MA HON MING v. LEE TSAN SUM

HCA 1620/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1620 OF 1998

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J U D G M E N T

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1. This matter arose out of the sale and purchase of the property known as the 1st floor of Block J on Lots Nos 174, 175 and 176 in DD 28 in the New Territories (hereinafter called the property).

2. By a provisional sale and purchase agreement dated 14 October 1997 the plaintiff agreed to buy the property from the defendant at a price of $1,380,000.00 and paid a deposit of $30,000.00. This provisional agreement contained the usual provision for the parties to execute a formal sale and purchase agreement on or before 3 November 1997 when a further deposit of $108,000.00 was to be paid. The provisional agreement stipulated that each of the plaintiff and the defendant had to pay the estate agent Kenwick Property Agency Co. a fee of $13,800.00. The agent was also a party to this agreement. The provisional agreement further provided that in case where the vendor or the purchaser should fail to complete the sale and purchase the defaulting party should compensate the agent in the sum of $27,600.00, which was the total fees which the agent would be able to earn.

3. In pursuance of the provisional agreement, the parties did enter into a formal sale and purchase agreement on or about 3 November 1997. As between the plaintiff and the defendant, this formal sale and purchase agreement superseded the provisional agreement. It is not in dispute that together with the initial deposit, the plaintiff had paid a total deposit of $138,000.00, being 10% of the purchase price.

4. The agreement of 3 November 1997 contained an express clause that "the Vendor shall prove and give a good title to the Property at his own expense and shall at the like expense make and furnish to the Purchaser such certified or attested copies of any deeds or documents of title, wills and matters of public record as may be necessary to prove such title." Part A of the 2nd Schedule to the Conveyancing and Property Ordinance was also expressly incorporated into the agreement.

5. The title deeds were delivered to the purchaser's solicitors on 14 November 1997. On 19 November 1997, the purchaser's solicitors wrote to the vendor's solicitors raising requisitions. In so far as it is material for this action, the purchaser's request was for :

(a) production for perusal before completion certified copies of "completion certificate and permit to occupy issued by the relevant Government Department",

(b) production for perusal before completion

(i) Certificate of Exemption in respect of Building Works;

(ii) Certificate of Exception in respect of Site Formation Works; and

(iii) Certificate of Exemption in respect of Drainage Works.

By a letter dated 6 January 1998, the vendor's solicitors endeavoured to answer the purchaser's requisition and enclosed with the letter various correspondence between the vendor's solicitors and the District Lands Office as well as a certificate dated 9 June 1990 issued by one H W Leung, who would appear to be an architect and civil engineer. By this certificate, Mr Leung certified that after carrying out the necessary inspection of the 2 houses erected on lots nos. 174, 175 and 176, he confirmed that

(a) the 2 houses have been erected within the registered lot boundaries with a total roofed-over area of the 2 houses not exceeding 89.4 sq. metres. and a building height of not more than 7.63 metres;

(b) all the standard health requirements for village type houses have been complied with;

(c) the development of the 2 houses erected on the lots has been completed.

The letter of the vendor's solicitors went on to give a detailed explanation and argument as to why notwithstanding that there was no occupation permit and no certificates of exemption of building works, foundation works and drainage works, the vendor has shown a good title to the property. The things raised in this letter formed the main subject matter of the argument before me today and I will deal with them later in this judgment. The purchaser was not satisfied with the answer and insisted that a good title and not been shown. There was further correspondence between the parties. However I do not think that these further correspondence would throw much light on the issue I have to decide. The purchaser was not prepared to complete until the documents requested were supplied. Eventually there was no completion and each party held the other to be in breach of the contract. The crux of the matter is whether the documents sent on 6 January 1998 together with the explanation given in the letter amounted to a sufficient answer to the requisitions. If it did, then a good title has been shown.

The Certificate of Compliance

6. A certificate of compliance is normally understood to be a certificate issued by the Director of Lands certifying that all the terms of the General and Special Conditions of an agreement for a Grant of land by the Government have been complied with. Counsel for the purchaser submitted that there was a proper requisition raised for the supply of the Certificate of Compliance which, he submitted should be supplied as part of the title deeds. It is also submitted that without this certificate, the vendor would not have a legal title to the property. I am however of the view that no matter how one would read the requisition in the letter of the purchaser's solicitors of 19 November 1997, one cannot see that it was a certificate of compliance that the purchaser was after when the letter asked for "completion certificate and permit to occupy issued by the relevant Government Departments". The requisition for certificate of compliance is thus not properly raised. Nor do I think that the letter of the 12 January 1998 from the purchaser's solicitors would help to clarify the matter. In paragraph 2 of the letter, although Certificate of Compliance was mentioned, the reference to the case of Lui Kwok Wai would rather indicate that what the purchaser was after was the Certificate of Exemption rather than Certificate of Compliance. I therefore hold that the requisition for a Certificate of Compliance was not properly raised.

