Siu Kai Ming v. Lau Sai Hing

HCA2131/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2131 OF 2008

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J U D G M E N T

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1.This is a somewhat unusual dispute concerning the upper part of a house built in the New Territories in 2006, by the Plaintiff, on land acquired by the Defendant.  The building of the house was financed by the Plaintiff. The Defendant did not have sufficient funds to pay the Plaintiff the building costs so in order that the Plaintiff would have some asset or interest as his remuneration it was agreed that he should become the owner of the 2^nd Floor and roof of the premises, whilst the Defendant would have the ground and first floors.  There were to be common parts and agreed access.  It was also agreed that the Defendant should have the chance of buying the upper part of the premises from the Plaintiff at some stage.  It is the precise nature of this agreement which is the subject of this litigation.  What appears to me to be common ground at the outset is that it would be entirely logical for the Defendant to want to own the whole building, just as it would be logical for the Plaintiff, as a builder, to want to realise the true value of his interest in that house viz the value of the 2^nd Floor and the roof, on a commercial basis.  It was, after all, a commercial enterprise.

The History

2.The Defendant had acquired the land by way of inheritance as the adopted son of the landowner who died without issue.  That landowner, the late Mr Lau Wan, had himself planned to build a house on the land in question designated as RP 78 in DD236, Tai Wan Tau Village, Clearwater Bay, Sai Kung in the New Territories.  He had entered into an Agreement with Great Country Investment Limited on the 18 August 1992.  This building company was to construct a three-storey house the consideration for the said contract being that the owner would assign to the building company the second floor and roof subject to some designated common area and facility.  The owner was to retain the ground and first floors of the premises.

3.In July 1995 Mr Lau Wan, the owner, died and although on the 7 March 1996 the District Lands Office issued a Certificate of Exemption in the name of the deceased owner, thereby exempting the proposed building from the requirements of the provisions of the Buildings Ordinance (subject to contain conditions), the Agreement was subsequently cancelled and no house was built under that original arrangement.

4.In late July 1996, Madam Wong Sai Ying, as executor of the deceased’s estate, obtained a Grant of Probate.  She is the mother of the defendant, who was the sole beneficiary of the estate under the Will.  It is to be noted at this stage that all the formal documents between the parties had been drafted by solicitors.

5.The building project did not formally resurface until 15 March 2004 (no doubt as a result of earlier discussions and agreement in principle), when the Defendant signed an application for a certificate of exemption in respect of Building works etc., from the District Lands Officer of Sai Kung setting out that he had appointed as building contractor Kin Wo Construction Engineering Company.  The Plaintiff is the director/shareholder of this company.

6.We then move on two years to 5 June 2006 when after, or at the same time as the submission by the Plaintiff of a Bill of Quantities, the Plaintiff and the Defendant (and his father) signed a building contract whereby the cost of the construction was stipulated to be HK$1,166,200 and various other considerations were provided for.  This price was later increased to take account of additional expenditure.  Against this background I move on to consider the Agreement of 6 June 2006.  

The Principal Agreement

7.This is dated the 6 June 2006.  It recites the building project as a joint development project between the Defendant as the owner of the land and the Plaintiff to develop a small village-type house of 3-storeys and specified dimensions.  After the building of the house the Defendant was to be assigned the title to the ground and first floors, whilst the Plaintiff was to be assigned the title to the second floor and the roof.

8.The second, and as it has turned out the contentious provision stipulates that if the Plaintiff (the builder) wants to sell the part of the building to be assigned to him, the Defendant has a pre-emptive right to purchase the Plaintiff’s part of the building on giving written notice within one month of the date of lodging the application for the Occupation Permit/Certificate of Compliance.  It is agreed that those two expressions are synonymous. The underlinings are mine in order to highlight the material parts of the section.

9.The purchase price was to be the highest of three valuations respectively by the Wing Lung Bank, the Hang Seng Bank and the Bank of China.

10.The actual cost of the construction to include additional fees and costs was now to be HK$1,536,200.  The work was expected to take about one year from the demolition of the existing building on the site. 

11.The Plaintiff (the builder) was to apply for all necessary planning approvals and Certificates of Exemption.  Additionally he was to apply for the Certificate of Compliance/Occupation Permit and be responsible for any documentation and fees relating to the 2^nd Floor and the roof viz that part of the property which was to be assigned to him.

12.The provision in relation to the eventual respective titles to the property required the Defendant to lodge the original title deeds and covenants and the agreement in triplicate with the solicitors designated by the Plaintiff, for them to hold on trust for both parties until completion of the building and the obtaining of the Certificate of Compliance/Occupation Permit. Neither party was to recover these title documents without the written consent of the other, before the Certificate of Compliance was obtained.

13.It was clear, and stipulated, that the Plaintiff would construct the whole building at his own cost, and that the consideration for his so doing would be the granting of title to him of the upper part of the building —  the second floor and the roof.  That was the critical nature of the joint venture.

