LEAD WELL INVESTMENTS LTD v. QUALI-WELL DEVELOPMENT LTD

HCA 1914/2020

[2024] HKCFI 2264

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1914 OF 2020

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DECISION

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A.  Introduction

1.  This is the plaintiff’s appeal against the order of a Master dated 2 April 2024 (“Order”) dismissing the plaintiff’s application by summons filed on 4 December 2023 (the “Summons”) for summary judgment under Order 86 of the Rules of High Court and ordering the plaintiff (“P”) to pay the defendant’s costs summarily assessed at HK$220,000.

B.  Background

2.  The following background is largely undisputed:

(1)  On 20 September 2019, the defendant (“D”) as vendor and P as purchaser entered into a provisional agreement of sale and purchase (the “Provisional Agreement”) in respect of Blocks A and B (the “Property”) on 11/F of Wai Yip Industrial Building (the “Building”) for a consideration of HK$29,000,000.

(2)  On 4 October 2019, D and P entered into a formal agreement of sale and purchase (the “Formal Agreement”).

(3)  The present application only concerns whether P’s requisition on a notice (the “MBIS Notice”) issued by the Building Authority (the “BA”) in relation to the mandatory inspection and repair of the common parts of the Building under the Mandatory Building Inspection Scheme (the “MBIS”) was validly raised.

(4)  The requisition was first raised by P’s solicitors (“KWM”) to D’s solicitors (“JCL”) under a letter dated 14 October 2019 wherein KWM asked whether there was any notice or order from the Government requiring D to do or pay for works in relation to the repair renovation improvement or refurbishment of the common parts or common facilities of the Building.

(5)  D responded on 28 May 2020 that under a search record obtained by JCL, the Building “may not be a target [sic] building of MBIS/MBIS [sic]”.

(6)  However, upon a search by KWM on 1 June 2020, there was in fact a MBIS Notice. By letter dated 1 June 2020 issued by KWM to JCL, KWM raised a requisition on the existing MBIS Notice against the common parts of the building which forms part of the Property.

(7)  The MBIS Notice was issued on 16 September 2017, more than 2 years before the signing of the Provisional Agreement. Under the MBIS Notice, notice was given to the Incorporated Owners of the Building (the “IO”) that a prescribed inspection and, if necessary, prescribed repair in respect of the common parts of the Building are required to be carried out by:

(a)  appointing a registered inspector within 3 months of the date of the MBIS Notice to carry out the prescribed inspection;

(b)  completing the prescribed inspection within 6 months of the date of the MBIS Notice; and

(c)  completing the prescribed repair within 12 months of the date of the MBIS Notice, if the prescribed repair is found necessary under s.30B(8) of the Buildings Ordinance.

(8)  D attempted to answer the requisition in the following ways on diverse dates:

(a)  On 9 September 2020, JCL replied in writing that:-

“12… We are instructed that our client is prepared to deduct a reasonable sum from the balance of purchase price upon completion and such sum will be held at our office as stakeholders for contribution required to be made for the compliance of [the MBIS Notice].”

(b)  On 6 October 2020, JCL wrote further, enclosing a fax from the Building’s property manager, Winson Property Management Ltd (“Winson”), that:

“A short time before the issue of the MBIS Notice, [the IO] had just completed the comprehensive repair and renovation works in respect of the common part of the Building … It is noted that our client had made a total contribution of HK$96,600.00 x 2 = HK$192,000.00…

In view of the recent completion of the comprehensive repair works to common parts of the Building, it is anticipated that the repair works required by the MBIS Notice would be minimal and the contribution required from our client would not be much.

Our client proposes to deduct a sum of HK$200,000.00 (equivalent to the previous repair contribution) from the balance of purchase price upon completion and such sum will be held at our office as stakeholders for contribution required to be made for the compliance of the MBIS Notice.”

(c)  By letter dated 14 October 2020, KWM demanded D to substantiate such proposal.

(d)  On 21 October 2020, JCL replied:

“Not long before the issue of the MBIS Notice, [the IO] had just completed the comprehensive repair and renovation works in respect of the common part of the Building. To comply with the MBIS Notice it will not be necessary to re-do all the repair works which had just been completed. Only some additional works need be carried out. It is reasonable to assume that the costs for complying with the MBIS Notice will not exceed the previous cost for comprehensive repair and renovation of the Building.

Alternatively our client is willing to deduct a reasonable sum proposed by your client from the balance of purchase price upon completion and such sum will be held at our office as stakeholders for contribution required to be made for the compliance of the MBIS Notice. Any shortfall will be paid by our client and any surplus will be refunded to our client.”

