HCA 1158/2007
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 1158 OF 2007
____________
BETWEEN
| | SUN CROWN TRADING LIMITED | Plaintiff |
| and |
| | HOLYROOD LIMITED | Defendant |
____________
HCA 1159/2007
N THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 1159 OF 2007
____________
BETWEEN
| | GATEWAY INTERNATIONAL DEVELOPMENT LIMITED | Plaintiff |
| | and | |
| | HOLYROOD LIMITED | Defendant |
____________
(Heard Together)
Before: Deputy High Court Judge Carlson in Court
Dates of Hearing: 1-2, 5-9, 15-16, 19-22 September 2011, 7-10, 24-25 November 2011
Date of Judgment (Handed Down): 1 March 2012
_______________
J U D G M E N T
_______________
Introduction
1. These two actions, for reasons which will become immediately apparent, have been tried together. The respective plaintiffs are purchasers of a flat each at what was then a newly built-on site comprising two blocks of flats, a stand-alone house and a further block which accommodated the communal swimming pool, a clubhouse and the electrical and mechanical services for the Development. The defendant in the actions is the developer of the site which is known as “The Oasis” and is situated at 8-12, Peak Road, Hong Kong. It is approached by means of a winding downhill access road off Peak Road and stands on a levelled out plateau which has been formed and cut into steeply sloping ground which finishes at Kennedy Road and beyond to Queens Road East. The plaintiffs’ claims are based on breaches of the Sale and Purchase Agreement (SPA) under which they purchased their flat, the DMC for the Development and at common law. At this stage, it is only necessary to outline the bases of the claims. The allegations are that this was a completely mismanaged construction project. When the plaintiffs became contractually obliged to complete their conveyances they had conveyed to them flats constructed to a thoroughly defective standard and the Development itself remained substantially unfinished. It remained, and was to remain for a further three years, a building site. The plaintiffs had to spend significant amounts of money to repair serious construction defects to their flats before they could fit out and decorate them. The Development was uninhabitable due to the fact that serious works of construction needed to be completed. The noise and dust was intolerable. The swimming pool was not up and running, neither was the clubhouse. As a result the plaintiffs were not in the position to let out their flats. Nobody wanted to live there whilst the building work was being conducted. The plaintiffs lost rental income, which is one element of the claim. In the event one of the plaintiffs’ owners gave up her intention to let out the flat and moved in herself with her family. The other plaintiff eventually found a tenant for her flat. This part of the claim is based on the loss of rental from when the flats could reasonably be expected to let until the date when the flats and crucially, the Development itself was in such a state of completion to enable the flats to be let out. Much of this part of the claim is based on Nuisance caused by the building operations at the Development after completion of the conveyances to the plaintiffs. The other heads of claim known as “the Fittings Claim” which is for the cost of bringing the flats up to the standard they should have been on completion and finally, “the Facilities Claim” based on the failure to complete and licence the swimming pool on time and to have the clubhouse fitted out and in operation on completion of the conveyances. All of these matters will need to be gone through much more thoroughly in due course but what I have set out here is a sufficient introduction to the issues which will require a decision from the court.
2. I can say at the outset that the building of these properties has been an absolute disaster. The defendant is a company controlled by a lady called Lilian Oung. It seems clear to me that the construction of what were to be high-end luxury flats was embarked upon with grossly insufficient funding.
3. The business model, if I can so describe it, was for the defendant to borrow money from its bankers, sell a number of units off the plan to interested purchasers who put down a 10% deposit, and I should say these flats were being sold at the time (in 2002) at over $45 million each, and then to put up the buildings to the point when the Buildings Department was able to grant the defendant the Occupation Permit (“OP”) at which time the purchaser became contractually bound to pay the balance of the purchase price.
4. Unfortunately, well before the building work had got to the point that the OP could be given the defendant, which as I have said had insufficient funding, it fell out with its building contractor because it was unable to pay for the work as it progressed with the result that the contractor stopped work and sued the defendant for what it was owed.
5. The defendant has, throughout this saga, been fully occupied in litigation, apart from these two plaintiffs, with its contractors. It is worth recording here the six other proceedings in which it has been successfully sued by its contractors.
(i) Hip Hing Construction v Holyrood Ltd (HCCT 6/2001) appeal from arbitral award against it dismissed.
(ii) Landbase Surveyors Ltd v Holyrood Ltd (HCA 481/1999) non-payment of professional fees owed to its surveyors for an application to the Lands Department to reduce premium for the Development.
(iii) Woon Lee Construction v Holyrood Ltd (HCCT 43/2001) leave to appeal from arbitration award against it dismissed.
(iv) Woon Lee Construction v Holyrood Ltd (No. 2) (HCCT 68/2010) leave to appeal from further arbitration award against it for outstanding payment dismissed.
(v) Woon Lee (HK) Co. Ltd v Holyrood Ltd (HCCT 4/2009) sued for unpaid price for works at the Development.
(vi) Woon Lee (HK) Co. Ltd v Holyrood Ltd (CACV 188/2010) appeal from judgement in HCCT 4/2009 dismissed.
6. To underline the defendant’s financial woes, it was also in litigation with the Bank of China in respect of a substantial loan that it had secured to assist it in building the Development. As it had defaulted on the loan it was at one time placed into Receivership by that bank. Two actions relate to this. They are Holyrood Ltd v Bank of China (Hong Kong) Ltd & Ors, HCCL 35/2003 and Holyrood Ltd v Bank of China (Hong Kong) Ltd, HCA 2655/2004.
7. In addition to these court proceedings, workmen on site appear to gone unpaid leading to a banner protest on the access road down to the Development (1159/D4/1055-747) by the workmen.
8. These grave financial difficulties were recorded in what was the 2nd Owners Meeting in October 2006. The minute reflects the defendants lack of money”
“Holyrood has 13 apartments under mortgage to Wing Lung Bank. In order to get loans, they should let two apartments successfully at the end of the year. Holyrood now appoints Woon Lee as main contractor to complete the work and Wing Lung Bank will pay the contractor directly.”
9. The defendant having been unable to pay the bills presented to it by its contractor then decided that the only way that it could complete the Development was only to do works that were required of it in order to obtain the OP together with the Certificate of Compliance (“CC”) and to defer other work to after completion of the conveyances to the purchasers of units that it had been able to sell.
