KONG COLIN CHUNG PING (aka COLIN CHUNG PING KONG), the executor of the estate of KONG WING HONG v. KONG CHUN IP

HCMP 202/2021

[2023] HKCFI 2495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 202 OF 2021

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D E C I S I O N

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Introduction

1.  The plaintiff and the defendant are tenants-in-common of a number of properties in Kowloon.  The plaintiff commenced these proceedings in February 2021 seeking an order to sell the properties pursuant to the Partition Ordinance, Cap 352. 

2.  Shortly after that, the parties reached settlement, agreeing to the sale of the properties.  For today’s purposes, we are only concerned with the property at No 792 Nathan Road, Kowloon.  This has been referred to in these proceedings as the “Prince Edward Property”. 

3.  The property is known as On Hong Ning Commercial Building.  It is a 16-storey commercial building, comprising shops on the lower ground floor and the ground floor and offices on the upper floors.  It was completed in 1982. 

4.  By consent of the parties, K Yeung J made the following order for sale on 2 November 2021: 

“1.  The premises described in the schedule (“Premises”)  be sold in the manner as follows:

(1)  Messrs Jun He Law Offices and Messrs PC Woo & Co are jointly authorized to receive offers for purchase of the Premises and the Premises shall be sold to the highest offeror that were received by these law firms within 49 days from the date hereof that is above the reserved price as set out in the schedule [ie HK$270 million]: 

(2)  If the Premises is not sold in paragraph 1(1)  above then the same sale method shall be adopted for another 49 days thereafter; and

(3)  If the Premises is not sold under paragraphs 1(1)  and 1(2)  above, the reserved price in the schedule shall be reduced by 5% and the sale procedures in paragraphs 1(1)  and 1(2)  above shall be repeated using the reduced reserved price.  The sale procedure in paragraph 1 shall be repeated with new reduced reserved price until a purchaser is located for the Premises at the new reduced reserved price at that time.

(2)  The conveyancing procedures of the Premises is to be conducted by a law firm and selected by the parties exchanging within 7 days from the date hereof his / her nominated law firm and its fixed professional fee quote, and the lowest fixed professional fee quote shall be selected as the law firm representing the parties;

(3)  The proceeds of sale of the Premises be applied to the following priority: 

(1)  in discharge of all Government rent, rates, taxes and other outgoings due and affecting the Premises;

(2)  the costs charges and expenses incurred in connection with the sale of the Premises; and

(3)  the parties are to share the residual sale proceeds equally.

(4)  Liberty to apply.”

The plaintiff’s application

5.  Before me this morning is the plaintiff’s application to vary the above order by reducing the reserve price from HK$270 million to HK$163 million.  That is para 4 of the plaintiff’s amended summons taken out on 27 February 2023, as amended on 30 March 2023. 

6.  The basis of the application is that there has been a downturn in the real property market condition since the order was made.  As a result, the parties have not been able to sell the Prince Edward Property.

7.  In his supporting affirmation, the plaintiff says that the parties have received no offer that meets the reserve price set out in the order, and, further, that due to substantial economic changes, including the rising interest rates and also the economic depression caused by the COVID-19 pandemic, the property market in Hong Kong has been deteriorating, resulting in substantial decrease in property prices. 

8.  He also says: 

“The basis for the reserved prices set out in the Orders is the market price of the respective Properties. Accordingly, for parties to realistically sell the Properties, the reserved prices of the Properties set out in the Orders should be reduced.”

9.  In this application, the plaintiff has adduced expert valuation evidence.  The expert has valued the market price of the Prince Edward Property to be HK$165 million. 

10.  I refuse the application, because in my view the court has no jurisdiction to vary the order as sought by the plaintiff. 

11.  On jurisdiction, Mr Alex Fan, counsel for the plaintiff, submits that there are two bases on which the court has the jurisdiction to vary.  First, under the express liberty to apply direction: see para 4 of K Yeung J’s order.  Second, pursuant to an implied term of the agreement of the parties as evidenced in that order. 

