WIDE LINK LTD. v. TAM SING CHEONG AND OTHERS

HCMP 1102/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1102 OF 1998

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J U D G M E N T

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1. By an Originating Summons the Plaintiff sought a declaration that it was entitled to rescind a Provisional Agreement for Sale and Purchase entered into on 15th September 1997 between itself as Purchaser and Defendants as Vendor, in respect of a shop premises at G/F, 138 Wanchai Road, for misrepresentation and/or breach of clause 15(A) and 15(B) of the Agreement by the Defendants.

2. The Plaintiff sought an order for rescission and an order for repayment of the deposits of $5 million paid under the Agreement.

JURISDICTION

3. At the outset of the hearing Defendant contended that Plaintiff's application to determine whether there was a misrepresentation and/or breach of Clause 15(A) and (B) by Defendants was misconceived.

4. The basis of the Defendants' argument was that as S.12 of the Conveying and Property Ordinance Cap.219 does not include a provision similar to S.49(2) of the Laws of Property Act 1928 (which enables a Court to require payment of a purchaser's deposit in cases where the Court has declined to order the purchaser to perform the agreement) a purchaser in H.K. would be precluded from recovering his deposit in such circumstances.

5. Accordingly the Court would lack jurisdiction to grant the reliefs claimed by the Plaintiff in the Originating Summons at Para. 3 (an order that on rescission being granted the Defendants repay the deposits paid under the Agreement) and Para 4 (a declaration that on rescission the Plaintiff was entitled to a lien on the property for the return of the deposit.)

6. Defendants argued that the Court's power under the section was declaratory, not curative.

7. Having heard the parties I was satisfied that this was a proper case where the court had jurisdiction to decide the matter under S.12 of the Conveyancing and Property Ordinance, Cap.219.

8. That section enables a vendor or purchaser, by petition or originating summons, to apply to the court "in respect of any question arising out of or connected with any contract for the sale or exchange of land" and "the court may make such order ... as to the court appears just"

9. The court thus has a wide jurisdiction to decide such a question as posed by this application, namely, whether a purchaser is entitled to rescind on the ground of misdescription by the vendor. Further the court's power to make orders under S.12 is wide enough to enable it to order rescission, or the return of a deposit.

10. If there was a need to resolve disputed facts it would not be appropriate for the Court to do so on affidavits alone. However for the purposes of the application the facts of the case were not disputed by the Plaintiff and the Court was not called on to consider questions of mala fides, or consider disputed valuation evidence.

FACTS

11. The Plaintiff company learned in September 1997, through its real estate agent, Midland Realty, that a shop at GF, 138 Wan Chai Road was for sale at $35 million. The agent reported that the property was let to a dumpling shop (D.S.) at a rental of $128,000.00 p.m. which would be increased to $157,000.00 p.m. from May 1998.

12. After consideration, the Plaintiff instructed the agent to make an oral offer of $30 million; after negotiation this was increased to $31,500,000.00. A Provisional Agreement for Sale and Purchase (PASP) at $32,300,000.00 was signed and a deposit of $1 million offered with the returned Agreement. The PASP was the standard real estate agent's form. Additional clauses provided as follows:-

15A. The existing tenancy of this property has a monthly rental of $128,000.00 until 6th May 1998 and a further non-fixed term of 2 years at the monthly rent of $157,000.00. During the term of the tenancy, the tenant shall be responsible for all charges. The rental deposit of $471,000.00 will be transferred to the purchaser on or before completion.

B. The tenant is operating a business in the name of D.S.

C. This property must be sold and purchased as agreed.

13. In all Plaintiff paid $5,000,000.00 as deposits under the PASP.

14. Solicitors for the vendor prepared a draft Agreement for Sale and Purchase (ASP) which stated that the property was sold with the benefit of a Tenancy agreement. Part VI gave details of the Tenant as Geewing Co. Ltd. (Geewing), the term being 8 months from 7th September 1997, with an option to renew for a further term of 2 years. Rent was $128,000.00 and rental deposit was stated as $384,000.00.

15. Copies of the lease and sublease were sent to Plaintiff's then solicitors at Plaintiff's request. They showed the property was subject to a lease not to Defendants, but to Grandtide Management Ltd. (Grandtide), dated 28th May 1990, for 5 years from 1st May 1995 to 30th April 2000. Grandtide sublet to Geewing; the sub-lease was dated 28th April 1998. The term was 3 years from 7th May 1995 to 6th May 1998, at a rental of $128,000.00. Clause 10 of the sub-lease granted an option to renew for 2 more years at $157,000.00 p.m.

16. Included in the draft ASP was a clause whereby the Vendor undertook to procure a surrender of the Lease and Sub-Lease and a new tenancy agreement to be entered into by the Vendor and Geewing on the same terms and conditions as the sub-lease.

