HERMAN HAAS AND ANOTHER v. LAU KUI KWAN

HCA4265/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4265 OF 1998

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J U D G M E N T

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1. In this trial the plaintiffs are not legally represented but appear in person. The first named plaintiff, Hermann Hass, has not attended court at all. Only the second named plaintiff, Madam Kwan Suk Han Susan, has been in court conducting the case for both plaintiffs in person. Madam Kwan, who is the mother of the first named plaintiff, has handed to the court a Letter of Authorization from the first named plaintiff authorizing her to appear and conduct the case on his behalf as well.

Introduction

2. The defendant was the registered owner of Flat C on the 2nd floor and Car Parking Space 13 on the Lower Ground floor of Splendour Villa, No.10 South Bay Road, Hong Kong ("the Property").

3. By a Provisional Agreement dated 7 October 1997 ("the Provisional Agreement") and a formal Agreement for Sale and Purchase dated 21 October 1997 ("the Agreement"), the defendant agreed to sell and the plaintiffs agreed to purchase the Property for HK$18,500,000.00. Under the terms of the Agreement, completion was scheduled to take place on or before 6 January 1998. When the Agreement was entered into between the parties, the plaintiffs had at the same time paid the defendant a deposit in the sum of HK$1,850,000.00.

4. On 16 December 1997, the parties entered into a Supplemental Agreement ("the Supplemental Agreement") whereby the completion date under the Agreement was extended to 6 March 1998. It was further agreed between the parties under the Supplemental Agreement that the plaintiffs would :

(a) pay to the defendant a further deposit of HK$500,000.00;

(b) damages for the extension of the completion date in the amount of HK$40,000.00;

(c) reimburse the defendant for all the mortgage interests the defendant had to pay in respect of the Property during the two months extension for the completion; and

(d) pay all the outgoings including the rates in respect of the Property for the period of the extension for the completion.

5. In return, the defendant agreed under the Supplemental Agreement to grant to the plaintiffs a temporary occupation licence in respect of the Property for the period of the extension for the completion.

6. It was also provided in the Supplemental Agreement that in the event the plaintiffs failed to complete, all the deposits paid by the plaintiffs shall be forfeited to the defendant. Upon the signing of the Supplemental Agreement, the further deposit of HK$500,000.00 was paid by the plaintiffs to the defendant.

7. Completion of the sale did not take place.

Plaintiffs' claim

8. The plaintiffs' claim is put on the footing that the defendant was in breach of the Agreement in that the defendant had failed to prove title by failing or refusing to produce proof of proper authorization from the Buildings Department for alterations done to the balcony of the Property, which the plaintiffs say, are structural alterations. In the absence of such authorization, the plaintiffs' case is that the structural alterations are illegal affecting the root of title.

9. In the premises, the plaintiffs ask for the return of all the deposits paid by the plaintiff under the Agreement and Supplemental Agreement.

Defence and Counterclaim

10. The defence raised to the plaintiffs' claim is that the defendant was not in breach of the Agreement but that the plaintiffs were out of time in making the requisition relating to the alterations to the balcony of the Property, such requisition being raised by the plaintiffs only on 3 March 1998, just three days before the extended time for completion.

11. Moreover, the defendant says that the alterations to the balcony of the Property were not structural and therefore did not require the authorization of the Buildings Department and, furthermore, as it was not structural it did not go to the root of title, so that the plaintiffs were not entitled to raise that requisition out of time.

12. Thirdly, the defendant says that despite that requisition being out of time and despite the fact that the defendant was under no duty to answer such requisition, the defendant did, nevertheless, inform the plaintiff's then solicitors that the defendant was agreeable to have his solicitors stakehold $140,000.00, which could be used to reinstate the altered balcony to its original state thereby removing any complaint which the plaintiffs may have as to the altered balcony.

13. Despite all the matters stated above, the plaintiffs failed to complete and thereby repudiated the Agreement. The defendant accepted the repudiation by the plaintiffs, rescinded the Agreement and forfeited the deposits paid under both the Agreement and Supplemental Agreement as he was entitled to.

