Meaning of ‘saleable area’: Top Faith Property Ltd v Wong Ben

In Top Faith Property Ltd v Wong Ben ([2022] HKCA 783) Top Faith Property Ltd (‘the buyer’) entered into a Provisional Sale and Purchase Agreement to buy the entire issued share capital of Hero Wealth Corporation Ltd for HK$250 million. Hero Wealth was the vehicle for the ownership of office units in the Lippo Centre.

Pre-contract, the buyer made an inquiry as to the ‘saleable area’ of the office units. The shareholders of Hero Wealth (‘the sellers’) provided a plan stating that the saleable area was 758.46 square metres. This was untrue and the buyer relied on misrepresentation to rescind the contract.

The buyer succeeded at first instance. The sellers appealed. They argued that the statement was true. There was no standard definition of ‘usable area’ and the architect who prepared the plan took a reasonable approach to calculating the usable area.

The 1999 Code of Measuring Practice of the Hong Kong Institute of Surveyors (‘HKIS’) did incorporate a definition of ‘saleable area’. The representation was false if this definition were applied.

However, the sellers argued that this did not enjoy any special status. The architect who prepared the plan was not bound by it and chose, instead, to use the definition of ‘usable floor space’ in the Building (Planning) Regulations (Cap 123F).

The Court of Appeal said that when interpreting a representation, ‘the proper approach is an objective one that focuses on what the words and conduct constituting the Representation would in the relevant context have conveyed to a reasonable person in the position and with the characteristics of the plaintiff’ ([24]).

The question was as to the common understanding of reasonable vendors, purchasers and estate agents) [25]).

The HKIS code was the only available professional guide as to the meaning of the term at the relevant time and was generally accepted by the market ([28]).

Thus, the representation was ‘indisputably false’ and the appeal failed.

Michael Lower

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Misrepresentation: misleading descriptions of a flat

A contract can be set aside if the purchaser was induced to enter into it by a misleading description of the property to be sold. The false statement may be made either by the seller or the seller’s agent. The false ‘statement’ may be a series of statements which cumulatively convey a misleading impression of the property.

Facts

In Joytex Development Ltd v Super Homes Ltd ([2018] HKCFI 2286) C acquired Joytex as the vehicle for the purchase of a flat in Conduit Road, Mid-Levels from its developer Super Homes Ltd (‘SHL’).

Joytex alleged that its purchase of the flat was the result of representations (which proved to be false) that the flat would have an open kitchen layout and that all necessary government approvals for implementing this layout had been, or would be, obtained.

The sales agent’s statements

W worked for the estate agent appointed as sole sales agent by SHL. W gave C a brochure. W also told C that the flat would have an open kitchen layout. C was buying the flat as an investment. W told C that the likely category of tenant for the flat would find the open kitchen layout attractive.

The floor plan in the sales brochure

The floor plans for the flat in the brochure showed an open kitchen layout but there was qualifying wording to the effect that they were ‘only for reference’. SHL had approved the contents of the brochure. C noted the floor plan but did not read the brochure in detail and did not notice the qualifying words.

The 2009 side letter (signed at the time of the provisional sale and purchase agreement)

C signed a side letter (about fixtures and fittings to be installed in the flat). The attached plans showed both open and closed kitchen designs.

The solicitor’s statement

C agreed to instruct SHL’s solicitors to act for him in the purchase. A conveyancing clerk, L, handled the transaction. The plan attached to the sale and purchase agreement did not show an open kitchen. L assured C that SHL would change the kitchen to an open kitchen layout. The assignment, like the agreement, showed a closed kitchen layout.

No approval for the open kitchen layout

It later turned out that there was no Government approval for the kitchen layout and no likelihood that such an approval would be obtained. C sought the rescission of the contract and damages on the grounds that he had entered into the contract in reliance on SHL’s misrepresentation.

The legal issues

Whether SHL made representations that the flat would have an open kitchen layout

SHL had made representations. The court could have regard to the cumulative effect of a series of events ([80]). The representation in the floor plan in the brochure was not enough since there was a statement qualifying the plan (it was for reference only) ([84] on the legal effect of qualifying statements).

On the other hand, the 2009 side letter conveyed the impression that the flat could have an open kitchen layout ([87]). SHL approved its terms ([89]). W’s statements were representations that the flat would have an open kitchen layout. The fact that her employers were the sole sales agents of SHL was relevant  ([96] – [97]). While W may have exceeded her actual authority in some of the statements she made, she was acting within the scope of her ostensible authority ([100] – [101]). L was acting within the scope of his authority when he made the relevant representations to C.

