CHAN CHOI FUNG AND ANOTHER v. HUGE BASE INVESTMENT LTD

HCA1711/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1711 OF 2005

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J U D G M E N T

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1.  The plaintiffs were at all material times the registered owners of the property known as Shop 11 on Ground floor and Cockloft of Ever Wealth Building, Nos. 9–11 Fat Tseung Street (“the Shop”).

2.  The plaintiffs as vendors and the defendant as purchaser entered into a provisional agreement dated 3 March 2005 for sale and purchase of the Shop for $5.65 million and an initial deposit of $300,000 was paid by the defendant.

3.  A formal agreement for sale and purchase dated 31 March 2005 (“the Agreement”) was entered into by the parties.  At the time of the Agreement, a further deposit of $265,000 was paid by the defendant.  The completion date was originally fixed for 29 July 2005, but was later postponed to 1 August 2005 by mutual agreement.

4.  On 4 May 2005 title deeds and documents relating to the Shop were delivered by the then solicitors acting for the plaintiffs to the then solicitors acting for the defendant for proof of title and/or requisitions thereto.

5.  Completion did not take place on 1 August 2005 or any time thereafter with both parties alleging wrongful repudiation of the Agreement by the other.

6.  The plaintiffs now claim that the defendant has wrongfully repudiated the Agreement despite the plaintiffs having proved its title to the Shop and seek (inter alia) to forfeit the total deposit of $565,000 paid by the defendant.

7.  The defendant, by its Counterclaim, alleges that the plaintiffs have wrongfully repudiated the Agreement whereby the defendant was entitled to rescind same, and claim for the return of the deposits paid and damages for misrepresentation and breach of contract.  The defendant’s complaint is that the plaintiffs had failed to (a) properly answer a requisitions raised by the defendant in relation to the End Wall of the entrance to the Shop, but instead had reinstated the End Wall without consulting with the defendant some time between entering the Agreement and the date for completion, and (b) the plaintiffs had failed to properly answer its requisition in respect of an extension to the cockloft and had demolished same before the date for completion.

Relevant clauses in The Agreement

8.  The clauses in the Agreement relevant to this dispute are as follows:

9.  Clause 8 thereof provides that the Shop was sold subject to the tenancy as set out in Part VI of the Schedule thereto.

10.  Clause 12(a) provides for any requisition or objection on title to be delivered to the plaintiffs’ solicitors within seven working days after receipt of the title deeds by the defendant’s solicitors otherwise it shall be considered as waived and the defendant be deemed to have accepted the plaintiffs’ title.

11.  Clause 13(a) provides that if the defendant fails to complete, other than due to the default of the plaintiffs, the deposit money paid shall be absolutely forfeited as and for liquidated damages.

12.  Clause 14 provides that if the plaintiffs fail to complete, other than due to the default of the defendant, the deposit paid shall be returned to the defendant who shall also be entitled to recover any damages sustained by such failure of the plaintiffs to complete.

13.  Clause 16(a) states that the plaintiffs warrant and declare that the plaintiffs are not aware of any notice or order from any Government or competent authority requiring the plaintiffs to demolish or reinstate any part of the Shop, but if such notice or order is discovered, issued or served before date of completion, the costs for such demolition or reinstatement shall be borne by the plaintiffs.

14.  Clause 16(c) provides that the plaintiffs undertake to notify the defendant forthwith upon receipt of any such notice or order.

15.  Clause 18 provides that the defendant confirms that it has inspected and accepts the existing physical state, condition and finishes of the Shop, is aware that it is purchasing the Shop in its present state and condition and that the Shop is sold on an “as is” basis and no warranty or representation has been given or made as to the physical state or condition of the Shop or of the building.

16.  Clause 18(b) provides that in particular, no warranty or representation is given as to the physical state or condition or the legality or the user of the Shop or of the building or any structures or erections therein or thereto.

17.  Clause 20(a) provides that the plaintiffs shall show and give a good title to the Shop

18.  Clause 22 provides that the Agreement supersedes all previous agreement, if any, whether oral or in writing, entered into by the parties thereto or their agents.

Main Factual Issues

19.  Two main issues arise between the parties from the requisitions on title raised by the then solicitors for the defendant.

20.  The first issue relate to a fire resistance wall (also called the End Wall) of the entrance to the Shop.  The second issue relate to what is described in the Defence as “the Extended Cockloft”.

