LINK HARVEST LTD. AND ANOTHER v. WAYHANG DEVELOPMENT LTD.

HCA 13971/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13971 OF 1997

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J U D G M E N T

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1. This is an action concerning two sale and purchase agreements both dated 15 September 1997. The subject matter of the 1st agreement was the piece of land known as Lot No. 382 and extension thereto in DD 399 (the "1st Property") and the 1st Plaintiff was the purchaser under this agreement. The subject matter of the 2nd agreement was the piece of land known as Lots Nos. 91, 92 and 440 RP in DD 399 (the "2nd Property") and the 2nd Plaintiff was the purchaser under this agreement. The Defendant was the vendor under both agreements. The price of the property under each of the agreements was $30 million. In respect of each of the agreements, a sum of $6 million, being 20% of the purchase price had been paid by the time of the signing of the agreements on 15 September 1997. The balance of the purchase price was payable on completion. The date of completion under each of the agreements was 5 December 1997.

2. The properties were adjoining properties. The terms of the agreements were virtually identical. Each of the agreements contained a clause that completion of the sale and purchase of the property shall be conditional upon the completion of the sale and purchase of the property under the other agreement. Apart from this clause, the agreements also contained the usual clause that time shall be of the essence to the agreement. In respect of the 1st agreement, there is a special clause that the purchaser is aware that the Government Lease (New Grant No. 2231 and New Grant No. 2401) in respect of the 1st Property was missing and the purchaser shall not raise any requisition or objection in relation thereto. No such similar clause is found in the 2nd agreement.

3. It is common ground that the 2 purchasers were shell companies established or acquired purely for the purpose of buying the properties. They were beneficially owned by the same person or group of persons.

4. Within the time allowed for raising requisitions, the purchasers' solicitors raised certain requisitions in respect of the title to each of the properties. The vendor's solicitors gave certain answers which did not satisfy the purchasers' solicitors. In the end, there was no completion on the completion date. On 5 December 1997, the purchasers' solicitors demanded the return of the deposits on the ground that the vendor has failed to answer the requisitions and was unable to deliver vacant possession. On 12 December 1997, the vendor sought to terminate the agreements and forfeit the deposits on the ground of the purchasers' repudiation of the agreements.

5. The point about vacant possession turned on certain alleged encroachment to the properties. However, this was not pursued in the hearing before me. Hence the question before me is whether the requisitions were properly answered. In view of the special condition that the obligation to complete under one agreement was dependent on the completion of the other, if one of the purchasers is justified to refuse to complete under its agreement, the other would also be justified to refuse to complete the other agreement as well. Thus if the purchasers should succeed in showing that the requisitions had not been properly answered in relation to any one of the agreements, the purchasers would be successful in relation to both agreements.

The 1st agreement

Lot history of the 1st Property

6. Lot No. 382 in DD 399 was in fact an old schedule lot granted under a Block Crown Lease. In 1939 this Lot No. 382 together with Lots Nos. 91 & 92 were assigned to F M Twiggs. On 19 July 1940, F M Twiggs obtained from the Government a lot known as Lot No. 382 extension by public auction. This lot was described in the memorandum of sale as a garden lot and the grant of the lot was subject to the General Conditions and Special Conditions Nos. 1(a) & (b) set out in Government Notification No. 364 of 1934. In fact General Condition 16 of Government Notification No. 364 was amended on 12 January 1940. For the present purposes, the relevant terms in these conditions are General Conditions 9 & 16, and Special Condition 1, which are set out below :

"General Conditions :

(b) ....

If the Purchaser shall neglect or fail to comply with any other of these conditions, His Majesty may re-enter and resume the property as if no sale had taken place in which case the premium paid by the Purchaser shall be wholly forfeited to His Majesty.

(b) The Purchaser, his executors, administrators or permitted assigns shall not, except by way of mortgage, assign, underlet or part with the possession of or otherwise dispose of the lot or any part thereof or any interest therein nor enter into any agreement so to do, without the previous consent in writing of the District Officer, unless and until the District Officer shall have issued a certificate to the effect that the building condition, if any, has been fulfilled to his satisfaction or if there is no building condition, that the lot has been developed to his satisfaction.

Special Conditions

1. (a) No buildings of any description shall be erected on the lot.

(b) The Purchaser shall not during the term for which the lot is sold permit or allow the land to remain uncultivated according to the custom of the country for a period of two consecutive years at any time after the date on which the lot is sold."

7. On 8 April 1948, F M Twiggs sold Lots Nos. 91, 92, 382 and 382 extension all in DD 399 to Madam Leung Ngai Sau (hereinafter called "Leung"). I pause here to note that by 8 April 1948 the Government must have been satisfied that the said Lot No. 382 extension had been developed to the satisfaction of the District Officer. This is because under General Condition 16, there could not be any assignment of the lot unless the District Officer had given his consent to do so, or unless the lot had been developed to his satisfaction. There was no evidence of any consent by the District Officer to the sale of the lot to Leung. Counsel for the vendor submitted that once the lot had been developed to the satisfaction of the District Officer the effect of restriction of General Condition 16 was spent. I agree with such contention. It seemed to me that the purpose of General Condition 16 was to ensure that the land was developed in accordance with the conditions of the grant of the land. The restriction on alienation could be lifted in 2 circumstances. The first one is where the consent of the District Officer to the alienation was obtained. However, this was not a permanent lifting of the restriction. The condition made it clear that the permitted assignee would still be bound by the same restriction on alienation. The second circumstance of the lifting of the restriction was when the land was developed to the satisfaction of the District Officer. Upon this happening, the restriction on alienation ceased.

8. On the same day of the assignment, Leung obtained from the Government a building licence to enable him to erect a building not exceeding 3,000 square feet in area on Lot No. 382 extension subject to certain conditions set out in the licence. For the purpose of this action, the relevant conditions are :

1. The Licensee shall build and finish, fit for occupation, before the expiration of 24 calendar months from the date of the grant of the Licence, in a good, substantial and workmanlike manner, one or more good and permanent messuage or tenement upon some part of such lot, with walls, of stone or brick ... and in such manner as may be approved by the District Officer, and in all other respects to the satisfaction of the District Officer, and shall expend thereon in materials, improvements not less than the sum of $14,000. Provided that notwithstanding any default by the Licensee in complying with the condition and notwithstanding any acceptance on behalf of the Crown of any Crown rent or other payment whatever, the Distinct Officer may in his discretion, and whether the Licensee consent or not, fix at any time and from time to time any extended period for the completion of any of the said building in substitution for the said period of 24 months and thereupon the obligation hereunder of the Licensee to complete the said building shall be taken to refer to such substituted period, and the right to re-entry reserved in the conditions under which the land is held from the Crown shall arise upon default of completion within such substituted period as if it had been the period originally provided.

2. The Licensee, his executors, administrators, or permitted assigns, shall not sell or otherwise dispose of or assign the lot or any part or interest therein without the previous consent in writing of the District Officer, unless or until the District Officer shall have issued a certificate to the effect that the building covenant has been fulfilled to his satisfaction.

3. All the Special Conditions, except Special Condition No. 1 published in G.N. 364/34 shall be observed by the Licensee, except that the word "Purchaser" shall where it occurs, be replaced by the word "Licensee".

9. The licence also contained an endorsement :

"N.B. - The approval of the building by the District Officer, N.T. must also be obtained."

The requisition & objection

10. By their letter dated 12 September, 1997 the purchasers' solicitors raised inter alia the following requisition in relation to the 1st agreement :

"Building Licence No. 214 dated 8/4/1948 in respect of extension to lot no. 382 - please provide evidence to show that building covenant under Condition 1 has been complied with and that consent has been given by the District Officer, New Territories for alienation of the lot under Condition 2."

