Dr Franklin Li and Another v. Crocus Property Inc

HCA004909A/1980

Headnote

Level of damages - vendor of office units defaulting - whether use of toilets on a floor of modern multi-storey office building is an easement of necessity in default of specific agreement.

IN THE SUPREME COURT OF HONG KONG

BETWEEN

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IN THE SUPREME COURT OF HONG KONG

BETWEEN

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(Consolidated by Order dated the 11th day of December, 1980)

Coram: Hon. Penlington J. in Court

Date: 10 February 1983

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JUDGMENT

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1. By an agreement dated 9th June 1978 the defendant in these actions "Crocus", purchased the whole of the 15th floor of World-Wide House, a building not then in existence, from the developers, the Mass Transit Railway Corporation, "M.T.R.".

2. On the 15th of July 1980 Crocus sold part of the floor "unit 3" to Dr. Franklin Li, and another part "unit 4" to Dr. Henrietta Ip and a  Mrs. W.F.Y. Mok.  Agreements entitled "Confirmation of Instructions" were signed in the offices of the Crocus' solicitors on that day. The relevant parts of the agreement with Dr. Li (which was identical with that entered into with the other plaintiffs except as to description and price) are as follows:

Confirmation of Instructions

Term of payment :

Other terms and conditions :-

3. The Confirmation of Instructions entered into between Dr. Ip, Mrs. Mok and Crocus for unit 4 set out the purchase price as $8,486,800, calculated on a basis of 3,031 sq.ft. gross area at $2,800 a sq. ft. subject to adjustment when the final calculations had been made as to the actual gross floor area.

4. Subsequently Crocus refused to carry out its obligations under the agreements and the plaintiffs sought specific performance. The matter came before me in 1981 and I rejected the claims on the ground that there were some matters which I considered vital to the contracts and which had not been decided between the parties. On that ground I held that the agreements could not be enforced.

5. The plaintiffs appealed from that judgement but before the appeal was heard on the 3rd of April 1982 Crocus sold the two units to Kerry Trading Co. Ltd. ("Kerry"). The price for both units was $23,307,586 but subject to adjustment when the authorised architects had calculated the gross floor area, the price being based on $3,650 per square foot. The final calculation on that basis gave an adjusted price of $22,965,961.50 which would suggest an adjusted area of 6,292 sq.ft. There is no evidence of any sub-division of that price as between units 3 and 4.

6. On the 14th May 1982 Crocus' appeal was allowed by the Court of Appeal who held that the Confirmation of Instructions were sufficient in themselves to form binding contracts and there was nothing omitted which was vital to their performance. If there were any matters such as the use of common corridors, lift lobbies or toilets they could be settled by agreement between the parties or, if necessary, the Courts would settle what those rights are in accordance with established legal prin iples. The decision followed that in Forda Investors Ltd. v. U.O.B.   Finance (H.K.) Ltd. 1979. H.K.L.R. 382.

7. The plaintiffs claim that they are entitled to the difference between the price they would have paid and that received by Crocus from Kerry less some expenses such as stamp duty and legal fees. Crocus had repudiated the contract but it was not accepted. Therefore the plaintiffs lost their right to specific performance only on the day of the assignment to Crocus, 3rd April 1982, and that should be taken as the date for assessment of damages. (Johnson v. Agnew 1980 A.C. 367. Howard v. Pickford. 1951. K.B. 417 at 421). I think that is correct. They also argue that the price paid by Kerry should be taken as the fair market value of the units on that date. With that I also agree. What is, however, argued by Crocus is that you can't simply dedut the plaintiff's purchase price from Kerry's and say the plaintiffs are entitled to the difference because what was sold to Kerry was not what the plaintiffs were entitled to receive. What they would have got under the Confirmation of Instructions was much less valuable because:

8. The basis of Crocus' defence that the contracts with the plaintiffs gave no right to use the toilets on the 15th floor is that the Court of Appeal said "that such rights could not be imported into the contracts". That being so there can't be a collateral agreement because that would have to be in writing (Zeta Estates Ltd. v. Li Mang-wah and anr. 1979. H.K.L.K.501 at 509) and the only way that an easement to use the toilets can be implied as if it is an easement of necessity. It may be highly convenient to use the toilets but it is not necessary.  The units can be used without the toilets whereas the owners must have to have use of the corridors to enjoy any benefit at all.