21.  I shall deal with each of these two factual issues separately.

(A) The End Wall

22.  In so far as the first issue relating to the end wall of the entrance to the Shop, there is effectively no factual dispute between the parties.  What happened was as follows.

23.  After the documents of title were delivered to and inspected by the defendant’s solicitors, a requisition was raised by them that there had been structural alteration to the entrance of the Shop in that the End Wall to that entrance had been removed.  The defendant’s solicitors further asked to be shown the written approval from the Buildings Department for the removal of the End Wall.  At the same time, the authorized person acting for the defendant certified that the End Wall, being 900 mm in width was required under the Buildings Ordinance, removal of which will not be permitted by the Buildings Department.

24.  By letters respectively dated 17 May and 4 June 2005, written complaint was lodged with the Buildings Department by the defendant’s authorized person and solicitor in respect of the removal of the End Wall of the entrance of the Shop.

25.  On 13 June 2005, the Buildings Department issued an advisory letter requiring the plaintiffs to reinstate the End Wall of the entrance of the Shop to accord with the approved building plans.

26.  As a result, reinstatement works were carried out by the plaintiffs and the End Wall to the entrance to the Shop was restored.

27.  On 14 July the authorized person instructed by the plaintiffs reported to the Buildings Department that the reinstatement works as suggested by the Buildings Department had been completed.

28.  On 25 July 2005, after inspection by the Buildings Department, it confirmed by letter to the authorized person acting for the plaintiffs that the required reinstatement works had been complied with.

(B) The Extended Cockloft

29.  The issue with the Extended Cockloft arose in this way.

30.  The original approved plans of the Shop showed that the Shop has an original or existing cockloft which is at the back part of the Shop and that for some 1.5 metres extending in from the front entrance of the Shop there is no cockloft but what is described as a “void” in the approved plan.

31.  By letter dated 26 July 2005, the defendant’s solicitors raised with the plaintiffs’ solicitors by way of requisition on title as follows:

“We have just been instructed that the void space at the front of the shop has also been built up to form an extension of the original cockloft.  This amounts to an unauthorized building work which is liable to the enforcement action by the Building Authority.  Again, your client has never disclosed this material fact to our client at any material times.  Your client is now requested to produce such satisfactory proof that the extension of the cockloft is authorized by the Building Authority and properly approved by the Incorporated Owners or Manager of the building respectively.  A copy of the assignment plan of the cockloft is enclosed.”

32.  By a further letter the following day (i.e. 27 July 2005) the defendant’s solicitors further stated:

“Your client has since receipt of our letter to you yesterday carried out such work to demolish the ‘extended’ cockloft at the void space of the Shop.  This is likewise objectionable for the same reasoning above stated.  Your client simply cannot do that unilaterally.  We do not ask your client to remove the extended cockloft as it would diminish the floor space of the shop substantially and compel our client to face a property substantially different from the agreed in the contract.  We ask your client to prove it is authorized by the Building Authority and the Incorporated Owners and/or Manager of the building.”

33.  The evidence of Lo Chuk Yuk, a director of the defendant, was that after he was told by the estate agent, a Mr Wu, that the Shop was available for sale, he had gone to where the Shop was situated and viewed it from outside its entrance (i.e. without going into the Shop) and had seen a cockloft which extended to the front part of the shop as well.  This viewing of the Shop took place on 1 March 2005, before the provisional agreement for sale and purchase was entered into between the parties.

34.  This evidence of Lo was supported by the evidence of his expert witness, Joseph Leung, a qualified architect and authorized person, whose evidence was that he had made two inspections of the Shop, the first in May 2005 when he saw the “void area” to be covered up and in the second inspection which was in July 2005, he saw that the “void area” between the ground floor and the cockloft was decked over with canvas, the purpose of the canvas being to catch falling building debris.  The implication of that evidence being that the Extended Cockloft was being demolished at that time.

35.  The erection of the Extended Cockloft was pleaded in paragraph 16(2) of the Defence and Counterclaim by the defendant by averring that the void space at the front of the Shop had been built up to form an extension of the original cockloft which the defendant termed “the Extended Cockloft”.

36.  This averment of the defendant as to the erection of ‘the Extended Cockloft’ was admitted by the plaintiffs in paragraph 9 of the Reply and Defence to Counterclaim which states:

“Save and except the demolition of the Fire Resistance Wall and the erection of the Extended Cockloft are admitted, paragraph 16 of the Defence is not admitted and the Defendant is put to strict proof thereof.”

37.  At the trial, the plaintiffs attempted to call evidence to dispute or deny the existence and/or erection of the Extended Cockloft.

