Construction of contract: look at the words used in their commercial context

In Marble Holdings Ltd v Yatin Development Ltd ((2008) 11 HKCFAR 222) S agreed to sell commercial property in the centre of Macau to P. The property was tenanted and was being bought as an investment and not for occupation. T1 had possession under the terms of a lease that would end on 30th March 2004. S had an agreement for lease with T2 at a much higher rental to commence on 1st April. The completion date for the sale and purchase was on or before 30th April.  The sale was subject to the “existing tenancy.” Given the uncertainty as to when completion would take place, the definition of “existing tenancy” referred both to the lease to T1 and the lease to T2. In fact, S knew that there was a possibility that T1 would not give up possession and the lease to T2 provided that T2 could terminate the agreement if it had not entered into possession by 30th June. P, however, had not seen the lease to T2. T1 refused to give up possession on 1st April. P refused to complete on 30th April and purported to accept the repudiatory breach by S. It sought to recover its deposit. The question was whether S was in breach in selling subject to the lease to T1 rather than a lease to T2.

The Court of Final Appeal held that it was. When interpreting the contract one had to look at the words used in the context of the document as a whole and the commercial context. Here the context was that this was a purchase of an investment property and so the identity of the tenant would be understood by the parties as being important. There was a breach of condition in attempting to sell subject to the wrong tenancy. The fact that the lease to T2 did envisage that T1 would remain in possession was irrelevant to the interpretation of the sale agreement since P had not seen it.

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