The cumulative effect of all of the factors in the previous paragraph was that SHL had represented to C that the flat would have an open kitchen layout ([110]).

Reliance

Although C was an experienced and successful businessman, he had relied on SHL’s representations. Deputy Judge Stock SC said, ‘if the effect of a contract has been misrepresented, it is not necessarily an answer to say that had the representee read the contract, he or she would have discovered the true position’ ([116]).

The qualifying words ‘in rather small print’ in the brochure were not sufficient to defeat the claim ([117]).

Falsity

The representations were false. Joytex could not establish that the misrepresentations were fraudulent.

Remedies

Joytex was entitled to rescind the contract and to recover the price paid with interest on assigning the flat to SHL.

Joytex was entitled to damages for non-fraudulent misrepresentation. The aim is to put the purchaser in the position it would have been had the contract not been made. SHL was not able to show that it had reasonable grounds for believing, and that it did believe, in the truth of the representations.

Joytex was not entitled to damages for the alleged loss of profit from an alternative investment. This required the plaintiff, ‘to show on a balance of probabilities that it would have entered into the alternative and more profitable transaction, and a real and substantial chance (as opposed to a speculative one) that the relevant third party would have transacted.’ ([151]). Joytex was unable to meet this requirement; there was no evidence to show that it viewed any other property or that it would have retained such a property had it done so ([160]).

Joytex was, however, entitled to damages to cover, for example, legal costs and stamp duty and the management fees it had paid as the owner of the property.

Michael Lower

Settlement induced by misrepresentation that one of the parties had title to land as bona fide purchaser for value

In Howin Industrial Ltd v China Group Global Ltd ([2017] HKEC 1485) P transferred land to D2 to D13 for no consideration. D2 to D13 were male indigenous villagers entitled to ding rights. D2 to D13 executed declarations of trust confirming that each of them held his land on trust for P. These declarations were not registered at the Land Registry.

P was wound up. The Government subsequently issued notices of resumption in respect of the land. D2 to D13 assigned the land to D1 which had been incorporated to handle the compensation claims.

P’s liquidators discovered the declarations of trust. They made inquiries and were led to believe that neither D1 nor its lawyers knew of the declarations and that D1 was a bona fide purchaser for value of the land (‘the representation’). This was shown to be false in subsequent criminal proceedings.

Influenced by the representation, P’s liquidators entered into a deed of settlement (‘the deed’) dividing the compensation monies between P and D1.

When P’s liquidators discovered the truth, they sought to have deed set aside. They were successful. It was enough that they were influenced to enter into the deed by the representation (Zurich Insurance Co plc v Hayward [2016] 3 WLR 637, SC).

Time did not start to run until they had discovered the fraud or concealment (Limitation Ordinance, s. 26(1)).

P was entitled to a declaration that it was the sole beneficial owner of the land. This appears to be founded on a resulting trust arising from the fact that D2 to D13 did not give consideration. P did not need to plead the illegality.

In the criminal proceedings, the Court of Appeal had taken the view that the assignments to D2 to D13 were sham documents having no legal effect. D2 to D13 thought that the point of the documents was to transfer the ability to exploit their ding rights.

P was entitled to all of the compensation paid by the Government.

Michael Lower

Misrepresentation as to the identity of the purchaser

In Greatland Property Consultants Ltd v Charis Patria Ltd ([2016] HKEC 2518) C signed sale and purchase agreements to sell two floors of a building to P (a company that owned two other floors of the building) for a total consideration of HK$ 6 million. This meant that P owned 80% of the shares in the building and could apply for a compulsory sale of the property under the Land (Compulsory Sale for Redevelopment) Ordinance. The sale was arranged by L, an estate agent. C had made it clear to L that it was prepared to sell for HK$6 million but that the price for a sale to P would be much higher. L represented to C that the buyer was a businessman from the mainland. On this basis, C agreed to sell for HK$ 6 million. The provisional sale and purchase agreements provided for C to pay L HK$60,000 by way of commission (or agreed damages if the sale did not go ahead). When C discovered that P was the purchaser it rescinded the sale and purchase agreements and paid P HK$300,000 by way of liquidated damages.

L brought proceedings against C claiming the HK60,000 she alleged was due under the sale and purchase agreements. C’s defence was that L had misrepresented the identity of the purchasers. To facilitate this, L had written the purchasers’ name in Chinese so that C would not realise that the purchaser was P. Although P’s company chop was placed next to the signature of the authorised signatory, this was only done after C’s representative had signed so that C had no way of seeing it before the contract was entered into. Overturning the finding at first instance that this misrepresentation had not induced the contract, the Court of Appeal (Chu JA giving the main judgment) held that C’s defence was successful. Its counterclaim to recover from L the HK$300,000 it had paid in damages to P was also successful.