(e)  On 23 October 2020, Winson wrote to JCL:

“…根據2012年4月11日業主周年大會會議記錄（詳見附件），本大廈於2013年展開整體維修工程，包括大廈結構、外牆維修、更換去水喉工程等，當時連同工程備用金5%，共集資HK$2,559,900.00，每物業個單攤分HK$96,000.00。預算是項強制驗樓及維修工程，初步估算約HK$6,000,000.00以供　貴律師行作參考。（備註：鑑於本司不是專業工程顧問，只能以附近同類型大廈整體維修工程作估算；但一切結果則以招聘工程顧問，完成招聘工程承辦商後為準）…”

(f)  As a result, on 27 October 2020, JCL wrote to KWM (enclosing Winson’s letter of 23 October 2020) that:

“… We enclose herewith a letter dated 23 October 2020 from [Winson] to us, the contents whereof are self-explanatory.

Our client proposes to deduct a sum of HK$460,000.00 (HK$6,000,000.00 x 20/266 = HK$451,127.80) from the balance of purchase price upon completion and such sum will be held at our office as stakeholders for contribution required to be made for the compliance of the MBIS Notice. Any shortfall will be paid by our client and any surplus will be refunded to our client.” (the “Offer”)

(g) The Offer was repeated by JCL to KWM on 29 October 2020.

(h) The Offer was refused by KWM on 29 October 2020 and 30 October 2020.

(i) It is not disputed that as at the completion date on 30 October 2020, the IO had not yet appointed any registered inspector to conduct inspection under the MBIS Notice. Accordingly, on the completion date, no inspection under the MBIS Notice had yet been done, nor had any necessary repairs to the common parts of the Building been conducted following the requisite inspection.

(j) By letter dated 2 November 2020 from KWM to JCL, P alleged that D repudiated the Formal Agreement and purported to accept the repudiation.

C.  Legal principles

3.  The applicable legal principles are trite. An appeal against a master’s decision operates by way of rehearing. The judge treats the matter as though it came before him for the first time. But the judge will give the weight it deserves to the decision of the master, even though he/she is not bound by it. Fresh points may be raised before the judge which were not raised before the master[1].

4.  It is trite that while the scope of application of O.86 and O.14 are different, the legal principles applicable to an application for summary judgment under both Orders are the same. Once a plaintiff has established a properly constituted case against the defendant, the burden will be on the defendant to satisfy the court that there is a triable issue or there are reasonable grounds for a bona fide defence and summary judgment should not be granted against him[2].

5.  There is no dispute that an undischarged MBIS notice constitutes a blot on title: see To Yung Sing Herman v Szeto Chak Mei[3].

6.  However, the fact that there is a blot on the title does not mean that good title cannot be given. The overarching principle in relation to good title is, as set out by Litton PJ in Mexon Holdings Ltd v Silver Bay International Ltd[4] : to approach the matter with robust common sense from the standpoint of a willing purchaser and a willing vendor.

7.  There is no dispute from Mr Lee Yee Hung and Mr Eric Chim (counsel for P) that if adequate provision by the vendors for the costs of the prescribed inspections and repair works necessary for the eventual discharge of the MBIS Notice have been provided for, good title can be given.

D.  Discussion

8.  The question thus turns on whether the costs of the prescribed works have been adequately provided for by D.

9.  Mr Gary C.C. Lam (counsel for D) relied on the following cases:

(1)  In Lam Mee Hing v Leung Hing Wah [1995] 3 HKC 247 at 252I, Yeung J, after trial, found that such an encumbrance would be discharged by the vendor agreeing to be responsible for the apportioned costs of the works, and it was in fact offered throughout the negotiation between the parties.

(2)  In Hu Mei Yu Anastasia v King Best Enterprise Ltd[5], DHCJ To (as he then was) held that where an undertaking from a vendor has been given, it should be approached from the standpoint of a purchaser with robust common sense and willing and intending to see the transaction through to completion[6]. In that case, the purchaser never requested any security or any amount of money to be set aside or to be held as stakehold money. A willing purchaser intending to complete would, if he thought the undertaking insecure, request for some form of security. DHCJ To held that the vendor’s offer of undertaking is reasonable and sufficient to discharge the encumbrance.

(3)  In Luk Ho Chang v Fook Man Finance Co Ltd[7], the vendor had warranted that if there was a resolution by the incorporated owners for repairs in existence before the date of the agreement, it would bear the share of costs for such repairs. DHCJ Muttrie (as he then was) held that there was no practical difference between a building order and a resolution by the incorporated owners for repairs. Further, it was held that a possible way to give a good title clear of encumbrance would be by way of stakeholding and undertaking.

(4)  In E-Global Ltd v Trenda Ltd[8], the case concerned a Fire Services notice which was agreed to be an encumbrance on title and binding on individual owners. DHCJ Burrell (as he then was) found that an offer to stakehold a sum (though speculative) and an undertaking (though not fortified) to pay costs above that sum was adequate. The learned Judge also found that a complaint that the undertaking was not fortified or secured was not justified, as no fortification nor further security was asked for. It was just rejected.

(5)  In Tsang Kwok Hung Frederick v Ching Lai Tuen[9], the Court of Appeal held in obiter that an undertaking to pay or stakeholding is a practical solution particularly in respect of works to be done in the common area, as opposed to within the subject units themselves.

