HOMYIP INVESTMENT LTD. v. CHU KANG MING TRADE DEVELOPMENT CO. LTD.

1995, No. MP1100

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H E A D N O T E

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Property Law - Sale and Purchase Agreement - Purchaser raised requisition on unauthorised work constructed in a two storey house.

1995, No.MP1100

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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Background of the application

1. This is a vendor and purchaser summons issued by the Plaintiff. The Defendant is the registered owner of the property known as a House No.39 Hong Lok Road West, Hong Lok Yuen, Tai Po ("the property"). By a Provisional Sale and Purchase Agreement ("the Agreement") dated 3rd May 1994, the Defendant agreed to sell the property to the Plaintiff. The property is a two-storey residential house. There are two bedrooms on the first floor of the property. The Defendant had on each of the bedrooms constructed a false ceiling thereby creating another storey between the false ceiling and the pitched roof. Access to this additional area was by way of a staircase leading up from the staircase landing on the first floor. Openings were made on the walls and doors were constructed on each side of the staircase landing which led into the additional area. The existence of this additional area was discovered on 13th February 1995 by a surveyor instructed by a bank which was considering the Plaintiff's application for finance. The surveyor was unable to express a view as the legality of the additional work.

2. On 21st February 1995, the Plaintiff sought legal advice on the matter and shortly thereafter a surveyor was instructed to carry out an inspection of the property. On 3rd March 1995 the Plaintiff's surveyor prepared a report which stated that the approved building plans from the Building Department showed that the property was a two-storey house. The Occupation Permit also referred to the property as a two-storey house. At the time of the inspection, the additional storey was used as a store room and a servant's quarters. The surveyor was of the view that the addition of one extra storey, without the prior consent of the Building Authority, constituted a breach of s.41 of the Building Ordinance. The surveyor could not find any consent being given by the Building Authority in respect of the erection of the additional storey.

3. By a letter dated 13th March 1995, the Plaintiff's solicitors raised requisition on the legality of the additional storey and required the Defendant to produce satisfactory documentary evidence to show that the erection of the additional storey had received the approval of the Building Authority. On 16th March 1995, which was the date scheduled for the completion of the sale of the property, the Defendant's solicitors wrote to the Plaintiff's solicitors stating that "the alleged forming and use of an additional storey together with the staircase leading thereto and the openings made for access in connection therewith has been discontinued and reinstated".

4. The Plaintiff's solicitors immediately asked the Defendant's solicitors for clarification of their statement and requested an inspection of the property. An inspection was carried out on 20th March 1995.

5. On 21st March 1995, the Defendant's solicitors wrote to the Plaintiff's solicitors stating that after the inspection, there was no need to elaborate on their statement. By the same letter, the Defendant's solicitor imposed a time limit for the completion which was to be 7 days from 20th March 1995.

6. On 24th March 1995, the Plaintiff's surveyors prepared a further report in which they summarised their findings as follows :

(1) The staircase leading to the additional storey and the landing was removed and demolished.

(2) The removal of doors giving access to both rooms on the additional storey was achieved by blocking out both door openings.

(3) There was no sign to show that any demolition work had been carried to remove the unauthorised floor slabs at both rooms located on the additional storey.

7. Upon receipt of the report, the Plaintiff's solicitors immediately wrote to the Defendant's solicitors stating that if the Defendant failed to prove the legality of the additional storey or answer satisfactory the requisition before 27th March 1994 (i.e. the new completion date), the Defendant would be in repudiation of the Agreement. The Defendant did not respond. By a letter dated 29th March 1995, the Plaintiff accepted the repudiation and demanded the return of deposits paid under the Agreement in the sum of $3,060,000.

8. In opposition to the Plaintiff's present application, the Defendant instructed Messrs Raymond Chan Surveyors Limited to prepare a survey report. The report was exhibited to the affidavit of Mr Chu Kwok Keung, Eric filed on behalf of the Defendant. The report stated that an inspection was carried out on 8th May 1995. A timber false ceiling was found above the two bedrooms. The condition of the ceiling was good and there was no sign of any damage at the time of the inspection. The timber ceiling was subsequently opened and the void between the ceiling and the roof slab was inspected. It was found that the ceiling was constructed of light weight timber and supported by light weight steel frames. There was no additional floor slab above the ceiling. The surveyor was of the view that by the nature of the false ceiling, the construction of the false ceiling did not involve the structure of the property and they were building works not requiring the approval from the Building Authority.