14.That agreement was signed by the Plaintiff and the Defendant and countersigned by Madam Wong Sau Ying (the Defendant’s mother) as witness.  The document itself was on the headed paper of Kin Wo Construction Machinery Limited, the Plaintiff’s Company.  It was entitled Joint Development House Splitting Agreement (as translated from the Chinese) and thus indicated the nature of the venture — the house when built would be divided into two so that each party would have the title to part of it.

The supplemental Agreement of June

15.On the same day another document was signed.  It is also on Kin Wo Construction’s headed paper.  It is translated from the Chinese as “Supplemental Joint Development House Splitting Agreement”.  The parties are the same.  The preamble refers to what I shall term the “Head” Agreement followed by some supplemental clauses.

16.It provided for the Plaintiff builder in effect to reimburse the Defendant for the HK$20,000 which he had paid to Access Service Limited as the surveying company instructed by the Defendant.  It also protected the Defendant in respect of the actual building cost if it exceeded the quoted cost.  In reality therefore this joint venture was not going to cost the Defendant anything save in respect of his legal fees when it came to the point of preparing documents of title.

17.The period for construction was varied to approximately fifteen months which indicates completion in or about September 2007 with allowance for the various potential delaying factors.  After construction, but pending the issue of the Certificate of Compliance, the keys to the ground and first floors would be handed over to the Defendant.

18.Additional provisions related to the area and height of the building and the common parts, the signing of documents by the Defendant (or his family) upon oral notice being given, and the Plaintiff’s obligation in respect of a twelve-month maintenance clause regarding the structural aspects of the building.  There were also provisions in respect of any breach by either party.

19.I now turn to the critical part of that supplemental agreement, Clause 5, which referred to the provision for valuations from three banks, and the Defendant’s pre-emptive right to purchase the second floor and roof from the Plaintiff after certain formalities.  It was now stipulated that if the Defendant was not satisfied with the valuations provided by the banks, he was entitled, jointly with the Plaintiff, to instruct a fourth valuer, the cost being shared between them.  It is however the second part of the clause which calls for close attention and scrutiny.

20.It is preferable to repeat this clause as it has been authoritatively translated from the Chinese:

“…Party B [the Defendant] shall have the final decisive right to determine whether or not to purchase Party A’s property [the Plaintiff’s 2^nd Floor and roof unit] within one month from the date of lodging application for Occupation Permit. Party A [The Plaintiff] shall also have the right to decide whether or not to sell the title of the top floor and the roof to Party B. [the Defendant].” (the words is parentheses are mine solely for clear identification.)

21.As expressed there is no doubt that the clause means that the Defendant has a right to offer to purchase the Plaintiff’s part of the property which the Plaintiff has the right to accept or reject.  That right is the right of first refusal with the offer continuing to be based on the highest valuation of four (assuming the Defendant exercised his opinion to seek, with the Plaintiff, a fourth valuation); it was to be made in writing as required by the original agreement and exercised within one month of the date of lodging the application for the Occupation Permit.

22.This supplemental provision did not alter the nature of the pre-emptive right, nor when and how that right was to be exercised.  It can be said to have clarified the nature of the right and simply added a possible fourth valuation for consideration.

The nature of the Defendant’s Pre-emptive right

23.Although the ‘Head’ Agreement is not drafted by lawyers it uses the expression ‘pre-emptive’ right which in its ordinary meaning (Oxford English Dictionary) means a right of a person to purchase before an opportunity is offered to others.  Mr Mak for the Plaintiff relies, amongst other authorities, on a statement in Barnsley’s Land Options (5^th Edition) at 1-006:

“The grant of a right of pre-emption entitles the grantee to become a preferred purchaser if and when the grantor decides to sell his land.”

24.The case cited as “one of the clearest judicial explanations of a right of pre-emption” is that of Mackey v Wilson (1947) 47 S R (N.S.W) 315.  At page 325, Street J said:

“A ‘right of pre-emption’ confers no immediate right upon the prospective purchaser. It imposes a negative obligation on the possible vendor requiring him to refrain from selling the land to any other person without giving to the prospective purchaser the opportunity of purchasing in preference to any other buyer. It is not an offer and in itself it imposes no obligation on the vendor to sell the same. He may do so or not as he wishes. But if he does decide to sell then the prospective purchaser has the right to receive the first offer to sell, which he may also accept or not as he wishes.”

25.In Chapter 6 of Barnsley the rights of pre-emption are considered in greater detail.  Although it acknowledges that the law regarding such rights is “bedevilled with complexity and uncertainty” it goes on to indicate the matters that are “tolerably clear.”  The terms “rights of pre-emption” or “rights of first refusal” are “often used… interchangeably”.  “In both cases the grantor — the owner of the interest in land — agrees that he will not dispose of his property without first offering it to the grantee.”  The decision of the High Court of Australia in Woodroffe v Box [1954] 92 C L R 245 describes the term or expression “right of first refusal” as “somewhat inept”; although it is often applied to a situation where the grantee has the “first right to refuse an offer to purchase at the price at which the grantor is willing to sell”

26.The term “right of pre-emption” is often applied to the situation in which the grantee has the right to purchase at a fixed price (or at one not chosen by the grantor) before the latter is free to sell to another.