11. It is common ground that at least as on the date of the agreement, there was a building erected on Lot No. 382 extension. The purchasers having inspected the property, I think it is also safe for me to assume that the building does not exceed the area of 3,000 square feet because there was no requisition being directed at the size of the building on the lot. What the purchasers were concerned with was that there might be a breach of Condition 1 of the Building Licence if the building was not of the material and design approved by the District Officer and was not completed within the building covenant period of 24 months or any extension given. The purchasers argued that if there was non-compliance of the building covenant, then there would be a risk of re-entry by reason of General Condition 9. The purchasers further argued that unless and until the District Officer had issued a written certificate to say that he was satisfied that the building covenant had been complied with, any assignment of the lot would be in breach of Condition 2 of the Building Licence. Thus unless this certificate was shown, there would be a risk of re-entry because the lot had been assigned on a number of occasions in the past and of course the vendor could not assign the property to the purchaser on this occasion unless a specific written consent to assign from the District Officer was obtained.

The answer

12. As to the purchasers' requisition and objection, the initial answer given was the building licence pre-dated the intermediate root of title. By that I understand the vendor to be contending that since the intermediate root of title in this case was the assignment in 1965, in the absence of any evidence to suggest any breach of the licence conditions, it would not be necessary to positively show compliance with the terms of the building licence which was given in 1948. In the hearing before me, this answer was not maintained. Instead, the ultimate answer relied upon by the vendor was that in all the circumstances of this case which had been brought to the notice of the purchaser, the District Officer must be taken to have been satisfied that the building covenant had been complied with. Further in all the circumstances of this case, the covenant against alienation must be taken either (1) as having been spent because the District Officer must have been taken to have been satisfied that the building covenant had been performed and also to have given the written certificate to that effect; or (2) waived. Further or alternatively, there was really no risk of the Government taking any action to forfeit the lease even if there was any breach of the building covenant and the covenant against alienation.

Assessment

13. In my judgment, it is quite obvious that a building must have been erected at the lot shortly after the grant of the building licence. Although there was no direct evidence on when the building now found at the lot came into existence, there was evidence of the grant of a miscellaneous permit to Leung on 12 September 1951 permitting him to run pipeline over Crown land leading from the stream course to Lots No. 382, 91 & 92 in DD 399. Of course, the permit did not refer to Lot No. 382 extension, but there is no question that the extension must be immediately adjacent to Lot No. 382 and in fact all these lots were assigned to Leung on the same occasion. This permit would show that at least by 1951 there must be some development on the whole site purchased by Leung in 1948.

14. In 1957, Leung died. In the schedule of property annexed to her probate, the property at Lots Nos. 91, 92, 382 and 382 extension was described as "3 Pine Lodge", Castle Peak Road, thus indicating that by the time of her death, there must be some buildings erected on these lots. On 26 March 1965, her executor, Kwok Pui Cheung, assigned the 1st and 2nd Properties to one Ada Kwok in consideration of $280,000. There was nothing in the recitals to this assignment to show that this assignment had received the prior consent in writing of the District Officer. This would support the inference that no approval was required because the District Office must have been satisfied that the building covenant was performed and must have issued a certificate to that effect. Ada Kwok died on 29 March 1980. In her life time, she had sold Lot No. 440 RP of the 2nd Property to one Edward Cannon for $330,000. On 2 May 1983, the executrix of Ada Kwok assented the 1st Property and Lots Nos. 91 & 92 to Chung Ho Kei and Chung Kwok Fai in equal shares. The land search of the 1st and 2nd Properties showed that on 23 December 1991, Lots Nos. 91, 92, 382 and 382 extension were assigned to Queen's Electronic Manufacturing Ltd., who later assigned these lots to Union Full International Ltd. on 20 January 1992. On 10 November 1992, Union Full International Ltd. assigned these lots to the Defendant.

15. Apart from the history of the dealings of the 1st Property, the vendor also drew my attention to the photographs of the building found on this Lot No. 382 extension in 1997. The photograph did indicate that this was quite an old building and was rather dilapidated too. However, just from the photographs alone, I do not think that I can come to any conclusion on the age of the building. However from the schedule to the probate of Leung's will, and also from the terms of an assignment of the Mountain Lodge of the 2nd Property in 1972 which will be considered below, I am of the view that it must be plain and obvious that the building found at Lot No. 382 extension in 1997 must have been erected latest by 1957.

16. In fact the contention of the vendor was that since the building covenant would prima facie require the building to be completed within 24 months from 8 April 1948, failing which there was a right on the part of the Government to forfeit the land, in the absence of any evidence to show that the Government had taken any steps to forfeit the land or to enforce this covenant, it gave rise to a strong inference that the covenant had been complied with within the time allowed by the covenant. I agree with this contention. As regards the restriction against alienation, the vendor's submission was that there would be no restriction against alienation after the building covenant was complied with and a certificate to such effect had been given. Since there was such strong evidence giving rise to the inference that the building covenant must have been complied with, there should also be an inference that the certificate had been given. At any rate, the lot had been disposed of in 1965, 1991 and twice in 1992 without any protest or objection from the Government. At least in 1965, the District Office was the office in charge of the registration of the assignments and was also the office in charge of the compliance of covenants in Government leases and licences. While it may be the case that there were different officers being entrusted with the task of registration and lease term enforcement, the District Office as a whole must be taken to have constructive knowledge of the disposal of the lot in 1965. The Government having received the rent for the lot continuously from 1948 to date could not now be heard to say that it had not waived its right to forfeit the Government lease in respect of Lot No. 382 extension either on account of the failure to comply with the building covenant or the breach of the covenant against alienation.

17. The purchasers however argued that under Condition 1 of the Building Licence, there was power on the part of the District Officer to grant an extension of time for the compliance of the building covenant. It was argued that it might be possible that the period for the compliance had been extended. Furthermore, the purchasers also pointed to the fact that on 19 September 1997 the vendor's solicitors wrote to the District Lands Office asking that office to check their records and to supply them with a certified copy of any consent letter in their record and also to confirm that the office had no objection to the building presently erected on the lot or to any proposed sale of the lot, but instead of supplying any evidence of compliance of the building covenant or consent to the alienation of the lot, the District Lands Office wrote back on 13 October 1997 to say that that Office had no record showing that the building covenant had been complied with or any consent having been given for the assignment of the lot and nothing was said in response to the invitation to confirm that the Lands Department would have no objection to the building presently erected on the lot or to any proposed sale of the lot. The purchasers submitted that this letter would in fact create more problems for the purchasers in that it showed that the Government did not take the attitude that the building covenant had been complied with nor did the Government accept that it had lost its right to enforce any breach of the building covenant or the covenant against alienation.

18. In my judgment, it would be fanciful to suggest that the Government might have extended the time for complying with the building covenant, as there is simply no evidence of any such extension. Even if there were some extension of time, plainly it would be ludicrous to suggest that the time for compliance had not long expired. In fact from the reply of the District Lands Office, it is plain that the Government had no record whatsoever on whether the building covenant had been complied with or not, nor had the Government any record to show any extension of time. However, it is equally clear that the Government has not ever tried to suggest that the covenant has not been complied with. Although the District Lands Office would not make any admission that it had no objection to the building, it is also plain that the Government did not have any record of any breach or non-compliance of the building covenant. If there were in fact such record, it would be very surprising that the District Lands Office would not have pointed this out in their reply letter of 13 October 1997. Although the limitation period for the Government to take forfeiture proceedings is 60 years and that period has not yet elapsed, in the present case, if the Government were to take any action to forfeit on the ground of non-compliance with the building covenant, the Government would have to bear the burden of proof that there was in fact a breach of the covenant. The question is in what way could it be said that the building covenant was broken? Now that there was in existence a building standing on the lot, it would be difficult to say that the covenant was broken because there was no building erected at all. Having regard to the size of the building, it would be unrealistic to suggest that the building or structure erected did not amount to a rateable improvement of $14,000. If it were to be suggested that the covenant was broken because the structure was not erected within the 24 months period, it is difficult to see what evidence could the Government adduce to show that there was delay in complying with the covenant. In all the circumstances of this case, bearing in mind the long lapse of time and the apparent lack of record on the part of the Government, in my view it would be fanciful to suggest that in 1997 there was any real risk of the Government taking any action to re-enter or to enforce the building covenant in Condition 1 of the Building Licence.