14. The defendant further counterclaims against the plaintiffs for damages for the breach, payment of the sums which the defendant was entitled to under the Supplemental Agreement and consequential relief for the wrongful registration of the Writ herein against the premises as a lis pendent in the Land Registry.

The evidence on the main issue

15. Clause 16 of the Agreement provides that the Vendor (i.e. the defendant) shall prove title to the premises in accordance with Section 13 of the Conveyancing and Property Ordinance.

16. The relevant part of Clause 17 of the Agreement states (inter alia) as follows :

"Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's Solicitors within 7 working days after the receipt of the title deeds by the Purchaser's Solicitors herein and further requisitions shall be raised within 3 working days upon receipt the reply from the Vendor's Solicitors to the Purchaser's requisitions (if any) otherwise the same shall be considered as waived (in which respect time shall be of the essence of this Agreement)."

17. On 29 October 1997, the solicitors, acting for the defendant at the time, delivered the title deeds and other documents to the then solicitors for the plaintiff in respect of this sale.

18. On the following day, namely 30 October, the plaintiffs' solicitors raised requisitions with the defendant's solicitors. Those requisitions are unconnected to the present dispute and irrelevant for present purposes.

19. Such requisitions raised were answered by the defendant's solicitors by letter dated 31 October 1997. No further requisitions were raised in respect of those answers.

20. After the Supplemental Agreement was entered into by the parties and the completion date extended to 6 March 1998, the plaintiffs' newly instructed solicitors, Messrs Choy & Co., on the same day that they were instructed by the plaintiffs, namely 3 March 1998, wrote to the defendant's then solicitors by letter of the same date as follows :

"Re : Flat C, 2nd Floor and Car Parking Space No.13 on the Lower Ground Floor, Splendour Villa, Hong Kong ('the Property').

We refer to the above matter and as given to understand by client, they have reasons to believe there exist certain structural alterations to the above properly namely:-

(i) The railing of the balcony was removed, installed in place thereof was a aluminium framed fixed glass wall;

(ii) Above the fixed glass wall thereof were eracted 4 aluminium framed glass penals which serves as windows;

(iii) Decorated floor was installed at the balcony area; and

(iv) Decorated roof was installed at the balcony area.

Thus the balcony was enclosed and becomes part of the living room.

As the above alterations relates to and affects the structure of the Property, it constitute an unauthorized and illegal alterations and as they are not exempted building works, previous approved by Building Authority is required. Enclosed is copy Survey Report in respect of the above alterations for your perusal.

Please provide us with the requisite approval by the Building Authority of the above structural alterations for perusal before completion failing which our client reserves the right to rescind the Sale and Purchase of the above property and thereupon, all deposits paid shall be returned to our client forthwith."

21. The survey report, enclosed with the letter from Messrs Choy & Co. referred to above, is a report from Ted Chan & Associates Limited ("Ted Chan & Associates") and states as follows :

"Survey Report
Flat C, 2nd Floor, Splendour Villa, 10 South Bay Road, Hong Kong

The balcony of the apartment stated above is suspected to have been altered illegally. An inspection was carried out on 27 February 1998 and the balcony in question was measured.

According to the inspection, part of the living room of this unit was suspected as the former balcony. The reasons are as follows:-

1. From our visual inspection in front of the said building, it is quite obvious that some units have balconies in existence and some have not.

2. The units, which have no balcony, different style of windows were installed. This non-uniformity of the outlook of the building substantiates some balconies were altered in other usages.

3. For instance, both the upper and the lower floors of the subject unit have balconies, but the outer wall of the subject unit is window installed. In other words, no balcony is existed.

The approval plan of the subject unit from Building Department has already been ordered to verify same.

A diagram and some photos, showing the suspected balcony in Appendix A is attached for your reference."