Michael Lower

 

Misrepresentation: a flat with a view in the Court of Appeal

Yang Dandan v Hong Kong Resort Co Ltd ([2016] HKEC 1722, CA) concerned the alleged misrepresentation made by Hong Kong Resort Co Ltd (‘the developer’) in the sales brochure for the flat bought from it by Yang Dandan (‘YD’). YD pointed to passages in the sales brochure to the effect that she was acquiring the top floor flats in a ‘high rise’ development. The same brochure indicated  that the planned development on nearby land also owned by the developer would be a ‘mid rise’ development. YD was acquiring a duplex on the top two floors of the high rise development. She argued that the descriptions in the brochure amounted to representations: (a) that the mid-rise development would not obstruct the view enjoyed from her property; and (b) that the developer had the intention of ensuring that the top floor flats would continue to enjoy an unimpeded sea view in the future. The mid-rise development was later built and did have a minor impact on the view from YD’s balcony.  YD argued that this meant that there had been a misrepresentation. This claim was rejected by the Court of First Instance.

The Court of Appeal (Kwan JA giving the main judgment) dismissed her appeal. First, there was too great a leap from the contrasting ‘high-rise’ / ‘mid-rise’ descriptions to the notion that a reasonable person with YD’s characteristics (a highly educated purchaser) would infer that there would be a significant difference in height between the top of the mid-rise development and YD’s flat. Differences in topography, for example, would have to be taken into account ([56] – [58]). Second, since the mid-rise development had yet to be built at the time of the sale to YD, the ‘representation’ was as to future intention and not present fact. There was no suggestion that the developer was dishonestly concealing its then (at the time of the sale) present intentions concerning the mid-rise development. ‘An honest statement of future fact or intention is simply a prediction or a promise, not a representation’ ([65] per Kwan JA). Third, several passages in the brochure concerning the mid-rise development contained qualifications making it clear that plans and descriptions of it in the brochure were liable to change in the future, that the developer reserved its right to alter its plans and that any plans would have to be approved by the relevant Government departments. These were not exclusion clauses. They did, however, affect the way in which a reasonable purchaser would understand the descriptions of the proposed mid-rise development.

Michael Lower

Promised sea view? Misrepresentation claim.

In Yang Dandan v Hong Kong Resort Co Ltd ([2015] HKEC 2050, CFI) Y bought a duplex on the top floors of a block of flats. The apartment has the benefit of a sea view. Y claimed that she was induced to enter into the contract to buy the apartment from the developer by two representations:

1. the written representation in the sales brochure that the open land (‘the Amalfi land’) between her apartment and the sea would be used for a ‘mid-rise residential development’; and
2. an alleged oral representation made by the developer’s employee before the contract that the apartment would enjoy a view of Victoria Harbour and that only a hotel then under construction would interfere with the sea view.

The developer also owned the Amalfi land and block one of the later Amalfi development partially obscured the sea view from the terrace of Y’s apartment. Y sought damages for misrepresentation under section 3(1) of the Misrepresentation Ordinance. She claimed that the representations led her to believe that she would have an unobstructed sea view and that the developer intended to ensure that this would not change.

There was no actionable misrepresentation since Y had not pleaded that the developer had been reckless as to the truth of its statements as to its future intentions and yet the case did not concern a question of a present fact as at the time of the negotiations and contract. That aside, the question is how the representation would have been understood by a reasonable person in Y’s position and with her characteristics (a highly sophisticated and intelligent business person for whom an unobstructed sea view was important). In that regard, the written representation had to be considered in the context of the whole of the sales brochure in which it was to be found. The brochure contained disclaimers making it clear that the developer could change its mind as to how the Amalfi land would be developed.There was no evidence that the oral representation had been made.

Despite the finding that there had been no actionable misrepresentation, Kent Yee DJ went on to consider whether Y was estopped from bringing any such claim by virtue of a clause to the effect that, ‘The terms and conditions of this Memorandum shall supersede any and all oral and written agreements or representations made by or on behalf of the Vendor’. The developer sought to rely on contractual estoppel in this respect. Y’s argument that the controls on exemption clauses in section 4 of the Misrepresentation Ordinance were engaged by the clause was rejected since, on its proper construction, the clause did not exclude or limit liability. Rather, it allowed the written terms to supersede all earlier agreements and representations ([77]). Even if section 4 were engaged, the provision was reasonable ([78]). On the other hand, it was accepted that another clause in the agreement (the ‘entire agreement’ clause) did not preclude an action for misrepresentation.