9. Mr Chu in his affidavit further stated that in respect of the staircase which led from the 1st floor to the two empty spaces above, he was advised by Mr Craig Ma, a registered architect, that the staircase together with the floor landings may be structural in nature and their erection, without prior approval of the Building Authority, may constitute a breach of the Building Ordinance.

10. Mr Cheung, Counsel for the Plaintiff, informed the court that in the light of this information, the Plaintiff accepted that the ceiling which is still in existence is not illegal.

The issues

11. Two issues were raised in this application. First of all, whether the Defendant had showed a good title to the property by reason of the building work carried out without the approval of the Building Authority and whether the requisition had been answered. Secondly, whether the Defendant had complied with Clause 4 of the Agreement which provided that the property was sold to the purchaser on a "as is" basis.

Has good title been shown?

12. Mr Cheung submitted that the vendor must show a good title to the property and answer satisfactorily the requisition and objections within a reasonable time so as to enable the purchaser to satisfy himself on the matter. He relied on the two well-known Court of Appeal cases of Active Keen Industries Ltd. v. Fok Chi Keung [1994]1 HKLR 396 and Kok Chong Ho v. Double Value Development Ltd. [1993]2 HKLR 423. The vendor also has to pass a good title on the date of the completion. This entails that the vendor must have had a good title on the date of completion and this is a separate and distinct obligation from the preceding obligation.

13. Kok Chong Ho is concerned with a multi-storey building in which there was unauthorised structure in existence. The Court of Appeal was of the view that the purchasers were reasonable in raising requisition of the existence of the unauthorised flat which may give rise to the risk of an enforcement proceedings under the Building Ordinance. Clough, J.A. held that as a matter of law, there can be no doubt that s.24 of the Building Ordinance can be enforced by the service of a notice (and subsequent enforcement action) on any joint owner or owner of an undivided share of a building all or part of which has been erected without approval of the Building Authority.

14. Active Keen is also concerned with unauthorised building work in a multi-storey building. Litton, J.A. at p.409 held that the expression "encumbrance" in relation to land invariably means some claim to the property or charge which could be imposed upon the property. He held that :

"The underlying facts in this case are unclear but, generally speaking, there are two possible situations affecting building in multi-ownership, and the question is whether they can result in encumbrance against the title of the individual flat :

(1) The Building Authority seeks to exercise its power under s.24 of the Ordinance with regard to unauthorised works in common ownership, that is, affecting only the common areas of the building;

(2) The Building Authority seeks to exercise those powers with regard to unauthorised works belonging to individual owners.

As regards the first, an order served on all the owners under s.24(2) would in law be effective, and could bring in its train the consequence that, eventually, the apportioned cost of removal is charged against the title of the individual owners under s.33(9). This would then constitute an encumbrance. But as regards the second, how could the exercise of power under s.24 affect the owners of individual flat in the building apart from the owner of the unauthorised works?"

15. Thus Litton, J.A. took a different view from Clough, J.A. Notwithstanding the difference in opinion, Litton, J.A. at p.411 held that :

"Here the purchaser's solicitors had plainly over reacted, but they were nevertheless faced with a real problem. The 'discrepancy' between the occupation permit and the assignment plan prima facie indicated that unauthorised structures have been erected on the 9th floor sometime in the past. Whilst that did not by itself mean necessarily that there was a blot on the title to the flat (and they were wrong to think that the decision in Giant River let to that conclusion). Nevertheless Kok's case suggested that in such a situation it was reasonable to raise queries with the vendor's solicitor. It is just possible that those solicitors could have provided satisfactory answers. In these circumstances, the purchaser could not reasonably have remained silent. So they pointed out the discrepancy and asked for clarification..."

The Defence

16. Mr Wong, Counsel for the Defendant, argued that firstly, the requisition raised by the Plaintiff had been properly answered. Secondly, as an alternative, he said that even if the false ceiling was illegal in nature, it did not constitute an encumbrance on the property. It is convenient to deal with Mr Wong's alternative argument first.

Illegal structure

17. Mr Wong argued that the existence of unauthorised or illegal structures may, in certain circumstances, amount to a breach of the conditions of the Crown Lease which may give rise to a right of re-entry by the Crown. The exercise of the right of re-entry would clearly affect the owner's right to occupy the property and hence the existence of the structure is an encumbrance. However, in the present case, there was no suggestion or evidence of any possible breach of the Crown Lease.