10.  Mr Lee on the other hand relied on To Yung Sing Herman, in particular, the following paragraphs:

“106. It was thus incumbent upon the Vendors to demonstrate either that the Notices had been dealt with to the satisfaction of the BA or that the costs of the prescribed inspections and repair works under the Notices had been adequately provided for, such that no encumbrance under s.33(9) could ever arise […]

107. The Vendors had done neither.

108. In particular, with regard to the latter option, the mere offer to pay falls short of what is required. The Purchaser is entitled to be assured of adequate provision by the Vendors for the costs of the prescribed inspections and repair works necessary for the eventual discharge of the Notices.

109. However, as at the Completion Date:

(1) The prescribed inspections under the Notices by DTZ (or other RI / QP) were yet to be carried out. Indeed, the scope of the inspections required to comply with the Notices was still being debated.

(2) Without the inspections, it was not known whether any, and if so what, repair works would be required to satisfy the Notices. Needless to say, the costs to be incurred for the discharge of the Notices could not be ascertained.”

11.  Mr Lee submitted that in relation to proving title, the standard of proof is that of “beyond reasonable doubt”[10]. Accordingly, it was submitted that D needed to prove beyond reasonable doubt that the amount offered by it to be stakeheld by JCL would be adequate to meet the contribution required of by the IO on P in the future (or alternatively recovery by the Government under s.30B(3) of the Building Ordinance). Mr Lee submitted that D had failed to do so and thus P was entitled to rescind the Formal Agreement.

12.  Mr Lee sought to distinguish the cases relied upon by Mr Lam in the following manner:

(1)  Lam Ming Hee: it is said that the distinguishing feature in that case was that the apportioned costs for the compliance of the undischarged Building Order had been ascertained by the time of the hearing.

(2)  Hu Mei Yu Anastasia: Mr Lee distinguished this case on the basis that the apportioned costs for the renovation works had already been ascertained.

(3)  Luk Ho Chang: Mr Lee distinguished this case on the basis that the purchaser in that case was happy with the estimated costs of HK$80,000.

(4)  E-Global: Mr Lee submitted that the comment by DHCJ Burrell (as he then was) was only obiter.

13.  I am of the view that D has raised a triable issue or an arguable defence that P, as a willing purchaser should have accepted the Offer:

(1)  As the inspection and renovation had to be carried out by the IO of the Building, it is not within the power of D to carry these out.

(2)  As a registered owner of the Property, D has obtained all the information it could on the potential costs for complying with the MBIS Notice.

(3)  D has offered what it thinks would more than cover the likely costs of the inspection and renovation, namely HK$460,000.

(4)  D has asked P to suggest a counter-proposal if they did not agree with the estimate. P has not counter-proposed any amount.

(5)  D has also undertaken for the shortfall if the stakehold sum turns out to be insufficient.

(6)  P has not asked for fortification of such an offer/undertaking to pay the shortfall.

(7)  Effectively, Mr Lee is submitting that where an MBIS notice exists, and if no investigation or no steps had yet been taken to ascertain the costs of compliance, good title can never be shown. With respect, such a proposition is not supported by any of the cases relied on by the parties.

(8)  Despite the distinguishing features highlighted by Mr Lee, I am of the view that it is at least arguable that regardless of whether the costs of the renovation is ascertained, the fact that D has in the present case offered a sum to be stakeheld together with a promise to pay for the shortfall is sufficient to provide adequate provision for the costs of the prescribed inspections and repair works necessary for the eventual discharge of the MBIS Notice; and a willing purchaser would, if necessary, seek fortification on the promise to pay for the shortfall. In particular, I fail to see how the facts of E-Global are materially so different from the facts in the present case that the principles therein are inapplicable to the present case.

(9)  I agree with Mr Lam’s submission that in the case of To Yung Sing Herman, there was no indication that Hu Mei Yu Anastasia and Luk Ho Chang were brought to the learned Judge’s attention. In any case, To Yung Sing Herman can be distinguished on the basis that it concerned the sale of a whole building, which meant that a notice requiring the repair and renovation of the common area would affect the purchaser’s enjoyment of the property therein, namely the building. In the present case, the subject Property is a unit and thus any effect of the liability under the MBIS Notice is purely monetary. I am of the view that based on Tsang Kwok Hung Frederick v Ching Lai Tuen[11], it is arguable that as the works are to be done in the common area only, stakeholding coupled with an undertaking to pay a shortfall would have been held as sufficient provision for the compliance of the MBIS Notice.

14.  In light of all the authorities that the parties have cited, I am of the view that D has well passed the hurdle of an arguable defence.

E.  Conclusion

15.  P’s appeal and the Summons are dismissed. On a nisi basis, costs of the Summons and of the appeal be to D with certificate for one counsel. Such costs to be summarily assessed, if not agreed. D do lodge and serve its statement of costs within 7 days hereof. P do lodge and serve its list of objections, if any within 7 days thereafter.

16.  I thank counsel for their assistance.