Finally, had Y succeeded, she sought damages for loss of the opportunity to buy ‘the Ideal Property’ with the characteristics she thought she had been led to expect. This would be another property with a permanent and unobstructed sea view in Discovery Bay or elsewhere within her budget. Y had to show that she had a reasonable chance of buying such a property. Four comparable properties were identified but three of these were not available at the time of Y’s purchase. The fourth was in the same development as Y’s property and its sea view was similarly affected by the Amalfi development.

Michael Lower

Barclays Bank plc v O’Brien: the risk of failing to take steps to ensure informed consent

In Barclays Bank plc v O’Brien ([1994] 1 AC 180, HL) a married couple granted the bank a second charge over the family home as security for the overdraft facility of a company in which the husband had an interest. The wife signed the document without reading it; she did so because of her husband’s misrepresentation to the effect that the liability to the bank was limited to GBP60,000 and that the exposure under the arrangement would only last for three weeks. In fact, it was an unlimited guarantee. The bank took no steps to have the documents explained to the wife nor did it suggest that the wife should take independent legal advice.

When the company failed to meet its obligations, the bank sought an order for possession of the home. W sought to set the charge aside on the grounds that it was the result of H’s misrepresentation and undue influence.

Only the misrepresentation defence was relied upon in the House of Lords. Nevertheless, Lord Wilberforce (giving the only full judgment) spoke about undue influence and considered the steps that a lender must take to protect itself from a claim that its agreement with a surety might be set aside in the event that it is entered into as a result of misrepresentation or undue influence.

Lord Wilberforce prefaced his analysis with a reminder that there are policy considerations to be borne in mind in shaping the law. The law needs to strike a balance between the need to protect wives from an abuse of the trust and confidence that they place in their husbands, on the one hand, and the need to avoid the creation of a draconian regime that would render family homes unacceptable as security for loans (at p. 188).

Lord Wilberforce considered the proposition that wives enjoy some special equity and are the object of special tenderness on the part of equity. He accepted that there was a greater risk of undue influence ‘than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual’s will’ (at p. 191). At the same time, with an eye no doubt to the future rational and orderly development of the law, he rejected the broad proposition that wives should be accorded special rights in relation to surety transactions. He rejected then the idea of ‘a special equity applicable only to such persons engaged in such transactions.’ (at p. 195).

The judgment seeks to create a legal environment that properly balances the interests of wives and lenders (described below). It is not only applicable to wives. Towards the end of the judgment, Lord Wilberforce emphasises that the same principles apply ‘to all other cases where there is an emotional relationship between cohabitees.’ (at p. 198). Thus, the principles and procedures set out in the judgment are to be followed ‘if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor’. (at p. 198). Marriage is only one instance of a broader category.

The core of the judgment is its consideration of the circumstances in which lenders will take subject to the prior rights of the person whose consent was procured by undue influence or misrepresentation.

In a case like this, it may sometimes be possible for W to argue that H was the bank’s agent. This would provide a basis upon which H’s undue influence or misrepresentation could be attributed to the bank. An agency analysis of this situation, however, would usually be highly artificial (at p. 194).

Rather, the doctrine of notice provides the key: did the lender have actual or constructive notice of the misrepresentation or undue influence (at pp. 194 – 5)? The question is whether the lender is aware of facts or circumstances that put him on enquiry as to the possibility that the surety might have a right to rescind on the grounds of undue influence or misrepresentation. If the lender is put on enquiry and does not take reasonable steps to satisfy himself that W’s agreement to stand surety has been properly obtained then it will have constructive notice of W’s rights (at p. 196).

When is a lender on enquiry (so that it needs to take further steps)?

‘[A] creditor is put on enquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.’ (at p. 196).

When the lender is on enquiry it must ‘take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice.’ (at p. 196).

The steps that a lender is expected to take are set out in this passage:

‘in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.’ (at . 196)

In exceptional circumstances, where the lender knows of circumstances that make the exercise of undue influence probable rather than merely possible, the lender will need to ensure that the wife is separately advised (at p. 197).

This procedure seeks a fair balance between the wife and the lender, even though it does not guarantee that the wife fully understands the transaction (at p. 197).

As the bank had not taken steps to ensure that Mrs O’Brien had been properly informed of the nature of the transaction, it was fixed with constructive notice of Mr O’Brien’s misrepresentation.

