YIP NGAN YEE AND ANOTHER v. CHAN TSZ YAM AND ANOTHER

CACV442/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.442 OF 2000

(On Appeal from HCA No.7871 of 1997)

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J U D G M E N T

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Le Pichon JA :

1. This is an appeal from the judgment entered on 12 July 2000 against the defendants/purchasers for breach of an agreement for the sale and purchase of Shop No.104, 1st Floor, Cheong Wing Building ("the property"). The judge awarded damages in the sum of $346,797.08 together with interest and costs to the plaintiffs/vendors.

2. The underlying dispute is a conveyancing dispute. The short point which arises in this appeal is whether requisitions raised by the purchasers in a letter dated 19 March 1997 were properly raised, and if so, whether they were sufficiently answered. The judge below concluded that the requisitions were not properly raised as they did not set out precisely or clearly what the concern of the defendants was in relation to the title of the property. She further held that the requisitions related to non-existing difficulties.

3. The defendants as purchasers and the plaintiffs as vendors entered into a provisional agreement for the sale and purchase of the property in the sum of $1.18 million on 17 February 1997 when an initial deposit of $30,000 was paid. The provisional agreement provided for the payment of a further deposit of $88,000 upon the signing of the formal agreement on or before 28 February, $236,000 as further deposit on or before 11 March and the balance of $826,000 on completion which was scheduled for 1 April 1997. It is common ground that 30% of the purchase price was duly paid to the vendors.

4. On 18 February, the parties entered into a licence agreement pursuant to which the defendants entered into possession. They were to be responsible for water charges, electricity charges, management fees and rates, etc. On 28 February, the parties entered into the formal agreement. The property was described as -

"ALL THOSE 9 equal undivided 102nd parts or shares of and in ALL THOSE 6 equal undivided 85th parts or shares of and in ALL THAT piece or parcel of ground registered it the Tsuen Wan New Territories Land Registry as KWAI CHUNG TOWN LOT No.218 and of and in the messuages erections and buildings thereon known at the date hereof as CHEONG WING BUILDING (昌榮樓), No.107 Tai Loong Street, Kwai Chung, New Territories, Hong Kong ('the Building') TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT SHOP NO.104 on the FIRST FLOOR of the Building."

The agreement provided, inter alia, that the vendors had to show and give a good title (clause 20(b)) and time was of the essence (clause 25).

5. On 12 March 1997, the defendants' former solicitors received the following deeds and documents from the plaintiffs' former solicitors : the Occupation Permit dated 20 August 1974, a Deed of Mutual Covenant and a Management Agreement, both dated 17 October 1974, Assignment Memorial No.188335 dated 26 February 1980 ("the Assignment") and Assignment Memorial No.966397 dated 6 July 1994, being earlier assignments of the property.

6. On 19 March 1997, the defendants' former solicitors wrote to the vendors' former solicitors as follows :

"According to the Occupation Permit and Deed of Mutual Covenant, there is only one shop (unit) on the 1st Floor. However, there are now several shops on the said 1st Floor. Further, there is no documents to show how to allocate the share to the above property and the rights of way, rights and liability of the individual owners of the 1st Floor. Kindly clarify."

Were the requisitions properly raised?

7. The vendors' first objection was that they were not proper requisitions as they did not state precisely and clearly what it was they wanted in clarification of the vendors' title and that they were materially confusing and obscure. See Chan Chik Sum v. Great Pearl Industries [1997] 1 HKC 27 at 33 C where Bokhary JA (as he then was) observed that "requisitions on title must be formulated with reasonable precision if they are to be effective."