10. As to this approach by the defendant, there is the evidence of Mr Li Man Ying who was called to give evidence on behalf of the defendant. His evidence when cross-examined was that the defendant had engaged him in December 2004 to see to it that the OP was obtained. Woon Lee Construction Limited was the contractor and P&T were the architects. He appraised the situation and identified what works were needed to obtain the OP and the rest of the work would be deferred. As a result of this, substantial work which had originally been planned such as the cladding to Block B and the E&M Block (the swimming pool, clubhouse and services) was not done. They were built to a bare concrete finish. The cladding was not necessary to obtain the OP. Such was the defendant’s cash flow problem that it was obliged to borrow $3 million from its contractor Woon Lee Construction Limited in order to finance building work, which amount it repaid after the CC was given.
11. That this is the case can be seen from the documentary evidence which for these purposes I can briefly summarise.
12. Woon Lee’s original quotation, dated 10 March 2004, included completion of the façade of both Blocks A and B, the E&M Block as well as House B. This quotation was signed and accepted on the defendant’s behalf by Miss Oung [1159/D2/1055-102 to 1055-108]. Nevertheless, given the parlous financial constraints faced by the defendant, Miss Oung agreed that this work could be deferred. Following the issue of the OP, the balance of the purchase monies were paid to the defendant by the Plaintiffs after which the defendant pursued these works which it disingenuously at the time referred to as “upgrading” and “improvement” works. Far from it, these were the originally quoted works set out in Woon Lee’s original March 2004 quotation.
13. Part of Mr Li Man Ying’s cross-examination is instructive in this regard. He agreed that the façade of the buildings and the other work that needed to be done to the E&M Block was substantial work which involved considerable cost. Another part of his cross-examination is also illuminating. It emerged that the defendant was under pressure of time as well as financially in repaying a bank loan secured by mortgage. This could only be repaid if it obtained the OP and the CC. The more limited works that Mr Li had identified as necessary to obtain the OP in March 2005 and the CC in June 2005 were completed. In describing this he said that the defendant was financially in a dangerous position.
14. None of these difficulties were known to the purchasers at the time. Only the process of discovery and Mr Li’s evidence has drawn attention to this state of affairs. The result of this cost-cutting meant that what the purchasers got on completion were flats that were poorly completed and a very large programme of other building work which remained outstanding. The physical evidence speaks to this in the clearest possible way. There are hundred’s photographs which show the state of the Development from the time when the OP was issued to more or less the present day. To say that the plaintiffs and the other purchasers bought into a building site is no exaggeration. As I stand back from the evidence and, although it is usually not helpful to employ extreme language, it is abundantly clear that these purchasers were plunged into a nightmare out of which they did not emerge for at least three years and this, after they had paid over $46 million each for their units.
15. Mr Yeung, on the plaintiffs’ behalf, has summarised the matter with restraint. He has put it in this way:
(a) The Development was factually and practically “incomplete” at handover.
(b) The internal fittings and finishes of the units were of poor quality and did not even match that of low cost housing;
(c) Outstanding works gradually “recommenced” after the sale of some units, they went off at a certain stage, and began again sometime later when further units were sold.
16. It has been suggested, by way of explanation and justification, on the defendant’s behalf that it is not uncommon for a real estate development to be built in phases. Mr Wilson Chan, for the defendant, has invited me to view what has happened in this way. For my part, I cannot accept that submission. Mr James Law, the Plaintiffs’ expert, says that if this was to be treated as a multi-phased development then a separate OP and CC would need to be applied for and obtained for each phase. Such a Development would require that the DMC would spell this out clearly so that the owners would know that during their occupation further phases of their development would be built. They would realise precisely what they were buying into.
17. What these unfortunate purchasers bought into was a Development well short of completion. In fact about three years short of completion during which time substantial, noisy, dusty and expensive building work was being carried out. Far from being “upgrading” or “improvement” works these were necessary outstanding works and rectification of defective works all of which was the result of this developer taking on obligations for which it was ill-equipped. It was simply too poor in money terms to carry out this substantial project in a sensible, orderly way and produce a Development delivered on time to its purchasers and to a standard they were entitled to expect for the money that they had committed themselves to pay to the defendant.
18. Instead, this poorly financed developer, who had to resort to thoroughly unprofessional cost-cutting measures and using such funds as it could borrow as well as the purchasers’ money, delivered a thoroughly sub-standard product which was unconscionably late in its completion. Basically, the defendant got what it was prepared to pay for. It required works to be completed to a financial deadline, to a schedule that would not have accommodated the necessary care and application to produce an appropriate finish to the units, which is a matter that I will need to examine more fully when I consider the repair works that the plaintiffs are claiming for.
19. This sort of haste, also produced an access road made up of tiles which, on rainy or damp days, were slippery. This caused a collusion between two vehicles and resulted in further delay and disruption because the access road had to be re-surfaced with a more conventional tarmac surface.
20. As the evidence has demonstrated, and I will need to rehearse the important aspects of it in the course of the judgment, the brief summary which I have just given is, in my judgment, a fair reflection of what occurred in the building of this Development and the distressing consequences which were visited on Miss Lam and Miss Tao, who are the two ladies who stand behind these two plaintiff companies, and their families.
21. The one person who could have provided an explanation of what happened and why it happened is Miss Lilian Oung. She had given a lengthy witness statement in readiness for the trial. Well into the trial, which lasted 19 days, Mr Wilson Chan informed me that Miss Oung would not be able to give evidence. In April last year she had succumbed to a serious stroke and has been confined to her hospital ever since. She has lost the ability to speak which is an indication of how serious her condition is. Of course, there is no way of knowing to what extent the stresses and strains of this project and its attendant litigation has brought about her medical problems. Be that as it may, this has deprived the defendant of its most important witness and although I have read her evidence in preparation for the trial I have put out of mind its contents in arriving at my judgment.
22. The way I propose to proceed is to take the individual claims, discuss the evidence in respect of each and, if I find the defendant liable, proceed to deal with the quantum of damage in respect of each before I proceed to the next head of claim.
23. It must be clear even from the preceding broad summary of the dispute that there will be a considerable overlap in the evidence across the three heads of claim and so, any conclusions that I am persuaded to arrive at on the evidence in respect of one head will stand in respect of any other head of claim to which and insofar as it may be relevant.
