Introduction

In real estate transactions, agreements like the Option to Purchase (OTP) are critical in defining the rights and obligations of both buyers and sellers. Such agreements typically outline essential terms, including price, timelines, and conditions for payment, providing a framework for a smooth and transparent transaction.

However, disputes can arise when the contract’s language is ambiguous regarding payment schedules or obligations, or when one party asserts that terms related to the timing and conditions for the payment of sums, such as option fees or further sums, have not been properly met. The case of TG Master Pte Ltd v Tung Kee Development (Singapore) Pte Ltd and another [2024] 1 SLR 690 exemplifies how nuanced and contentious the interpretation of payment terms can be, particularly when it comes to option fees and further sums due.

In this article, we examine the contractual dispute between the parties, focusing on the further payment arising from the intended purchase of the properties. Central to the case is the interpretation of the OTP agreements, particularly the validity of the payment of option fee and subsequent further sums. The case raises key questions about contractual certainty and the enforceability of payment terms. Moreover, the appeal decision sheds light on how courts navigate the balance between the freedom to contract and equitable considerations when ambiguities arise regarding payment schedules and the fulfilment of obligations. This review looks closely at the legal principles, how the terms were interpreted, and the court’s decision, to highlight what this means for future real estate transactions.

Summary of Facts

Mr. Yung Man Tung (“Mr. Yung”) sought to purchase eight properties (“Properties”) owned by TG Master Pte Ltd (“TG Master”). On 3 January 2018, TG Master issued Mr. Yung eight identical OTPs for the Properties at $2,796,875 per property. Each OTP was valid for 24 months, expiring on 2 January 2020. To exercise each OTP, Mr. Yung had to pay 20% of the sale price, divided into two parts: (1) an Option Fee of $59,375 per property (totalling $475,000 across all OTPs) and (2) a Further Sum of $500,000 per property (totalling $4,000,000 across all OTPs). The Further Sums of $500,000 per property were due within three months of the issuance of each OTP. Since the OTPs were issued on 3 January 2018, the Further Sums were due by 3 April 2018.

In this case, Mr. Yung paid the Further Sums (after receiving an $80,000 goodwill discount from TG Master) totalling $3.92 million (instead of the original $4 million).

As part of the agreement, TG Master would lease the properties to a company designated by Mr. Yung.

In 2018, Mr. Yung paid the Option Fees and Further Sums. TG Master entered into 30-month tenancy agreements with Tung Kee per the terms of the OTP, and Tung Kee took possession of the Properties.

After paying the Further Sums, Mr. Yung requested multiple extensions of time to exercise the OTPs. TG Master granted these extensions. The first set of extension fees was stipulated in the Loan Agreement, while subsequent extension fees were based on alleged oral agreements. Mr. Yung paid a total of $122,720 extension fees for the extension of time to exercise the OTPs.

Despite multiple extensions granted by TG Master, Mr. Yung did not exercise the OTPs, and the Properties were returned to TG Master in September 2021 after court proceedings. TG Master later sued for the unpaid loan and extension fees, while Mr. Yung counterclaimed for the refund of the Option Fees, Further Sums and $122,720 in extension fees already paid.

Trial Court Decision

In the trial court decision, the judge found that Mr. Yung’s obligation to pay the first set of extension fees was dependent on TG Master’s obligation to grant the extensions. Although TG Master failed to prove its claim for additional extension fees, the Court allowed TG Master to retain the $122,720 that Mr. Yung had already paid.

In relation to the Option Fee, Further Sums, the judge applied the Hon Chin Kong framework, which helps determine whether payments are classified as deposits or part-payments, subject to the penalty doctrine. The court ruled that the Option Fees were genuine deposits, but the Further Sums were considered part-payments. Therefore, TG Master was required to return these amounts to Mr. Yung, as their forfeiture would have breached the penalty doctrine.

Appeal Verdict and Principles

TG Master appealed against the trial judge’s ruling on the Further Sums. In its appeal, TG Master presented several important arguments to contest the decision.

First, TG Master challenged the characterisation of the Further Sums. It argued that these sums were not part payments toward the eventual sale price of the property, as the trial judge had concluded. Instead, TG Master maintained that the Further Sums were provided as consideration for granting 30-month tenancy agreements to Tung Kee. Therefore, since they were tied to the lease arrangements and not to a sale, TG Master argued that they should not be subjected to the penalty doctrine.