19. In relation to the restriction of alienation in Condition 2, the argument of the purchasers was 2 folds. First it could be said that since there was no written certificate to show the compliance of the building covenant under Condition 1, nor any record to show that the District Officer had consented to the assignment of the lot in 1965, 1991 & 1992, these assignments of the lot in the past might constitute breaches of Condition 2 and the Government may take action to re-enter on account of these possible breaches. Secondly, unless the restriction of alienation was spent in the sense that there was due compliance with the building covenant under Condition 1 and also the issuance of the certificate, or unless there was an irrevocable waiver of this Condition 1 on the part of the Government, the assignment of Lot No. 382 extension to the 2nd purchaser would require the consent of the District Officer (or the District Lands Office), and from the letter of the District Lands Office dated 13 October 1997, the District Lands Office had refused to grant the necessary permission for the lot to be assigned.

20. In my judgment, for reason set out already, it would be absolutely unrealistic to suggest that the Government would take a stance that there was in fact no compliance with the building covenant under Condition 1. If the building covenant had been complied with, it was difficult to see on what ground the District Officer could refuse to issue the certificate, and in my view, in such circumstances, the issuance of the certificate would be a matter of formality. This being the case, it would likewise be unrealistic to suggest that the Government may nevertheless attempt to take the technical point that although there was compliance with the building covenant, yet because for one reason or another the District Officer had not issued a certificate and hence the lot could not be assigned. In Jumbo Gold Investment Ltd. v Yuen Cheong Leung (2000) 3 HKCFAR 52, the Court of Final Appeal held that it would be unrealistic to suggest that the Government would enforce the covenant on height restriction in the light of the fact that there were many pieces of land on the south side of Hong Kong Island which were subject to such covenant and there were many buildings obviously exceeding the height restriction on those pieces of land including the one under consideration by the Court. The Government not having enforced this covenant for years would be most unlikely to suddenly seek to enforce the covenant and claiming that the Government was not aware of the breaches of the covenant which had taken for a long time. Although the facts and consideration in the present case were not the same as those in Jumbo Gold, in my judgment, Jumbo Gold did illustrate that the conveyancing parties should take a realistic view on the behaviour of the Government and one should not assume that the Government would do anything capricious or irrational.

21. To the same effect was the observation of Findlay J in Teng Fuh Company Ltd. v Keen Lloyd Holdings Ltd. (HCMP No. 2438 of 1998), which was upheld by the Court of Appeal (CACV No. 139/99). Findlay J said :

"In considering this question [i.e. whether the Government will take forfeiture action in respect of a breach of Crown lease], I am I think, entitled to make some assumptions. And these assumptions are the same as those that any sensible, prudent and experienced solicitor should make in deciding whether to advise a client to accept title ...

... one must assume that the public servant making this decision would act sensibly, with proper regard to all the circumstances, and not capriciously or vindictively".

22. Thus in my judgment, it is fanciful to suggest that in 1997, the Government would take the point that there were breaches of Condition 2 of the Building Licence and seek to forfeit Lot No. 382 extension. Since it would be unlikely that the Government would take the stance that there was no compliance with the building covenant in Condition 1, it would also be unrealistic for the Government to take the stance that it would object to the assignment to the Plaintiff purchaser in this case. In this respect, although the District Lands Office had not indicated any view when being asked by the vendor's solicitors to confirm that they would have no objection to the present sale, in my judgment, this should not give rise to any inference that the Government might be minded to take objection to the sale. The letter from the District Lands Office of 13 October 1997 ended with the suggestion that the vendor's solicitors might like to check with the Building Department whether an occupation permit had been issued in respect of the building on the site. Plainly whether the Building Department had issued any occupation permit would not relevant to the question of any breach of the building covenant under Condition 1 or restriction on alienation under Condition 2. Thus in my view, given that the District Lands Office had already been appraised of the situation, if the Government was ever minded to reserve its position on the taking of any enforcement action on those conditions, one would have expected the District Lands Office to expressly reserve the right of the Government in the letter and not just make a suggestion to check with the Building Department when the result of the checking could not have any effect on the compliance with the 2 conditions. Certainly in relation to the pending sale of the lot to the Plaintiff, if the Government were minded even to reserve its right to object to the sale under Condition 2, one would have expected the District Lands Office to expressly say so. In my judgment it would be unrealistic to suggest that the Government would deliberately keep quiet and then seek to enforce Condition 2 after the parties had completed the sale.

23. Furthermore, the view that the Government would in all probabilities take the view that the building covenant had been complied with is also supported by a letter dated 3 January 1992 from the District Lands Office in reply to a letter from Vickers Hong Kong Ltd. In this letter the District Lands Office having referred to Lots Nos. 91, 92, 382 and 382 extension said :

"... this office would not be prepared to issue certificate of satisfaction now. However in view of the absence of office records showing the contrary, General Condition No. 16 of GN 364/34 as amended by GN 50/40 in respect of Lot No. 382 extension in DD 339 is deemed complied".

Of course, this letter could not be conclusive because in the absence of the letter of Vickers Hong Kong Ltd. it is difficult to know exactly the context of the letter. Furthermore, the letter of 3 January 1992 merely spoke of the deemed compliance of General Condition 16 and it was by no mean clear whether the District Lands Office was referring to the compliance of General Condition 16 when the land was developed to the satisfaction of the District Officer before the grant of the Building Licence or to the compliance with the building covenant imposed by the Building Licence. However, in my view counsel for the vendor was right in contending that at least this letter would show the general approach of the Government that before the Government would take any drastic stance of seeking to forfeit a piece of land the Government would act on positive evidence in its record. Furthermore, this letter also supported the view that the Government would not assume and act on the basis that there was no compliance of the covenant or certificate of satisfaction simply on the basis of the absence of any record of the issuance of such certificate of satisfaction although the Government would not in the 1990s issued a certificate of satisfaction which should or would have been issued many years before. Indeed this letter confirmed the view that the Government would assume that there was compliance with the conditions in the absence of any record or evidence to the contrary.

24. Thus in my view, the vendor was right in suggesting that in all the circumstances of this case, particularly in the light of the long lapse of time, it is fanciful to suggest that there was still a risk of the Government taking forfeiture action on the ground of non-compliance with Conditions 1 & 2 of the Building Licence. I am thus of the view that the requisition in relation to the 1st Property has been sufficiently answered and the objection to the title fails.

The 2nd agreement

Lot history of the 2nd Property

25. Lots Nos. 91 & 92 are old schedule lots and were acquired by F M Twiggs on 13 March 1939. The history of the subsequent dealings of these 2 lots has been set out already. Madam Leung, in her life time had also become the owner of a piece of land then known as Lot No. 412 in DD 399. This lot was immediately adjacent to Lot No. 382 extension. There is no information before me as to the terms of the grant of this Lot No. 412 save and except that it was a piece of building land. After the death of Leung, her executor effected an exchange of land with the Government. By a New Grant No. 4036 dated 29 May 1963, the Government agreed to grant a piece of land known as Lot No. 440 in exchange for the surrender of this Lot No. 412. It is really in the Schedule to Particulars and Conditions of Exchange in this New Grant No. 4036 that one could see that the old Lot No. 412 was building land. Also from the plan annexed to this New Grant one could see that although the areas of the old Lot No. 412 and the new Lot No. 440 were almost the same and that the locations of the 2 lots were also almost the same, the shapes of the 2 lots were quite different. Hence it could not be a case of an in situ exchange with modification of the terms of the grant only. As I have pointed out earlier, on 26 March 1965, Leung's executrix, Kwok Pui Cheung, sold both the 1st and 2nd Properties to Ada Kwok.

26. On 30 November 1972, Ada Kwok assigned Lot No. 440 to Edward Cannon. It is plain from the assignment that by then there was erected on Lot No. 440 a building known as Mountain Lodge. It was also plain from the assignment that the vendor Ada Kwok still retained some buildings nearby known as Three Pine Lodge and that both Mountain Lodge and Three Pine Lodge had been using a right of way through Three Pine Lodge for access to Castle Peak Road. In all circumstances of this case, in my judgment, Three Pine Lodge would be located at the 1st Property and from the plans annexed to the New Grant, it was likely that Three Pine Lodge was at Lot No. 382 extension.