The Nuisance Claims
24. This relates to the building operations carried on by the defendant after the completion of the conveyances to the plaintiffs, the nature of which was such that the plaintiffs were not able to let out their flats.
25. The starting points are the SPA’s both of which are dated 25 November 2004 [1158/C1/201-238 and 1159/C1/193-230]. The plaintiff in HCA 1158 completed its purchase on 19 August 2005. This was Flat B1, 6/F, Block A2 and included two car parking spaces. The purchase price was $47,123,300. In respect of HCA 1159 the purchase was completed on 22 July 2005. The purchase was of Flat A, 6/F, Block A2 together with one parking space. The purchase price was $46,223,000.
26. The rights and obligations of the co-owners is regulated by the DMC dated 19 July 2005 [1158/C265-332 and 1159/C255-323]. A manager was appointed under the DMC, which was Petersham Limited, a company controlled by Miss Oung. In turn Petersham Limited appointed a professional management company Knight Frank (Services) Limited (“Knight Frank”) to carry out those duties on its behalf as from 19 July 2005.
27. It is to be noted that following the conveyances to these two plaintiffs, the defendants retained the ownership of a number of units. This it did directly or through other companies controlled by Miss Oung. The significance of this is that the defendant and its associated companies became co-owners with the plaintiff’s under the DMC which regulated the activities of co-owners inter se. To this day the defendant remains the owner of House B, as well as the duplex units at the Ground Floor and the 1st Floor of Blocks A and B, as well as the top floor duplex unit [the 9th and 10th Floors] of these two Blocks.
28. Both Miss Lam and Miss Tao set about re-decorating their flats. The problems that they encountered will be described when I deal with the fittings claim. During and after the decoration period both ladies arranged with a number of estate agents to have their flat let out to suitable tenants. Due to the state of the Development and the work being carried out there, finding a tenant willing to live at this address was not possible. It was not until September 2008 that Miss Lam was able to find a tenant who signed a lease for $145,000 a month [1158/C4/655-339 to 655-417] [Flat 6B(A2)]. Miss Tao failed to find a tenant and, as I have already said, gave up and moved in herself with her family in November 2008.
29. What I propose to do now is to describe why nobody was willing to rent these flats from mid-2005 until September 2008. As I have said there are hundreds of photographs and very many pages of evidence describing the works that needed doing and the resulting state of the Development. I am only going to provide a summary of this evidence which will need to be considered alongside the photographs.
30. The account of this can be taken up from the obtaining of the OP in March 2005 for which only works necessary to obtain that were carried out. I have already referred to Mr Li Man Ying’s evidence about this. This work had been carried out by Woon Lee Limited. They were replaced in March 2005 by Marriott Engineering and Construction Company Limited (“MEC”). MEC had not signed a formal contract but prepared quotations which were authorised by the defendant. MEC’s engagement was terminated in 2006 and another contractor Woon Lee (HK) Limited (“WLHK”) replaced them.
31. The appointment of WLHK ended in litigation over unpaid fees. This was case number HCCT 4/2009 in which Saunders J entered judgment on 6 August 2010 in favour of WLHK. The appeal from his judgment was dismissed by the Court of Appeal on 15 April 2011 [see para.5(5)(6) above].
32. It is helpful to recite paras 10-12 of Saunders J’s judgment because it sets out some of the works that were being done at the Development about nine months after the plaintiffs had purchased their flats:
“10. Contract A was to carry out certain fitting out works in units 2A, 3A, and 8A of Block A2 of the project. The contract began in April 2006, and, on the contractor’s case, was completed in about December 2006.
11. Contract B was to carry out fitting out works on units 2A, 2B, 3A, 3B, and 5A of Block A1 of the project. That contract began in about May 2006, and on the contractor’s case was completed in about December 2006.
12. Contract C was to carry out fitting out works and alteration works at units GA, GB, 1A, 1B, 8B, 9A, 9B, 10A, and 10B of Block A1, units GA, GB, 1A, 1B, 9A, 9B, 10A, and 10B of Block A2, and Block B of the project. That contract began in about late August 2006. The case for the contractor was that by early 2008, the work required in contract C was some 93% completed. ”
To give some idea as to how extensive these works were, Contract C (as it is described in Saunders J’s judgment) was for $40,000,000 and is set out in a letter dated 29 August 2006 from WLHK to the defendant [1158/D2/978-119 to 978-112].
33. What also emerges is that these works were still in progress in early 2008. Then, as late as the 26 January 2007, the defendant engaged Kwong Man Kee Engineering Limited (“KMKE”) to carry out work on the access road to the Development which is another matter to which I have already made reference.
34. In opening his case, Mr Yeung has provided a very useful summary of the works, which was amply borne out by the evidence called in the trial. I am therefore able to make the following findings of fact as to the nature of the work carried out by the defendant. All of this after the plaintiffs had been given vacant possession of their flats.
35. The Ground Floor lobby of Block A2 needed completion, apart from which workman used the lobby to gain access to the rear of this Block in order to work on the external wall and to the duplexes.
36. The external walls of both Block A1 and A2 had epoxy spray paint applied to them and aluminium cladding was attached to the lower floors of the external walls.
37. The substantial windows to the duplexes at the G/F and the 9/F of Blocks A1 and A2 were replaced with curtain and metal façades.
38. The podium area was used to stockpile building materials and debris.
39. The main access road which had been tiled in 2005 was re-surfaced in 2007 with tarmac.
40. The fire staircase in Block A2 was demolished and re-modelled.
41. At the E&M Block, metal cladding was fixed to the external wall and to the soffits and the hood to the staircase was demolished.
42. The tower bridge connecting the E&M Block to Block A2 had cladding fixed to its external surfaces.
43. House B was the subject of very substantial works, including elements of re-modelling of its outer appearance. The podium was used to stockpile building materials and to deposit construction debris.