9. There was evidence given before me by two valuers, Mr. F.Y. Kan and Mr. G. Lyons, as to the effect on the value of the units if the owners did not have the right to the use of the common toilets on the floor. Their opinions differed very widely indeed. Mr. Kan said he would deduct a lump sum of $200,000, (rather than a percentage) whereas Mr. Lyons said he would discount the price by between 30 and 60%.  Even a 30% discount would be approximately $6,000,000, more than the damages claimed. Mr. Lyons said that it would be very difficult indeed to find a purchaser of a unit in a prestigious central office building to accept such a condition and a vendor would be restricted to purchasers who already owned adjoining units or who simply wanted a good address. Mr. Kan said that agreement could be reached for the use of other toilets at a reasonable rental and in any event new toilets could be installed in the units, albeit only with the consent of the owner below.

10. Of these two expert witnesses I prefered the evidence of Mr. Lyons. I am satisfied that the market price of a unit in a modern office building would be very substantially reduced indeed if no toilet facilities were available and I do not regard the 30% reduction suggested as being excessive for a suit of offices in such a building. In particular I think it would have been totally impractical for the plaintiffs to have used the units as consulting rooms without the use of toilets. There was some evidence given by Mr. Kan about the possible installation of additional toilets inside the units themselves. The evidence was clear that this was going to be difficult to do and clearly would require the consent of the M.T.R. and also of the owner of the premises below, through whose ceiling the necessary soil pipes would have to run. I have the very gravest doubts if such consents would have been forthcoming and even if there were the construction of the toilets and toilet lobbies must substantially reduce the area of useable space in the units even if those consents were obtained and the engineering problems overcome. I also agree with Mr. Lyons that it is unlikely that adjoining owners in such a building would agree to rent the use of toilets.  That may be possible in some areas of Hong Kong but not in World Wide House. (I can imagine the reaction of the committee of the Hong Kong Club to such a proposal.)

11. The Court of Appeal said at page 5 of its decision that

"the purchasers would undoubtedly have rights to use the lift lobby and the corridor and perhaps the toilets. Those rights would be implied according to long established principles of law."

There is not surprisingly perhaps, no great profusion of cases dealing with co-owners' right to use toilets on the floor of a multi-storey office building which did not exist when the agreement was entered into.   Some principles however are clear.

12. In Wheeldon v. Burrows 1878 12. Ch.D.31. Thesiger L.J. said that

"on the grant by the owner of a tenement of part of that tenement as it is then used and enjoyed there will pass to the grantee all those continuous and apparent easements which are necessary to the reasonable enjoyment of the property granted. "

Here the right was not being used and enjoyed because the property did not exist but the principle seems to be that the grantor must be taken to have intended that his grant shall be effectual and when the two properties have been severed there is a common intention that the grantee will be able to enjoy his property in a proper and substantial way (Bayley v. G.W.R. 1884. 26 Ch. D. 434 at 452).

13. Crocus says there can't be an easement of necessity because the use of the toilets is not necessary for the enjoyment of the units sold. The lack of them would undoubtedly be very inconvenient and, on its own evidence, would greatly diminish their value but you could manage without them. It also relies on the passage in the Court of Appeal decision at page 4 and 5 where Cons J.A. (with whom the Vice President concurred) says

"The matters left uncovered by the principal deed would relate to the lift lobby, the toilets and the corridor connecting these with units 3 and 4. However, these three areas are not expressed to be within the agreement signed on the 15th of July, nor in my view can they be imported into those agreements."

I am clearly bound by that and the defendnat argues that if the agreements don't give the plaintiffs the right to use the toilets the only way they could have had that right was if such use was necessary for the use of the units not merely convenient.

14. Because the use of the toilets can't be imported into the terms of the agreement does not however mean that it was not the intention of the parties that the purchasers should have such use. They may have had the intention but did not fully incorporate that into the agreement.