27. In 1974 Edward Cannon surrendered the north-eastern tip of Lot No. 440 to the Government, and the remaining land in the lot was then known as Lot No. 440 RP. The area surrendered was about 138 square feet out of the total area of about 18,000 square feet. From the plan annexed to the surrender agreement, it is plain that there was a building at Lot No. 440 RP by 1974. The land search of Lot No. 440 RP showed that the lot had been sold and assigned on 31 October 1988, 16 March 1991, 12 July 1991, 5 December 1991 and eventually, on 10 November 1992, this lot was sold and assigned to the Defendant.

28. It is important to note that New Grant No. 4036 was merely an agreement for the surrender of Lot No. 412 in exchange of the grant of Lot No. 440. It was in the form of an agreement for the grant of Lot No. 440 on the General and Special Conditions set out in the grant. Insofar as the present case is concerned, the following are the material provisions :

General Conditions :

8. The fulfillment by the grantee of his obligations under these General and Special Conditions shall be a condition precedent to the grant or continuance of the tenancy and in the event of any default by the grantee in complying therewith such default shall be deemed to be a continuing breach and the subsequent acceptance by or on behalf of the Crown of any Crown rent or rates or other payment whatsoever shall not (except where the Crown has notice of such breach and has expressly acquiesced therein) be deemed to constitute any waiver or relinquishment or other prejudice the enforcement of the Crown's right of re-entry for or on account of such default ...

9(a) Should the grantee fail or neglect to observe or comply with any of the conditions of this Agreement the Crown shall be entitled to re-enter upon or retain the old lot, and to re-enter upon and take back possession of the lot and all buildings, erections and works thereon ...

10(a) When the conditions herein contained have been complied with to the satisfaction of the District Commissioner, New Territories, the grantee shall subject to approval of his title by the said District Commissioner be entitled to a Crown lease of the lot for the term stated in the preamble to these conditions.

Special Conditions :

6. The design, disposition and height of any building to be erected on the lot shall be subject to the approval in writing of the District Commissioner, New Territories.

22. In the event of any authorised building works on the lot being exempt from the provisions of Sections 4, 7, 9, 9A, 9B, 9C, 12, 14, 15, 19 and 20A of the Building Ordinance 1955, and the provisions of the Regulations made thereunder, the following conditions shall apply :-

(a) No building works, site development works or drainage works shall be commenced on the lot until such plans and other details as may be considered necessary by the District Commissioner, New Territories shall have been prepared and submitted in duplicate to and approved in writing by the said District Commissioner.

(b) No alterations or additions to the buildings at present standing or at any time hereafter to be erected on the lot shall be made without the consent in writing of the said District Commissioner.

(c) Within two weeks of the completion of any building hereafter to be erected on the lot the grantee shall inform the said District commissioner in writing of such completion.

(d) No building at any time hereafter to be erected on the lot shall be occupied in any way except by not more than two watchmen, until the said District Commissioner shall have given his consent in writing to the occupation of the building.

(e) Unless and only so far as otherwise provided in these Conditions, building plans, structural details and calculations in respect of any building at any time hereafter to be erected on the lot shall be prepared in accordance with the provisions of the Building Ordinance 1955, any Regulations made thereunder and any amending legislation.

29. It is also important to note that while there were many references to buildings in the General and Special Conditions, there was no building covenant in the New Grant, nor was there any restriction on alienation until the completion of certain building or development on the land to be granted, which was a common feature of the conditions for the grant of building land in Hong Kong and which should be well known to all conveyancers.

The requisition

30. By their letter of 12 September 1997, the purchaser's solicitors raised the following requisition :

"Under Special Condition 6, the design, disposition and height of any building erected on the Lot shall be subject to the approval in writing of the District Commissioner, New Territories. Please therefore send us the relevant approval for our perusal. In addition, under Special Condition 22, any exempted building works have to be approved in writing by the District Commissioner, New Territories, we shall be obliged if you can let us have evidence of the same".

31. In the course of the exchange of the correspondence it became clear that the purchaser was asking for evidence to show that the building erected on Lot No. 440 RP was not in breach of the provisions of the New Grant so as to give rise to a risk of forfeiture of the grant by the Government, and further the building erected would not be subject to the risk of enforcement action by the Building Authority as being an unauthorised structure under the Building Ordinance.

The answer

32. The initial answer given by the vendor was that New Grant No. 4036 was entered into before 1 January 1970 and it was asserted that all conditions in the New Grant were deemed to have been complied with under Section 14(2) of the Conveyancing and Property Ordinance. The point sought to be made was that since all conditions in the New Grant were deemed to be complied with, then there could be no risk of any forfeiture. Counsel for the vendor did not rely on this answer before me. It was further said that the structure now found at Lot No. 440RP was already there at the time of the New Grant. The suggestion was that the structure being there before the commencement date of the application of the Building Ordinance 1955 to the New Territories and was not in any way affected by the Building Ordinance. This point was again not pursued before me. Instead, in the later correspondence as well as before me, the vendor's answer was (a) in all the circumstances of this case, including the lapse of time and the fact that the Government must be aware of the existence of the building on the lot latest by 1974 when a small part of Lot No. 440 was surrendered, even if the building on the lot was in some way in breach of the conditions of the New Grant, the Government must be taken to waive such breach; (b) as a supplementary point to (a), it was contended that the risk of any enforcement action for breach of conditions of the New Grant or under the Building Ordinance was fanciful; and (c) even if there was any potential risk of enforcement, in the special circumstances of this case where the vendor asserted that the purchaser bought the property for development purposes, there was substantial performance of the bargain by the vendor, such that specific performance of the agreement could be forced on the purchaser even against its will.

Assessment

The risk of forfeiture

33. The risk of forfeiture would arise if there was a breach of the provisions of the New Grant. In this respect, the relevant provisions would be Special Conditions 6 & 22. To show that there was a breach of Special Condition 6, it would be necessary to show :

(a) There was a building erected on the lot since the New Grant; and

(b) The design, disposition and height of the building so erected had not received the approval of the District Commissioner, New Territories.

To show a breach of Special Condition 22, it would be necessary to show :

(a) There was some building works performed at the lot since the New Grant;

(b) Those building works were exempted from the provisions of Sections 4, 7, 9, 9A, 9B, 9C, 12, 14, 15, 19, & 20A of the Building Ordinance 1955 and the regulations made thereunder; and

(c) There was non-compliance of any of the requirements under (a) to (e) of Special Condition 22. In general terms, those requirements related to the obtaining of the approval of the works by the District Commissioner, New Territories.

34. Thus the position is clear that if by the time of the New Grant in 1963, the building now found at the lot was already there, then in the absence of any suggestion that there were any subsequent building works, there could be no question of breach of the conditions in the New Grant. In this respect although in answering the requisition the vendor's solicitors had averted to the fact that the building on the lot was there before the exchange, the point was not seriously pursued before me at all. The point made by the vendor's solicitors in correspondence was based on the somewhat unusual provisions in the Special Conditions in the New Grant. The New Grant was made in consideration of the surrender of an existing Lot No. 412 which was roughly of the same size and there was no building covenant in the new grant. All these would no doubt point to the probability that it was a surrender and re-grant of a piece of land with some modification of the lot boundary and as the existing lot had already been developed, there was no need to have any building covenant. I would also add that Special Condition 22(b) which provided that "no alterations or additions to the building at present standing or at any time hereafter to be erected on the lot shall be made ... ", would further support the inference that there was in fact a building at the lot at the time of the New Grant. There was every indication from the terms of the Special Conditions that the conditions were drawn up to meet the special feature of this lot. Of course it might also be argued that there was also some contra indication in that there was no building shown within Lot No. 412 or 440 in the plans annexed to the New Grant. However, I do not think that the purpose of the plan was to show the details of what was in the lot. In my view the plan was merely used to identify the location and the size of the lot to be surrendered and the lot to be granted.

35. Thus in the absence of any evidence to suggest that the building now found on the lot was erected after the New Grant, I would have been prepared to hold that the building found on the lot in 1997 was there already at the time of the New Grant and hence there would be no risk of forfeiture action by the Government on the ground of the breach of the conditions. However, as this point was not pursued in the argument before me, I do not think that it is right for me to base my decision on this point.