44. As a result, following the completion of the plaintiffs’ conveyances, the scale of works commissioned by the defendant was such that the Development remained a busy construction site which was completely unconducive to persons living there. I gladly adopt a summary at para.42 of Mr Yeung’s opening which was completely vindicated by the evidence that he led at the trial, as a fair representation of what went on at the Development for up to three years after completion of the conveyances, although, of course, less so in intensity towards the end of that period. What appears below describes how the common areas of the Development were obstructed:
(a) Building materials, construction debris and dirt was all over the Development including:
i. Main Entrance and Lobby of Block A2
ii. Open Space and its entrances
iii. The Podium
iv. Access Road and Main Entrance to the Development
v. Carpark and its Main Entrance
vi. Open Area to the Swimming Pool
vii. The Children play area
viii. The Club House Entrance
(b) Scaffolding was erected on:
i. External walls of Blocks A1 and A2;
ii. The entirety of House B; and
iii. External face and bottom of the E&M Block;
(c) Main access road to the Development was closed for repaving work, blocked and/or jammed by trucks and minivans of Holyrood from time to time;
(d) A lift was not ready for use to access the units owned by the plaintiffs are one was reserved for workers’ access;
(e) Derrick crane truck was used to hoist materials to 9th and 10th Floor of Block A2;
(f) Construction tools and machinery (including oxy-gas cylinders used for welding) were not properly placed;
(g) Very loud and annoying noise and vibrations were created by Holyrood’s works and/by its workers.
45. It was this sort of activity that made it impossible for the plaintiffs to find a tenant for their flats, and it is this which gives rise to the claim for loss of rental income.
46. It is pleaded that these building operations give rise to five separate causes of action. Firstly, a breach of Clause 28(2) SPA, in a failure by the defendant to use its best endeavours to enforce all defects and maintenance obligations under all contracts relating to the construction of the Development insofar as such defect related to or affected the plaintiff’s property or the common parts and facilities of the Development. Secondly, breach of an implied term of the SPA that the properties would be fit for luxurious residential purposes. Thirdly, a breach of Clause 1(e) Schedule 4 of the DMC by the defendants by using the units that it had retained for a purpose or activity which was noisy, noxious, dangerous or offensive or, which became a nuisance to or caused damage or annoyance to the plaintiffs (as co-owners of the Development or as occupiers of the land or of neighbouring premises). Fourthly, a breach of Clause 6(a) Schedule 4 of the DMC by obstructing the Common Areas and Facilities, … or doing anything in such areas which may be or become a nuisance to the plaintiffs. Fifthly, breach of Clause 6(e) Schedule 4 of the DMC by converting a part of the Common Area to its own use or for its own benefit and sixthly, the tort of nuisance.
47. The amended-defence raises six issues. Firstly, that the post-conveyance works were only upgrading/minor improvement works which went to increase the attractiveness and value of the Development and thereby was for the benefit of all of the owners. Secondly, that the works were of a temporary nature. Thirdly, the drainage works were carried out at the request of the property manager and did not affect the plaintiffs’ units. Fourthly, that the decorative works were internal, did not affect the comfort of those living in the Development and were carried out during legally authorised hours. Fifthly, a similar point to the previous one, that the House is away and detached from Blocks A1 and A2 and therefore this work would have caused residents of A1 and A2 no loss of use or enjoyment of their unit. And finally, number six, that the plaintiffs have failed to mitigate its losses.
48. Mr Yeung has correctly identified 8 issues which need to be traversed, some more quickly than others. The first is really the fundamental factual one of whether the defendant, through its contractors, carried out the works as I have already summarised, and which are shown in the many photographs, after completion of the conveyances to the plaintiffs. I can indicate now that there is simply no doubt that this is so. The progress of these post-conveyance works is clearly catalogued in the documents passing between the defendant and its contractors and recorded in the photographs. I find as a fact that these very extensive works, which rendered the whole Development an on-going construction site, were carried out by the defendant over a period of three years from mid-2005 to mid-2008. This is a question of fact which I resolve in the plaintiffs’ favour. That finding triggers a question of law which is reflected in the second, third, fifth and six issues which I will relate and deal with in turn.
49. The second issue is whether there is an implied term inherent in the SPA that the plaintiffs’ units would be fit for luxurious living. Mr Yeung says there is such a term. Mr Chan submits that no such term exists, there being no need to imply such a term. All the parties’ rights and obligations are set out in the SPA and in the DMC. Schedule 5 of the SPA sets out what the purchaser is to be provided with in terms of fittings and so everybody knew precisely where they stood. Mr Yeung’s response to this is that where the developer is offering for sale a high-end luxurious development, as set out in the sale brochure, the necessary implication arising from what is being offered to a purchaser and the high price that he is being asked to pay would suggest that the developer is saying that “I am providing you with a blue-chip property, constructed to a high standard of finish and such fittings as I have contracted with you to include in the unit. I am selling you luxurious living”. It seems to me that, to borrow from the authorities, it really goes without saying that such a term is, in all the circumstances of this transaction, to be implied and I so rule. Presently, I will have to decide if there has been a breach of such a term.
50. The third issue, another of the core issues, is whether these works constituted breaches of the express and implied terms of the SPA and of the DMC and amounted to an actionable nuisance.
51. The fourth and fifth issues can be taken together and need not take up much time. The questions posed are whether the works were carried out at the request of the Property Manager (as opposed to the defendant/developer) and/or the co-owners and, if so, whether such a state of affairs amounts to a valid consent or waiver by the plaintiff so as to constitute a defence to the action.
52. These two issues can be dealt with shortly and I propose to dispose of them now. The evidence is that it was the defendant which commissioned all the works and insofar as any works may have been initiated by Knight Frank, it could not proceed without getting Miss Oung’s permission to proceed particularly, where funds were short and Miss Oung controlled the purse strings. The liability remains that of the defendant particularly given the very limited role of Knight Frank as property manager, which was limited to the provision of security guards and as a “post-box” for owners complaints which would then be passed on to Miss Oung. The answer therefore must be that the works complained of were the business of the defendant. No liability can attach to Knight Frank nor to co-owners, save that under the DMC the argument remains to be decided whether the defendant, as a co-owner and as the co-owner who commissioned these works, is in breach of the various Clauses in the DMC to which I have already drawn attention.
53. The sixth issue also falls to be decided summarily. It is this. Were the works “upgrading works” and if so, would this amount to a valid defence. The short and correct answer is that these were not upgrading works but outstanding works put aside by Miss Oung as a cost-cutting measure until after the OP had been issued, following which she would have had available to her more funds represented by the balance of the purchase price paid by the plaintiffs and any other purchasers who had contracted to buy units at this Development. The evidence is, and Mr Li Man Ying has supplied it, that these post-conveyancing works had all been contracted for in the original quotations before the money ran out and Mr Li had to be brought in to implement the scheme of only doing such works as were necessary to obtain the OP.
