MODERN SINO LTD. v. ART FAIR CO. LTD.

HCMP 5731/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5731 OF 1998

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JUDGMENT

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1. This is a Vendor and Purchaser Summons. The Plaintiff is the Purchaser and the Defendant is the Vendor under an Agreement for Sale and Purchase dated 4 August 1997 for a house in South Bay. Completion was agreed to be on 16 January 1999 (one and a half years after the date of the Provisional Sale and Purchase Agreement).

2. The Originating Summons refers to requisitions and objections in 9 documents, but it was clear from the submissions of the Plaintiff's counsel that it relies on only 2 requisitions:-

- Requisition No. (8) which relates to unauthorised building works in the house, and

- Requisition No. (9) which relates to the question whether the Vendor had any right in law to assign exclusive possession of 2 car parking spaces designated as Car Parks No. 1 and 2.

Reliefs sought

3. The Originating Summons contained the usual reliefs:-

(1) a declaration that the requisitions had not been satisfactorily answered;

(2) a declaration that the Purchaser was not precluded from raising those requisitions;

(3) a declaration that good title had not been shown;

(4) a declaration that the Purchaser was entitled to rescind the Agreement;

(5) an order that the Vendor return the deposits with interest;

(6) a declaration that pending the return of the deposits, the Purchaser is entitled to a lien;

but also in the alternative, if good title had been shown,

(7) appropriate declaratory reliefs and an order that the sale and purchase be completed within 7 days from the date of the order.

4. The Defendant, having previously indicated that it intended to contest the proceedings, has amended the Acknowledgment of Service to state that it did not intend to contest the proceedings and it did not appear at the hearing. However, as declaratory relief was being sought from the Court, and as it involved title to land, a full hearing in open court was conducted.

5. There were two hearings, because on the day of the first hearing, the Court of Appeal delivered a judgment (Jumbo King v Faithful Properties CACV 180/1998) overruling a first-instance judgment on which the Plaintiff's counsel had relied. The Plaintiff's counsel consequently asked for time to submit further arguments in the light of the Court of Appeal's judgment.

Requisition No.(8) - unauthorised building works

6. This requisition concerned certain building works which were not included in the approved building plans.

7. These building works are set out in detail in the Report of Ng Kwok Hing, an Architect and Authorised Person, dated 15 October 1998 and exhibited as "WPF-3" to the Affirmation of Wong Pui Fun in support of the Originating Summons ("the Architect's Report").

8. This Report shows that the total area covered by these building works (not included in the approved building plans) amounted to some 146.784 sq. m., and the nature of these works were substantial.

9. The presence of substantial buildings works not included in approved building plans immediately gives rise to at least 3 questions:-

(a) is there a risk of enforcement action by the Building Authority?

(b) is there a risk of re-entry by Government as lessor?

(c) is there a risk of action against the owner by co-owners under the Deed of Mutual Covenant (DMC)?

- Risk of enforcement action by the Building Authority

10. The documents reveal that in 1985, the Building Authority had served an order on the then owner of the property to demolish unauthorised building works. A comparison of this demolition order with the Architect's Report showed that the range of the unauthorised building works was less extensive in 1985.

11. Subsequently by a letter dated 1 August 1997, the Building Authority withdrew the demolition order and the Defendant has relied on this withdrawal as an answer to the Plaintiff's requisition.

12. However, it is clear from the Building Authority's letter dated 1 August 1997 that the withdrawal was only "for the time being". The letter stressed that "the works are still considered illegal and may be subject to enforcement action under the Buildings Ordinance if circumstances so require it".

13. By a letter dated 14 October 1998, the Building Authority stated that "under the current policy of the Buildings Department, enforcement action on the remaining unauthorised building works mentioned in the letter of withdrawal dated 1 August 1997 will be taken if the unauthorised building works have posed an obvious hazard to life or property". A leaflet was enclosed which showed the current policy - immediate enforcement action would be taken for those unauthorised building works posing hazard to life or property; but for those works existing for some time and not posing an obvious hazard, enforcement action would be taken in sequence.

14. The upshot of the correspondence from the Building Authority, as I understand it, was that whilst it had withdrawn for the time being the order for the demolition of those unauthorised building works existing in 1985, it would still take enforcement action against the unauthorised building works on the property sooner or later: sooner (immediately) if they posed a hazard to life or property, and later (in sequence) if they did not.

