Zeta Estates Limited v. Li Mang-wah, Paul and Another

HCA002121/1978

High Court Action No. 2121 of 1978

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Agreement for deferred purchase of land on payment of monthly instalments of capital and interest over 20 years. Agreement already run save 4 years. Purchasers refused to pay further instalments and called for immediate assignment of legal estate against payment of balance of capital outstanding. Sellers forfeited land and payments already made.

Purchasers relied on:-

Purchaser failed upon all three contentions, but relief granted against the forfeitures.

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Coram: Cons, J.

Date of Judgment: 30 July 1979

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JUDGMENT

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1. The defendants to this action are a married couple. In January 1974 they agreed to purchase a flat in Kowloon in a development known as "Spring Heights". The husband, Mr. Li, was then and still is a practising solicitor. Mrs. Li was at the time secretary to an American journalist. The development in question was one undertaken by the plaintiff company, which is a land developer and part of the Chinachem Group of Companies. The purchase price of the flat was agreed at $220,000. The defendants paid $5,000 deposit and a further $25,000 as the first payment. The balance of $190,000 and interest thereon was to be paid in monthly instalments over a period of twenty years. The instalments would remain the same throughout that period but the apportionment of them between capital and interest varied as time went by. The eventual total cost of the flat would be a little over $610,000. Completion and the formal assignment of the Crown lease were postponed and were to be conditional upon payment of all the instalments.

2. The monthly instalments commenced as from March of that year. The keys were handed over in May and the defendants moved in in April. They are still there. However, they have declined to pay any instalments since February 1978. This followed a disagreement with the company. In January of 1978 the defendants gave notice to the company of their intention to complete the purchase and sale by paying off the outstanding balance. The company had no objection but insisted on payment of the outstanding instalments in full, that is to say it would receive not only the balance of the outstanding purchase price but also the interest that it would have earned in the remaining years that the agreement had to run. As a concession, however, the company was willing to reduce interest to one quarter of the original rate. In round figures, and taking into account the payments that had already been paid, the total figure demanded by the company was $431,000. The defendants were not willing to pay "future interest" at all. The figure they offered was $327,000.

3. The formal agreement which had been duly signed by all parties contains the following two clauses :

"17. Where the Purchaser is paying the said purchase price by instalments and in manner described in the said Schedule hereto the following provisions shall apply:

"7. If the Purchaser, for any reason whatsoever, and other than the default of the Vendor, fail to pay to the Vendor the purchase price and interest reserved herein at the place and time and in manner provided in this Agreement, all monies paid by the Purchaser to the Vendor pursuant to this Agreement shall be absolutely forfeited to the Vendor who may resell the said premises either by public auction or private contract and recover from the Purchaser any additional damages over and above the monies so forfeited as aforesaid which the Vendor may sustain by reason of the Purchaser's breach as aforesaid and in these circumstances it shall not be necessary for the Vendor to tender an assignment to the Purchaser."

4. There was correspondence between the parties which led nowhere. Eventually, the plaintiff company in July, and relying upon those two clauses, took out these proceedings. They ask principally for possession and a declaration that the company may in addition retain as forfeit all monies so far paid to it by the defendants.

5. Five contentions have been argued by way of defence:

6. There is some overlapping between these five contentions but I will attempt to deal with them separately as they were argued before me.

The construction of the agreement

7. It is necessary to look in more detail at the terms of the agreement. In addition to those already set out the material clauses are:

For the defendants, emphasis is placed upon the several instances where the words "purchase price" appear unqualified by any reference to interest. Clause 3 is a good example, providing for completion when the "whole of the purchase price shall be paid". There is no mention of the payment of interest. It is said that the only mention of interest is in Clause 7 where it is a deliberate interlineation in the original document. In fact the words also appear in the Schedule. Particular emphasis is laid upon the words "on or before" in Clause 3 which provides that "the purchase shall be completed ...... on or before the 28th day of February 1994". I am referred to the case of Dagger v. Shepherd⁽¹⁾ where similar words were used in a notice to quit and were construed as being both a notice to determine the tenancy on the actual date mentioned and an offer to accept a determination on any earlier date that the tenant might choose.

8. The plaintiff says that I must read the agreement as a whole. It is pointed out that the first reference to purchase price is in Clause 2 which provides that the balance thereof "shall be paid in manner set forth in the Schedule"; that every subsequent reference to payment is qualified either by the words "in manner aforesaid" or "in manner described in the said Schedule hereto"; that the Schedule provides clearly for 240 monthly payments "inclusive of interest"; and moreover that each instalment is made payable on or before the first day of "each and every successive month".