17. The Plaintiff's original legal advisors took various steps towards concluding the sale and purchase and advised payment of further deposits under the PASP. A draft ASP and draft surrender of Lease and Sub-lease were approved. Approval was indicated for the new lease. In November 1997 Plaintiff's solicitors requested a formal agreement. A letter dated 15th November 1997 enclosed further deposit cheques and indicated that the draft ASP would be returned duly signed by the Plaintiff "in due course".

18. Around 15th December 1997 the Plaintiff changed solicitors. At that point the Plaintiff, through its solicitors, who reviewed the documents, objected to the proposed terms regarding the Sub-lease and the Tenancy Agreement, on the grounds that as the Defendants had not fully disclosed all matters relating to the tenancy there had been misrepresentation and that Defendants were in breach of Clause 15A and 15B of the PASP. Defendants' solicitors denied misrepresentation and breach and stated that the Plaintiff was estopped from raising them. Further correspondence between solicitors covered the same points, without any resolution of the argument.

19. On 29th December 1997 Defendants, having procured a surrender of the existing Sub-tenancy, entered a new lease with the Sub-tenant Geewing, whereby Geewing was to pay $128,000 p.m. from 7th September 1997 to 6th May 1998 and $157,000.00 from 7th May 1998 to 6th May 2000. This was Defendants' attempt to remedy the alleged misrepresentation.

20. The draft formal agreement was never signed as the Plaintiff refused to accept the revised arrangement offered by the Defendants. The negotiations between Plaintiff's former solicitors and Defendants' solicitors on the terms of the draft formal agreement had been made "subject to contract". Thus Plaintiff argued there was no binding contract unless the formal agreement was signed. As that agreement was never signed the further deposits according to Plaintiff were paid pursuant to the PASP - they could not have been paid under the Formal Agreement.

PLAINTIFF'S CASE

Misrepresentation

21. The Plaintiff argued that representations as to the existence of a lease between D.S. and the Defendants at a rental of $128,000.00 p.m. and the existence of a rental deposit of $471,000.00 were false and known by Defendants to be false. As the Plaintiff was a prospective purchaser of a property for investment he was particularly likely to be influenced by the existence and terms of any tenancy in making an offer for the property.

22. The misrepresentation would thus have been material in helping the Plaintiff decide whether or not to make the purchase and thus the Plaintiff would rely on them in deciding whether to enter the PASP. The onus was on Defendants to prove otherwise. As that was not done the Plaintiff prima facie had a right of rescission.

23. The Plaintiff relied on S.2 of the Misrepresentation Ordinance Cap.286 - whereby the Plaintiff has to satisfy the Court that the representation made rendered the property, or its benefit, substantially or materially different from what the Plaintiff relying on the said representation believed it to be.

Breach of Duty of Disclosure

24. The Plaintiff argued that the content of Clause 15A and 15B was misleading as, in the absence of any disclosure of the existence of the Head and Sub-Lease, any prospective purchaser was likely to believe the vendor had a direct lease with D.S. Defendants were under a duty to disclose the existence of the head and Sub-Lease.

Breach of Contract

25. The Plaintiff also argued that as Defendants were unable to perform the PASP according to its terms (the misrepresentations i.e. the non-existent tenancy having been incorporated as part of the terms of contract) they were also in breach of contract. As the Defendants could not perform the terms of the contract the Plaintiff was entitled to refuse to complete and could not be forced to accept any other arrangement(s) put forward by the Defendants.

DEFENCE CASE

26. The Defendants argued that none of the representations complained of by the Plaintiff was false or untrue such that rescission was justified.

27. The Defendants submitted that the Chinese for "tenancy" in the phrase "the existing tenancy" did not differentiate between a head or sub tenancy. However this submission had little merit as, from the context of the PASP and the nature of the negotiations, it was not unreasonable for the Plaintiff to proceed on the basis, that it was referring to one tenant - the apparent tenant, named in the PASP.

28. The Defendants argued that items (A) and (B) were additional information under Clause 15 of the PASP and represented the estate agent's attempts to give full details of the existing tenancy. Defendants did not concede any partial non-disclosure, but argued that if there had been, whether it amounted to misrepresentation depended on whether the omitted facts rendered what was stated, false or misleading in the context in which it was made.

29. In fact the information was false - there was no existing tenancy between the Vendor and the tenant as stated in the PASP. The Plaintiff was not made aware of that fact. The information was available to Defendants and should have been made known to the Plaintiff at the time the PASP was signed, if not earlier.

30. The Defendants submitted that it affronted commonsense to suggest that the Plaintiff might not have entered into the PASP if it had been fully apprised of the necessity for the vendor having to grant a lease to its service company which would then grant a lease to Geewing in the terms set out in the PASP.

31. The Defendants argued that they were able to cause the sub-tenant to surrender the sub-lease and to sign a new Tenancy Agreement with the Defendants directly and that, as long as this was done prior to completion, the Plaintiff was obliged to accept the arrangement.