38.  I had taken that evidence de bene esse on the basis that paragraph 16 of the Defence was vague and imprecisely pleaded as to what exactly constituted “the Extended Cockloft”.

39.  However, having viewed all the evidence in this case, in particular that fact that what was alleged to be the Extended Cockloft had already been canvassed between the solicitors for the parties in the letters of 26 and 27 July 2005 referred to above, and more importantly, there was never any application made by the plaintiffs at trial to withdraw the admission made in paragraph 9 of the Reply and Defence to Counterclaim, I have come to the conclusion that the plaintiffs well knew what they were admitting to when they made that admission and therefore are bound by such admission as to the existence or the erection of the Extended Cockloft.

40.  Accordingly, the evidence which the plaintiffs wished to rely on to dispute or deny that there was an Extended Cockloft is not admissible and will not be admitted in evidence.

41.  It follows therefore that I find, on the admission of the plaintiffs, there was an Extended Cockloft in the way described in the defendant’s solicitor’s letter of 26 July 2005 and pleaded in paragraph 16(2) of the Defence and Counterclaim.

42.  I also accept the evidence coming from Mr Joseph Leung that at some time towards the end of July 2005, he saw indications which showed that the extension to the original cockloft was being demolished such that the Shop was being reinstated to its original position of having only the original cockloft.

The Requisitions raised

(a) Requisition in respect of the end wall

43.  By Clause 8 of the Agreement, the Shop was sold subject to its existing tenancy, and by Clause 18 thereof the Shop was sold on an “as is” basis in the physical state and condition as it was at the time of the Agreement.

44.  The evidence from Lo Chuk Yuk, which is not disputed in so far as it related to the End Wall, was that when he went to look at the Shop from the outside on or about 1 March 2005 before entering the provisional agreement for sale and purchase, he saw that the entrance to the Shop was a complete entrance without any End Wall to it.

45.  Clause 12 of the Agreement provides that requisitions are to be raised by the defendant within 7 working days from receipt of the title deeds otherwise the same shall be considered as waived and the defendant be deemed to have accepted the vendor’s title.

46.  The documents of title of the Shop were delivered by the plaintiffs’ solicitors to the defendant’s solicitors on 4 May 2005.

47.  On 9 May 2005, the defendant’s solicitors raised the requisition regarding the removal of the End Wall of the Shop specifically requesting to be shown the consent or approval given by the Building Authority.

48.  Quite clearly form the facts of the case, no such approval or consent from the Building Authority existed and therefore it must follow that this requisition had never been directly answered by the plaintiffs.

49.  Instead as a result of the complaint regarding the End Wall made by the defendant’s solicitors and its authorized person to the Buildings Authority, which in turn resulted in the Buildings Authority requiring a reinstatement by the plaintiffs, the plaintiffs took the necessary steps to reinstate the End Wall which was completed some time in mid-July and upon the inspection carried out by the Buildings Authority, it confirmed by letter dated 25 July 2005 that the reinstatement of the End Wall had been complied with by the plaintiffs.

50.  In purported answer to the requisition raised, the plaintiffs’ solicitors by letter of 28 July 2005 to the defendant’s solicitors enclosed a copy of the letter from the Buildings Authority confirming that the reinstatement of the End Wall had been carried out by the plaintiffs.

(b) Requisition on the Extended Cockloft

51.  The requisition as to the Extended Cockloft was raised by the defendant’s solicitors by letter dated 26 July 2005.

52.  Clause 12(a) of the Agreement provides that requisitions on title are to be raised by the defendant within 7 working days from the time the title deeds were delivered to the defendant.

53.  Paragraph 16 of the Defence and Counterclaim pleaded that it was upon perusal of the title deeds that the defendant discovered the erection of the Extended Cockloft to be one of the structural alterations.

54.  In the absence of any explanation as to why the requisition in respect of the Extended Cockloft was raised only a matter of days prior to the date fixed for completion, I am of the view that the defendant is clearly out of time in raising this requisition and the plaintiffs were under no obligation to answer the purported but late requisition raised.

Substantial performance

55.  In so far as the End Wall is concerned, the first thing to note is that the reinstatement of the End Wall by the plaintiffs came about as a direct result of the complaints made by the defendant’s solicitors and its authorized person to the Buildings Authority.

56.  It would follow from this that the defendant, in making the complaints through its solicitors and authorized person, must have realized that the end result would be for the Buildings Authority to exert its authority upon the plaintiffs for them to reinstate the End Wall.