54. The seventh issue also falls to be summarily disposal of. The question posed is whether the post-conveyance works were causative of the lost rental income. This only falls to be answered if it is held that the works constituted a nuisance and/or a breach of the SPA and/or of the DMC.
55. Eightly and finally, whether the plaintiffs had reasonably mitigated their losses.
56. Before I come to any outstanding conclusions on these issues on this part of the case, I need to deal with an important and all-embracing submission made by Mr Wilson Chan which, if he can make good, would have the effect of disposing of much of the plaintiffs’ cases.
The defendant’s fundamental stance
57. This concerns, amongst other matters, the doctrine of “merger”.
58. Mr Chan has set out his position with admirable charity. He invites a consideration of what it was that the parties had contracted for as revealed in the SPA’s. Under Clause 1(1)(g) the Development is defined as:
“defined as ‘the residential development containing a podium (housing the car parking spaces and recreational facilities) and 3 residential blocks above the podium (two of which contain residential flats and duplexes and one of which contains a house) now being constructed or to be constructed on the land in accordance with the building plans and intended to be known as ‘8-12 Peak Road’.”
The building plans referred to there are:
“the general building plans and specifications prepared by the Authorized Person and approved by the Building Authority under Reference No. 3055/96 and includes any approved amendments thereto.” [See Clause 1(1)(c)]
Clause 4(1)(c) sets out the defendant’s obligation to physically complete the Development:
“… shall complete the Development in all respects in compliance with the conditions of the Government Grant and the building plans on or before the 31st day of August 2005 subject to such extensions of time as may be granted by the Authorized Person in accordance with sub-clause 5(a).”
Then comes, for Mr Wilson Chan’s purposes, the most important provision. It is Clause 4(7):
“For the purpose of this Clause the issue of a Certificate of Compliance or consent to assign by the Director of Lands shall be conclusive evidence that the Development has been completed or is deemed to be completed as the case may be and nothing in this sub-clause shall preclude [Holyrood] from providing that it has compiled with sub-clause 1(c) above by any other names.”
This Clause provides the manner by which the defendant was to conclusively prove that it had completed the Development which is defined in Clause 4(1)(c). Mr Chan describes it as “the contractual mechanism agreed on between vendor and purchaser” which is designed to avoid any dispute or argument as to whether the defendant had discharged its contractual obligation to physically complete the Development. The CC had been issued on 30 June 2005 and registered with the Lands Registry.
59. Mr Chan invites the conclusion therefore that the Development was conclusively deemed, by agreement between the parties, to have been completed in compliance with the conditions of the Government Grant and the building plans.
60. This said, Mr Chan accepts, as he must, that additionally the defendant was obliged to provide communal and recreational facilities set out in Schedule 6, Clause 10(e) which included the provision of a swimming pool, children’s play area and gymnasium (Schedule 6).
61. This then raises the very important status and function of Clause 29 of the SPA which provides that Clauses 10, 13 and 28 shall survive completion of the SPA. Mr Chan submits that Clause 29 does not have the effect of imposing a continuing obligation on the defendant to maintain the communal and recreational facilities beyond completion. This would fall upon the co-owners under the DMC who would fund these through payment of their management fees to the Development’s management company, in this case Knight Frank. Mr Chan submits that, on its proper construction, Clause 29 is there to negate the doctrine of “merger”. Without Clause 29 the plaintiffs’ would be deprived of a cause of action based on Clause 10(e).
62. Under the doctrine of merger an executory contract which is intended to be carried out by a deed of conveyance, that contract then merges into the conveyance. The contract is that contained in the conveyance and the executory contract cannot be used to enlarge, diminish or modify what appears in the deed of conveyance. This is trite law, see for example Hong Kong Conveyancing, Sihombing and Wilkinson, Vol 1(B), Chap XII, para 47.5.
63. And so, says Mr Chan, Clause 29 does not have the effect of creating a continuing obligation on the part of the defendant to provide facilities beyond completion of the conveyance. He then draws attention to the effect of the DMC, under which it is the duty of the property manager to manage the Development in a “proper, good and efficient manner and to keep the common areas and facilities in good and substantial repair …” para 3(a) Schedule 6 DMC and to, “where reasonably required to re-build any Common Areas and Facilities, renew and upgrade them as it reasonably deems fit in each case and to a standard commensurate with a first class residential building …” (para 3(b) Schedule 6 DMC).
64. It is in this way that the communal and recreational facilities are to be provided and maintained for the benefit of the owners of units at the Development.
65. Mr Yeung’s response to this position is to argue that the law is that whether contractual obligations survive completion must depend on the intention of the parties on a proper construction of the SPA. He supports this submission by reference to a passage from Contract and Conveyance, JT Farrand, page 202:
“merger is not an absolute doctrine but depends entirely upon the intention of the parties (See Barclays Bank v Beck [1952]) … that doctrine does not apply to cases where contractual obligation is of such a kind that it cannot be supposed to have been the intention of all parties that it should be extinguished by the conveyance … An obvious example of non merger would be the warranty given by a vendor of a house in the course of construction that it should be fit for human habitation (see Hancock v BW Brazier [1966] 1 WLR 1317) …
66. This being so, Mr Yeung submits that Clause 29 expressly provided that the Clause 10 obligations to provide communal facilities and Clause 28 to enforce all defects and maintenance obligations, on a proper construction, survive completion and will be a continuing obligation. Mr Yeung says that the simple fact of the matter is that on completion the defendant has failed in its obligation to provide any communal and recreational facilities. They had not been completed under Miss Oung’s cost-cutting measures to do only what was necessary to obtain the OP.
67. Mr Yeung, correctly accepts, that there is no continuing obligation on the defendant to maintain the communal and recreational facilities beyond conveyance and so, to that extent, Mr Chan is right to point to the property manager’s duties under the DMC, but that is completely different from the defendant’s obligation to build and provide completed communal and recreational facilities on the conveyance of the properties, which it signally failed to do.