15. The evidence given before me was clear that the premises were to be used as Doctors consulting rooms, indeed Crocus repudiated the contract by insisting that they never be used for anything else. It was a pre-requisite of the sale that the plaintiffs obtain to consent of the M.T.R. to certain alterations to the toilets and a plan showing those alterations was prepared by the architects and in fact approved by the M.T.R. The purchase price agreed between Crocus and the plaintiffs referred to "gross floor area" and the evidence was that this must include a share of the common corridors and toilets. Even if the right to use the toilets was not incorporated in the contract documents and can't be imported into them I have no doubt whatever that such was the intention of all parties. That being so I find considerable assistance from the dicta of Lord Parker in Pwllbach Colliery Co. Ltd. v. Woodman. 1915 A.C. 634. at 646.

"My Lords, the right claimed is in the nature of an easement, and apart from implied grants of ways of necessity, or of what are called continuous and apparent easements, the cases in which an easement can be granted by implication may be classified under two heads. The first is where the implication arises because the right in question is necessary for the enjoyment of some other right expressly granted. The principle is expressed in the legal maxim "Lex est cuicunque aliquis quid concedit concedere videtur et id sine quo res esse non potuit." Thus the right of drawing water from a spring necessarily involves the right of going to the spring for the purpose. The implication suggested in the present case does not fall under this principle; there is no express grant of any right to which the right claimed must be necessarily ancillary, nor is there any evidence that the nuisance is necessarily incidental to the defendants' mining operations.

The second class of cases in which easements may impliedly be created depends not upon the terms of the grant itself, but upon the circumstances under which the grant was made. The law will readily imply the grant or reservation of such easements as may be necessary to give effect to the common intention of parties to a grant of real property, with reference to the manner or purposes in and for which the land granted or some land retained by the grantor is to be used. See Jones v. Pritchard(1) and Lyttelton Times Co. v. Warners. (2) But it is essential for this purpose that the parties should intend that the subject of the grant or the land retained by the grantor should be used in some definite and particular manner. It is not enough that the subject of the grant or the land retained should be intended to be used in a manner which may or may not involve this definite and particular use."

16. I think the facts of this matter fall within Lord Parker's second class of cases. These units were to be used as doctors consulting rooms. ' Dr. Ip is a pediatrician. I can't see how she could have so used them without toilet facilities for her patients nor indeed could Dr. Li, a surgeon. In Wong v. Beaumont Property Trust Ltd. 1965 1 Q.B. 177 the Court of Appeal held that where premises were leased for the purpose of a Chinese restaurant and the health regulations required that a ventilation duct be installed which had to be fixed to the outside back male of the landlord's building, an easement of necessity should be implied. At P.122 Lord Denning cited Lord Parker's dicta in Pwllbach Colliery Co. Ltd. v. Woodman with approval and said it was the principle which underlies all easements of necessity. The Court held that as there had been a grant of a lease for the purpose of carrying on a restaurant business and the health authoritees had said that it was necessary to have a vent to  provide for proper ventilation, an easement must be implied so as to give effect to the common intention of the parties.

17. Here I am satisfied that from the oral evidence and the agreements that it was the common intention of the parties that the premises be used as Doctor's consulting rooms Regulation 5 of the Buildings (Standards of Sanitary Fitments etc.). Regulations provides for the number of toilets to be provided for male and female staff employed in every office building, the minimum in each case being one for each. This action is in respect of a only part of an office building but in my view where an office building is sub-divided and sold off in parts, the Regulations would apply to each part sold off and the minimum number of toilets set out therein would have to be made available for the persons employed in the units sold. I am satisfied that access to the toilets on the 15th floor was just as necessary to give effect to the intention of the parties as was the ventilation duct in Beaufort Property Trust v. Wong.