27.One other possibility is where the grantor is merely obliged to notify the grantee of his wish to sell and leave the latter to make a suitable offer to buy but the former can accept or refuse that offer.

28.The following matters as expressed in Barnsley are clear:

“1) The grantor of the right is not compelled (without more) to sell to the grantee; he is free to retain the property indefinitely and is under no duty to sell.”

29.In Pritchard v Briggs [1980] Ch 338 C A, Goff L J (as he then was), adopted the distinction between an option to purchase land and an agreement to give a right of pre-emption set out by Street J in Mackey-Wilson to which I have already referred.  Whereas the former “confers upon the optionee an equitable interest in the land, the subject of the agreement”, the latter “confers no immediate right upon the prospective purchaser”.  “The right is merely contractual and no equitable interest in the land arises.”

Stephenson L J, also considered the judgment of Street J and agreed with it.

30.“2) The grantor’s rights of disposition of his property are fettered in that in specified circumstances the grantee becomes entitled to acquire the property before all others: he thus          becomes a preferred purchaser… A right of pre-emption prescribes circumstances in which the relationship between grantor and grantee will become one of vendor and purchaser.”

In Pritchard v Briggs, Templeman L J (as he then was) said (p 418 C-D):

“In the case of a right of pre-emption the evolution of the relationship of vendor and purchaser depends on the grantor, of his own volition, choosing to fulfil certain specified conditions and thus converting the pre-emption into an option. The grant of the right of pre-emption creates a mere ‘spes’ which the grantor of the right may either frustrate by choosing not to fulfil the necessary conditions or may convert into an option and thus into an equitable interest by fulfilling the conditions.

31.nbsp;3) The trigger for the crystallization of a right of pre-emption is an event which depends on the volition of the grantor (and not, as is the case with an          option, on the volition of the grantee). 

4)   This is the grantor’s desire or decision to sell which is to be notified to the grantee.  This dependency on the volition of the grantor distinguishes it from an option whose triggering event is the grantee’s statement that he seeks to exercise his option to purchase. 

5)   A feature which all rights of pre-emption tend to have in common is the provision for an initial period during which the owner’s obligations are negative and the other party’s rights are ‘inchoate’ (unformed). 

6)   The triggering of a right of pre-emption merely involves the making of an offer or simply the notification by the grantor to the grantee.”

32.The exact nature of the grantee’s right in each case must be decided by the true meaning and effect of the relevant document.  The case before me is a simple contractual one in that the dispute is between grantor and grantee.  What is the true construction of the clause (or clauses) and how was it intended that it/they should operate?

33.Is the Defendant’s right as grantee under this “Head” Agreement, as supplemented by the collateral agreement of the same date, a right of pre-emption?

34.I do not overlook the fact that this was an agreement concluded at the time when the grantee was the sole owner of the land and the grantor would not receive any title to the designated part of the property until some future event after the property had been completed.  It clearly pre-supposed that at some stage after the receipt of the Occupation Permit the grantor would want to sell his part of the property.  It was his payment for the overall construction contract.  An option to purchase would put him at the mercy of the grantee.  An option would not make commercial sense.  Any purported attempt at sale by the grantor would be likely to be impeded at least on the face of it, by the option-holder stepping in.  A pre-emption right to purchase would permit the grantor some control over the price to be paid and require the grantee to meet a time schedule.  As Barnsley sets out at para 6-009 the grantee of a right of pre-emption acquires no entitlement to the subject property (even though at the time of the agreement he was the sole owner of the land) and the grantor cannot be obliged to sell or to offer the property to the grantee; he may simply do nothing and retain the property (2^nd Floor and roof).  Any obligation to offer or sell depends on the volition of the grantor.

35.The conditions set out in the “Head” Agreement are principally that the grantee should notify in writing (this requirement was not changed by the supplemental provisions — silence as to the form of notification simply means that the original position stands) within one month of the date of the lodging of the application for the Occupation Permit.  The grantor had the final decision whether or not to sell.  On any view this was no more than a right to make the first offer to the grantor to purchase at a price which was acceptable to the grantor.

36.The main argument for the Defendant, as advanced by Mr Andy Hung on his behalf, is that these agreements of the 6 June 2006 were in any event superseded by two further agreements one dated 2006, without a specific day identified in that year, and the other either 27 July 2006 or 5 August 2006 and that these constitute an option for the Defendant to purchase.  With regard to the variations in the dates (and the uncertainty of the date in 2006 on one) I am satisfied that there is no real significance in these, although there has been considerable concentration on these dates and the circumstances of the signing of the agreements by the Defendant (and the countersigning by the witness Mr Lau Pak On), and the number and source of the copies in existence.  It has therefore been necessary to sort “the wheat from the chaff”.

37.The real questions are firstly what is the status of these two documents and what is their relationship, if any, to the two agreements of the 6 June 2006.  Secondly what rights do they constitute on the part of the grantor and grantee?

The “Agreement of 2006”

38.It is of some interest to consider the Defendant’s case as to why this came into existence.

