EXERCISING AN OPTION TO PURCHASE PROPERTY BY WAY OF CHEQUE: WHAT IF THE CHEQUE IS DISHONOURED?

• Citation: (1997) 9 SAcLJ 407
• Author: JOSEPH CHUN
• Published date: 01 December 1997
• Date: 01 December 1997

Ng Soo Khim v Heng Teo Bong

Seah Kiat Seng v Amtel Exports Pte Ltd

Introduction

In Singapore, real property is usually bought and sold by way of an option to purchase granted by the vendor to the prospective purchaser in exchange for payment of an option fee by the prospective purchaser. The option normally stipulates that it is to be exercised within a specified time (usually two weeks) by the prospective purchaser signing and returning the acceptance page of the option together with payment of a deposit, failing which the option fee paid by the prospective purchaser in exchange for the option is forfeited and the option lapses. But what if the option is exercised before it expires, but the cheque tendered in payment of the deposit is dishonoured upon presentation for payment?

There are two recent local cases in which this issue was considered: Ng Soo Khim v Heng Teo Bong1 and Seah Kiat Seng v Amtel Exports Pte Ltd2.

Ng Soo Khim v Heng Teo Bong

In Ng Soo Khim v Heng Teo Bong3, the defendant and his brother (hereinafter referred to as “the joint vendors”) were joint tenants of a property. The joint vendors had on March 1, 1985, granted to the plaintiff an option to purchase the property at a price of $520,000. The preamble in the option read:

“To exercise this option you shall sign the acceptance form at p.4 herein and shall deliver the said form together with a cheque [italics mine] for the sum of … $47,000 being the balance of the 10% deposit to [the vendor’s] solicitors, Messrs Teo Choo Hong & Co, …”

The plaintiff exercised the option on March 1, 1985, the last and only day of the option period, by signing the acceptance copy and issuing to the joint vendors’ solicitors a cheque for the sum of $47,000, being the balance of the 10% deposit.

The cheque was deposited into the solicitors’ account on March 2, 1985, but on March 4, 1985, was returned by the bank to the solicitors with the

advice ‘refer to drawer’.

The evidence showed that the plaintiff did not have sufficient funds in his account on March 2, 1985, and only deposited a sum of $47,000 in cash into his account on March 4, 1985.

On March 7, 1985, the joint vendors’ solicitors wrote to the plaintiff’s solicitors to the effect that as the plaintiff’s cheque had been dishonoured when it was presented for payment, the joint vendors were treating the sale and purchase as abortive.

The property was subsequently sold at a public auction on March 7, 1985 by existing mortgagees exercising their power of sale. The defendant’s brother was adjudicated a bankrupt on March 15, 1985 and a receiving order was made against him on the same date.

The plaintiff claimed, inter alia, for the return of a sum of $5,000 which was paid by the plaintiff to the joint vendors as the consideration for the option to purchase. The plaintiff argued that on January 5, 1985, the existing mortgagees’ solicitors had informed the defendant’s brother that the existing mortgagees were proceeding with arrangements to sell the property by auction and therefore the joint vendors were not in a position to grant an option to the plaintiff without the existing mortgagees’ concurrence. Since the option was not approved by the existing mortgagees and the existing mortgagees did not subsequently give their consent to the sale, the consideration for the option had wholly failed and therefore the plaintiff was entitled to refuse to exercise the option and to a refund of the consideration paid for the option. Furthermore, as the plaintiff would in due course have discovered the defendant’s brother’s bankruptcy, the plaintiff would have been entitled not to complete the purchase and to recover the deposit.

The defendant argued that the plaintiff had not validly exercised the option to purchase in accordance with the terms contained in the option. The giving and acceptance of the cheque was a conditional payment, i.e. conditional upon the cheque being honoured. Had the cheque been honoured, the bank could well have been persuaded to give their consent to the sale and withdraw the property from the auction.

The learned Goh Phai Cheng JC held4 that the provision requiring payment of the deposit was not a condition precedent to the formation of the contract, but a fundamental term of the contract, a breach of which entitles the vendor to treat the contract as at an end. In his view, there was nothing in the terms of the option which expressly or impliedly stated that the contract of sale would not come into existence at all unless the cheque was honoured upon its presentation for payment. In the

circumstances the plaintiff had complied with the term relating to the exercise of the option notwithstanding its subsequent dishonour. The judge further held that on the facts of the case, the joint vendors were not entitled to treat the contract as at an end because they had failed to obtain the existing mortgagees’ approval and it was unlikely that the mortgagees would have given their consent anyway. Also, the plaintiff’s cheque was dishonoured not because the plaintiff had no ability or intention to complete the purchase in due course but because the plaintiff had deposited money into his account late. Had the joint vendors’ solicitors given notice of the dishonour to the plaintiff’s solicitors, the former would have been informed that the plaintiff had deposited money into his account on March 4, 1985, and the cheque would have been honoured if it were to be presented once more for payment. Furthermore, the plaintiff was only given the option on March 1, 1985, and was required to exercise it the same day.

With respect, it is submitted that the learned judicial commissioner gave undue weight to the absence of a provision in the option stating that a cheque had to be honoured in order to constitute acceptance. Although the word “cheque” was used in the preamble, it could hardly be the parties’ intention that even if the cheque was dishonoured, the option would be deemed exercised. Indeed, one would have thought that in order to give business efficacy to the agreement, the implication should have been exactly the opposite: that the cheque had to be honoured upon presentation for payment in order for the option to be considered properly exercised (subject to the joint vendors’ duty to present the cheque for payment within a reasonable time5).

As for the other reasons given by the learned judicial commissioner for his decision, it is submitted that these reasons are just as unconvincing. Although the option did not make the existing mortgagees’ consent a condition of the sale, nevertheless, the learned judicial commissioner held that even if the cheque in payment of the balance of...