68. As to Mr Chan’s reliance on Clause 4(7), Mr Yeung submits that this provides the agreed mechanism to determine when the Development would be ready for assignment of the individual units to the purchasers. He says that it operates rather like a condition precedent. The Director of Lands in issuing the CC was only concerned to ensure that the construction of the Development complied with the Government Grant and the building plans. He was not concerned with the contractual obligations contained in the SPA between the Defendant and the individual owners. Moreover, Clause 4(7) does not concern itself or affect any other express or implied obligation cast on the defendant regarding its standard of workmanship and the completion of fittings. In this regard, I respectfully agree with and adopt what To, DHCJ (as he then was) said in Lee Yuk Sum, para 36.
69. Accordingly, I uphold Mr Yeung’s submissions on the effect of Clause 29 in this case and on how Clause 4(7) is to be viewed. The simple fact of the matter is that the defendant failed to deliver a completed Development as it had agreed to do in the SPA (save no doubt, as to small touching up work and rectification works which one would expect to find in a “snagging list”). This being so, it had to face up to and complete a very extensive programme of works with all the noise, rubble and dust that one expects to find on a busy building site which, in the event, went on for three years after completion of the conveyances to these plaintiffs.
Conclusions on liability under nuisance
70. In my judgment, this is an overwhelming case based on the pleaded breaches of the SPA and under the tort of nuisance. I am also satisfied that Mr Yeung is correct in saying that the defendant qua a co-owner is liable to the plaintiffs for breach of the various obligations referred to under the DMC. The sheer weight of unfinished works, together with amendments such as putting up curtain walls to the Ground and 1st Floor duplexes and to what was done to House B made it impossible for anybody to live at the Development for the first three years after completion of the conveyances. This was a full-scale construction site. The defendant’s building of this Development, with so much left undone by the time of the conveyances to these plaintiffs, was completely out of order. Unsurprisingly, it made “the Oasis” a Development to be avoided by estate agents. It comes as no surprise that estate agents did not want to show Miss Lam’s and Miss Tao’s flats to their clients because they did not wish to waste their time. Miss Oung turned what must have been one of Hong Kong’s prime building locations into a complete disaster. A “real cowboy” operation. Shoddy workmanship, serial litigation against the defendant and then inflicting on innocent purchasers, the consequences of Miss Oung’s abject mismanagement of the whole Development, by grabbing the balance of the purchase price, over $40,000,000, from each purchaser on the grant of the OP and then putting them through the nightmare of three more years of building works so that they could not enjoy the fruits of their investment by living there or renting out their flats for profit.
71. It is highly regrettable that the defendant has sought to contest liability on this part of the case. In saying this I am not to be taken to be critical of Mr Chan nor of his instructing solicitors. They no doubt have been bound by their instructions and hampered by the fact that Miss Oung’s medical condition since able 2011 has been such that they have not been able to speak to her and give her the benefit of sound and sensible advice.
72. I will therefore enter judgment on liability under this head of the claim and now proceed to assess damages in respect of it.
Quantum of damages on nuisance
73. The claim is based on the loss of rental income due to the construction work on the building site and the lack of facilities. The exercise required is to assess the rental that would have been achieved by the two plaintiffs but for the condition of the individual units when they were handed over and of the buildings, the quality of the fittings provided and the state of the development as a whole until early 2008, by which time the Development was then in a generally tenantable condition.
74. In order to assist me the parties have called two highly experienced valuation experts. The plaintiffs’ expert is Mr Thomas Tang of CBRE and the defendant has called Miss Ellen Lo of Dudley Surveyors. Each of them has produced reports prepared in 2009 and further reports in 2011 and quite rightly, they then met with a view to narrowing the differences between them and they have put in a joint report Part E(3), one for each action.
75. To say that their evidence has been detailed hardly does it justice. Every conceivable point has been analysed with the greatest possible care. Ultimately, the assessment of rental must be a matter of feel, judgment and experience and requires a careful selection of comparables which can be said to be a relevant and helpful guide. In this case there has been an added difficulty in which the two experts have had to exercise their judgment as to the effect, if any, on the rental values of the two flats caused by the state of the Development from 2005 when the conveyances were completed.
76. I can usefully start at the end by stating what the losses would be according to the conclusions of Mr Tang and Miss Lo respectively.
77. What Mr Yeung has contended for is fair market rental plus management fees and government rates which is what the tenant would have had to bear. I agree that this is the proper compensation attributable to the plaintiffs.
78. In HCA 1158/2007 [Sun Crown Trading Limited] the amount for the period November 2005 to July 2007 is rent at $113,000 plus $12,697 management fees and rates which comes to $125,697 multiplied by 21 months. The total compensation for this period is $2,639,637 [E3/1192-127]. The following period is from July 2007 to September 2008, a period of 14 months. The rent for this period is $139,000 plus $12,697 management fees and rates, being a total of $151,697 multiplied by 14 months. This amounts to $2,123,758. The total compensation under this head of damages therefore is $4,763,395.
79. In case HCA 1159/2007 (Gateway International Development Limited), the first period is from October 2005 to July 2007. The rental is $105,000 plus management fees and rates of $12,697. The total therefore is $117,697 multiplied by 22 months which comes to $2,589,334. The next period is from July 2007 to October 2008 a period of 15 months. The rental is $135,000 plus $12,697 management fees and rates which comes to $147,697 multiplied by 15 months which gives a total of $2,215,455. The total compensation therefore is $4,804,789 [E3/1192-127].
80. As to Miss Lo’s valuation for 1158/2007 for the period from 2005 to 2007, she said that the appropriate rental figure is $93,000 instead of Mr Tang’s $113,000. If her valuation is accepted for this initial period of 21 months it would be $20,000 a month less than Mr Tang which comes to $20,000 multiplied by 21 months. Her result therefore is $420,000 less than Mr Tang which is $2,219,637.
81. For the period 2007 to 2008 she contends for $115,000 instead of $139,000. That is $24,000 a month less, which if one retains Mr Tang’s multiplier of 14 months is $336,000 less. For this period her compensation would be $1,787,758 instead of Mr Tang’s $2,123,758. Her total for HCA 1158 of 2007 is therefore $756,000 less than Mr Tang’s valuation. Her’s therefore is $4,007,395 which overall, is just under 16% less than Mr Tang’s values.
82. Turning to HCA 1159 of 2007 (Gateway International), her valuation for 2005 to 2007 is $82,000 instead of Mr Tang’s $105,000. Keeping to Mr Tang’s time scale for the moment, that is $23,000 per month multiplied by 22 months which is $506,000 less than Mr Tang’s total of $2,589,334, which comes to $2,083,334 for this first period.