32. In fact, as Plaintiff submitted, this would simply vary the contractual bargain between Plaintiff and Defendants and would not rectify the misrepresentation.

33. The new Tenancy arrangements varied not only the term of the tenancy but affected various contractual obligations of the sub-tenant vis-à-vis the landlord, to the landlord's possible disadvantage.

34. The Defendants' contention was that the Plaintiff had either lost its right to rescind through delay, or was estopped from doing so because of the acts of its former solicitors in continuing to discuss the terms of the formal ASP. The parties were in negotiation over the ASP and after the discovery of the misrepresentation, those negotiations being "subject to contract". Plaintiff on discovery of the misrepresentation was entitled to seek advice on the proper course to presume, and did so through its new solicitors. The formal ASP was never signed. No question of estoppel could arise. Nor did any question of estoppel by reason of delay - at the time the Plaintiff notified Defendants of the rescission the proposed completion date was 5 months away.

35. Defendants appeared to argue that somehow a binding agreement arose between the parties because negotiations "subject to contract" were in train. That the parties did not intend that any binding contract should arise until a formal agreement was signed, is shown by Clause 6(b) of the draft ASP. There the Vendor undertakes to procure the surrender of the Lease and Sub-Lease and a new Tenancy Agreement "after signing of this Agreement".

36. Although Defendants submitted that they could remedy the misrepresented position by causing the sub-tenant to surrender the Sub-lease and sign a new Tenancy Agreement with Defendants, this would not remedy the misrepresentations made, as the new proposals could have material consequences for the Plaintiff as landlord.

37. The Defendants, being unable to carry out what was represented in the original contract, were in repudiatory breach. The Plaintiff had no obligation to accept any new arrangements proposed by Defendants. On the basis of the Simona principle discussed in Fercometal S.A.R.L. v. Mediterranean Shipping Co. S.A. [1989] 1 AC 788 the Plaintiff was entitled to affirm the contract by treating it as still in force, or, as it had done, to accept the repudiation and treat the contract as discharged.

38. The chief consideration was whether the relevant misdescription, although not proceeding from fraud, was in a material and substantial point so far affecting the subject matter of the contract that it may reasonably be supposed that, but for such misdescription, the purchaser might not have entered the contract at all.

39. The question for the court, on the basis of Redgrave v. Hurd (1881) 20 Ch D 1 (at p.21) was whether

"if it is a material representation calculated to induce him to enter into the contract, it is an inference of law that he was induced by the representation to enter into it, and in order to take away his title to be relieved from the contract on the ground that the representation was untrue, it must be shown either that he had knowledge of the fact contrary to the representation, or that he stated in terms or showed clearly by his conduct that he did not rely on the representation."

40. In the instant case there was no evidence to show that the Plaintiff knew that the position was anything other than as stated in the PASP. Nor was there any evidence that he had said or done anything to show that he did not rely on the information. It is therefore an inference of law that he did rely on the information.

41. Given the speculative nature of what was to be Plaintiff's purchase for investment, the information about the tenancy contained in Clause 15A and 15B must be taken as "material statements". The fact they are untrue is sufficient ground for rescinding the contract.

42. Defendants effectively counterclaimed for specific performance, alleging Plaintiff was in repudiatory breach of the agreement. Plaintiff argued that the Defendants' request for specific performance rather than seeking to put an end to the contract showed that Defendants accepted that the contract was still alive both at the date fixed for completion i.e. 7th May 1998 and at the date of trial despite their asseverations to the contrary.

43. The Plaintiff relied on Balchita Ltd. v. Kam Yuck Investment Co. Ltd. & Anor. [1983] 2 HKC where in a similar situation it was held that the defendants could not stigmatize the plaintiff's refusal to complete as a repudiation of the agreement and purport to accept such repudiation so as to ground a counterclaim for damages, in effect to seek specific performance. The plaintiff was entitled to rescind the agreement for sale and purchase and to recover the sum paid on account of the purchase price.

44. Having heard the parties and considered their respective submissions, I find for the Plaintiff and grant the Plaintiff's application for the following:

1. A declaration that the Plaintiff is entitled to rescind the Provisional Agreement for Sale and Purchase dated 15th September 1997 made between the Defendants as Vendors and the Plaintiff as the Purchaser in respect of the sale and purchase of G/F No. 138 Wan Chai Road.

2. An order for rescission of the Provisional Agreement for Sale and Purchase.

3. An order that the Defendants repay to the Plaintiff the deposits totalling $5,000,000.00 paid by the Plaintiff under the Provisional Agreement for Sale and Purchase, together with interest thereon at judgment rate on individual payments from the date of payment by Plaintiff to the date of repayment by Defendants..

45. There will be an order nisi for costs of the application, to be paid by the Defendants to the Plaintiff such costs, to be taxed if not agreed.

46. Liberty to apply.