36. Instead, the vendor relied on the assignment of Lot No. 440 to Edward Cannon on 30 November 1972. In this assignment, it was clear that there was erected on Lot No. 440 a building known as Mountain Lodge which formed part of the subject matter of the assignment. The vendor further relied on the surrender agreement of 19 June 1974 whereby the said Edward Cannon surrendered to the Government some 138 square feet of the north-eastern tip of Lot No. 440 in consideration of $7,000. In the plan annexed to the surrender agreement, it was clearly shown that a building structure was found at the remaining portion of Lot No. 440. Thus it was submitted that the Government must be aware of the existence of the structure on Lot No. 440RP latest by June 1974. There was no enforcement action taken by the Government at all. In the circumstances, it was submitted that the Government must have waived the rights to forfeit the grant, and the risk of such forfeiture action was fanciful.

37. The purchaser on the other hand referred to the vendor's solicitors letter of 29 September 1997 to the District Lands Office. In that letter, it was pointed out that there was no occupation permit or a written approval for exempted building works under Special Condition 22 on the lot. The solicitors asked if the District Lands Office had any evidence to show that the building works were approved pursuant to Special Condition 22 or whether an occupation permit had in fact been issued, and if no such evidence was available, the solicitors also asked for a written confirmation that the District Lands Office would have no objection to the building erected on the lot. In reply, instead to saying whether the District Lands Office had any objection to the structure, the District Lands Office by its letter of 27 October 1997 merely said that (a) the then District Commissioner, New Territories has once given his approval to the building plans under Special Condition 6 on 26 April 1976; and (b) the then District Commissioner, New Territories had not given any approval to the building works under Special Condition 22. The letter ended with the suggestion that the vendor's solicitors may enquire from the Buildings Department as to whether any occupation permit in respect of the building erected on the lot had been issued. In the light of this letter, it was suggested that there may be a doubt as to whether the building now found at the site was the one erected in pursuance of the permission given on 26 April 1976, and if so, whether the requirement of Special Condition 22 had been complied with. Furthermore, it was suggested that this letter rather than giving comfort to the purchaser that no objection would be raised as to the structure by the Government, in fact indicated that the Government was unwilling to waive any objection to the structure.

38. In my judgment, the fact that a permission for some design of a building was given in 1976 did not mean that that design had been pursued. There was no evidence of any building works at the site at any time. If in fact, the present structure was the product of the design in 1976, then plainly it would involve some very major work in pulling down the building existing in 1974 and in erecting the present building which was a very big building. If the nature of the building to be built was such that it would be exempted from the provision of Sections 4, 7, 9, 9A, 9B, 9C, 12 14, 15, 19 and 20A of the Building Ordinance, the District Commissioner having been alerted to the intention of the erection of a new building, could hardly be expected not to pay any further attention to the lot and he would not have allowed the building works to take place without complying with Special Condition 22. The suggestion made by the District Lands Office that the solicitors may like to check with the Buildings Department on whether an occupation permit had been issued would suggest that the nature of the design approved by the District Commissioner in 1976 would be such that the designed building would require the approval of the Buildings Department and was not exempted from the various sections of the Building Ordinance 1955. The fact that the Buildings Department had no record of any occupation permit would suggest that either the work had simply been done without the consent and approval of the Buildings Department, or in fact there was no building work done in pursuance of the design approved in 1976 at all. Thus in my judgment, the information contained in the District Lands Office's letter of 27 October 1997 did not give rise to any inference that there was in fact any building works done since 26 April 1976. Certainly there was nothing to suggest that there might be any breach of Special Condition 22.

39. Furthermore, it is plain that the size of the building now found at Lot No. 440RP was such that it would not be exempted from the application of the various sections of the Building Ordinance 1955. Hence whether in fact this building was erected in breach of the Building Ordinance or not, it is clear that it would not be caught by Special Condition 22 which only applied to building works which were exempted from the application of the various sections of the Building Ordinance 1955.

40. In the circumstances, in my judgment, there was no basis to query whether there was any non-compliance of Special Condition 6 or 22 since at least 19 June1974 (if not since the date of the New Grant in 1963). Even if there were any breach of Special Condition 6 or 22, the same must have been known to the Government since latest by 19 June 1974, and as the Government had continued to receive rent and taking no action to forfeit the grant, the Government must have waived the right to forfeit the lease. This would be so notwithstanding General Condition 8. In my judgment the words "except where the Crown has notice of such breach and has expressly acquiesced therein" in General Condition 8 could not mean that there could be no waiver of the right to forfeit except when the Crown had made an express statement that it was not going to forfeit. In my judgment there was an inherent conflict in the use of the word "express" and "acquiesced". It is implicit in the word "acquiesced" that no express word of consent is required. The conflict is to be resolved in favour of the grantee. In my view General Condition 6 merely prevented the receipt of the rent per se to give rise to the waiver of the right to forfeit. It would not prevent a waiver of forfeiture from arising where there was positive evidence that the Crown had notice of the event giving rise to the right to forfeit and also the Government having done something other than the receipt of the rent which would indicate that the Government would not elect to pursue the remedy of forfeiture. In the judgment, there was ample evidence to show that the Government must have waived any right to forfeit even if there was any breach of Special Condition 6 or 22. First, the Government had accepted the surrender of part of Lot No. 440 in 1974. Secondly, the District Commissioner had given consent to certain building plans under Special Condition 6 in 1976 which would indicate that the Government would elect to treat the lease as continuing.

The risk of enforcement action by the Buildings Department

41. It is well settled that although the enforcement action by the Buildings Department would not affect the leasehold estate to be sold, it may affect title of the property to be sold because it may, in most cases where the subject matter of the sale was a building or part of a building, affect the purchaser's enjoyment of the building or that part of the building agreed to be sold to him.

42. The current Building Ordinance was first enacted in 1955. This Ordinance replaced and repealed the Building Ordinance of 1935. The Ordinance of 1935 regulated building works by prescribing details of the requirements as to the various components of building works such as the thickness of walls etc. Most of that Ordinance was expressly made not applicable to the New Territories. The Building Ordinance 1955 set out the modern scheme of control of building works. This Ordinance made it mandatory to appoint authorized person and registered contractor in respect of building works (Sections 4 & 7). The Ordinance also made provisions for the requirement to obtain the consent from the Building Authority for the commencement of building works (Section 9). It also made provisions for the issuance of an occupation permit before a new building could be occupied (Section 12). It also gave the Building Authority power to stop any building works which did not comply with the Ordinance (Section 14), or to order the demolition of any building or erected in breach of the Ordinance or to effect such alteration works so as to make a building to comply with the requirements of the Ordinance (Section 15). It is however important to note that by Section 1 of the Ordinance, the Ordinance only applied to Hong Kong Island, Aplichau, Kowloon and New Kowloon, but with power given to the Governor in Council to order the Ordinance or any part of it to apply to the New Territories subject to such modifications and exemptions as the Governor in Council may deem fit.

43. The Building Ordinance 1955 was amended by the Building (Amendment) Ordinance 1959. This Ordinance replaced Part I (i.e. Sections 3-8) of the Ordinance of 1955. However, for the present purposes, the replaced Sections 4 & 7 made similar provisions for the requirement to appoint authorized persons and registered contractor for any building works. Section 9 of the 1955 Ordinance was also replaced by the more elaborated Sections 9, 9A, 9B & 9C. Basically Section 9 required the obtaining of the consent of the Building Authority in the prescribed form before the commencement of building works. Section 9A made provisions for the circumstances when the consent was deemed to have been given after the application was made. Section 9B made provisions prescribing the grounds on which the approval or consent may be refused. Section 9C made provisions concerning the impositions of conditions by the Building Authority when giving consent. Section 12 of the Ordinance was also amended so that the Building Authority may refuse to issue an occupation permit if the building works had been carried out in contravention of any provision of the Building Ordinance. Sections 14 and 15 were also re-written but essentially the replaced Sections 14 and 15 also made provisions for the Building Authority to order any building works in contravention with the Ordinance to stop, or to be removed, or to be rectified. There was only a small amendment to Section 19, and the section required that all drainage work to be carried out to the satisfaction of the Building Authority and in compliance with the regulations made under the Ordinance. Section 20A was introduced by this Ordinance. It provided for the requirement of the consent of the Building Authority for the commencement of building works for the construction, formation, laying out, or alteration of any means of access or opening to or from any street. However again, all these amended sections had no application to the New Territories.