83. For the second period of 2007 to 2008, she contends for $105,000 as opposed to Mr Tang’s $135,000, which is $30,000 a month less multiplied by Mr Tang’s 15 months which is $450,000 less than his $2,215,455 which comes to $1,765,445. Her total therefore is $3,848,779 to Mr Tang’s total of $4,804,789 which is $956,010 less. In percentage terms her compensation would be 19.9% less than Mr Tang’s.
84. Notwithstanding these percentage differences, there is much agreement between the two valuers.
85. I take the points of agreement briefly. Valuation is by means of adopting the direct comparison approach. Market rental will be assessed exclusive of management and rates. The valuation dates have been agreed firstly, from the date of assignment of the flats. Secondly, the 1 April 2007 which is when the first tenant moved in and thirdly, two years from the date of the assignment. The saleable areas of the two flats are agreed as are those of the comparables at the Development. Fourthly, it is agreed that the comparables at the Development should be adopted as being the most appropriate and the comparables referred to outside should be disregarded due to the number of adjustments that would need to be made. Five comparables were agreed within the Development and referred to in the joint report in bundle E3. Adjustments of 1% per floor were agreed as was 3% per car park space and time adjustments would be made in accordance with the Private Domestic Rental Index E (published by the R v D). Efforts were made to assess market rental as at 22 July 2007 for Flat 6A and 19 August 2007 for Flat 6B as more comparables became available in 2007. It was also agreed that valuation opinions as at 22 July 2005 [6A] and 19 July 2005 [6B] would be 78% and 81% of the values on those dates in 2007.
86. The differences were four-fold. These have been summarised by Mr Yeung at pages 48 and 49 of his closing submissions and elaborated on at pages 51 to 59. Suffice it to say that I have had regard to what he and Mr Wilson Chan have addressed to me on the expert’s disagreements.
87. I propose to pay particular attention to the fact that in the final analysis it has been agreed that comparables outside the Development are to be ignored. I agree entirely because the best comparables are those in the Development and a number are available. Secondly, I prefer the evidence of Mr Tang as to the effect of renewal rents. He says that there is no pattern which can be had recourse to as a guide to rental values. Miss Lo had looked at renewals in 2009 and 2010 with a view to supporting her case that rents in 2007 and 2008 were only nominally different from rents in 2009 and 2010. Nevertheless, when one considers four rentals within the Development in 2007 with rent renewals in 2009 and 2010 there were both upward and downward adjustments which makes any comparison between the two dates unreliable and therefore best ignored. Thirdly, there has been a question as to whether a comparable J6 within the Development should be taken into account. J6 is the first tenancy at Development in April 2007. At the time only Miss Oung was living there. The rent negotiated by the tenant, when the Development was still being finished was significantly lower than the other comparables when things had settled down and more people were moving in. Miss Lo says that this does not matter, it is market information and it should be taken into account. Mr Tang says that where this rental is completely out of kilter with later tenancies it is far too unreliable and should be ignored. I agree with Mr Tang’s opinion. It is a rent which is completely at odds with subsequent leases and can therefore not provide a useful guide. Finally, Miss Lo has carried out research to try and determine the effect of building operations and the attendant inconvenience caused to residents. She has studied the effect of a two-year $111 million refurbishment of Queens Gardens which she says demonstrates only a modest effect on rent levels. The refurbishment was done between 2006 and 2008. Laudable as Miss Lo’s efforts have been, I cannot take Queens Gardens as any sort of precedent. Queens Gardens is located well away from this Development in a well-built up area of mid-levels. It is a well-regard and much sought after address for rental. It is much larger than “the Oasis”, well established and very popular with tenants. I am afraid to say that what went on at Queens Gardens can be no guide to the building site effect on “the Oasis” which really was a ghost town until well into 2007 and early 2008. There are far too many differences between the two for Miss Lo’s study of Queens Gardens to be of any assistance. These two developments simply do not bear comparison. I propose to ignore the Queens Gardens “study”.
88. As a matter of valuation I feel entirely confident in the views expressed by Mr Tang. Whilst I am completely satisfied that Miss Lo is highly experienced and knowledgeable in this field my confidence in her was disturbed by her willingness to wander far and wide, such as her study of Queens Gardens and her willingness to have a second look at the off-site comparables after it had been agreed that these would be disregarded. Mr Tang has been completely consistent and the logic of his approach I have found to be unimpeachable. I propose to adopt his valuations and put aside Miss Lo’s.
89. This then brings me to the question of whether both Miss Tao and Miss Lam could have let their properties sooner. Mr Yeung has allowed a three-month period, had everything gone as it should have, to allow the flats to be decorated and ready to be let. In the event both ladies took much longer. Mr Wilson Chan has perfectly understandably seized on this point. For my part, and this is part of the fittings and facilities claims, I understand perfectly well why they should have delayed before getting the flats ready. It will become clear, and in this regard I accept the evidence of both ladies, that much longer was needed to change and repair defective or sub-standard fittings, repair window frames and finishes, attend to damp patches before decoration in earnest could begin.
90. This being the case, I propose to assess the rental period on the basis of what should have happened had the plaintiffs been handed over flats and a Development as it should have been and not in the appalling state that they were in. The first three months from the assignments will be ignored in the calculation of compensation because it would have taken this sort of time to redecorate and find a tenant. Thereafter I will apply Mr Tang’s rental values as being what the plaintiffs would have received had the flat and the Development been assigned in good contractual order with the recreation and communal facilities up and running. In such circumstances the compensation under this head will be as appears in paras 78 to 80 above. Accordingly, in 1158/2007 the plaintiff will have damages awarded to it in the sum of $4,763,395 and in 1159/2007 $4,804,789. In this latter case, I find that Miss Tao behaved perfectly reasonably in eventually giving up finding a tenant and moving in herself. The amount I have awarded reflects the rent that could reasonably have been obtained plus management fees and rates. To this amount I will award interest to the plaintiffs at 1% above HSBC Best Landing Rate from the date when the individual payments would have been paid by the tenant until judgment and thereafter at the judgment rate until payment. This part of the order will be an order nisi.
The facilities claim
91. This relates to the communal and recreational facilities including the fitness area, swimming pool, access to it and decking, changing rooms for both men and women, the gymnasium and access passageways to the fitness area and the children’s play area.