39.It was suggested by the Defendant’s family that there were three mistakes in the agreements of 6 June 2006 which called for rectification.  Two of them were simply typographical errors although I sensed that the Defendant was seeking to elevate them to a level of greater importance.  However the third concerned the provision in relation to the right to purchase which was said to be mistakenly expressed in the agreements of 6 June 2006.  Accordingly it is essential to consider this “2006” Agreement in detail.

40.The mistake in the name of the Defendant originally written as “Lua Yau Hing” was corrected in the June 2006 Agreements at the time, almost certainly by the Plaintiff since the colour of the ball point pen on the correction is the same as that of his signature.  This is inconsequential.  It is agreed by all that it was an agreement between the Plaintiff and the Defendant and signed by both parties.

41.The second “error” — more an omission - was the fact that the letters “R.P.” (Remaining Portion) should have been immediately preceding the number of the Lot viz 78.  This is immaterial.  All concerned knew clearly what piece of land was the site of the proposed building.  It was fully described in the “2006” and the 24 July 2006/5 August 2006 agreements.  The area of the proposed building was also adjusted from 700 square feet to 641 square feet.

42.The agreement repeated the various obligations and the arrangements for the division of the title of the property between the two parties, as had been set out in the “Head” Agreement.

43.Clause 5 relating to the pre-emptive right contained some variations from the earlier agreements of June 2006.  The purchase price is to be the highest of the valuations by three specified firms of surveyors, these replacing the three banks specified earlier.  The Defendant was to communicate his decision to purchase to the Plaintiff within 30 days of the issue of the Certificate of Compliance.

44.I am not sure how much significance I should attach to the expression introducing the re-drafted pre-emptive right — “if the [Defendant] needs to re-purchase the property” — but the terminology is inconsistent with an option to purchase but entirely consistent with a pre-emptive right to be exercised within a tight time-scale.

45.The Defendant’s case is that this clause was created because his father, on his behalf, was unhappy with the corresponding provisions in the June Agreements and he or they had further negotiations with the Plaintiff which resulted in this 2006 Agreement.  The supplemental agreement of the 24 July 2006 (or 5 August 2006, it matters nor which one is considered since they are identical) adds nothing material which calls for construction in the context of the 2006 Agreement.

46.Much evidence was given as to the number of copies of this 2006 Agreement how each came into existence, where they were signed, and even as to the dates on the copies.  None of that wide ranging exercise had any significance.  What is important is that the Plaintiff signed the main agreement and suggested or advised the Defendant, through his mother, to go to a firm of solicitors (Patrick Tam & Co) for it to be explained to him, if he needed an explanation, and for him to sign it — and for Mr Lau Pak On to witness the signing.  It was not entirely clear whether Mr Lau Pak On at any stage, witnessed the signature of the Plaintiff before any visit to the solicitors. But once again, that does not matter.  None of those involved suggests that there is any variation between the copies of the Agreement or that the Agreement does not reflect what they understood and agreed.  The mere fact that the solicitor must have had probably three copies of the agreement, all bearing the Plaintiff’s signature, and possibly that of Mr Lau Pak On, is again of no significance.

Did the Defendant exercise his pre-emptive right in accordance with the Agreement?

47.The provision relating to this had been re-drafted in what I judge to be a novation agreement to meet the concerns of the father and mother about the relevant provision in the earlier agreement but without changing the substance of it.  The new agreement had been drafted and presented by the Plaintiff.  In accordance with his suggestion they (mother, defendant and witness) attended the solicitors for any explanation or advice they required.  The Defendant signed the agreement as well as other documents.  I am satisfied that there was no change to the pre-emptive right contained in the “Head “Agreement.  It would have made no sense for the Plaintiff to have agreed to an option instead of a pre-emptive right hence the tight conditions for the Defendant’s offer.

48.The Certificate of Compliance was issued on the 23 October 2007, the building having been competed in August.  One other major but preliminary act had not yet taken place.  The Defendant had not conveyed the title to the 2^nd Floor and roof of the building to the Plaintiff.  Therefore, as a matter of practicality, the Defendant could not purchase what he already had — a completed building on land already held by him.

49.He had 30 days from the 23 October 2007 in which to notify his wish to purchase.  The deadline was the 22 November 2007.  He knew from where the Certificate would be issued even though it was part of the Plaintiff’s obligations to apply for it.  No notification of any kind, written or oral was given by the Defendant within that time.  If he had any difficulty in obtaining the Certificate of Compliance he could have asked for a copy.  It was never raised as an obstacle.

50.Although the timing is precise — viz 30 days from issue of the Certificate (not from notification of its issue) — it is arguable that the Defendant was relying on being informed that it had been issued rather on than his own inquiry of the issuing office, the District Lands Office.

51.In fact, and I so find, the Plaintiff’s wife on the 16 November 2007 notified the Defendant that the Occupation Permit had been issued and that he had one month in which to reply as to whether he wished to buy-back the flat, as it was now described.  That written notification was signed by the Defendant’s mother as his agent in acknowledgment.  The Defendant therefore had until the 15 December at the latest to give formal notification that he wished to exercise his right.