Liberty to apply

12.  Mr Fan submits that the court may revisit an order pursuant to the liberty to apply provision for the sole purpose of working out the order.  The court may do so where the order drawn up is one which requires working out, and the working out involves matters on which it may be necessary to obtain the decision of the court: see Poon Ching Man v Lam Hoi Pun [2015] 3 HKLRD 57 at paras 27 to 28. 

13.  Mr Fan submits that the variation to the reserve price which the plaintiff is now seeking brings no change to the substance of the agreement.  He says that the substance of the agreement is to sell the Prince Edward Property and share the proceeds between the parties, and in particular at a realistically marketable sale price, which is best represented by the prevailing market price. 

14.  I do not take issue with the submission that the objective intention of the parties is to sell the property at the market price.  This is clear from the explicit wording used in the order.  In para 1(1), it is provided that the property shall be sold to “the highest offeror”. But, in my view, that is only half of the story when it comes to the substance of what has been agreed between the parties.  The other half of the story is the reserve price and that is what we are concerned with today. 

15.  The parties have set out a mechanism in the order to determine the reserve price, both initially and going forward in case the property is not sold immediately.  The first task for me today is to ascertain the objective intention of the parties in respect of the reserve price.  Materially, how is it to be determined going forward where a sale is not completed within the initial period of 98 days from the date of the order?

16.  The intention is to be gathered from the express wording used in the order and also the surrounding objective facts.  But, at the outset, the function of a reserve price in the context of sale of real properties should first be recognised. 

17.  Generally speaking, a reserve price is the minimum price at which a property owner is willing to sell his property.  It is not the price at which he will sell.  He may sell at that price or above that price. 

18.  In principle, it is not a must that an owner may wish to align the reserve price with the prevailing market price.  It is up to the owner to decide.  Of course, very often, an owner would wish to sell at market price and to achieve that, the reserve price should ordinarily reflect the prevailing market price. 

19.  But it is not difficult to imagine situations where an owner may wish to sell but does not want to sell cheap and there is a price which he does not want to go below.  He may be in a position to afford to wait to see whether the market would rebound.  In that case, he may set a reserve price which does not directly correlate with the market condition. 

20.  Ultimately, the function of a reserve price is to set the lowest price at which the owner will sell the property.  I will not take it as a starting point that a reserve price would always necessarily be tied in with the prevailing market condition. 

21.  The question before the court today is – what have the parties decided with respect to the reserve price of the Prince Edward Property?  Is it, as the plaintiff contends, that the intention was that the initial reserve price should reflect the prevailing market price and, going forward, the reserve price should match, or to use Mr Fan’s words, catch up with the prevailing market price? 

22.  The objective background facts are these.  The Prince Edward Property is a valuable property.  It is one whole commercial building located in Nathan Road, Kowloon.  It is worth hundreds of millions of dollars.  As a matter of common sense, it would take time for the parties to find interested buyers and get offers. 

23.  The order contains clear and unambiguous wording.  For the initial reserve price, there is no dispute or there is no serious dispute that it reflects or is fixed by reference to the then prevailing market price.  But if the property is not sold immediately after the order, going forward, the order provides for a mechanism for reducing the reserve price over time if no offer is received. 

24.  The initial reserve price is HK$270 million.  If the property is not sold within the first 98 days, the reserve price will be reduced by 5%.  The new reserve price will hold good for the next 98 days.  It must be noted that it is expressly provided in the order that this reduction exercise would be repeated if the property is not sold in the meantime. 

25.  As described by Mr John Hui, appearing with Mr Martin Lau for the defendant, this mechanism is automatic, mechanical and not linked to or dependent on any external market factor.  In other words, on the face of the wording of the order, the mechanism operates on its own without taking into account the surrounding market condition. 

26.  In my view, the plain objective intention of the parties is that while they would wish to sell at market price, when it comes to the reserve price after the initial 98 days, this reserve price should be reduced gradually and at a specific pace.  In other words, there should be certainty as to how the reserve price should be determined. 

27.  Furthermore, the parties have clearly contemplated that this sale exercise would not be a very swift one.  That must be true given the nature of the property itself.  They are looking at a longer time horizon as evidenced by the 98-day cycle mechanism that they have put in place. 