7. In any event, I do not see why a Certificate of Compliance is required in this case. One asks the question, Certificate of Compliance with what? The property in question is situated in the New Territories. It is also notable that the said lots nos 174, 175 and 176 in DD 28 are what is commonly known as the old scheduled lots, which are house lots set out in the schedule to a Block Crown lease. The significance of their being old scheduled lots would appear to be that unlike many new grants, there is no building covenants contained in the Block Crown lease requiring that certain structures of specified value must be erected on the lots within the period specified in the lease before the interest in the lease could be disposed of and before the Crown would be prepared to grant the legal estate in the form of the Crown lease. As a matter of history, these old schedules lots were those lots which had houses already erected on them at the time when the Block Crown lease was granted. Also because there was already a grant of the legal estate by the Crown Lease, there is no question that the title of the "lessee" would be an equitable title only before the terms and conditions of the lease were complied with. The present case is thus very different from cases where the Government had merely agreed to grant certain land to a person under the terms of General and Special Conditions of Grant. The present case is thus distinguishable from Chen -v- Lord Energy Ltd [1999] 1 HKLRD 205.

The Occupation Permit & Certificate of Exemption

8. In order to understand the requisitions raised and the contention of the parties, it is necessary to go into the details of the scheme of exemption of building and building works under the Building Ordinance (Application to the New Territories) Ordinance (herein after call the Ordinance).

9. Section 3 of the Ordinance provides that subject to Part III of the Ordinance, the Building Ordinance shall apply to the New Territories. This would mean that unless one can show that certain provisions in Part III (i.e. Sections 4 to 13) of the Ordinance are applicable so as to take the particular building or building works outside the ambit of the Building Ordinance, all building and building works in the New Territories would have to comply with the Building Ordinance. For the present purposes, the most important consequence of the application of the Building Ordinance would be that the building could not be occupied (save for very limited purposes) unless the Building Authority has issued an occupation permit to occupy that building (see Section 21 of the Building Ordinance). Another important consequence is that there must be approved plans before any building works (which is defined in the Building Ordinance as including the foundation and site formation work and drainage work) could commence. Further apart from criminal sanctions, the Building Authority may also by order in writing require the demolition of the building, or the building works which had been erected in contravention of the Building Ordinance.

10. By Section 4 of the Ordinance (which is under Part III of the Ordinance), the Director may issue a certificate of exemption in respect of any building works in the New Territories. However it is notable that "building works" has a narrower meaning in this Ordinance than the same words in the Building Ordinance, in that "building works" in this Ordinance would not include site formation works and drainage works or the construction of sea walls. The "Director" is defined in the Ordinance as the Director of Lands and any person authorised by him under Section 11. Section 6 provides that where the Director has issued a certificate of exemption under Sections 4 or 5 (i.e. a certificate of exemption of building works) then he may also issue a certificate of exemption of site formation and a certificate of exemption of drainage works. These are the 3 certificates of exemption referred to by the purchaser's solicitors in their letter of 19 November 1997.

11. The effect of the certificate of exemption is provided in Section 7 of the Ordinance. It is plain from the wordings of Section 7 that Sections 4, 9, 14, 21 and 30 of the Building Ordinance would not be applicable to any building works or site formation works for any building specified in a certificate of exemption, and likewise in the case of a certificate of exemption of drainage works, Section 28 of the Building Ordinance would not be applicable to any drainage work for any building specified in that certificate. It is thus plain that the building, or the building works, or the drainage works, or the site formation works the subject matter of the exemption from the various provisions in the Building Ordinance are to be identified and ascertained from the relevant certificate of exemption. It must therefore follow that without the certificates of exemption, there could not be any exemption from the relevant provisions of the Building Ordinance at all because the subject matter to be exempted could not then be identified or ascertained.