52.The next document of note is the Defendant’s confirmation of acceptance of what I will term as vacant possession of the building.  It relates to the whole building, not a part of it.  It is signed by the Defendant’s mother as his agent and although not dated as such, bears the date 10 December as the date of inspection.  The Plaintiff’s wife, Madam Chen Yin Fong, was a truthful and careful witness.  She it was who gave the notification to the Defendant’s mother and obtained her acknowledgment on the 16 November 2007.  I am also satisfied that she gave her a copy of the Certificate of Compliance on that occasion. She also obtained the signature of Madam Wong Sau Ying to the confirmation of acceptance of vacant possession on the 10 December 2007.

53.The appointed period for the notification of the exercise of the Defendant’s right passed without his doing what was required.

The obtaining of the valuations

54.Those remains a degree of uncertainty concerning the sequence, dates and originator of the instructions.

55.Larry Tam & Associates carried out a valuation on the 29 November. They had been asked to do so by the Kowloon West Branch of the Bank of China. The Plaintiff’s wife said that she arranged for this.  The valuation appears to have been for mortgage purchases.  It was put at HKD3 million.

56.Jones Lang LaSalle were undoubtedly instructed by the Defendant on the 3 December.  The report is dated the 10 December.  The valuation was for mortgage and the figure was HKD2.1 million.

57.A G Wilkinson & Associates again appear to have been instructed by or on behalf of the Defendant, since the report was submitted to his wife Madam Sewin Szeto.  The report is dated 6 December and so the instructions were given before that date.  The valuation was HKD2.44 million.

58.Finally Centaline was instructed by the same lady sometime before the 5 December, the report itself being dated 14 December and the value assessed as HKD2.4 million.

59.The Defendant had left it very late to instruct surveyors who had been identified for this purpose as long ago as 24 July 2006.  Moreover, assuming the later of the dates of his knowledge of the issue of the Occupation Permit was the operative one i.e. 16 November 2007, and that he had no knowledge of the issue of the Occupation Permit at the time of its issue, i.e. 23 October 2007, no steps were taken to instruct surveyors until the end of November 2007, at the earliest, yet he had agreed the identity of the surveyors for this purpose sixteen months earlier.

60.Whether the Defendant was at any time in this period in a sufficiently sound financial position to buy the top flat is quite uncertain.  He had made no solid effort to get a mortgage and his mother’s evidence was, I find, quite unreliable.

61.Although she affected not to know when she started receiving rental of the factory on the mainland, her bank passbook show that it was not until mid-2008.  On the figures presented by the Defendant’s witnesses I do not see how he and his family could have met the mortgage instalments set out on the Bank of China’s quotation.

Did the preemptive right subsist or change?

62.Does the provision in the 2006 agreement change the nature of the Defendant’s right to purchase the 2^nd Floor and roof of the building from the Plaintiff?

63.There are certainly significant differences between the relevant respective clauses.  The change in the sources for the valuations is not material.  There is no longer a reference to a joint valuation.  There is now a provision for the highest price to be paid.  More importantly now the prospective purchaser, the grantee, is to notify his decision within 30 days after the issue of the Certificate of Compliance.  This is somewhat more exact than the previous provision for the timing of the notice and in effect gives the grantee a clearer time scale.  It does not specify that the notification is to be in writing (as the earlier agreement had done) but this is an oversight in my judgment and not a deliberate change in procedure.  In view of the fact that the grantee had a defined time period for the communication which would of course include the price he was offering, written notification was required and implicit.  As a matter of common sense and practice adopted by the parties in relation to other procedures it would require a written notice.  In any event at the very least it would require written confirmation. 

64.The Plaintiff would not have agreed to the Defendant having anything more than a pre-emptive right.  The relatively tight conditions imposed in the 2006 agreement support this.  The reference to the Defendants “final decisive right” had been omitted as had the Plaintiff’s right to decide “whether or not to sell.”  The timing was still governed essentially by a fixed period by reference to the Occupation Permit.  It had not extended the nature of the Defendant’s right nor had it limited the volition of the Plaintiff.  As a matter of commonsense and commercial reality the Plaintiff would not have contemplated any arrangement whereby the Defendant was able to inhibit his ability to sell for the best price available on a timescale under his control and I am satisfied on this.  He would not have wanted to leave his capital and profit tied up on a loose arrangement whereby the volition was that of the grantee.  That is why the timescale was fixed to run from the issue of the Occupation Permit and no doubt why he was unwise enough to enter into the Memorandum of Understanding.

65.The agreement of 2006 remains essentially an agreement containing a pre-emptive right for the grantee, the Defendant.  I do not propose to repeat the considerations in Barnsley’s Land Options or the authorities considered therein which I have set out earlier.  The volition is still that of the grantor.  The reference to “the purchase price shall be the highest” of the three valuations does not convert the pre-emptive right into an option to purchase at that price.  The grantor still retained the entitlement to decide not to sell, or, not to sell at that price.  But even if I were to be wrong on that construction the defendant failed to meet the time -scale and accordingly his right lapsed.  His other failure had been the fact that the upper part of the house had not been conveyed to the Plaintiff as provided for in the Agreement — that conveyance of title was a logical pre-requisite to the exercise of the pre-emptive right.