Second, TG Master addressed the contractual nature of the OTP agreements. It argued that the Hon Chin Kong framework, which was applied by the trial judge, was not relevant in this case. According to TG Master, the OTPs had never been exercised, and Mr. Yung had no legal obligation to exercise them. As no binding sale and purchase agreement had ever come into existence, TG Master contended that the penalty doctrine should not apply to unexercised OTPs. Without a sale agreement, TG Master argued, the legal reasoning behind the penalty doctrine was inapplicable.

Finally, TG Master presented a “no breach” argument. It asserted that since Mr. Yung was not in breach of contract, the penalty doctrine could not be applied. TG Master reasoned that because Mr. Yung was never obligated to exercise the OTPs, he could not be considered in breach for failing to do so. As a result, TG Master argued, the Further Sums should not be subjected to the penalty doctrine, as there was no breach of contract to justify its application.

The Court of Appeal’s Decision

The Court of Appeal allowed TG Master’s appeal and overturned the trial court’s ruling. Several key principles and findings were outlined in the decision, which clarified the legal reasoning behind the judgment.

First, the Court addressed the issue of new points raised on appeal. TG Master had introduced additional arguments, such as the “No-Breach” and “Contractual Nature” arguments, which were not fully addressed at trial. However, the Court allowed these new arguments on appeal, explaining that they were legal in nature and did not require the introduction of new evidence. As these points were purely matters of law and did not catch Mr. Yung off-guard, the Court found that there was no prejudice caused to him by considering these arguments during the appeal.

Second, the Court examined the nature of the Further Sums. It held that these sums were not merely payments toward the eventual purchase of the property, as the trial court had concluded. Instead, the Further Sums were part of a fee paid by Mr. Yung to secure the right to enter into tenancy agreements with Tung Kee. This meant that the sums were consideration for a service—specifically, the granting of tenancy rights—rather than a partial payment towards the sale of the property. As such, the Court found that the Further Sums fell outside the scope of the Hon Chin Kong framework and the penalty doctrine.

In its third point, the Court focused on the Option Fees and Further Sums as constituting a “True Option Fee.” It found that when viewed together, the Option Fees and Further Sums represented a “True Option Fee” that Mr. Yung paid to secure the OTPs. Importantly, these OTPs were never exercised, meaning no sale and purchase agreement ever came into effect. Given this, the penalty doctrine, which generally applies to secondary obligations that arise following a breach of contract, was deemed inapplicable.

The Court further elaborated on the inapplicability of the penalty doctrine. It reiterated that because Mr. Yung was not obligated to exercise the OTPs, there could be no breach of contract. As a result, the penalty doctrine could not apply to the forfeiture of the Further Sums. The Court found that these sums were non-refundable consideration for the right granted to Mr. Yung and Tung Kee to enter into tenancy agreements, rather than payments that could be classified as penalties for breach. Therefore, TG Master was entitled to retain these sums.

As such, the Court allowed TG Master’s appeal, finding that it was entitled to retain the Option Fees and Further Sums. The Further Sums were consideration for tenancy agreements, not deposits or part payments under a sale contract, and were not subject to forfeiture under the penalty doctrine. TG Master had already fulfilled its obligation to grant Mr. Yung the right to exercise the OTPs, and thus, it was entitled to keep the “True Option Fee” despite the non-exercise of the OTPs.

Conclusion

The trial court’s decision in this case sheds light on the handling of option fees, further sums, and extension fees, but it also highlights some important lessons for real estate transactions. Clear and detailed contracts are crucial to avoid misunderstandings and disputes.

The case shows that both parties need to be precise in their agreements and provide solid evidence if they claim additional payments or extensions. Failure to do so can lead to losing money or facing other legal issues.

In summary, this case underscores the importance of careful contract drafting and a thorough understanding of all terms to prevent costly disputes and ensure fair outcomes. Should you require assistance in reviewing or drafting contracts on real estate transactions, do not hesitate to seek professional legal guidance. A well-structured agreement is the key to protecting your interests and avoiding unintended legal consequences.