12. However it does not follow that once certain building or certain building works or drainage works or site formation works is specified in a certificate of exemption, those works would be exempted from the relevant Sections of the Building Ordinance. This is because Section 7(1) of the Ordinance is expressly made subject to Section 7(2) and the latter sets out certain requirements, which must be met before the certificate of exemption would have its effect under Section 7(1). In so far as the present case is concerned, the building in respect of which the 3 certificates of exemption may be issued must be one which did not exceed the dimensions set out in Part one of the schedule to the Ordinance. Thus in the case of a 3 storey building, when the overall height of the building is between 7.62 to 8.23 meters, the roofed-over area cannot exceed 65.03 square meters. In addition, there are further requirements on the thickness of the load bearing walls, which must also be observed. Alternatively if the height of the building does not exceed 7.62 meters, then (a) the roofed over area could not exceed 65.03 square meters, or (b) if there are approved plans (defined as plans prepared by the Director or plans prepared and modified with the Director's consent) and the building complies with such approved plans, the roof-over area could not exceed 92.90 square meters.

13. The person who is given the power to grant the certificate of exemption under the Ordinance is the Director who is defined to mean the Director of Lands. Under Section 11 of the Ordinance, the powers of the Director other than his powers under Section 4 may be exercised on his behalf by any District Lands Officer of a District in the New Territories. It is significant to note that there is no corresponding provision in the Building Ordinance to enable any of the powers and duties of the Building Authority to be exercised by the District Lands Officer.

14. It is also significant to note that the power of the Director under Section 4 to issue certificate of exemption in respect of any building works in the New Territories is not restricted to cases where the building works has not commenced. It is also notable that the Director has a discretion on whether to issue the certificate as this section merely provides that the Director may issue the certificate of exemption. By contrast, the power to grant a certificate of exemption under Section 5 is only exercisable in 4 situations mentioned in that section. Except in the case of replacement of a temporary structure, all other situations where the power is exercisable are cases where the building has not yet been built. This is plain from the use of the words "for a building to be built" in the section. Since the District Lands Officer does not have any power to issue certificate of exemption under Section 4, it must follow that in cases where the relevant building works is for the erection of a new building, there is no power on the part of the District Lands Officers to grant any certificate of exemption retrospectively after the building is completed. The only person who can grant a certificate of exemption retrospectively to cover a completed building or building works is the Director of Lands under Section 4.

15. One obvious consequence of the absence of any certificate of exemption is that the Building Ordinance will apply to the building or building works. Unless it is shown that the provisions of the Building Ordinance have been complied with, then there would be the risk that the Building Authority may take enforcement action against the offending building or building works. It is trite law that where this risk exists, the title to the property would be rendered defective and the purchaser is entitled to refuse to complete.

16. In the present case, there is no dispute that the vendor is not able to provide any occupation permit because none was in fact issued. Nor could the vendor produce any of the 3 certificates of exemption. The vendor however argued that from the series of exchange of correspondence between the vendor's solicitors and the District Lands Officer, there is no doubt that in due course the necessary certificates of exemption will be issued and that in any case there is no risk of any enforcement action being taken.

17. From the vendor's solicitor's letter dated 18 August 1993, it would appear that in 1988 the then owner of the site applied to the District Lands Office for the approval of the intended development and was advised that it would be necessary for the owner to submit site formation and drainage plans to the Building Ordinance Office for approval. It would appear from this letter that the plans were duly submitted and were approved. These plans were thus not approved plans for the purpose of Part 1 of the schedule to the Ordinance. However before the certificate of exemption of building works was issued, the then owner had already commenced work but upon being warned by the District Lands Office, work was stopped for a while. Without waiting for the certificate of exemption to be granted, the owner commenced work again and proceeded to complete the buildings. The letter asked the District Lands Officer to grant the necessary certificate of exemption of building works under Section 5 of the Ordinance relying on the fact that under Section 5 the District Lands Office was duty bound to issue the certificate.

18. In response to the letter of 18 August 1993, the District Lands Officer replied by letter dated 3 August 1994. It remains to be a mystery as to why it had taken the District Lands Officer nearly a year to answer the letter. From this letter in reply, it would appear that the building works was commenced in April 1989 and the owner had been warned against such conduct on 10 April 1989 and 21 June 1989. However the letter went on to say (emphasis added):

"Retrospective approval to the completed buildings may be considered if the buildings in question satisfy the specifications of those of an New Territories Exempted House and a penalty will be charged.

From my records, I note that there are some irregularities in the buildings and these must be rectified by way of toleration or otherwise before I can consider any application for retrospective approval to you client to cover the buildings erected without my approval under the Block Crown Lease and the Certificates of Exemption in respect of Building Works, Site Formation Works and Drainage Works."