18. Under s.24 of the Building Ordinance, the Building Authority is empowered to order the demolition of the unauthorised building works and such an order may be served against the owner of the building works. The owner who is served with an order has to comply with it, otherwise he shall be guilty of an offence (s.40). If he complies with the order, there could be no question of any charge or claim again the property itself. Although the owner served with the building order is certainly inconvenienced and put to expenses to comply with the order, it is a personal claim only and it could not be said that the title to the property is impinged by s.24 or s.40.

19. If the owner fails to comply with the order, then under s.24(3), the Building Authority may proceed to demolish the building works and to recover the costs from the owner (s.24(4)). Under s.33(1), the Building Authority may certify the costs and interest thereon recoverable from the owner and have a memorandum of the certificate registered with the Land Registry (s.23(9)) which will then constitute a first charge to the property. But as soon as the costs are paid, the Building Authority must lodge an appropriate memorandum of satisfaction to discharge the charge (s.32(10)).

20. The exercise of power by the Building Authority to register the statutory charge does not arise from the mere existence of the unauthorised structure. The power can only be exercised upon three conditions occurring, namely :

(1) The owner of the unauthorised structure failed to comply with the building order and

(2) The Building Authority carried out the demolition work and incurred costs and

(3) The owner failed or refused to pay for such costs.

21. Mr Wong argued that there could be no reason to assume that the Plaintiff will not comply with a building order that may be served on him thereby committing an offence under s.40. If the Plaintiff complies with such an order, there can be no question of any possible encumbrance against the title of the property. He submitted that the law is concerned with the title of the property at the time of completion. So long as the vendor is able to convey the whole legal estate and equitable interest in the land sold, free from encumbrance, the vendor has discharged his duty (see Barnsley's Conveyancing Law and Practice 3rd ed. p.246 cited in Active Keen at p.409). The law is not concerned with possible encumbrance that may contingently arise in the future if the purchaser should fail to satisfy some personal claim that may be made against him, and that is so even if that personal claim may be related to the property that he is presently buying.

Encumbrance on title

22. In my view, although the existence of unauthorised work in a multi-storey building would not necessarily constitute an encumbrance on the title of an individual flat in that building, the situation is different where the unauthorised work is inside a flat or within the boundaries of a house. It is clear from the reasoning of Litton, J.A. in Active Keen that the existence of an unauthorised structure in a flat or, as in the present case, inside a house would constitute an encumbrance because the service of an order under s.24(2) would in law be effective against the individual owner and could bring in its train the consequences that eventually the cost of the removal is charged against the title of the individual owner.

23. Although Mr Wong submitted that the view of Litton, J.A. was obiter, I would respectfully adopt the reasoning of Litton, J.A. The consequence of not complying with a s.24 order will invariably lead to the registering of a charge against the property. This arises as a direct consequence of the existence of the unauthorised work. Why should a purchaser bought himself a litigation by the unauthorised work? In my view the existence of an unauthorised work in the property would constitute an encumbrance.

Has the requisition been answered

24. Mr Wong argued that the requisition needed not be answered in writing. The Plaintiff was fully appraised of the situation by the inspection on 20th March 1995. By that stage, the staircase had been removed and the opening on the walls had been enclosed. Further the latest report from Raymond Chan clearly indicated that the remaining false ceiling is not work which will require the approval of the Building Authority.

25. I disagree with Mr Wong that the requisition had been adequately answered by a visual inspection of the property. Mr Raymond Chan's evidence that the false ceiling was made up of light timber supported by light steel iron frames and the construction of which would not require the approval of the Building Authority only became available after the completion date. The inspection was carried out by Mr Raymond Chan by opening up the timber ceiling. The visual inspection of the property on 20th March 1995 just could not reveal that the false ceiling would not require the approval of the Building Authority.

26. Mr Craig Ma, in his report of 15th March 1995, referred to three matters. He firstly said that the "forming and use of the additional storey above the 1st floor together with the staircase leading thereto and the openings made for access in connection therewith has been discontinued and has been reinstated". The other two matters were in respect of works unconnected with the present application. Mr Craig Ma stated that other two matters were works exempted from the provisions of s.41 of the Building Ordinance. He did not say that the false ceiling was also work which would not require the approval of the Building Authority. Mr Ma was either of the view that the false ceiling was unauthorised work but did not say so in his report or alternatively he did not know whether it was unauthorised work or not. If the Defendant's own architect was not prepared to prefer a view on the matter, how could the Plaintiff be expected to conclude, by a visual inspection of the property, that the false ceiling which created an additional storey in the property did not require the approval of the Building Authority.