22. It should be noted at once that the alleged "structural alteration" contained in the letter from Messrs Choy & Co. of 3 March is not supported at all by the survey report of Ted Chan & Associates in that it makes no mention of the alteration being structural. All that the survey report states is that the alteration is suspected to be illegal. In that connection, it should also be noted that it makes no reference to Section 41(3) of the Buildings Ordinance which provides that it is only where the alterations are structural that the authorization of the Buildings Department is required.

23. In this respect, the defendant has called its own expert to give evidence on the alteration to the balcony. That evidence takes the form of a survey report prepared by Mr Chow Sai Hung, Ronald, an architect who is an authorized person, as well as his oral evidence in court.

24. In a nutshell, the report states that a survey was carried out on the Property on 5 May 2001 to determine the scope and extent of the alteration to the balcony.

25. When compared with the approved building plans of the Property, he was able to say that the alterations to the balcony of the Property include :

(1) removal of the original glass door/partition separating the living room and the balcony/veranda;

(2) addition of sliding window on top of the glass parapet; and

(3) inclusion of some other decorative flooring and ceiling.

26. Next the report makes reference to Section 41(3) of the Buildings Ordinance.

27. Lastly, it states that in the opinion of the maker of that report, the alterations done to the balcony of the Property no approval from the Building Authority is required by reason of Section 41 (3) because :

(a) the alteration works in the balcony do not involve the structure of any building in the sense that they will not exceed the allowed structure capacity and affect the structural stability;

(b) all the alteration works carried out are in the building; and

(c) no part of the alterations carried out is in contravention of any regulation with balcony particularly with reference to (i) balcony gross floor area calculation and (ii) prescribed window area requirement, since both (i) and (ii) had been fully included in the approved plans.

28. The expert called by the defendant was not challenged by the plaintiffs in the opinion he had expressed. Indeed the only question asked of him by the plaintiff was how it was that he came to prepare the survey report put in evidence. The answer given by Mr Chow was that it was done on the instructions of the plaintiffs.

Other issues and evidence

29. Madam Kwan gave evidence and called a witness, Joe Chan Chuen Hung, the estate agent involved with this Property to testify on her behalf that throughout the time right up to the extended date of completion, Madam Kwan had never moved into the Property to stay there and that the keys to the Property had always been kept at the office of the estate agency, such that each time Madam Kwan wanted to visit the inside of the Property, arrangements had to be made with the estate agency for them to bring along the keys and to accompany her to the Property.

30. The evidence of both of them were that Madam Kwan had visited or inspected the Property on two occasions before the Provisional Agreement was entered into on 7 October 1997, and that she had also visited the inside of the Property on two other occasions in around January 1998. On all these occasions she was accompanied by the estate agent, Mr Chan, to enter the Property. Mr Chan further said that on each of those occasions he had to bring along the key to the Property which was kept at the estate agent's office.

Finding of fact on the main issue

31. There is very little dispute on facts between the parties. The first issue of disputed fact is whether or not Madam Kwan had been in occupation of the Property after the temporary license was granted to her by the Supplemental Agreement.

32. While there is evidence from the plaintiff and supported by her witness Mr Chan on this issue, there has been no direct evidence from the defendant that Madam Kwan had taken occupation of the Property at any time after the temporary license was granted to her.

33. The defendant relies on what is stated in Madam Kwan's witness statement where it says in paragraph 10 : "During my stay at the Property, I noted that the balcony of the flat was enclosed..." and relying on the word "stay" used in that sentence, the defendant asks me to read that, as an admission by Madam Kwan, that she had stayed in the Property after the temporary license was granted to her alternatively to infer from that that she had been in occupation of the Property at some stage.

34. Connected to this issue of disputed fact is the second disputed fact between the parties, namely whether Madam Kwan had ever taken possession of the keys to the Property after the temporary license was granted to her by the Supplemental Agreement.

35. Once again, there is evidence from Madam Kwan, corroborated by her witness Mr Chan, that the keys to the Property had always remained at the estate agency's office throughout the time.