66.Amongst Mr Hung’s submissions is the suggestion that the issue of the Certificate of Compliance/Occupation Permit converts the right of pre-emption into an option.  I do not agree — it triggers the start of the 30 day period within which the Defendant must give notice of his desire to purchase. He refers to the “timeous notice” as an implied term.  That cannot be right — it is an express term of the contract.

67.Mr Hung also suggests that if, on receiving notice from the Defendant that he wished to purchase, the Plaintiff reacted by saying “I am not ready to sell yet”, that in effect meant that the Defendant had no right; and it would be against logic and commonsense.  That is to misunderstand the nature of a pre-emptive right which leaves the grantor with the right to accept or refuse the grantee’s notice that he wished to purchase.  If Mr Hung is correct it would mean that in a depressed market which would favour the grantee, the grantor could not say “At the price you offer, I would make a loss on this venture and I am going to wait until you can make an offer which does not have that result”, or, “I will simply wait until the market picks up.”

68.It appears from Mr Hung’s submission in relation to the letter from the Defendant’s solicitors of the 11 October 2008 which he describes as a “purported withdrawal (which must be a mistake)” that it is predicated on the continued existence of a contractual right “which the parties are under an obligation to perform”.  This is to ignore all that had preceded the 11 October 2008 quite apart from the fact that almost one year had passed since the issue of the Certificate of Compliance.  In my view the words “unequivocal” and “irrevocably” do not allow of a construction of mistake or even ambiguity.

69.Madam Wong on her son’s behalf offered to pay HKD2.44 million which was Centaline’s valuation.  It is unclear precisely when this offer was orally communicated to the Plaintiff but it is likely to have been outside the 30 day period because the Plaintiff said Madam Wong had given him the figures from all three valuations in a telephone conservation before the offer of HKD2.44 million was made by her, and Centaline’s report was dated 14 December 2007.

70.The Plaintiff on his evidence was not optimistic about the possibility of the Defendant offering a realistic purchase price.  He recalled Madam Wong saying at about one month before the issue of the Certificate of Compliance, that her son had lost money gambling and that they would not be buying the Plaintiff’s part of the property.  She said in her evidence that the gambling son was not the Defendant but another son.  He added that for some time before 30 May 2007 (the day on which he signed the Memorandum with Fancy Spread) he had been asking Madam Wong whether the son was going to purchase the property. He did not receive an unequivocal response from her.  Nonetheless when he received the offer off HKD2.44 million from her, he said he agreed to accept it providing completion took place within 7 days.  When she asked for a month he agreed but asked for written notice.  He did not receive this.  I accept his evidence on all these matters.

71.I am not at all sure that he in fact agreed to sell at HKD2.44 million — or that he seriously intended to sell at that figure.  In the background was the Memorandum of Understanding which premised a sale price of HKD3.2 million.

72.Nonetheless although he believed that the Defendant had abandoned his pre-emptive right by reason of the fact that no written notice was sent and the month’s extension for completion passed without any progress on the Defendant’s part, the matter did not die entirely.

The Aftermath - an opportunity revived

73.Despite the existence of the Memorandum and the failure of the Defendant to give written notice of his offer to purchase and to proceed with completion of division of the property, the Plaintiff held open to him the opportunity to purchase his interest.

74.A letter from Kitty So & Tong, on behalf of the Plaintiff dated the 9 April 2008 to Patrick Lam & Co. who were acting for the Defendant, (these were the solicitors at whose office the Defendant, his mother and the witness attended to sign the 2006 Agreement and with whom the documents relating to title had been lodged) extended to the Defendant a further opportunity to “buy-back” the upper part of the building in the following terms:

“Pursuant to Clause 3(5) of the … Agreement [this can refer only to the ‘2006’ document] … your client has a right to buy back the property in consideration of the highest valuation advised by the three surveyors’ firms therein mentioned.

Our respective clients have agreed to vary and modify such condition that they agreed only to appoint Messrs. A.G. Wilkinson & Associates to be the surveyors of the property and their valuation will be the amount of the consideration for your client to buy back the property as aforesaid.”

75.It enclosed a joint letter of instruction for the Defendant to consider. This was a clear open offer to renew the Defendant’s pre-emptive right.  The somewhat odd aspect is the fact that the Defendant, through his wife, Madam Szeto had instructed this firm of surveyors unilaterally in early December 2007 (or late November) and received on or about 6 December 2007, a valuation of HKD2.4 million. Nonetheless the parties had agreed a joint instruction.  Whether they or one of them had overlooked this, or whether it was simply an updating exercise to see if the valuation had changed is not known.  Possibly the housing market had moved forward.  Whatever the situation, the Defendant had still not assigned that part of the property to the Plaintiff.