15. Therefore there is clearly a risk of enforcement action by the Building Authority, not only on the "new" unauthorised building works, but even also on those detected in 1985, the subject-matter of the "withdrawal" letter of 1 August 1997.

16. Accordingly, in my judgment, there is a sufficient risk of enforcement action by the Building Authority to render the title objectionable.

- Risk of re-entry by Government as lessor

17. Then there is the question of the Government lease. By a letter dated 3 January 1997, the District Lands Officer had, for consideration stated and subject to the conditions stipulated, confirmed that certain extensions (coloured pink on the plan attached) would be allowed to be retained throughout the period when the existing house should be standing, notwithstanding the limits on gross floor area and number of storeys set out in Special Condition (5).

18. However, it is apparent from a comparison of the plan attached to the January 1997 DLO letter and the plan attached to the October 1998 Architect's Report that there were in 1998 more unauthorised building works with an increase in floor area than that permitted under the DLO letter. As the January 1997 waiver would not have been necessary if the gross floor area under the lease had not been exceeded, it follows that the additional unauthorised building works must also have been in contravention of Special Condition (5), a breach which would render the property liable to be re-entered and the title objectionable.

- Risk of action by co-owners under the DMC

19. Finally there is the question of action under the DMC. Clause 5 of the DMC provides that each party might at his own expense make any improvements inside the house of which he is entitled to the sole and exclusive use, occupation and enjoyment provided that such improvement did not contravene the Buildings Ordinance. Clearly that clause has been breached by the existence of the unauthorised building works, and the co-owners may take action.

Answer - Withdrawal of the demolition order

20. In purported answer to the requisitions, the Vendor had first relied on the withdrawal of the demolition order. As I have set out above, the withdrawal of the 1985 order was only temporary and the title is still objectionable by reason of the unauthorised building works.

Answer - Cl.21

21. The Vendor had also sought to rely on Cl. 21 of the Agreement which states that the Purchaser had inspected and was fully satisfied with and accepted in all respects the existing physical state, condition and finishes of the property and the fixtures and fittings therein and "shall not make any objection or requisition thereto or in connection therewith". Further no warranty or representation was given or made by the Vendor on, amongst other things, the physical state and condition of the property, the area of the property and the composition of the building or manner of construction.

22. The issue is whether that language is sufficient to preclude the Purchaser from objecting to the title on the basis of the unauthorized building works. I find that the Purchaser is not precluded from objecting to the title on that basis. Clause 21 is not drafted as widely as Clause 18(e) in Jumbo King v Faithful Properties. Moreover, there the Court of Appeal affirmed that a vendor would not be able to rely on such a clause in the event of non-disclosure.

23. Here the Building Authority's demolition order of 12 December 1985 had been registered against the property. The "withdrawal" letter from the Building Authority was in 1997, well after the present Vendor had acquired the property in 1994. Therefore the Vendor must have been aware of the fact that there still existed on the property unauthorised building works, which the Building Authority had ordered to be demolished in 1985 and which the Building Authority still considered illegal and subject to enforcement action, as indicated in its 1997 "withdrawal" letter. Quite apart from the above works, there were the additional works which were not covered by the Building Authority's letter or the District Land Officer's letter in 1997.

24. In my judgment, it does not avail the Vendor to rely on a clause such as Cl. 21 without his having first disclosed to the potential Purchaser the fact that there were unauthorised building works on the property.

Answer - Time for raising requisitions

25. The Vendor's solicitors also took the point that the Purchaser had raised a requisition too late by its letter dated 25 August 1998. Clause 17 of the agreement provided that any requisitions or objections in title had to be raised within 7 days of receipt of all the title deeds and documents otherwise the same should be considered as waived (in which respect time was of the essence).

26. The matters raised in the letter dated 25 August 1998 related to the additional floor space created by the unauthorised building works. It was merely a variation on the theme of the scope of the Government lessor's tolerance of unauthorised building works indicated in the District Land Officer's letter of 3 January 1997. That requisition No. (5) was first raised by the Purchaser's solicitors by letter dated 10 September 1997 to which the Vendor's solicitors replied by letter dated 19 September 1997. No objection was raised by the Vendor's solicitors then on the basis that the requisition was out of time, and the Purchaser's letter dated 25 August 1998 did not contain a new requisition.