44. The Building Ordinance 1955 (Application to the New Territories) Ordinance 1960 came into effect on 1 January 1961. By this Ordinance, the Building Ordinance was made to apply to the New Territories, but under Section 4 of this Ordinance, the Governor in Council may by regulation provided that such of the provisions of the Building Ordinance 1955 and such of the regulations made thereunder, as may be specified shall not apply to building works for the erection, alteration or demolition of, such buildings in the New Territories. However, by Section 6 of this Ordinance, it is clearly provided that Sections, 4, 7, 9, 9A, 9B, 9C, 11, 12, 19, 20A and 21(1) shall not affect any building works which were in the course of being carried out at the commencement of the Ordinance.

45. In exercise of the power under Section 4 of the Building Ordinance 1955 (Application to the New Territories) Ordinance 1960, the Governor in Council made the Building Ordinance 1955 (Application to the New Territories) Regulations 1960. Regulation 2 provided that :

"The provisions of sections 4, 7, 9, 9A, 9B, 9C, 12, 14, 15, 19 & 20A of the principal Ordinance and the provisions of the regulations made under that Ordinance shall not apply to building works for the erection, alteration or demolition of, or which are otherwise connected with, any of the following buildings, situated or to be situated in the New Territories -

(1) any dwelling house which -

(a) has, or when erected or altered, will have, a roofed over area of not exceeding 700 square feet; and

(b) is not, or, when erected or altered will not be -

(i) more than 15 feet in height, or

(ii) when no structural reinforced concrete was or will be used in its construction, more than 25 feet in height,

...

(2) any building which is not, or, when erected or altered, will not be, more than 15 feet in height ... which will be used solely for agricultural purposes"

(3) any building which is or, when erected or altered, will be used for the purpose of school and ... "

[It is to be noted that the Building Ordinance (Application to the New Territories) Ordinance 1960 and the Building Ordinance (Application to the New Territories) Regulations were both repealed and replaced with some modifications by the current Building Ordinance (Application to the New Territories) Ordinance Cap. 121, which came into effect on 16 October 1987]

46. Thus at the time of the New Grant in 1963, the Building Ordinance 1955 was already made applicable to the New Territories with the exemption from the application of various provisions in relation to certain types of buildings. As the size of the building on Lot No. 440RP is such that it could not fall within the exemption under Regulation 2 of the Building Ordinance (Application to New Territories) Regulations, then, the Building Ordinance might also apply to the building notwithstanding that the building might have already been erected on the lot by the time of the New Grant in 1963. It would only be exempted from the operation of the Building Ordinance if it was already there before 1 January 1961 or at least was in the process of being erected on 1 January 1961.

47. In the present case, although in my judgment one can safely conclude from Special Condition 22(b) that at the time of the New Grant, there was a building on Lot No. 440, I do not think that one is entitled to draw the inference that this building must have been there before 1 January 1961 or was in the progress of being erected on 1 January 1961. In this regard, it has to be pointed out that in the schedule to the properties annexed to the Probate of the Will of Leung, the 1st and 2nd Properties were described as "lots nos. 91, 92, 382 and 382 extension in D.D. 399 (3 Pine Lodge) Castle Peak Road, and lots Nos. 205 sec A and 205 sec A extension and 412 in D.D. 399". The probate was granted 30 December 1959. While the premises at Lots Nos. 91, 92, 382, and 382 extensions was also described as "3 Pine Lodge" which was suggestive of the existence of a building on those lots, there was no similar description of "Mountain Lodge" or the name of any building on Lot No. 440. This would rather suggest that the building "Mountain Lodge" had not yet been built by the time of the probate in late 1959.

48. In the circumstances, in my judgment, there is at least a reasonable risk that the building now at Lot No. 440RP would be caught by the provisions of the Building Ordinance 1955. If all the provisions of the Building Ordinance had been complied with, then one would expect that there would be an occupation permit being issued in respect of the building. In this regard, I would point out that the occupation permit is not a document of title in the sense that it would not form part of the chain of passing of the interest in the premises to be sold. In most cases, the purpose of the occupation permit is merely to show that the provisions of the Building Ordinance had been complied with, so that the purchaser could rest assured that there would not be the risk of an enforcement action by the Building Authority against the structure of the premises assigned to him. Hence I am of the view that the purchasers were perfectly justified to make requisition on the occupation permit.

49. The vendor's answer was that even assuming that the building on Lot No. 440RP would have been caught by the Building Ordinance 1955, there was really no risk of any enforcement action by the Building Authority because :

(a) The building had been there for a very long time, and from any point of view, it must have been there since the assignment to Edward Cannon in 1972 (and in my finding, it must have been there at the time of the re-grant in 1963), and the existence of the building must have been known to the Building Authority and no action had been taken against this building even up to today.

(b) At any rate if the Building Authority was to take action, the Building Authority must be in possession of reliable evidence to show that the building had been erected in breach of the provisions of the Building Ordinance. When enquiries were made of the Building Authority on 16 October 1997 as to the occupation permit of the building on Lot No. 440RP, the reply of the Building Authority on 23 October 1997 was merely that an occupation permit had not been issued and the vendor's solicitors were advised to contact the District Lands Office for further information. Plainly this would show that the Building Authority had no information about this building. From the letter of 3 December 1997, the District Lands Office made it clear that it had no information as to whether this building was there at the time of the grant in 1963 or not. As a matter of good Government, the Building Authority would not take enforcement action against the structure in 1997 having regard to the long period of inaction and the lack of positive evidence to show that the building must have been erected in breach of the provisions of the Building Ordinance.

50. In my judgment there is a distinction between the risk of forfeiture by the District Lands Office on the one hand and the risk of enforcement action in relation to the structure of land by the Building Authority on the other. While I am of the view that one can safely assume that there is no risk of forfeiture action in this case, I do not think that one can come to the same conclusion in relation to the risk of enforcement action by the Building Authority in this case.

51. First, it is by no mean clear as to for how long the Building Authority must be aware of the possibility that the building on Lot No. 440RP was erected in breach of the Building Ordinance. Prima facie, the New Grant in 1963 would not have involved the Buildings Department at all. It would merely be a matter for the District Office in those days. Again the assignment of 1972 would not in any way involve the Buildings Department. The surrender of part of Lot No. 440 in 1974 again did not involve the Buildings Department, nor was the grant of consent for the design of a building in 1976 under Special Condition 6 of the New Grant. Since 1961 the District Commissioner or the District Office no longer has any involvement with the building works in relation to buildings or structures which were not within the exemption under Regulation 2 of the Building Ordinance (Application to New Territories) Regulation as the supervision of such kind of building works was in the hands of the Building Authority under the Building Ordinance. I can see no reason for imputing the knowledge of the District Office to the Building Authority. On the evidence before me I would consider that the earliest reliable evidence to show that the Building Authority should be aware of the presence of the building at Lot No. 440RP was the Consent to the Commencement of Demolition Works dated 15 April 1994. Hence the period of inaction on the part of the Building Authority was not too long.

52. Secondly, the position of the Building Authority in relation to enforcement action against unauthorised structures is quite different from that of the District Lands Office against breaches of the terms of the Government lease. In the case of breaches of the terms of the Government lease, the District Lands Office is essentially enforcing the right of the Government as the lessor in private law, although it is recognised that the Government being the ultimate landlord of all lands in Hong Kong would generally act fairly. However as a landlord, the Government is bound by the general law relating acquiescence and waiver of forfeiture as in the case of a private landlord and the Government is also entitled to enter into any private arrangement with the lessee. On the other hand, the Building Authority is vested with the statutory power to enforce the provisions of the Building Ordinance and his liberty to allow departures from compliance with the statutory requirement is very much fettered. Counsel of the purchasers drew my attention to the decision of Re an application by Ho King Kwan for judicial review [1986] HKLR 931 where Mayo J held that the Building Authority had no power to undertake or agree not to enforce regulations made under the Building Ordinance particularly where such regulations were designed for the protection of the public. Furthermore, in Wong On v Lam Shi Enterprises Ltd. (1995) HCMP No. 2549, Le Pichon J held that the Government qua Building Authority, had no power to waive compliance with the statutory requirements of the Building Ordinance. I would agree with that proposition subject to the qualification that the Building Authority had the statutory power under Section 42 of the Ordinance of granting exemptions to all provisions in the Ordinance except those under Section 14. (In terms of the legislative provisions in force in 1963, the Building Authority had power under Section 26 to exempt all provisions except Section 9).