Michael Lower

Undue influence: bank not put on inquiry merely by disadvantageous transaction

In Bank of China (Hong Kong) Ltd v Leung Ngai Hang ([2006] HKCU 78, CA) Miss C and Miss L had been friends and business partners. They bought an investment property together. They borrowed money to fund the purchase into their names as joint tenants, the loan being secured by a legal charge. They subsequently remortgaged with the Bank of China replacing the fixed term loan with more general banking facilities. By this time, Miss C no longer had any business relationship with Miss L. One element of the loan package was the provision of open-ended banking facilities to Miss L’s business.

The loans were not repaid. The bank sold the property but there was an outstanding balance. Miss C relied on undue influence and misrepresentation as her defence.

This failed since there was nothing to implicate the bank in any wrongdoing (assuming there had been some impropriety). Was there anything to put the bank on inquiry ([14])? A disadvantageous transaction on its own was not sufficient to achieve this. There was nothing about the relationship between Miss C and Miss L to suggest that there was a risk that consent had been procured by some improper means ([17]).

In any event, it was not clear that the present transaction was manifestly to Miss C’s disadvantage. The money had been used to redeem an earlier charge. There were benefits in replacing a fixed term loan with general banking faclities ([18]).

Michael Lower

Misrepresentation and undue influence: where the wife benefits from the arrangement

In Bank of China (Hong Kong) Ltd v Leung Wai Man ([2011] 4 HKLRD 707) a husband and wife guaranteed the indebtedness of S Ltd to the bank. They also gave the bank a charge over their home. The husband did so because he hoped to become an employee or part owner of S Ltd. The wife joined in because she trusted her husband’s judgment in these matters and thought that she should defer to him. Things went badly and the bank sought to enforce its rights under the guarantee and charge.

The couple first sought to rely on misrepresentation as against the bank. They claimed to have told the bank’s employee responsible for the arrangement that they could not meet any liability exceeding HK$1 million. The charge was an all-monies charge and their eventual liability was higher than HK$ 1 million. The husband claimed that the employee had smiled and nodded at the suggestion that the liability was capped at HK$1 million and that this was an implied representation that the liability was so limited. This failed on the facts. In any event, silence and inaction do not amount to a representation unless there is a duty of disclosure or an important part of a representation is withheld ([44]).

The wife’s defence based on undue influence failed. The sources of the relevant legal principles were identified ([53]) as were the points to be considered when a wife seeks to set aside a guarantee in circumstances such as these ([54]).

There was no evidence of undue influence here ([56]). Here there was evidence pointing to the relationship between the husband and wife being one of trust and confidence ([56]). Even on this point, however, the court had to recall that in any healthy marriage there was a normal level of mutual trust that would not suffice for the purposes of undue influence ([57]). There was nothing about the transaction that called for an explanation since it was for the joint advantage of the husband and the wife: the couple secured an immediate benefit in that the original charge over their home had been paid off as part of the arrangement and they had hopes that the husband would secure an attractive business opportunity as a result of the arrangement ([58]).

As for the bank’s involvement, even if there had been undue influence there was nothing to put the bank on inquiry:

‘There is no evidence in the present case to show that the bank had suspected that the first defendant had exerted undue influence on the second defendant. In such circumstances, the bank did not have any responsibility to make inquiry.’ (Carlye Chu J at [59]).

Michael Lower

Misrepresentation: whether material

In Master Yield Ltd v Ho Foon Yung Anesis ([2013] HKEC 898, CA) L induced T to enter into a tenancy agreement by a misrepresentation to the effect that it would be possible to install air-conditioning units on the external walls of the property. In fact, the consent of the incorporated owners was needed for this. Had they known, T would not have taken the lease and it was reasonable for T to take that attitude. The question was whether or not the misrepresentation was material and had induced the contract.

Lam JA said:

‘The ultimate question is whether a representee was induced by the representation and it is a question of fact to be asked in respect of this particular representee (as opposed to an objective reasonable bystander). The effect of a representation on an objective reasonable bystander is only relevant in terms of onus of proof.’ ([22])

That is, it is enough that the representee was subjectively influenced. If an objective reasonable bystander would have been influenced, the burden of proof shifts to the representor to show that there was no influence ([21]).

The representation need not have been the only factor influencing the representee to enter into the contract, just one of the factors ([26]).

Since in this case a reasonable, objective bystander would have been influenced and L had not shown that the representation had not influenced T, the misrepresentation claim succeeded. T was entitled to damages under section 3 of the Misrepresentation Ordinance.

Michael Lower