19. By a letter dated 26 August 1994 the vendor's solicitor asked for particulars of the irregularities and also for confirmation as to whether the buildings satisfied the specifications of those of New Territories Exempted House and also for the penalty proposed by the District Lands Office. There was no reply to the letter for over a year. In his letter of 7 September 1995, the District Lands Officer merely said that it would require a thorough inspection of the buildings before he could give a detailed reply on the irregularities.

20. The matters appear to have gone asleep for another 9 months. In May 1996 the District Lands Officer wrote to enquire if the vendor's solicitors acted for all the owners and also requested that an inspection of the houses be arranged. In October 1996 the District Lands Officer wrote again to say that he would only consider the application if the solicitors acted for all the owners. Upon the vendor's solicitors confirming that in 1993 when the application was made they had instruction to act for all owners and in any event the developer (for whom they undoubtedly acted) had the interest to perfect the title, the District Lands Officer merely wrote on 29 October 1996 to say that the matter was receiving attention. There was no further development since October 1996.

21. Based on the certificate of Mr H W Leung and the exchange of letters set out above, the vendor's solicitors in their letter of 6 January 1998 in answer to the requisition contended that :

(a) Based on the certificate of H W Leung, the houses would qualify to obtain exemption under the Ordinance.

(b) From the letter of 3 August 1994, the District Lands Officer had indicated willingness to entertain retrospective approval subject only to penalty if they were satisfied that the houses would qualify to be exempted.

(c) The lack of approval and exemption certificates were known to the District Lands Office for 4 years and there was no enforcement action, and this would indicate that there was no real risk of enforcement action.

(d) From the enquiry made by the vendor's solicitors the irregularities were in relation to things such as enclosure of balconies or roof structures in some buildings only. In any case there was no such enclosure to the balcony of the property and there was no risk of any enforcement action against the property.

(e) From their previous experience the level of penalty was only a fine of some $5,500.00 per house and the vendor's solicitors was prepared to meet the proportionate penalty attributable to the property.

(f) There was so far no criminal prosecution and overall there is no real risk of enforcement action.

I do not consider that the answer given by the vendor's solicitors together with the enclosed certificate and letters has sufficiently answered the concern of the purchaser.

22. First as to whether the property in question would qualify for exemption under Part I of the schedule to the Ordinance, I note that the certificate merely gave the total area of 2 houses being not mere than 89.4 square meters and the height of the houses be not more than 7.63 meter. Under Part I of the schedule, if the height of the building was between 7.62 to 8.23 meters, then its roof-over area must not be larger than 65.03 square meters. But if the height of building is not more than 7.62 meters, then it may have a roof-over area of up to 92.9 square meters if there were approved plans and the building complies with the approved plans. In this case, Mr Leung simply certified that the building had a height of not more than 7.63 meters. If it is said that the building would qualify for exemption because its height was within 7.62 meter to 8.23 meter, then it must be shown that its roof-over area would not exceed 65.03 square meters. Here Mr Leung merely said that the total area of the 2 building was not more than 89.4 square meters. It is not clear as to whether the building where the subject property would form part would have any roof-over area of more than 65.03 square meters or not. Furthermore there was no information given as to the thickness of the load bearing walls. If it is said that the building qualified for exemption because it was not more than 7.62 meters, then although the roof-over area would be within the limit of 92.9 square meters, yet there was no evidence that there was any approved plans for the building.

23. Secondly, the correspondence relied on were all between the vendor's solicitors and the District Lands Officer only. As I have pointed out above, the District Lands Officer did not have the power to grant any exemption under Section 4 of the Ordinance. He could only grant exemption under Sections 5 and 6. Under Section 5, he could only grant exemption in relation to a building to be built, and as such he cannot grant a certificate of exemption of building works retrospectively. At any rate, the letter of 3 August 1994 did not amount to any firm undertaking that any certificate of exemption will be granted. At the most it merely indicated that the District Lands Officer would be prepared to entertain an application for exemption. The fact remained that since August 1994 up to date, there was still no certificate of exemption granted.

24. Thirdly, from the letters it would appear that in any event, there would not be any certificate of exemption until the irregularities in the buildings are disposed of. There was no compelling evidence as to what those irregularities were. Although the vendor's solicitors said in their letter of 6 January 1998 that the irregularities were the enclosed balconies and structures on the roof, yet there was no confirmation from the District Lands Office that such was the case. In any case the fact that the subject property did not contain any enclosed balconies or structure on the roof (because it was only a 1st floor premises) is neither here nor there. The attitude of the District Lands Office was that it would only entertain an application by all the owners of the buildings on the lots no. 172, 174, 175, 176, 177 and 178 and it is quite clear that the grant of an exemption just in relation to the property would be out of question.

