The danger of signing a preliminary agreement and cheque to show sincerity

In Phoneyork Co Ltd v Chesson International (Holdings) Ltd ([2012] HKEC 751) C was a potential purchaser of an industrial building owned by P. C’s agent persuaded P’s director to sign a preliminary sale and purchase agreement and a cheque for the preliminary deposit to show sincerity. This is a common practice in the domestic context and, where the buyer, is an individual, in purchases of commercial property too. To protect himself, P’s director prepared an explanatory memorandum specifying that he did not yet intend to be bound. He endorsed the back of the cheque to similar effect. P resiled from the transaction and C brought an action on the cheque. The court held that the explanatory memorandum and endorsement showed that the purchaser did not intend to be bound by the preliminary agreement nor to deliver the cheque unconditionally to the seller. The action failed.

Recorder Yuen SC closed with the following words of caution:

‘Lastly, by way of postscript, may I add this remark. This case is an example which shows that the estate agents’ practice of suggesting a potential purchaser to sign a preliminary agreement and to issue a cheque to show sincerity may be a recipe for potential misunderstanding unless the matter is handled very well. It is time for estate agents to reconsider whether such a practice should be continued, and if yes, how such practice should be carried out properly so as to avoid any unnecessary or potential misunderstanding.’ (at para. 107).

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