Requisition No. (9) - no shares allocated to Car Parks No. 1 & 2

27. The property agreed to be sold was "All Those 3 equal undivided 12th parts or shares of and in All That piece or parcel of ... Rural Building Lot No.1010 ... Together with the exclusive right and privilege to the [sic] use occupy and enjoy of [sic] FIRSTLY ALL THAT HOUSE NO. 19A South Bay Road ... and SECONDLY ALL THOSE Car Parks Nos. 1 and 2 ..."

28. The Purchaser's requisition was that in relation to these Car Parks the Vendor had no interest in land to convey.

29. To deal with this issue, it is necessary to consider the history of the dealings in these Car Parks.

30. The development on the lot was a joint development by Annie Lam Young and Sze Kuen Investments Ltd. The development was to comprise 4 houses (Houses No. 19, 19A, 19B and 19C), each of which was intended to have 3 shares in the lot, making up a total of 12 shares. No shares had been allocated for the Car Parks.

31. In 1978, a Deed of Mutual Covenant was entered into between the developers and the first purchaser. By the Deed, the first purchaser acquired 3 shares and exclusive possession of House No.19C, and the developers (who held 9 shares) retained exclusive possession of, amongst other things, House No.19B (the developers then still in the course of developing Houses No.19 and 19A) and these Car Parks.

32. In 1980, there was a Deed of Exchange between the two developers (as tenants in common of 6 shares in the lot) by which Annie Lam Young was assigned 3 shares together with exclusive possession of House 19A, and Sze Kuen was assigned 3 shares together with exclusive possession of amongst other things, House 19 and Car Parks Nos. 1 and 2.

33. On the same day, Annie Lam Young assigned to Jen Chieh Investment Co. Ltd. 3 shares in the lot and exclusive possession of House 19A.

34. Some 8 years later, in 1988, Sze Kuen purported to assign to Jen Chieh "ALL THAT the sole and exclusive right and privilege to hold use occupy and enjoy ALL THOSE CAR PARKS NOS. 1 and 2" "to the intent that the Car Parks shall attach and be appurtenant to" House 19A. No shares in the lot were assigned by Sze Kuen to Jen Chieh.

35. In 1994, Jen Chieh assigned to the Vendor in this action "ALL THAT the estate right benefit and interest of and in FIRST ALL THOSE 3 equal undivided 12th parts or shares of and in ALL THAT ... RURAL BUILDING LOT NO. 1010 Together with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT HOUSE NO.19A and SECONDLY ALL THOSE CAR PARKS NO. 1 and 2 ...".

36. The critical transaction in the history of the dealings recounted above is the purported Assignment of the Car Parks by Sze Kuen to Jen Chieh in 1988. It is clear from Lai Wing Ho v Chan Siu Fong [1993] 1 HKLR 319 (as affirmed in the Court of Appeal in Jumbo King v Faithful Properties) that a right to exclusive use of land (as an incident in land) can be created only as an incident to the ownership of an undivided share in the land.

37. No share in the land changed hands between Sze Kuen and Jen Chieh by the purported 1988 Assignment. Therefore, what Jen Chieh could acquire from Sze Kuen was at best a licence which was personal to Jen Chieh. Such a licence was not an interest in the land which Jen Chieh could assign to the Vendor here, and it follows that the Vendor had no right to exclusive possession of the Car Parks which it could convey to the Purchaser.

38. The Court of Appeal judgment in Jumbo King v Faithful Properties did not challenge the decision in Lai Wing Ho. In Jumbo King, no shares were allocated to certain parts (e.g. the flat roofs), but the developer had reserved exclusive possession to himself at a time when he still had shares in the land together with exclusive possession of certain units. When the developer assigned his shares, he gave exclusive possession to the purchaser of, not only those units, but also the flat roofs. That was valid under the law as the exclusive possession of the flat roofs was being passed as an incident to the ownership of shares in the land.

39. That is very different from this case where Sze Kuen had not assigned any shares in the land when it purported to "assign" exclusive possession of the Car Parks to Jen Chieh.

40. By reason of the above, I would agree with the Purchaser that requisition No. (9) had not been satisfactorily answered by the Vendor, and that the Vendor has failed to show that it has good title to the Car Parks.

Order

41. Accordingly, I would grant a declaration in terms of paragraphs (1)(i) and (ii), paragraph (3), and paragraph (4) of the Originating Summons. I would make no order in relation to paragraphs (5) and (6) as the Purchaser has not at this stage terminated the Agreement. I would make an order nisi that the Plaintiff should have its costs.