53. Counsel for the purchasers also drew my attention to the decision of Godfrey JA in The Incorporated Owners of Hoi Luen Industrial Centre v Ohashi Chemical Industries (Hong Kong) Limited [1995] 2 HKC 11, where it was held that the Incorporated Owners of a multi-storey building was under a statutory duty under Section 18(1)(c) of the Building Management Ordinance to enforce the covenants in the Deed of Mutual Covenant and could not grant any permission, whether it be express or implied, to any person to act in contravention of the Deed of Mutual Covenant. In my judgment, the analogy between the provisions in the Building Ordinance and the Building Management Ordinance was not exact. In Section 18(1)(c) the mandatory word "shall" is employed when prescribing the duties of the incorporated owners. However, in Section 24 of the Building Ordinance, there is no mandatory word enjoining the Building Authority to take action. Section 24 of the Building Ordinance merely says :

"(1) Where any building has been erected, or where any building works or street works have been or are being carried out in contravention of any of the provisions of this Ordinance the Building Authority may by order in writing require -

(a) the demolition of the building, building works, or street works; or

(c) such alteration of the building, building works or street works as may be necessary to cause the same to comply with the provisions of this Ordinance or otherwise to put an end to the contravention thereof,

and in every case specify the time within which the demolition, alteration or work required by such order shall be commenced the time within which the same shall be completed."

54. The true meaning and effect of the word "may" in Section 24 of the Building Ordinance were considered by the Court of Appeal in Quebostock Limited v The Building Authority [1986] HKLR 467 where the Court of Appeal held that the power given by Section 24 was discretionary. In coming to this decision Silke JA adopted the views of Lord Reid in Padfield v Minister of Agriculture, Fisheries and Food & others [1968] AC 997 that the question was not one of black or white in the sense that it was either a case where the Building Authority would have a complete discretion or none at all. Rather, it was a case where the discretion would exist and that the discretion was limited so that it must not be exercised in such a way as to frustrate the purpose of the legislation. Silke JA with whom the other 2 members of the Court agreed, said (at pages 475H - 476I) :

"I would adopt, with great respect, the dicta of Lord Reid in Padfield where he deprecates the black and white view, if I may so call it, of either a full discretion or none at all.

I am fortified in my adoption by that which was said in Suffield Corporation v Luxford Sheffiedl Corporation v Morell [1929] K.B. 180 :

"'May' always means may. 'May' is a permissive or enabling expression; and there are cases in which, for various reasons, as soon as the person who is within the statute is entrusted with the power it becomes his duty to exercise it."

S.24 itself has, in my judgment two forms of in-built discretion. The Building Authority may decide to order the demolition of the building or it may decide to order such alteration of the building as may be necessary to cause the building to comply with the provisions of the Ordinance. Second, it may specify the time within which the work required by such order shall commence and also the time within which it shall be completed. I appreciated that this last is Mr. Bernacchi's fall back point and that Mr. Strawbridge says in effect, "too bad: if time is wrong you cannot appeal, you must accept that the Building Authority will act in a responsible manner". But I think it to be an indicator of the general tenor of the section. Jackson-Lipkin J. while he took the more clear-cut approach holding in effect, that without the qualifying words of "in the opinion of" there was no discretion and a duty, was aware that as he put it:

"For the purpose of s. 43 of the Ordinance it matters not whether the discretion be fettered or unfettered; if there is any, the Appeal Tribunal's decision must be quashed".

By his finding he placed upon the Building Authority a duty to search the highways and the byways of Hong Kong for matters contravening the Ordinance and to immediately act thereon in conformity with the provision of s. 24. I do not think that this can be the case. For if he were to carry out that "duty" the Building Authority would need a force the size of the Royal Hong Kong Police Force consistently on the lookout for contravention ...

I differ, with respect from the Trial Judge for I would hold the word "may" in s. 24 does denote discretion. It is not a matter of "all or nothing". The Building Authority may make an order or it may not. It may do this even if the contravention is under the provisions of s.14. I accept that s.42 which allows for modifications of all of the provisions of the Ordinance by its sub-s.(5) expressly excludes s.14. But it would seem quite wrong if s.14 were contravened by failure to either apply for an initial approval of plans or for the secondary approval to commence works, then the result could be that a fully erected building which has escaped the notice of the Building Authority could be ordered by him to be totally demolished without the provision of the short and inexpensive appeal to the Appeals Tribunal under s. 43. Indeed if there be a duty it must be so ordered even if the Building Authority thought that the building was in every respect an admirable construction which contravened no other provision of the Ordinance nor any other zoning plan under any other Ordinance.

While Singway [1977] HKLR 275 is an aid to construction of s. 16, bearing in mind the context of s. 24 its particular provisions, the general scope of objects of the Ordinance, I would hold that s. 24 does confer a discretion ..."

55. In my judgment an exercise of the discretion not to take any enforcement action against a particular breach is not the same as a waiver of the compliance with the statutory requirements.

56. Even though Section 24 gives the Building Authority a discretion on whether to exercise its power against a particular contravention and what order it would make if it has decided to exercise its power, in my judgment, prima facie, one would normally expect that the Building Authority would take enforcement action against the unauthorised building or structures. Thus, unless there is a good reason for believing that the Building Authority would not to take any action, where a building or structure was erected in contravention with the Building Ordinance, there is the risk of an enforcement action by the Building Authority so as to render the title of that building or that structure to be defective. It is difficult to state exhaustively what would be the good reasons. The typical one would be where the breach is very trivial, or where because of the nature and the age of the structure, the enforcement priority within the Building Authority was so low that it could be expected that the time for enforcement would not come even by the end of the practical life of the building or structure in question.

57. In the present case, if the building was caught by the Building Ordinance, then the whole building would be structure in contravention of the Ordinance and contravention could not be trivial. There was no evidence before me to suggest that the Building Authority would not take action against this structure even if it is found to be unauthorised, or that the Building Authority would have given such low priority to enforcement action against this building that enforcement action would not be expected to take place within the practical life of this building so that the enjoyment of the 2nd purchaser of this building would not be affected.

58. Thirdly, in relation to the argument that there was no risk of enforcement because it could reasonably be expected that the Building Authority would not take any enforcement action unless it is in possession of good evidence to show that the building was in contravention of the Building Ordinance and there was nothing to positively show that the building must have been erected in contravention of the Ordinance, I am of the view that while it is true that there was no positive evidence before me to show that the building must have been erected in contravention of the Building Ordinance, it is by no mean certain that such unfavourable evidence could not be found in the future. I have already pointed out that the way that the lot was described in the schedule of properties in the probate of Leung would indicate that there might not be any building at Lot No. 440 at the time of the probate. Furthermore, I think that the purchaser was right in criticising that the vendor had not really done everything reasonable to show that the structure was a pre 1961 structure and as such was not caught by the Building Ordinance. For instance, it is well known that there were aerial photos of the New Territories taken from time to time and there was no attempt at all to obtain any of the relevant aerial photographs to put the matter at rest one way or the other.

59. The burden is on the vendor to satisfy a reasonable and willing purchaser that there was no real risk of enforcement action against the building on Lot No. 440RP. In my judgment, the vendor has failed to do so in the present case.

Substantial performance

60. In Goldful Way Development Ltd. v Wellstable Development Ltd. [1998] 4 HKC 679, Yuen J held that a good title could be given where a vendor was able to offer substantial performance of the contract. Thus even if there were some defects in certain aspects of the title of the property offered, if the circumstances are such that in a suit for specific performance, the Court would have been prepared to order specific performance of the contract against an unwilling purchaser with or without compensation on the ground that there is, or can still be substantial performance of the contract, the title offered by the vendor could be said to be a good one. The decision of Yuen J was upheld and adopted by the Court of Appeal in Wide Link Ltd. v Tam Sing Cheong & others (2000) CACV 151 of 1999.