18. Some doubt as to whether that was a really an easement of necessity was expressed in an article in 1964. 80. L.Q.R.322 and it may be that it is not strictly speaking within that class but only one required "in order to make the transaction ........ sensible and effective according to its terms". Per Evershed M.R. in Re Webbs Lease. 1951. Ch. 808 at 816. I do not think the difference makes any practical difference here. In Beaufort Property Trust v. Wong the original parties to the grant did not then relaise that the easement was required and could not then have had the necessary intention. Nevertheless the Pwllbach Colliery doctrine was used. Here there was such an intention ab initio.

19. I am not therefore required to decide if there was an easement of necessity in the strict sense but in my view the courts should have regard to changing conditions. I would consider that the use of toilets is not only convenient for the occupants of an office or Doctors' rooms on the 15th floor of a central office building, it is essential and necessary and if required would have so held even if this meant extending the doctrine beyond its present limits.

20. The other points where the defendant says what was sold to Kerry was not the same as the plaintiffs were entitled to receive can be dealt with more briefly. The first is that the units were sold together with the benefit of a Supplemental Deed of Mutual Covenant with the defendant. No doubt, however, it would not only have benefits but also liabilities. The plaintiffs have at all times indicated that they were perfectly happy to enter into such a deed and the Court of Appeal has said, on the authority of Forda Investors Ltd. v. U.O.B. Finance (H.K.) Ltd., at 387, that the terms of such a deed would be settled by the Court in default of agreement. I do not therefore consider that Kerry got any more than the plaintiffs would have if the contract had been completed. The Deed signed with Kerry is not overly generous to Kerry.

21. Finally the defendants say that the sale to Kerry was made together with a first option right. This right however was only to buy either the units or the balance of the floor at the then current market price. The only real value of such an option seems to be to enable either party to prevent a sale to a purchaser who is for some reason not considered a suitable neighbour - a business competitor for instance.

22. I did not regard Mr. Lyon's evidence on this as convincing when he said he would place a value on such an option of 10% of the purchase price. I think that if it is an option to purchase but only at current market value it is worth very little indeed. Mr. Lee argued that it could in any event be very easily thwarted and that may well be so. In any event I do not propose to make any allowance for the option in assessing damages.

23. The plaintiffs are entitled to damages based on the difference between the price they would have had to pay to Crocus and what Kerry in fact paid, less deductions for stamp duty and legal expenses. They were denied use of the property by the defendant and I do not see how they can be liable for rates, air-conditioning, property tax or management fees.

24. The total gross area set out in the agreements of 15th July 1980 was 6,694 sq.ft. but this was subject to adjustment by the architects when the actual area could be calculated. The final price was to be based on $2,800 per sq.ft. The price paid by Kerry was $22,965,961 on a basis of $3,650 per sq.ft. which gives a figure of actual adjusted gross floor area of 6,292 sq.ft. That is a rather remarkably large adjustment but I think I must assume that the price the plaintiffs would in fact have had to pay would have been based on that final figure. I consider I must also assume that the reduction in area would have applied pro rata to both units. This formula gives for unit 3 an adjusted area of 3,443 sq.ft. The difference in purchase price per sq.ft. was $850. The plaintiffs in action 4909/80 are therefore entitled to damages of $2,926,550, less stamp duty on a price of $9,640,400 (i.e. 3443 x $2,800) and legal fees on the conveyance. Using the same formula and method of calculation the plaintiffs in action 4910/80 are entitled to damages of $2,421,650, less stamp duty on a price of $7,377,200 and legal fees.

25. I have not calculated the actual amount of stamp duties and legal fees in each case (there was some dispute as to the appropriate fee scale) but it was intimated that I could leave that to the parties to calculate. I accept that offer though naturally there will be liberty to apply in default of agreement.

26. The plaintiffs are also entitled to interest of the amount of the judgement in each case from the 3rd April 1982 at 14%.

27. The plaintiffs are to have their costs, and there will be certificate for 2 counsel.

(1)    [1908] 1 Ch. 630.

(2)    [1907] A.C. 476.

Representation:

Martin Lee, Q.C. & Alfred Fung instructed by Lo & Lo for Plaintiffs.

Henry Litton, Q.C. & Ronny Tong instructed by Philip K.H. Wong & Co. for Defendant.