the present case). 

Repudiation of the Agreement   

25. The correspondence exchanged between the parties on the date of completion indicated that the plaintiff was alerted to the presence of the chattels on the premises.  The plaintiff, however, was adamant that “the existence of the said chattels at the roof [clearly] does not constitute any breach of the agreement” : see letter from the plaintiff’s solicitors.  In view of the stance taken by the plaintiff, the defendant accepted the plaintiff’s repudiation of the agreement.

26. Miss Tong, for the defendant, submitted that delivery of vacant possession was generally regarded as a fundamental term in an agreement for the sale and purchase of land, and a breach of such a term would entitle the purchaser to rescind.  Mr Shek, for the plaintiff, did not take issue with that proposition.

27. In the circumstances, given my finding that the plaintiff had breached its obligation to give vacant possession in respect of the 5^th Floor and the Roof at the time of completion, I find also that the plaintiff was in wrongful repudiation of the Agreement (as amended by the Supplemental Agreement).

The deposit    

28. In light of my conclusion above, the defendant being the innocent party would be entitled to a return of the deposits.  Accordingly, the second question on forfeiture does not arise for consideration.  I would nevertheless set out my views briefly in case I am wrong on the first.

29. In the course of the hearing I have raised a question concerning the construction of Clause 13 :  Whether, insofar as the right to forfeit refers only to “the deposit money paid hereunder”, such an expression would confine the forfeitable sums to the initial and further deposits of $540,000 each and thus preclude forfeiture of the extra deposit paid under the Supplemental Agreement. 

30. In the end, I accept Miss Tong’s argument that it would not.  Clause 4 of the Supplemental Agreement provided that “the Agreement shall be deemed to be supplemented, amended and varied by this Supplemental Agreement”.  By that deeming amendment of the Agreement, the relationship of the parties should be regarded as being governed not by two separate agreements, but one single agreement as amended.  The expression “the deposit money paid hereunder” in Clause 13 must accordingly be read to include all the deposits paid, whether pursuant to the Agreement or the Supplemental Agreement. 

31. Thus, argued Miss Tong, the aggregate of the sums sought to be forfeited exceeded the conventional 10% of the purchase price.  On the authority of the Court of Final Appeal’s decision in Polyset Ltd v. Panhandat Ltd [2002] 3 HKLRD 319, unless the vendor was able to show exceptional circumstances to justify the higher amount, no part of the sums would be subject to forfeiture.

32. Miss Tong further stressed, first, that the period between the signing of the Agreement and the extended completion, being just over three and a half months, was not unusually long; secondly, that a sum representing interest was already payable to the plaintiff for the extension of completion; and thirdly, that the market at the time in 2006 (both domestic and retail) was rather stable, if not in fact on a slightly upward trend.  There was no justification for the extra deposit in these circumstances.

33. On this question, I have taken note in particular of the following observation of Bokhary PJ in Polyset, at para.25 :

“

A view on such an issue does not readily lend itself to much elaboration.  The correct test must of course be applied to the material facts.  But once that has been done, the resolution, one way or the other, of an issue of this kind unavoidably becomes very largely a matter of impression on a question of fact and degree.”

34. In the present case, notwithstanding those factors urged upon me by Miss Tong, I am of the view that there was sufficient justification of the higher amount of deposit having regard to all the circumstances.  First, the period for completion (as extended) was close to four and a half months from the date of the provisional agreement.  Such a period, though perhaps not exceptional, was longer than usual.  It is also to note that with the extension, the period became almost double that of the time originally agreed between the parties.  Secondly, while it is true to say that the interest was to compensate the plaintiff for the delay in receiving the balance of the purchase price, the extra deposit served the purpose as added security for performance given the fact that the Property would have to be kept off the market for the further period.  In these circumstances, and considering that the aggregate sums in question only exceeded the conventional percentage by a small margin, I have come to the view that the higher amount was justified.

35. Accordingly, had I found in favour of the plaintiff on the question of vacant possession, I would have held that the plaintiff would be entitled to forfeit the whole of the deposits.   

Conclusion    

36. The plaintiff’s Originating Summons herein is dismissed.  I would grant an order in terms of paras (2), (3), (6) and (7) of the defendant’s Notice of Counterclaim.  The rate of interest, insofar as it relates to repayment of the deposits, is to be 1% above HSBC’s best lending rate from time to time for the period between 1 November 2006 and the date of this Judgment, and thereafter at judgment rate until payment.

37. I would also make an order nisi that the defendant should have the costs of these proceedings.