92. I have already ruled that under Clause 10(e) and Schedule 6 and Clause 28(2) of the SPA the defendant was bound to provide these facilities. Under Clause 29 the provisions of Clauses 10 and 28 survive the conveyance. I have already ruled and provided reasons for saying why Mr Wilson Chan’s submission based on Clause 4(7) must fail. I do not propose to repeat my reasons here.
93. These facilities, on the evidence, were not in operation until the first tenant moved in April 2007 which is a very long time after the conveyances to these plaintiffs in 2005.
94. This all goes to support the nuisance claim for loss of rental. No tenant, in addition to all of the other points about the state of the Development as a whole, would be interested in taking a tenancy when these facilities were not up and running.
95. Any suggestion by the defendant that this is somehow down to the Property Manager is a particularly unattractive argument. Given the defendant’s duty to provide these facilities and the diminished role of Knight Frank, then limited to providing security guards and acting as a post-box between the owners and Miss Oung, it is difficult to see what Knight Frank could do to ensure that the building works were completed.
96. As no damages are claimed under this head, it is sufficient for me to hold, as I do, that the defendant was in breach of Clauses 10(e) and 28 in not providing these facilities until at the earliest April 2007. Beyond this finding I need to go no further.
The fittings claim
97. The intention, in common with many high-end developments in Hong Kong, was for the defendant to provide a bare-shell unit with basic fittings, plumbing, electrics and ducting for air-conditioning, leaving it to the usually well-to-do new owner to decorate as he or she wished. In this case, I have seen the state of the fittings which are very shabby indeed. Worst still, the windows leaked, wire mesh at the frame was visible and the finish was simply appalling. This, all the result of Miss Oung’s lack of money and consequent cost-cutting. Mr Yeung characterises the finish as not measuring up to what one expects of low-cost housing. He is correct in that observation.
98. As a result, much needed doing to put the basics in order before the units could be decorated and ready for a tenant.
99. I have already found that there is an implied term that the properties would be fit for luxurious residential purposes and I have given reasons for this. In practice what this meant was that the buildings and the units contained within them would be well constructed and completed, subject to some small works of rectification. The lift lobbies and the common areas would be well decorated with good quality finishes and the recreational facilities and clubhouse well-appointed and up and running. The units themselves would be watertight, with good quality window frames of a good fit. This really was not a big ask of the defendant but, in the event it failed miserably. Given the cost of construction and the asking price for the units, the developer was looking at a large profit. The $46,000,000 asking price is enough to indicate the standard of the finished product. The sales brochure alone was touting the Development as a very superior place to live at.
100. In the event, the two plaintiffs, to use the demotic, were sold a pup. The flats were not habitable. The windows leaked. Having seen the finish as shown in the photographs particularly the state of the windows and the very poor air-conditioning ducting, as well as the state of the fittings in the bathrooms it is clear to me that the plaintiffs were obliged to put right defects before they could begin decoration.
101. To help me try the case I had a view of the premises on 1 September 2011 with counsel, their solicitors and surveyors. I was able to get a good understanding of the problems that would have existed when the properties were conveyed by comparing now with then through the photographs.
102. At the end of the day this is a claim designed to reimburse the plaintiffs for the cost of putting the premises into the position that they should have been on assignment. In other words the cost of repair and rectification.
103. The standard is set by Clause 10(c) (Schedule 5) as well as Clause 4(1)(b) and the implied term which I have held to apply to these conveyances.
104. To prove their case the plaintiffs have called Mr James Law an experienced surveyor and the defendant, Mr Albert Chan an equally experienced expert.
105. On a true construction of the SPA, Mr Wilson Chan’s point on Clause 4(7) fails in respect of this limb of the claim as well.
106. My task now is to assess, as best I can, the fair cost of rectifying the defective works. This has been embarked upon minutely which, of course, is what would be expected of an expert surveyor in such circumstances. Mr James Law has costed these out for Flat 6B [Sun Crown/HCA 1158/2007] at 1159/E1/1131-40 to 43 at $237,500 and for Flat 6A [Gateway International/HCA 1159/2007] at 1159/E1/1131-34 to 39 at $203,000. Mr Albert Chan’s results are at E(2) 1266-18 to 21 for Flat 6B [HCA 1158/2007] at $150,000 and for Flat 6A [HCA 1159/2007] E(2) 1266-12 to 17 also at $150,000.
107. My sense of it is that Mr Law is too generous on both cost and time and Mr Albert Chan not generous enough. Given the parlous state of these premises, I tend to think that Mr Law’s assessment is closer to the mark than Mr Chan’s. I am simply not prepared to delve into the minutiae of these calculations. I apprehend that justice will be achieved if I were to “tax off” 20% from Mr Law’s assessment. In the circumstances, in HCA 1158, Flat 6B there will be a deduction of $47,500 so that the award will be $190,000 and in the case of Flat 6A there will be a deduction of $40,600 so that the amount of the award will be $162,400. Accordingly, there will be a judgment to the plaintiff in their respective amounts under this head to be added to what I have awarded to them under the nuisance claim. To these amounts there will be interest at 1% above HSBC Best Landing Rate from the date of payment of the invoices for the repair works until judgment and thereafter at the judgment rate until payment. This order for interest will also be an order nisi.
Totals
108. In HCA 1158/2007 the total judgment will be in the sum of $4,953,395 and in 1159/2007 it will be $4,967,189.
Costs
109. The defence of this action has offended the court’s sense of justice. These plaintiffs have had to fight long and hard and at great expense for the relatively small amounts which are undoubtedly due to them. A party and party taxation would simply not do them justice. If ever there was a case for an indemnity taxation it is this one and I so order. This will be an order nisi.
Finally
110. I want to express my sincere gratitude to both Mr Yeung, for the plaintiffs, who has presented his case with admirable clarity and in great detail and Mr Wilson Chan who has had a most difficult row to hoe and who has given the defendant’s case a respectability which it has been completely undeserving of. The defendant owes him a considerable debt of gratitude.
| (Ian Carlson)
Deputy High Court Judge |
M T Yeung and Adrian But, instructed by Foo, Leung & Yeung, for the plaintiffs
Wilson Chan, instructed by Baker & McKenzie, for the defendant
Please refer to CACV64/2012 for the relevant appeal(s) to the Court of Appeal.