28.  Overall speaking, I consider that the intention of the parties and the substance of the agreement as reflected in the order is that they would wish to sell the property at market price.  But that is always subject to a reserve price which does not necessarily reflect the prevailing market conditions but follows a well-defined mechanism for its determination. 

29.  For that reason, I reject Mr Fan’s submission that the reserve price was intended by the parties to match or catch up with the prevailing market price. 

30.  I have referred to the affirmation evidence of the plaintiff himself.  He was of the view that the basis for the reserve price set out in the order would be the market price of the property.  That may be his subjective interpretation or intention or wishes as far as the reserve price is concerned.  But those subjective wishes or intention have no part to play when the court tries to deduce the objective intention of the parties as regards the reserve price. 

31.  I would add that in fact if the parties had intended that the reserve price should in some way be correlated with the market price, they could have easily and readily provided for another mechanism where the reserve price could be tied to the market prices.  But they have not done that. 

32.  Having come to this conclusion on the objective intention of the parties on reserve price, it is clear that when it comes to the determination of the price, there is no working out required. 

33.  In fact, under the mechanism, the parties are now in the sixth cycle with the currently applicable reserve price to be about HK$198 million.  If one is to give effect to the terms of the order, one should simply follow the mechanical calculation as set out in the order.  There is nothing else to be worked out.  Accordingly, the liberty to apply direction does not apply. 

34.  To accede to the plaintiff’s application would amount to rewriting the agreement reached by the parties in respect of the reserve price.  The court has no jurisdiction to do so. 

Implied term

35.  The plaintiff submits that the court has jurisdiction to vary pursuant to an implied term in the order.  The implied term is to this effect – either party may apply to adjust the reserve price in accordance with the market price in view of the changing market situation. 

36.  In this context, Mr Fan has put forward a slightly different argument about the intention of the parties.  He submits that the parties clearly envisaged that the sale of the property should be conducted in an expeditious manner.  If the reserve price as fixed results in failure to sell the property (due to absence of willing purchasers to buy it at the high price), the order for sale will be rendered nugatory.  The parties will then effectively be prevented from carrying out the order for sale on a timely basis. 

37.  The emphasis of this submission is timing.  Mr Fan submits that the intention of the parties is that the sale should proceed in a timely manner. 

38.  The principles governing implied terms are well-known. Most relevantly, the process of implying a term into the contract must not become the rewriting of the contract in a way which the court believes to be reasonable or which the court prefers to the agreement which the parties have negotiated.  A term is to be implied only if it is necessary to make the contract work.  If there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot be an implied term, since the parties have demonstrated that it is not their agreement.  See, eg, Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 at para 7. 

39.  As discussed above, the objective intention of the parties when it comes to the determination of the reserve price is that they would follow a well-defined timeframe.  In other words, they have opted for certainty and they have no intention for the reserve price to closely track or catch up with the prevailing market price. 

40.  As to time, I do not take issue with Mr Fan’s submission that the parties do want to proceed and execute the sale exercise in a timely manner.  But, again, I do not think that that represents the whole picture.  What is clear from the express wording is that the parties have indeed contemplated that it would take some time for the sale to go through and they have provided for a specific timetable for the reduction of the reserve price. 

41.  In other words, while they would want to proceed expeditiously, that is still subject to the safeguard that there is a reserve price to be determined in an automatic way. 

42.  Hence, there is no room to imply the term suggested by the plaintiff.  In fact, incorporating this implied term into the agreement would go contrary to the express terms agreed to by the parties. 

43.  For the above reasons, I reject the argument based on implied term. 

Conclusion

44.  I have no jurisdiction to vary the reserve price as asked for by the plaintiff.  His application must fail.  I dismiss para 4 of the plaintiff’s amended summons. 

[Submissions on costs]

45.  Costs of paras 1 and 2 of the amended summons be in the cause of the originating summons. 

46.  Costs of para 4 of the amended summons, including all reserved costs, be to the defendant on a party-and-party basis, with certificate for one counsel (Mr John Hui)  for today’s hearing.