61. Counsel for the vendor submitted that even though there was a risk of enforcement action by the Building Authority on the structure at Lot No. 440RP, since the purpose of the purchasers in acquiring the 1st and 2nd Properties was to re-develop the land, and this would involve the demolition of the structures on the land in any event, the risk of enforcement would pose no or no great adverse effect on the purchaser's enjoyment of the 2nd Property. Accordingly there was substantial performance of the 2nd agreement and the purchaser was wrong in not completing the agreement.

62. I would be prepared to accept that there was substantial performance of the 2nd agreement and the purchaser was wrong in not completing the agreement if I could be satisfied that the purpose of the purchasers in acquiring the 2 properties was for immediate re-development. This is a question of fact which is to be decided objectively.

63. From the photographs, I accept that the buildings standing on Lot No. 382 extension and Lot No. 440RP are old buildings and are certainly not fit for immediate human habitation without at least some rather major renovation and repairs. The vendor acquired the 2 properties in 1992 and the properties have been left vacant ever since the date of the acquisition. According to Mr Xu, a director of the vendor, the vendor acquired the buildings for re-development. However at the time, the vendor was more pre-occupied with the development of another project at Aplichau. By the time when Mr Xu averted to the progress of the re-development of this project, one Mr Au approached the vendor indicating that he was representing certain developers who were interested in buying the properties. The negotiation which eventually resulted in these 2 agreements was conducted between Mr Xu and Mr Au, and Mr Au told Mr Xu that the developers he was acting for would use 2 shell companies to enter into the agreements. Although Mr Xu would not have cared about the purpose for which the purchasers would acquire the 2 properties, Mr Xu was able to say that Mr Au gave him the impression that the purchasers wanted the properties for re-development. In this respect, he pointed out that Mr Au had expressly requested a meeting with the vendor's architect making enquires about the details of re-development such as the costs of site formation and retention wall. I have no hesitation in accepting Mr Xu as a truthful witness.

64. A director of the purchasers, Mr William Lee made a witness statement which was admitted in evidence without any objection or cross examination. His statement however did not in any way deal with the position of Mr Au, nor was there anything mentioned about the purchasers' purpose of the acquisition of the properties.

65. Counsel for the vendor submitted that it would have been opened to the purchasers to file further witness statements in reply to deal with the vendor's evidence on the role of Mr Au and also the vendor's case on the purchasers' purpose of the purchase. On the part of the purchasers, it was submitted that it would have been open to the vendor to cross examine Mr Lee and that the vendor's case should have been put to Mr Lee in cross examination. I am of the view that the fact that the vendor's case had not been put to the purchasers' director despite the opportunity to do so does not mean that I cannot make any finding on matters not so put although if I were to find on those matters, I must warn myself that those were matters which had not been put to the purchasers' witnesses and as such I do not have the benefit of the witnesses' comments on them. I can also take into account the fact that the vendor's case could not have taken the purchasers by surprise in that the vendor's case was quite apparent from the witness statement of Mr Xu and that if the purchasers were so minded, their witnesses could be asked to give supplementary witness statements to deal with those points or to ask me for leave to comment on those points in their evidence in chief.

66. Having considered the evidence before me, I would find that Mr Au was acting as the purchasers' agent when he was conducting the negotiation of the agreements. The fact that he also received some rewards from the vendor when the deal was concluded did not alter his position as the purchasers' agent at the negotiation stage.

67. However, on the totality of the evidence before me, while I can find on the balance of probability that the purchasers would require the properties for re-development purpose, I cannot find that the purpose was to effect immediate re-development. No doubt when a property developer acquires landed properties, it would be reasonable to expect that he would re-develop the property. However, it is not invariably the case that the property is acquired for immediate redevelopment. It is all too common that a property developer may hold the property for a while when the market condition is not quite so favourable. It is also quite probable that because of commitments in other projects, the developer may not be able to immediately develop the property. In fact the history of the vendor's holding of the 2 properties is a very good example of a property developer's not immediately developing properties acquired by it even though there is every intention to acquire the properties for re-development. In the absence of any clear indication to show an intention of immediate re-development, I would consider that the normal expectation must be that the developer would buy the property with a view of development if the market is right and if he has the means to do so, and if the conditions are not favourable, he may keep the property for rental income or alternatively re-sell the property without any re-development. In short, one would normally expect the developer to keep his options open. In my judgment, the purpose of the purchasers in buying the 2 properties was just that.

68. In the circumstances, I do not think that the vendor could be said to have offered substantial performance of the 2nd agreement. The outstanding risks of enforcement action by the Building Authority would affect any re-sale of the property without re-development, and it may also affect any letting of the 2nd Property pending the implementation of the scheme of re-development.

Conclusion & relieves

69. I am of the view that the vendor has satisfactorily answered the requisitions and has shown a good title to the 1st Property but has failed to show a good title in relation to the 2nd Property. Accordingly the purchasers were justified in not completing both agreements and each of them was entitled to the refund of the deposit and part payment paid under its respective agreement. I will also grant a declaration in terms of paragraph (2) of the prayer in the Amended Statement of Claim in favour of both Plaintiffs.

70. The legal expenses paid by the Plaintiffs in the net total sum of $104,738 were not challenged, and I am satisfied that the amount was reasonable, and I hold that each of the Plaintiffs is entitled to recover the sum of $52,369 as damages on account of the wasted legal expenses.

71. Also each of the Plaintiffs had paid Mr Au's company a consultant fee of $600,000. This amount was pleaded in paragraph 31 of the Statement of Claim as agency fee. The Defendant denied this in its pleading. I cannot attach any probative value to how the amount was called in the Statement of Claim in the absence of any admission by the Defendant. In the witness statement of Winnie Leung, the accountant of the Plaintiffs, which was admitted in evidence, this amount was said to be "consultancy fee". The Plaintiffs called no other evidence to explain the nature of this payment. There is no doubt that the amounts were paid. Mr Au's company, Success China Investment Ltd., issued a receipt to each of the Plaintiffs acknowledging the receipt of the sum of $600,000. The receipt to the 1st Plaintiff contained a caption of "Re Tsuen Wan New Territories Land Registry as Lot No. 382 and The Extension Thereto in Demarcation District No. 399" and the amount received was said to be "being consulting fee for the abovementioned transaction". The receipt given to the 2nd Plaintiff was mutatis mutandus the same, and the only difference was that the 2nd Property was put at the caption instead of the 1st Property. From the evidence of Mr Xu, I am satisfied that Mr Au acted for the Plaintiffs in conducting the negotiation with the Defendant. However, he might be authorized to do so as a consultant of the Plaintiffs and, as consultant, his fees may or may not be payable even though he was not successful in concluding the agreements and the fees received may or may not cover other works of advice in relation to the properties. In the absence of any evidence on the nature of the payment and the arrangement between the Plaintiffs and Mr Au, I cannot exclude the possibility that the fees were payable in any event and had nothing to do with whether the acquisition of the properties was successful or not. It would have been easy for the Plaintiffs to call evidence on the nature of the payment but it would appear to me that for the tactical advantage that the Plaintiffs did not want to reveal their exact relationship with Mr Au, the Plaintiffs had opted to call no viva voce evidence. In all the circumstances, I am not satisfied that the amount paid had become wasted expenses as a result of the breach of the agreements on the part of the vendor in failing to prove good title.

72. In relation to the claim for the loss of the stamp duties paid, the position is that in certain circumstances where the vendor's title is defective, the Stamp Duty Commissioners would be prepared to refund the stamp duties paid. Thus it is not necessarily the case that the amount of the stamp duties paid had been lost. The present case is slightly complicated in that in my view the vendor's title in relation to the 1st Property is not defective. Hence it may be the case that the stamp duties in respect of the 1st Property would not be refundable. The point has not been argued before me and I express no opinion on this. In the circumstances, I am of the view that the most appropriate order to make on the stamp duties is that I will give the Plaintiffs liberty to apply for assessment of further damages on account of the loss of the stamp duties paid upon their showing that an attempt to obtain full refund of the stamp duties paid has failed.

73. In exercise of my discretion, I will award interest at the rate of 1% above prime rate on all amounts from 5 December 1997 to the day of handing down of this judgment.

74. I will also make an order nisi that the Defendant is to pay the Plaintiffs' cost of this action.