36. Mr Chan also gave evidence that the keys were returned by their agency office to the defendant when the defendant called him by phone to ask back for the keys.

37. Again, there is no direct evidence from the defendant on this issue. However, the defendant points to a letter from the former solicitors of the plaintiff dated 10 March 1998 (in reply to an earlier letter from the defendant's solicitors chasing the plaintiff for the return of the keys to the Property after the transaction had fallen through) which states : "please be informed that the keys in respect of (the Property) has been returned to your client by ours on 9 March 1998". The author of that letter was not called as a witness and I have not heard his evidence on how that came to be written on this letter.

38. The defendant gave evidence, but nowhere in his evidence was he able to say directly that the plaintiff had stayed in the Property after the temporary license was granted to her. All he could say was that his consent was not needed for the plaintiff to go to the Property after the Supplemental Agreement had been entered.

39. As for the keys, his evidence was that he had supplied keys to several agencies including the one where Joe Chan was an agent, namely Centaline Property Agency. After the Provisional Agreement, he had informed all the other agencies that the Property had been sold. Up to that time, only one of the two locks to the Property was locked and he had supplied the key to that lock to the several agencies. However, after the Provisional Agreement, the other lock was also locked and he also provided the other key to Centaline as well.

40. There was no evidence from him that those keys were ever transferred from Centaline to the plaintiff nor did he dispute Mr Chan's evidence that it was he who had contacted Mr Chan for the return of the keys.

41. From this evidence, I find that the keys to the Property had at all times remained with Centaline and also that the plaintiff had never moved into the Property despite having been granted a temporary license after the Supplemental Agreement.

42. I also have no hesitation in accepting the evidence of the architect, Mr Chow Sai Hung Ronald, who was called as an expert witness by the defendant, in its entirety.

43. From his evidence and the expert report, I find that the alterations to the balcony of the Property by removing the railings and enclosing it entirely with windows to be a non-structural alteration, and as such it needed no authorisation from the Building Authority.

Decision

44. From the findings as found by me, there can be no question but that the requisition raised by the plaintiff on 3 March 1998 relating to the balcony was out of time.

45. As I have already found upon the evidence of the defendant's expert that the alterations to the balcony of the Property was not structural, it did not go to root of title and as such the plaintiff was not entitled, under the Agreement to raise such requisition out of time.

46. Moreover, I have accepted that such alterations did not require the approval of the Building Authority and in that respect, even if the plaintiff was entitled to raise it, it had been adequately answered by the defendant.

47. I therefore come to the conclusion that the plaintiff was in breach of the Agreement and Supplemental Agreement in failing to complete.

The counterclaim

48. The counterclaim by the defendant can conveniently be dealt with in two separate categories : firstly, under the Supplemental Agreement and, secondly, the claim for loss and damage due to breach of the Agreement.

49. Dealing firstly with the claim under the Supplemental Agreement. Under the Supplemental Agreement, the plaintiff had agreed to pay compensation of $40,000.00 to the defendant for the postponement of the completion date. There is no dispute that this amount has not been paid by her.

50. Secondly, under the Supplemental Agreement, the plaintiff also agreed to compensate the defendant for the interest payments which the defendant had to make in respect of the mortgage of the Property during the two months postponement for the completion. Again, there is no dispute that this has not been paid by the plaintiff.

51. In this respect, the defendant has produced a letter from the Hang Seng Finance Ltd showing that the amount of interests payment made by him to the Hang Seng Finance Ltd. for the period from 1 April 1997 to 31 March 1998 came to $579,255.86 in respect of the mortgage of the Property. Two months interests therefore comes to $96,542.64.

52. In so far as loss and damages for the breach is concerned, the counterclaim by the defendant is based on the premise that the plaintiff has caused the Writ herein to be registered in the Land Registry as a lis pendent whereby the defendant has been prevented from re-selling the Property in a falling market and therefore unable to mitigate his loss from the plaintiff's breach of the Agreement. On this basis, the defendant is asking for damages to be assessed as being the difference between the contract price and the value of the Property at the time of trial.