8. The occupation permit dated 20 August 1974 permitted the first floor of the building to be occupied as "1 shop for non-domestic use". That remained the position on 17 October 1974 when the Deed of Mutual Covenant was executed : the whole of the first floor to which 6 of 85 equal undivided parts of shares in the building were allotted was vested in a single owner, namely, the developer. It would appear that the sub-division into shop units took place sometime after 17 October 1974. By the time the Assignment was executed in 1980, subdivision had taken place because the plan attached to it showed the first floor as having nine separate shop units. But none of the documents supplied to the purchasers (including the plan and the Assignment) shed any light as to how the 6 of 85 equal undivided parts were allocated or apportioned amongst the nine shop units. In those circumstances, it is hardly surprising that the purchasers raised a requisition concerning the allocation of shares to the property. In my judgment, there was nothing obscure about that requisition. It would have been obvious to anyone who is legally trained what it was all about.

9. The next objection raised by the vendors was that the requisitions related to non-existing difficulties. This was the conclusion reached by the judge below. However the issue was not whether the developer who was the original owner of the whole of the 1st floor had power to subdivide it into units. Rather, there was nothing to indicate what remained vested in the developer as at the date of the Assignment as it was not known when the other shop units were created and how many shares had been allocated to each of them. Put differently, the purchasers were entitled to be satisfied that at the date of the Assignment the developer had the ability to assign to the assignee of the Assignment, 9/102nd parts or shares of and in 6/85th undivided shares in the building. In Marking Ltd v. Cheerifat Investment Ltd (unreported) HCMP 2727 of 1995, I held that a purchaser is entitled to know if any document exists that relates to the allocation of undivided shares so as to be in a position to ascertain whether what was contracted to be conveyed is consistent or at variance with the allocation. I remain of that view.

10. A consequence of subdivision by a common vendor in the manner as depicted on the plan to the Assignment is that 'new' common parts or areas are created such as corridors over which the owners of the individual shop units require a right of way in order to gain access to the individual shop units. Any purchaser of these shop units would need to know how those rights are governed and who is to pay for the upkeep, maintenance, repair and redecoration etc. of the newly created common areas. Again I can find nothing obscure, unclear or imprecise about the requisition concerning the rights and liabilities inter se of the owners of the shop units on the 1st floor.

11. For these reasons, I am of the view that the requisitions were properly raised.

Were the requisitions sufficiently answered?

12. On 24 March, the purchasers received the following response :

"1. We enclose herewith a copy Schedule/List showing the allocation of shares to the above property and the whole of first floor for your reference. Section 21 of the Building Ordinance Cap.123 gives Form 22 as the form in which an Occupation Permit is to be issued. We take the view, therefore, that an Occupation Permit is a permission given by the Building Authority for occupation of a building or parts thereof for the purposes therein specified e.g. domestic or non-domestic. It was unnecessary for the Building Authority to have specified the actual number of shops on the first floor. Furthermore, the Occupation Permit does not say that the shop cannot be sub-divided. As regards rights of way, rights and liability of the individual owners of the 1st floor, we would refer you to the provisions as contained in Deed of Mutual Covenant Memorial No.116843."

On 27 March, the defendants' former solicitors replied as follows :

"1. The copy Schedule/List enclosed in your said letter is not an acceptable conveyancing evidence to prove the allocation of share complied with the fact that there is no clear figure showing the share thereof. Please note that no share is shown in the Land Search Record. Regarding the function of Occupation Permit, we do not share your view that the function of Occupation Permit is only for the user of each floor; otherwise, why the number of shop/lift are clearly stated for each floor in the Occupation Permit No.N.T.98/74. Please make it clear that we are not concerned with the rights of ways and liability between the owners of 1st Floor and the owners of other floors. We are concerning the rights and liabilities between the owners of the shop on 1st Floor and so the DMC Memorial No.116843 is not in any event a solution thereto."

There was no response to this letter before the date fixed for completion under the agreement which was 1 April 1997.