9. If I may say so with every respect to whoever was responsible, the agreement is not a happily worded document, possibly because the draftsman hoped to achieve economy by drafting one pro-forma agreement where he ought really to have drafted two, that is one for outright sales and one for sales on an instalment basis. Be that as it may, in my opinion, the present agreement, worded as it is from that single pro-forma, when taken as a whole indicates a clear intention on the part of those subscribing to it that it is to be a twenty-year agreement. That follows from the Schedule and its incorporation into the substantive agreement. The defence contention requires me to give a very strict and literal meaning to particular words taken in isolation. I do not think it right that I should do that. The first contention therefore fails.

Legal consequence of "interest"

10. There is authority that "interest is compensation for delay in payment": Bond v. Haemetite Steel Co.⁽²⁾ which is echoed in Riches v. Westminster Bank Ltd.⁽³⁾. It is argued from this that since the agreement provides separately for interest as such and not, as is common in hire-purchase agreements, for payment of a total figure calculated upon the cost plus a premium to represent interest, the agreement is nothing more than a means to provide compensation for delay in payment; and further that since compensation is provided for as from the very commencement of the agreement it must follow that the parties contemplated possible payment in full as from the very beginning.

11. The plaintiff company urges me not to be misled by "labels". But to look at the substance of the agreement as a whole. There is force in this criticism. If the document had been drawn along the lines of a hire-purchase agreement the defence argument would have been completely untenable. Although it has been argued separately it is really, I think, part and parcel of the construction argument, and I have considered its possible effect before coming to the conclusion that I have already expressed thereon.

12. Although I accept without hesitation the two authorities to which I am referred I am not sure that interest always carries the implication that the defendants suggest. For example, I would doubt if the private individual who puts his modest savings on fixed deposit looks upon the interest he thereby earns as compensation for being kept out of his money. The authorities quoted deal with interest in particular circumstances. The first in contradistinction from trading profits; the second upon the question whether for tax purposes interest awarded by the court upon damages ranks also as damages or is to be treated as interest. It is said for the defendants that there is no evidence that this was a long term financial venture by the plaintiff company. Apart from the agreement itself that is so. But the retort might well be made that there is no evidence that it was not. All I know is that the defendants were offered their own choice of terms. I have no idea how their ultimate choice affected the plaintiff company's overall financial considerations or its future conduct. I am not persuaded that the separate provision for interest as such detracts from the long term nature of the agreement which appears from its provisions as a whole or that it confers upon the defendants a right to demand completion upon repayment of the balance of the purchase price without further interest at any time they choose. The second contention therefore fails.

Implied term

13. It is suggested that in the context of Hong Kong and its political realities it is highly desirable that any purchaser should get in his title as soon as possible, and that in this particular instance that there are three further and important considerations:

For these reasons it is said that business efficacy demands that the defendants should have a right to pay off and obtain the title as soon as they wish and are able.

14. I must confess I find it difficult to appreciate this argument. The matters mentioned are certainly conditions which a prudent purchaser would bear in mind but I cannot see how they render the agreement non-effective from a business point of view. The defendants are in possession and their possession is protected by registration in the Land Office. Forfeiture for an unwitting breach of condition is not a practical consideration. By the time the New Territories lease expires they will have had possession for some twenty-four years. In any event from the technical point of view the building is south of Boundary Street, albeit only just. The Crown lease does not expire in 2003. There is an option to renew for a further seventy-five years "at a fair and reasonable rental value of the land" at that date. I do not find that the term suggested is necessary to prevent "such a failure of consideration as cannot have been within the contemplation of either side" at the time they entered into agreement: see The Moorcock⁽⁴⁾. This argument also fails.

Analogy to mortgage

15. It is suggested that the present position is so similar to that of a mortgage or where a seller of land has retained an equitable lien for the balance of the purchase price that equity will step in and apply similar rules. Thus it will not allow harsh or unconscionable conditions to be enforced and will set aside any matter that renders the right of redemption illusory. Reliance is placed upon several cases. For example, Fairclough v. Swan⁽⁵⁾, where a public house held on a twenty-year lease was mortgaged to a brewery with a term that precluded redemption until six weeks before the lease expired. There was also a term tying the public house to the sale of the brewery beers only. It was held that for practical purposes the mortgage was irredeemable and the condition against redemption should be set aside. Cityland and Property (Holdings) Ltd. v. Dabrah⁽⁶⁾ is a more recent case, where the court refused to enforce a premium which had been imposed upon a six-year mortgage and which represented 50% of the amount lent or 19% interest per annum.

16. An alternative argument upon the same foundation is that where a mortgagee has actually taken possession he loses what is otherwise his usual right to notice or interest in lieu of notice before the mortgagor may pay off the balance outstanding. This is so even where the contractual date of redemption has not yet been reached. Bovill v. Endle⁽⁷⁾ is authority for that. It is suggested that these proceedings by the plaintiff company should have the same effect.