57.  It is true that there is no evidence before me that the plaintiffs had at any time consulted the defendant before the plaintiffs took steps to reinstate the End Wall, albeit done in response to the Buildings Authority’s reinstatement order.

58.  The Shop was sold on an “as is” basis.  At the time of the  Agreement, the entrance of the Shop (without the End Wall) was 2.35 metres in width.  The End Wall which was reinstated was 900 mm in width.  Thus the entrance was reduced to only a width of 1.45 metres after the End Wall was reinstated by the plaintiffs.

59.  The plaintiffs rely on the evidence of the existing tenant of the Shop, Mr Liu Wai Hung who carries on the business of a butcher at the Shop to the effect that the reinstatement of the End Wall to the Shop has not in any way affected his business as a butcher there.  Indeed, Liu has renewed his tenancy with the plaintiffs when it expired in November 2007 for a further term of two years which will run up to November 2009.  Mr Liu explained in evidence that the reinstatement of the End Wall has not affected his butcher’s business in any way was because in running his butcher’s trade at the Shop, he would place a butcher’s table outside the entrance of the Shop, effectively on the pavement outside the entrance of the Shop, and it is on that long table that he performs his work as a butcher.  Therefore the existence of the End Wall does little to interfere with his butcher’s business.

60.  It is also common ground that the defendant had at no time made known to the plaintiffs the purpose for which it was purchasing the Shop.  Mr Lo’s evidence in this respect is that if the defendant had obtained the Shop and if there came a time that the butcher no longer continued as a tenant at the Shop, he would consider to use the Shop to sell garments himself.  However, this was never made known to the plaintiffs before the Agreement was entered into.

61.  Secondly, in so far as the Extended Cockloft is concerned, the plaintiffs have admitted the existence of the Extended Cockloft.

62.  I have also accepted the evidence of the defendant that the Extended Cockloft was demolished by the plaintiffs towards the end of July 2005.  In this respect, it is clear from the letter dated 27 July 2005 from the defendant’s solicitors to the plaintiffs’ solicitors that the Extended Cockloft was already demolished at the time that letter was written, i.e. before the date for completion.

63.  There is, however, no evidence as to the size of the Extended Cockloft.  The dimensions of the void area shown on the approved cockloft plans of the Shop shows the void area to be 1500 mm x 1800 mm which would come to approximately 2.7 square meters.

64.  It would follow that the area of the Extended Cockloft cannot be greater than 2.7 metres, but may be smaller than that.

Decision

65.  The defendant’s case is entirely premised on the basis that by Clause 18 of the Agreement, the Shop is sold on an “as is” basis and in the physical state and condition that the Shop was in at the time the Agreement was entered into.

66.  In the case of Leung Wing Fai v Onlink Investment Ltd [2000] 1 HKLRD 725, Madam Justice Yuen (as she then was) had to consider a clause which was similar in wording to Clause 18 in our present case.  It was also an “as is” clause in the case of Leung Wing Fai.

67.  In that case, Madam Justice Yuen held that the “as is” clause was for the protection of the vendor in that the vendor would not need to improve the property which the vendor was selling.  It was not a right that could be asserted by a purchaser to restrain a vendor from demolishing what was undisputed to be unauthorized building works, nor could it be used as the purchaser’s justification for insisting that the unauthorized building works be sold to him together with the rest of the property.

68.  By the same token, having regard to the wording of the present Clause 18, the same would be applicable in our present case.

69.  This is particularly so in respect of the End Wall when it is clear that the notice to reinstate the End Wall was served on the plaintiffs by the Building Authority in May 2005, i.e. before the completion date, such that the provisions in Clause 16(a) of the Agreement would be invoked and come into play.

70.  Moreover, one should not lose sight of the fact that it was a consequence of the defendant’s complaints (through his solicitors and authorized person) to the Building Authority that set in motion the notice or order from the Building Authority for the plaintiffs to reinstate the End Wall.

71.  In this respect, I also take note that in the case of Goldful Way Development Ltd v Wellstable Development Ltd [1999] 1 HKLRD 563, it was also Madam Justice Yuen who held that a vendor was not merely a bare or dormant trustee of the property he had agreed to sell.  His relationship as trustee for the purchaser subsisted subject to his paramount right to protect his own interest as vendor of the property.