76.There was no reply to that letter and no explanation for that, or for the lapse of time before another firm of solicitors, Chan & Associates, wrote on behalf of the Plaintiff on the 8 August 2008 (your months after the letter of Kitty So & Tong) to the Defendant, referring to the agreement reflected in the letter from Kitty So & Tong.  It now appeared that the Plaintiff was contending that he was unaware that the Defendant had unilaterally appointed A.G. Wilkinson & Associates in December 2007.

77.The Defendant was criticised for not informing the surveyors at that time of the price that Fancy Spread was willing to pay i.e. HKD3.2 million. Although the Plaintiff had said that he had informed Madam Wong of this in or about May 2007, I am not convinced that he did do so in the fullest terms i.e. the Memorandum of Understanding.

78.The ultimatum now was that the Defendant must pay HKD3.2 million or else proceed with the partition of the title and assign the upper part to him.  The alternative was an action for an order that the title to the top section of the property be assigned to him — on which he would in any event succeed — and interest on the balance of the purchase price which according to the Memorandum Fancy Spread was willing to pay, on which he does not have a good case.  I will deal with these claims in due course.

79.In the meantime, Damien Shea’s reply dated 9 September 2008 on behalf of the Defendant to Chan & Associates needs to be considered.  It did not deny that the Plaintiff had informed Madam Wong of the price that Fancy Spread had agreed to pay but in the overall scheme of things, which had become somewhat confused, that is peripheral and of no importance.

80.It referred to the three valuation report obtained by the Defendant and purported to give notice that the Defendant wished to exercise his right of pre-emptive purchase by offering HKD2.44 million (the Centaline valuation).

81.It was of course way out of time however one calculates the 30-day period.  It was even well beyond the offer contained in the letter from Kitty So & Tong of the 9 April 2008.  It was an attempt unilaterally to resurrect the pre-emptive right.  It made no mention of any earlier attempt to exercise the right, from which the reasonable inference to be drawn is that there had not been any serious attempt to do so.  It was at best a defensive retort to the threats made in the letter from Chan & Associates.  It did not try and grapple with the fact that the Defendant had taken no steps to assign the title to the upper part of the building, to which the Plaintiff was entitled in any event, regardless of the nature of other disputes.

The Letter of the 11 October 2008 from Damien Shea & Co to K B Chan & Co

82.A little over one month after the letter from Damien Shea & Co purporting to give notice to the Plaintiff’s then solicitors they wrote to a new firm on the scene, K B Chan & Co.  There is no information to explain this change but clearly the Defendant’s solicitors became aware of it.  The following paragraph is the material content:

“We have instructions to inform you that on account of your client’s failure aforesaid our client irrevocably withdraws his endeavour to exercise his right under the contract to purchase the 2^nd Floor and roof erected on Lot No R P in DD 236, Sai Kung New Territories, Hong Kong at the valuation price of 2.44 million HKD.”

83.That is an unequivocal statement that the Defendant abandons any attempt to exercise his pre-emptive right.  The mere mention of the price does not suggest that he wishes to exercise it at a different purchase price (higher or lower).  It is an “out-and-out” withdrawal for all time, hence the considered use of the word “irrevocably”.

84.“Your client’s failure aforesaid” is simply a reference to the fact that the Plaintiff’s solicitors had failed to reply to Damien Shea & Co’s letter of 9 September which had demanded a reply within 14 days to the proposed exercise of the pre-emptive right of purchase in the sum of HKD2.44 million.  It came almost one year after the issue of the Occupation Permit.  Nothing was said in this latest letter about the Plaintiff’s entitlement to the top section of the building.

The Memorandum of Understanding with Fancy Spread

85.On the 30 May 2007 the Plaintiff had entered into the Memorandum of Understanding with Fancy Spread Limited in the name of the Defendant purporting to act as his attorney.  Coincidentally the occupier of the house next to the one being built was involved with this company as director or shareholder, it is not entirely clear whether he was one or both.

86.Another quirk is that this “neighbour” became the defendant’s tenant of the first floor of the new house by virtue of an agreement between him and the Defendant on 8 May 2008 but that is some way “along the road” and is not relevant for the purpose of my findings on the real issues.

87.It is clear to me that the Plaintiff had no right to act on behalf of the defendant in this transaction.  He had no written Power of Attorney and he does not contend that he had the defendant’s oral agreement. Moreover, there was nothing in any of the written agreements which entitled him to act in this way.  The Defendant was not aware of the Memorandum until much later.  In due course solicitors acting for Fancy Spread Ltd became involved and a charge was registered against the property in favour of Fancy Spread which subsists today.

88.The Memorandum provides for the sale of the second floor and roof, which at that time not only had not been constructed (the building was not completed until August/September 2007) but was not in the Plaintiff’s ownership, hence no doubt the need to use the Defendant as a party to the Memorandum. The purchase price was HKD3.2 million and the Plaintiff received the deposit of HKD320,000.