17. The short answer to this head of argument is that the agreement is not and never was intended to be a mortgage. It is an agreement for a deferred sale and purchase. Nothing more. It does not from its own inherent nature attract the application of any particular equitable principle. However, even if it did I find nothing in it which in fact offends against any principle. Twenty years is not in itself necessarily an unconscionable delay: Davis v. Symons⁽⁸⁾. At the end of that period the original lease will still have nine years to run and there is an option for a further seventy-five years. In Knightsbridge Estates Trust, Ltd. v. Byrne⁽⁹⁾ the court upheld a mortgage where the contractual right to redeem was postponed for as long as forty years. One of the matters taken into consideration there was that it was

"a commercial agreement between two important corporations experienced in such matters, and has none of the features of an oppressive bargain where the borrower is at the mercy of an unscrupulous lender." (p. 455).

It is suggested that the present case does have those undesirable features. With respect, for my own part I am unable to see them. The defendants are mature adults. Mrs. Li, if I may say so with respect, is not a timid lady. She struck me as being a person of considerable commonsense. Mr. Li had then been in practice for several years. They were not forced to accept the twenty-year period. They could have taken a shorter period or even purchased outright. The interest charged is at the rate of 14.4% per annum. I have no knowledge of the general interest rate obtaining in Hong Kong in 1974 but that would not be an excessive figure for the present time. Indeed it reflects the rate at which the property itself has appreciated in the five years since the agreement was made. It is said that the close proximity of the expiration of the New Territories lease to the "date of redemption" would leave the defendants with a valueless asset. The distant future has long been a matter for speculation. Even so the value of the defendants' right is not postponed until that time. They have a present interest which they can sell at any time they wish. Clause 5 of the agreement expressly acknowledges that fact.

18. Nor do I think the defendants can derive assistance from the alternative argument put forward. Bovill v. Endle and the earlier cases referred to therein proceed on the footing that it is the mortgagee who disturbs the original contractual relationship between the parties. Therefore he cannot, as it were, take advantage of the new position. In the present instance it is the defendants who have disturbed that relationship and it is they who are now trying to take advantage of their new, and not too enviable, position.

Collateral agreement or warranty

19. When the defendants came to buy the flat their first contact with the plaintiff company was through a Mr. H.C. Wong. They met him by chance when they decided to look over another block of flats that the plaintiff company was building in Kowloon City. Mr. Wong was there and showed them round. The defendants were not impressed by those particular flats so Mr. Wong took them to Spring Heights. He said that there was just one flat still available there. He showed them that flat and they became interested. The price asked was $240,000 but Mr. Wong agreed that $220,000 would be sufficient and he pointed out that the price could be paid by instalments. Mrs. Li discussed with him the possible amount of the instalments and down payments and other matters like the provision of car parking space. In particular she asked what the position would be if in future they had enough money to pay up the money outstanding. Mr. Wong replied that his company would be delighted, and that there would in that event be no special charges. Mrs. Li says that this is a matter she consciously took into account when she decided, as she put it, "to borrow the money from the company". Otherwise, she said, she would have first approached her own or her husband's parents.

20. On these facts I was asked to find that there was a collateral warranty or agreement. I think it wrong to approach the question as one of warranty. There was no representation of fact as there was, for example, in the case of Esso Petroleum Co. Ltd. v. Mardon⁽¹⁰⁾ where as part of the negotiations for the lease of a service station Esso put forward what they said was a reliable estimate of potential business. In my view there was in this case an actual agreement or nothing.

21. The plaintiff company first say that Mr. H.C. Wong had no authority to make any such agreement; that although he had authority to sell flats he did not have authority to negotiate either as to the price or as to similar matters. They referred to him as "a caretaker" but he seems to me to have been something more than that. When he first met the defendants he gave them his visiting card which indicated that he represented Chinachem Group of Companies and Chinachem Investment Co. Ltd. He had a sales desk in the foyer of Spring Heights with illustrated brochures and tables giving the monthly rates in relation to the various instalment periods. He was allowed to accept the initial $5,000 and the receipt he signed for that describes him as "the person handling ..... at the rent and sale place". The plaintiff company may not in fact have given authority to Mr. Wong to go as far as he did. But I am quite satisfied that the plaintiff allowed him to act in such manner that it must be bound by what he did.

22. Then the plaintiff company says that what occurred was not sufficient to amount to an agreement; that it was nothing more than a casual conversation to which legal consequences ought not to be attached. In support they point to the fact that although Mr. Li mentioned to her husband what Mr. Wong had said, her husband did not think fit to see that it was expressly included in the formal written agreement. That may be because her husband took the view that it was not necessary, a view which his wife says he still holds. Be that as it may, having seen Mrs. Li I am satisfied that so far as she was concerned her talk with Mr. Wong was not just casual conversation. She was deliberately enquiring as to one particular aspect of the contract of sale that she and Mr. Wong had in mind and he gave her a deliberate answer. I am satisfied they both took it as having been agreed between them.