25. In relation to the level of penalty, I do not think that the purchaser was obliged to accept the view of the vendor's solicitors that the level of fine would be some $5,500.00 per house only. At any rate the undertaking offered by the vendor's solicitors was not that they would meet all the penalty but they would only meet the proportionate penalty attributable to the property. If the other owners of the buildings were not prepared to pay the penalty, then it is plain that there could be no exemption and it is obvious that the offer to pay the penalty would not be sufficient to make sure that the question of penalty would not be an impediment to the grant of the exemption.

26. It is plain that without the certificate of exemption, the building and the building works would still be governed by the Building Ordinance. The consequence was that the building could not be occupied without an occupation permit. Likewise the building and the building works are liable to enforcement action by the Building Authority under Section 24 of the Building Ordinance. The fact that the District Lands Office had been aware of the breach since at least 1993 and had taken no action does not mean that the Building Authority was likewise aware of the breach and had decided to take no action at all. In the circumstances in view of the lack of the occupation permit and the Certificates of Exemption the possibility of the risk of an enforcement action by the Building Authority was real (see Lui Kwok Wai -v- Chan Yiu Hing [1995] 1 HKC 197). Accordingly I hold that the requisitions had not been sufficiently answered by the vendor and the vendor had failed to show a good title to the property.

27. It must follow that on the facts of the present case, the vendor was not entitled to terminate the contract and had acted in breach of the contract.

28. As the vendor had not shown a good title, the purchaser is entitled to recover the amount of $138,000.00 being deposit paid. The purchaser however also claimed the following damages :

(a) Stamp Duty paid for the agreement : $10,350.00.

(b) Legal cost and disbursement.

(c) Estate agent fees : $13,800.00.

29. In relation to the estate agent fee, I am of the view that the rule in Bain -v- Forthergill (1874) L.R. 7 H.L. 158 applies, and the vendor is not liable for this sum. In any event, there was no evidence that the purchaser had paid the estate agent. In fact, I was told by the purchaser's counsel that his client had not paid the agent. Under the provisional agreement, in the event that the sale could not proceed because of the default of either party, the estate agent could claim the whole of his fees from the defaulting party. In this case, the estate agent could claim the whole of the sum of $27,600.00 from the vendor. I do not think that the purchaser would be liable to the agent for the fees in any event. Accordingly I would not allow this sum.

30. As regards the question of stamp duties, the position is that if a sale has fallen through owing to defects in title, the party having paid stamp duties on the agreement for sale and purchase may be able to apply for the refund of the stamp duties paid from the Commissioner. In the present case, I do not think it would be reasonable to deny the purchaser any right to recover the stamp duties from the vendor as an item of damages simply because he may be able to obtain a refund. Through his counsel the purchaser had offered an undertaking that the purchaser will use reasonable effort to obtain reimbursement of the stamp duties paid from the Commissioner and would reimburse the vendor in the event of his being able to obtain back any stamp duties from the Commissioner. On this undertaking, I am prepared to award to the purchaser also the sum of $10,350.00 being the stamp duties paid.

31. In relation to the conveyancing cost, the bill presented by the purchaser's solicitors was in the sum of $24,000.00 but it is conceded that following items of the bill should be deducted :

(a) The stamp duty for the agreement : $10,350.00.

(b) The registration fees for the assignment and mortgage in the total sum of $900.00.

(c) The stamp duty for the assignment : $100.00.

32. After deducting the amounts set out above the amount claimed as conveyancing cost would be $12,650.00, and I will also award the purchaser this sum.

33. Although in the statement of claim there is no specific claim for interest under Section 48 of the High Court Ordinance, under the prayer for such other relief as the Court may deem fit, I am of the view that the purchaser should be entitled to interest on the amount awarded at the prime rate from the date of completion, i.e. from 14 January 1998 up to the date hereof.

Conclusion :

34. I will grant the purchaser the declarations asked for in paragraphs 1 & 2 of the Prayer. I will order the vendor to repay the purchaser the $138,000.00 deposit and would declare that the purchaser is entitled to a lien on the property for the repayment of this sum. I will further award damages in the sum of $12,650.00. There will be interest on the sum of $138,000.00 and $12,650.00 at the prime rate from 14 January 1998 up to the date hereof. The purchaser is also entitled to have the cost of this action.