13. The schedule/list supplied with the letter of 24 March was untitled and undated. It bore in typescript the following description :

"Kwai Chung Town Lot No.218

Main Page : D.R. Vol.260 Fol.28
'A' Book : Vol.3A Fol.260
New Grant No: 4925
Class : Non-Industrial
Area : 5,044 Sq.ft.
Crown Rent : $60.00
Name of Building : CHEONG WING BUILDING"

Alongside this description were two stamps recording the fact that it (the schedule/list) was subject to a Deed of Mutual Covenant (Memorial No.116843) and a Management Agreement (Memorial No.116844) both registered in Fol.8 but the volume number was left blank. Below all this was a table. The left hand column specified the relevant floor commencing with the 11th down to the lower ground floor and horizontally there were boxes, one for each of the units on each of the floors. The entries were handwritten. In each box (save for those in relation to the 1st floor dealt with below) there were two numbers; one was prominent and occupied the centre space and the other which was much smaller in size appeared in the bottom left hand corner.

14. The 1st floor entries were as follows :

These entries were different from the rest in that one appeared to be a fraction. But what each of the entries appearing in each box was meant to represent was obscure. Nowhere was it explained how, when and for what purpose the schedule/list came into being. Nor was it obvious that the schedule/list was meant to deal with undivided shares in the property since all that one was confronted with was a mass of numbers which, seemingly, bore no relation to 85 undivided shares. It would now appear that the relevant entries were not those that featured prominently but those appearing at the bottom left hand corner of each of the boxes which were considerably smaller in size when compared to the other entries.

15. As was held in Active Keen Industries Limited v. Fok Chi Keung [1994] 1 HKLR 396, in answering requisitions, the vendor's solicitors must be "frank and open" (at 412 line 6) and that what is required of the vendor is "candour and commonsense" (at 413 line 31). The purchasers should not be put in a position of having to speculate as to the nature of the document or what the entries were meant to signify. Although it is now being asserted that the schedule/list was a control card kept at the Land Registry, no suggestion to that effect was put forward at the time nor has any evidence to that effect ever been put forward. Certainly the vendors' reply on 24 March made no mention of it. Understandably, the purchasers' solicitors replied to the effect that they did not regard the schedule/list as "acceptable conveyancing evidence" to prove the allocation of shares and specifically made the point that there was no clear figure showing the shares allocated to Shop 104. It has to be borne in mind that all the entries were handwritten and in the copy provided to the court, it was unclear whether the entry appearing in the bottom left hand corner of the box for Shop 104 was "9" or "11".

16. As regards the requisition concerning rights of way, rights and liabilities of the owners of the shop units on the 1st floor inter se, the deed of mutual covenant could not provide the answer because it predated the subdivision of the shop units. Under clause 4(q)(i) of the deed, the common parts include "lavatories .... staircases, landings, passages ... and any other areas which are not included in any part of the building exclusively owned by one owner or several co-owners as specified in the 1st Schedule". The 1st Schedule showed that the whole of the 1st floor was owned by a single owner. Accordingly, other than the staircase and landings, the 1st floor did not have any other area that came within that definition. But the plan to the Assignment showed a corridor encircling the lift and staircase area which was located in the centre of the building which also led to lavatories that were obviously intended for the use of the owners of the shop units.

17. Prima facie, the corridor that was created subsequently when the 1st floor became subdivided and the lavatories that were to be used by the tenants or owners of the individual shop units in common were not "common parts" for the purposes of the deed of mutual covenant. The apportionment and burden of the costs of upkeeping these "common parts" which were created after the date of the deed of mutual covenant would naturally be of concern to any purchaser of the units on the 1st floor. Access to the individual units would also be a legitimate concern. A right to pass and repass along the corridor between the relevant unit and the lift and/or staircase was essential and any purchaser would want to be assured of this right.

18. The vendors' solicitors' response was plainly insufficient : it did not even begin to respond to the requisitions in its letter of 24 March. That was the only response notwithstanding the further letter from the purchasers' solicitors of 27 March. In that letter the purchasers' solicitors made the point that the land search record did not contain any reference to the number of undivided shares allocated to the property. Although a copy of the relevant land search record was not attached to the purchasers' response on 27 March 1997, the land search record made on 11 August 1997 also contained no reference to any undivided shares being allocated to the property. This is to be contrasted with later land search records (made on 16 October 1997 and 3 April 1998) which emerged at the trial where it was expressly stated that "the share of the lot is 9/102 in 6/85th". In my judgment, the point made concerning the land search record was not made out of time : it was really part and parcel of the requisition made on 19 March 1997.