27. In my view, the Defendant had failed to show that it had a good title to the property at the time of the completion and further it had failed to answer satisfactorily the requisition raised by the Plaintiff.

Clause 4 of the Agreement

28. Clause 4 of the Agreement provided that the property was sold on a "as is" basis. On the evidence filed in this case, there is no doubt that the staircase leading to the additional storey was in existence at the time of the Agreement but was removed afterwards.

29. Having decided that the Defendant has failed to satisfy its obligation under the Agreement, it is not necessary for me to decide whether the Defendant was in repudiation by removing the staircase leading to the additional area thereby rendering it impossible to deliver the property on its completion on an "as is" basis.

30. However, I will refer briefly to Mr Wong's submissions on this point. Mr Wong submitted that Clause 4 is an intermediate/innominate term of the Agreement only. It is a term which "is capable of being broken either in a manner that is trivial and capable of remedy by an award of damages or in a way that is so fundamental as to undermine the whole contract". (Chitty on Contracts 27th ed. para.12033.) The term is not a "condition" the breach of which will give rise to a right of recession. The breach of an intermediate term will not entitle the Plaintiff "to treat himself as discharged from the contract unless he can show that the breach deprive him of substantially the whole benefit which it was intended that he should obtain from the contract" (Chitty para.12038 and also Hong Kong Fur Shipping Company v. Kawa Saki Kisen Kaisha Ltd. [1962]2 QB 26).

31. I agree with Mr Wong that, on the face of the present case, it is clear that the Plaintiff cannot show that the breach of Clause 4 has this significant effect on him. When the Plaintiff entered into the Agreement, it did not even know that there was this additional storey in the property. It purchased the property without inspection. The physical state and condition inside the property was simply a matter of no concern. It cannot be said that the removal of the additional staircase has the effect of substantially depriving it of the whole benefit which it was intended that it should obtain from the Agreement. Thus even if there was a breach of Clause 4 the Plaintiff cannot rely on it as affording it a ground to treat the Agreement as rescinded. But as I said earlier, this is not a point that I need to determine in this application.

Other relief

32. In the circumstances, the Plaintiff is entitled to a declaration that good title to the property has not been shown and a declaration that the requisitions to the title has not been answered by the Defendant.

33. Mr Wong stated that in the event I should make a declaration in favour of the Plaintiff on the title, he would not object to the further declarations that the Plaintiff has effectively rescinded the Agreement and that the Defendant shall refund to the Plaintiff the deposit in the sum of HK$3,060,000. He, however, objected to the granting of the relief set out in para.6 of the summons, namely the payment by the Defendant of the estate agent's commission in the sum of $153,000 and the stamp duty in the sum of $420,750. Mr Wong argued that the payment of the agent's commissions and the stamp duty is governed by the Agreement and in the absence of any provisions in the Agreement the Plaintiff could not recover the same from the Defendant.

34. The usual order to be made in a vendor and purchaser summon is a declaration as to title. Further provisions should also be made, if in the event the decision goes against the vendor, for the purchaser to be entitled to rescind with all the usual consequences, such as re-payment of the deposits, payment by the vendor of the purchaser's cost and expenses of investigating title etc. (See In the matter of Kwun Tong Inland Lot No. 386 (1988) MP No.1996 of 1988).

35. The Agreement has not provided specifically for the repayment of the commission fees and stamp duties in the event of the Agreement not being completed. It would appear that in order to recover these two amounts the Plaintiff would have to frame its cause of action on breach of contract and seek damages as a result of the breach. In matter of damages, the Plaintiff may have difficulties in the light of Bain v. Fothergill [1874] LR 7 HL158. The matter was not fully argued at the hearing before me and if the parties wish to pursue further on these two items they have to restore the matter before me.

36. Apart from these two items, I shall declare that the Plaintiff has effectively rescinded the Agreement and order the Defendant to refund $3,060,000 to the Plaintiff forthwith. I shall further order that the Defendant is to pay to the Plaintiff the cost of investigating the title of the property including the legal fees and fees paid to the architects and surveyors. The assessment of such expenses shall be conducted by the Master. The Plaintiff is entitled to the cost nisi of this application.

(P. Cheung)

37. Judge of the High Court