23. The third objection taken by the plaintiff company is however fatal. It is section 5 of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23. There is nothing in writing. The defendants seek to rely upon the well-known cases of Angell v. Duke⁽¹¹⁾, Boston v. Boston⁽¹²⁾ and City and Westminster Property Ltd. v. Mudd⁽¹³⁾. With respect I do not think these cases assist. In each there was a collateral contract which in itself was not a "contract for the sale or disposition of land". In my view the present agreement is. It is part and parcel of the actual sale of the land. It ought to have been included in the written agreement. Counsel has not copied the learned judges in Angell v. Duke and set out what he alleges would be the collateral contract in simple direct speech. I have tried to do so myself. But whichever form of wording I have adopted it always comes out that the quid pro quo of the plaintiff company is the immediate transfer of the legal estate. In my judgment the plaintiff company must succeed on this objection.

Relief

24. Finally, and almost as their last resort, the defendants ask that in the event that this court should find against them on all the defences they have raised - as this court does - this court should grant them relief from forfeiture and allow them time to make up the instalments that have been missed. They base their application upon the submission that Clause 7, which empowers the plaintiff company to forfeit both the land and all payments already made, is a penalty.

25. I have no hesitation in agreeing with their submission. One has only to consider the possible application of that clause in, say, the 19th year of the agreement. By then the purchase price will have been paid almost in full and the plaintiff company would be able to retain not only that and the interest but also to recover the very land that was sold in beginning.

26. My attention is drawn to a comment in Steedman v. Drinkle⁽¹⁴⁾ where Viscount Haldane said at p. 279:

"But (the Courts of Equity) never exercise this jurisdiction where the parties have expressly intimated in their agreement that it is not to apply by providing that time is to be of the essence of their bargain."

- which is the case here. With respect I think that remark is confined to the decree of specific performance, even though the paragraph in which it appears starts off with the words "As to the relief from forfeiture". In the more recent case of Shiloh Spinners v. Harding⁽¹⁵⁾ Lord Simon of Glaisdale put it this way (at p. 726):

It is this prominent consideration that has exercised my mind to some extent in this case. Viscount Dilhorne put the consideration in a slightly different way when he said (also at p. 726):

"I only desire to add that the cases in which it is right to give relief against forfeiture where there has been a wilful breach of covenant are likely to be few in number".

Undoubtedly the defendants' conduct was wilful in the sense that they deliberately took their stand on rights which they thought were given to them by the agreement. They might have been more prudent to have continued payments and made their own application to this court. But they did not do so. Nevertheless, is their conduct such that equity should at this stage refuse assistance as in fact it did in the Shiloh Case? I have to consider the harm that the defendants have caused the plaintiff company. They have kept that company out of a few thousand dollars for a little over one year. They have made that company incur what are probably considerable legal expenses. That is all. It can be put right by suitable payments. I compare that with the position in the Shiloh Case where Lord Wilberforce at p. 725 described the evidence as establishing

"a case of clear and wilful breaches of more than one covenant which, if individually not serious, were certainly substantial: a case of continuous disregard by the respondent of the appellants' rights over a period of time, coupled with a total lack of evidence as to the respondent's ability speedily and adequately to make good the consequences of his default, and finally a failure to show any such disproportion between the expenditure required and the value of the interest involved as to amount to a case of hardship."

These two situations seem to me to be poles apart. I am satisfied that the defendants are entitled to relief in this instance upon their making good within a definite period all that they now owe to the plaintiff company upon the agreement and the other expenses that the company has been forced to incur.

27. In view of this conclusion it is not necessary for me to consider the fascinating question that would arise as to the monies already paid if relief against forfeiture of the land had not been granted or the further question of waiver.

28. I have indicated the substance of the order I propose to make. I would like to hear counsel now or at some other time as they so wish as to the precise terms in which that order ought to be drafted.

Representation:

H. Litton, Q.C., and R. Tong (F. Zimmern & Co.) for the plaintiff.

R. Mills-Owens and Miss M. Yuen (Liu, Chan & Lam) for the defendants.

(1) [1946] 1 K.B. 215

(2) [1902] 1 Ch. 353 at 363

(3) [1947] A.C. 390 at 399, 400

(4) [1889] 14 P. 64

(5) [1912] A.C. 565

(6) [1967] 3 W.L.R. 605

(7) [1896] 1 Ch. 648

(8) [1934] 1 Ch. 443 at 449

(9) [1939] 1 Ch. 441

(10) [1976] 2 W.L.R. 583

(11) [1975] L.R. 10 Q.B. 174

(12) [1904] 1 K.B. 124

(13) [1959] 1 Ch. 129

(14) [1916] 1 A.C. 275

(15) [1973] A.C. 691