19. In those circumstances, it was the vendors rather than the purchasers who were in breach of the agreement by failing to answer the requisitions adequately and in reasonable time before the scheduled completion date. It follows that the vendors were not entitled to rescind the agreement or to forfeit the deposit.

20. Having reached this conclusion, it is unnecessary to consider the merits or otherwise of the further submission of counsel for the purchasers that the vendors were not entitled to forfeit the deposit on 23 July 1997 because time had ceased to be of the essence and I do not propose to do so.

The order

21. I would allow the appeal and the order below must be set aside.

22. Pursuant to the provisional agreement, a deposit aggregating $354,000 had been paid to the vendors. Part of this deposit, namely $185,797.32 was refunded to the purchasers on 15 December 1997. The purchasers have counterclaimed for the balance of the deposit, and conveyancing costs of $11,000. From this sum there has to be deducted out-goings due to the vendors in the sum of $2,953.20 which is agreed and mesne profits of the property agreed at $5,900 per month. Where the parties disagree is whether the period of mesne profits should run from 18 February 1997, the date when the purchasers went into possession, or whether it should commence from 1 April 1997, the scheduled date of completion. The purchasers vacated the property on 10 September 1997.

23. Counsel for the purchasers submitted that had the purchase gone through, the purchasers would not have had to pay anything in respect of their occupation of the property as from 18 February. In my judgment, the vendors are entitled to recover mesne profits for the period that the purchasers were in possession prior to completion for the following reason. The purchasers had no right to possession prior to completion. Their entitlement to possession depended upon the licence agreement between the parties which allowed them into possession. At that point in time a risk must have existed that the vendor might not have or be able to show good title to the property. So short of an express warranty on the part of the vendors that they would be able to show and give good title, the purchasers went into possession subject to that risk. No such warranty can be found in the licence agreement (or elsewhere). The vendors should therefore not be deprived of their entitlement to mesne profits. Accordingly, I find that the period for computing mesne profits ran from 18 February 1997.

24. The amount to be paid by the vendors to the purchasers is $136,719.68 computed as follows :

Deposit	354,000.00
Conveyancing costs	11,000.00
		365,000.00
Less
Refund of part of deposit	185,797.32
Mesne profits	39,530.00
Outgoings	2,953.20
		228,280.52
		136,719.48

The purchasers are also entitled to interest. Interest is payable by the vendors (1) at the rate of 2% over prime on (a) the sum of $118,000 from 17 February 1997 to 15 December 1997 and (b) the sum of $236,000 as from 11 March 1997 to 15 December 1997 and (2) on the sum of $136,719.68 at 2% over prime from 16 December 1997 to the date of this judgment and thereafter at judgment rate until payment. I should mention that the fact that a sum of $350,000 was paid into court pursuant to an order made on 19 May 1998 to vacate the registration of the defence and counterclaim as lis pendens should not affect the rate of interest payable to the purchasers. The total amount found due to the purchasers is to be released to the purchasers out of the $350,000 paid into court and any balance paid to the vendors.

25. The purchasers also seek a declaration that the vendors indemnify them for any claim of the estate agent for commission under the provisional agreement. In principle, I do not see any reason why such a declaration should not be made. Although no demand has been made of the purchasers to date, the claim cannot be ruled out altogether because the limitation period has not expired.

26. There is to be an order nisi for costs in favour of the purchasers here and below.

Hon Keith JA :

27. For the reasons given by Le Pichon JA, I agree that this appeal must be allowed, and I also agree with the orders which she proposes.

Hon Rogers VP :

28. I agree. There will be an order as proposed in the judgment of Mrs Justice Le Pichon JA.