72.  Given that the reinstatement order was served on the plaintiffs before the completion date, and the fact that such reinstatement order from the Building Authorities emanated as a result of the defendant’s complaints made through its solicitors and Authorized Person, the defendant can have no complaint of such reinstatement.  Nor can the plaintiffs be faulted for carrying out such reinstatement at their own expenses.

73.  I turn now to deal with the Extended Cockloft.

74.  On the facts as found by me, there was an Extended Cockloft but which was demolished by the plaintiffs shortly before the date set for completion.

75.  It would appear that the Extended Cockloft was constructed without approval from the Building Authorities.  Therefore its demolition by the plaintiffs was no more than the demolition of an unauthorized or illegal structure.

76.  On the authority of the two judgments of Madam Justice Yuen cited above, the Extended Cockloft was not something which the defendant can insist to be assigned to it even if the Shop was sold on an “as is” basis.

77.  The only difference between the Extended Cockloft and the End Wall was that with the End Wall, a reinstatement notice was served upon the plaintiffs by the Building Authorities while no such notice or order was served in respect of the Extended Cockloft.  That does not change the fact that it was still an illegal or unauthorized structure.

78.  At the date for completion, the plaintiffs were able to assign the Shop to the defendant with its orginal cockloft, albeit without the unauthorized extended part of it.

79.  The Extended Cockloft would not have had an area greater than the area of the ‘void’ space marked on the approved plan

80.  Given the above matters, I come to the conclusion that the plaintiffs were in a position to substantially perform the Agreement by assigning to the defendant the Shop with the End Wall reinstated and the Extended Cockloft demolished.

Misrepresentation

81.  The defendant’s case on misrepresentation is pleaded in paragraph 31 of the Defence and Counterclaim.

82.  The representation relied on by the defendant may be summarized as follows:

(a)  the Shop included the Extended Cockloft;

(b) the front entrance of the Shop is about 2.35 metres;

(c) that all parts of the Shop including any alteration thereto (and therefore also (a) and (b) above) are properly authorized by the Building Authority.

83.  It was pleaded by the defendant in paragraph 31 of the Defence and Counterclaim that the representation were made expressly or impliedly and were made prior to the execution of the Agreement.

84.  It is common ground on the evidence that the parties had not met or conversed before the Agreement (nor for that matter after the Agreement was executed).  Everything was conducted through a real estate agent, Mr Wu. However, there was no evidence that Mr Wu had ever represented that the Shop or any alteration thereto were properly authorized by the Building Authority.

85.  I can therefore safely exclude express representation as pleaded.

86.  As for implied representation, even accepting that Mr Lo saw the entrance and the Extended Cockloft himself on or about 1 March from the outside of the shop, that per se does not give rise to any implied representation as alleged by the defendant.

87.  Moreover, the defendant’s case on implied representation is fully met and totally refuted by Clause 18, in particular sub-clause (b) thereof, of the Agreement.

88.  Given that Clause 18(b) specifically states that no warranty or representation is given by the plaintiffs or their agents of the physical state or condition or the legality “of any structures or erections therein or thereto”, the defendant’s case on misrepresentation cannot even cross the first hurdle of showing that there was any such representation as alleged by the defendant whether express or implied.

89.  In the absence of proving that there were the representations alleged, it must follow that the defendant’s case on misrepresentation collapses altogether.

Conclusion

90.  The plaintiffs were ready and willing to perform the Agreement with the End Wall reinstated and the Extended Cockloft demolished, but that it was the defendant who had refused to complete because of the reinstatement of the End Wall and the demolition of the Extended Cockloft.

91.  In those circumstances, I find the defendant to have wrongfully repudiated the Agreement by its refusal to complete in such manner as the plaintiffs were ready and willing to do so.

92.  There will accordingly be judgment to the plaintiffs for the following declaration:

(a)  the plaintiffs have duly rescinded the Agreement and are discharged from further performance of same;

(b) that the plaintiffs are entitled to and have duly forfeited the total deposit of $565,000 paid by the defendant under the Agreement and are entitled to retain same for their own use and benefit.

93.  There will be a further order that the registration of the Agreement in the Land Registry against the Shop by Memorial No. 05041302770104 be vacated and removed from the Land Registry.

94.  The counterclaim of the defendant is dismissed.

Costs

95.  There will be a costs order nisi as follows:

(a)  costs of the plaintiffs’ claim to be paid by the defendant on a party to party basis to be taxed if not agreed;

(b) the costs of the plaintiffs defending the counterclaim of the defendant be paid by the defendant to the plaintiffs on party to party basis to be taxed if not agreed.