89.A further deposit in the same sum was to be paid by Fancy Spread upon the signing of an Agreement for sale and Purchase which was to take place within 14 days of receipt of written notice by the vendor to the Purchaser of the issue of the Certificate of Compliance.  There was a further provision relating to completion.  However a later provision expressly stated:

“…but for the purpose of showing the sincerity and intention of the parties hereto, the vendor and the purchaser hereby expressly enter into this Memorandum which does not constitute a binding agreement between the parties hereto.” (my underlining)

90.I do not need to consider the implications of this Memorandum as far as the parties to it and the Plaintiff are concerned.

91.It was, to say the least, extremely unwise of the Plaintiff to enter into such a Memorandum, even one which was not enforceable.  The building was not complete.  The Defendant thus had a limited opportunity of exercising his pre-emptive right.  As far as the Plaintiff was concerned the Defendant would have to match the price stated in the Memorandum viz HKD3.2 million.  But even that would not avail him because the Plaintiff had on the face of it entered into an agreement to sell to someone else (albeit not a binding agreement) at that figure.  It could of course have been in effect, a threat by the Plaintiff (the grantor) to breach his “negative obligation” under the pre-emptive right.  However the defective nature of the Memorandum, — it was not a valid exercise by the Plaintiff of the defendant’s authority — means that it is of no consequence as far as the dispute between the parties is concerned save to fix in the Plaintiff's mind that in effect his part of the building had a valuation of HKD3.2 million from one potential purchaser.

The final consequences

92.The Defendant is in breach of his contractual duty to convey to the Plaintiff title to the 2^nd Floor and roof of the village house built by the Plaintiff at the Plaintiff’s expense, being the consideration for the contract between them.  He has been in breach since in or about September 2007.

93.The Defendant’s pre-emptive right lapsed on either 22 September or 15 December 2007 when he failed to meet the conditions for putting forward his offer to purchase.  When the Plaintiff revived that opportunity for him on 9 April 2008 he failed to meet the conditions then.  He ignored that opportunity.

94.Four months later a further opportunity was extended to him in the form of an offer to sell at a price of HKD3.2 million.  That was countered by an offer to purchase in the sum of HKD2.44 million one month later.  By then the pre-emptive right had well and truly lapsed.  The Defendant’s contractual right had long gone.  Of course if the Defendant had complied with the conditions in 2007 or even after the 9 April 2008, the Plaintiff would have had to sell at the price agreed.  The Memorandum of Understanding did not affect the Defendant’s right in any way at any time.  When the offer to sell was made by the Plaintiff in the sum of HKD3.2 million — which happened to be the sum Fancy Spread Ltd appeared to be prepared to pay — the Defendant had ceased to have any pre-emptive right.

95.The letter from his solicitors of the 11 October 2008 was a formal statement confirming an existing fact — “the defendant irrevocably withdraws his endeavour to exercise his (pre-emptive) right.”

96.I am satisfied that the Defendant (or anyone acting on his behalf) did not make any serious attempt to exercise the contractual right, save when he obtained the surveyor’s valuations and then he was out of time and it was not in writing.  But that was shortlived.  I think that the Defendant (or his mother) was testing the Plaintiff’s reaction.  I am confirmed in my view by all that followed in 2008.

97.I am also quite sure that the Plaintiff had been trying to ascertain the Defendant’s intentions even if only because he had signed a Memorandum of Understanding with Fancy Spread for sale at HKD3.2 million.  As I said earlier, that was unwise and could have proved to be an obstacle bearing in mind the Defendant’s contractual right.  However the Defendant’s own inaction prevented that being so.  Any problems arising for the Plaintiff out of that Memorandum are of his own making and do not concern me in the context of this action.

The Consequential Orders and Declarations

98.The Defendant is to convey to the Plaintiff the title to the 2^nd Floor and roof of the village house at Lot R P 78 DD256 Sai Kung, Tai Wan Tau Village, Clear Water Bay and give vacant possession thereof, in accordance with the Joint Development Contract, together with the rights of access to and egress from the said premises and the common parts;

99.The Defendant is to provide an account in respect of any mesne profits received by him as a result of any letting of the said premises between the 23rd October 2007 and the date of this order, and thereafter until the date of completion of the assignment of the said title to the Plaintiff, and to pay to the Plaintiff any such sums received. 

100.The Plaintiff is entitled to register a lien in his favour over the whole of the said property, that is the entire building, until the date of completion of the aforesaid assignment, in the sum of HKD2,597,146.67 plus interest at the commercial rate from 28 October 2008 until the date of completion of the assignment.

101.The Plaintiff is not entitled to any relief in respect of any obligations under the Memorandum of Understanding signed by him on the 30 May 2007 for the reasons set out in this judgment.

102.There will be an order that the Defendant to pay the Plaintiff’s costs of this action on a party and party basis to be taxed if not agreed.

103.In the event of there being any argument as to the form (as opposed to the substance) of these orders, I make them as orders nisi.

Mr Andrew Mak, instructed by Adrian Yeung & Cheng, for the Plaintiff

Mr Andy Hung and Mr Karl Wong, instructed by Damien Shea & Co, for the Defendant

Please refer to CACV143/2013 for the relevant appeal(s) to the Court of Appeal.