53. In support of that contention, the defendant seeks to rely on what was said by Lord Wilberforce in the case of Johnson v. Agnew [1980] AC 367 at 400 :

" The general principle for the assessment of damages is compensatory, i.e., that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach..... But this is not an absolute rule, if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances."

54. In so far as the evidence is concerned, Madam Kwan admitted in the witness box when giving evidence that she had caused the Writ herein to be registered against the Property because she had wanted to prevent the defendant from selling the Property.

55. In the Statement of Claim, one of the matters claimed by the plaintiff was for a lien on the Property and an order for the sale of the Property with the proceeds thereof being applied to repay the plaintiffs the deposit of $2,350,000.00.

56. There is also evidence before me from the land search records (the latest one carried out on 16 September 2002) of the Urban Land Register that the Writ herein was registered against the Property on 21 April 1998.

57. In this respect, the defendant has adduced evidence before me from a surveyor, Mr Chris M.L. Chau of Centaline Surveyors Ltd, and who was called as an expert witness. Mr Chau has prepared and produced into evidence two valuation reports in respect of the Property. The first report prepared in July 2002 gives the open market value for the Property to be $8,540,000.00. The second report prepared in February 2003 gives the open market value for the Property to be $7,740,000.00.

58. These two valuation reports were not challenged by the plaintiff and the only matter brought out by the plaintiff in cross examination of this expert witness was that he came to prepare these reports as a result of being instructed by the defendant's solicitors so to do.

59. I accept the evidence of Mr Chris Chau and his valuation as contained in these two reports prepared by him.

60. I also accept the statement of the law as contained in the passage from Lord Wilberforce cited above.

61. By reason of my decision herein that the plaintiffs were in breach of the Agreement by failing or refusing to complete, it follows therefrom that it was wrong for the plaintiffs to have registered the Writ herein as a lis pendent. In any event that registration must also have been wrongful since the plaintiffs were not entitled to any interests in the Property notwithstanding their claim for a lien upon it.

62. Applying the law to the present case, it is abundantly clear that to assess damages for the plaintiffs' breach in this case by calculating the difference between the contract price and the market price at the time of breach will carry with it injustice by reason of the wrongful registration of the Writ against the Property in the Urban Land Register. There can be no doubt that such registration of the Writ served to encumber the Property and had the effect of preventing the defendant from selling it in a falling market to mitigate his loss.

63. It follows therefrom that the increased loss to the defendant due to the falling market over this period of time should fairly be taken into account as well in considering the loss suffered by the defendant caused by the plaintiffs' breach.

64. I shall therefore assess the loss to the defendant arising from the breach by the plaintiffs of the Agreement to be the contract price of $18,500,000.00, less the present market value of $7,740,000.00, giving the sum of $10,760,000.00. From this sum will be deducted the sum of $2,350,000.00, being the amount of the deposits paid by the plaintiffs and already forfeited by the defendant. This leaves a final figure of $8,410,000.00

Conclusion

65. For the reasons given above, accordingly, the plaintiffs' claim is dismissed.

66. There will be judgment to the defendant upon the Counterclaim for :

(a) the sum of $40,000.00 being agreed damages under the Supplemental Agreement;

(b) the sum of $96,542.64 being compensation for two months interests payment agreed under the Supplemental Agreement;

(c) damages for breach of the Agreement in the sum of $8,410,000.00;

(d) interests for the amounts ordered under (a) and (b) above at 5% p.a. from the date of the Counterclaim herein until judgment and thereafter at judgment rate;

(e) a declaration that the plaintiffs are not entitled to continue to register the Writ of Summons herein with the Land Registry; and

(f) an order that the registration of the Writ of Summons herein in the Land Registry be vacated.

Costs

67. There will be a costs order nisi that the plaintiffs pay the defendant the costs of defending the plaintiffs' claim as well as the costs of the defendant's counterclaim, to be taxed on a party and party basis if not agreed.