SUNLINK GROUP (HONG KONG) CO. LTD. v. SORRAYO INVESTMENTS LTD.

MP2113/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2113 OF 1998

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JUDGMENT

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This is a Vendor and Purchaser summons. The Plaintiff is the purchaser and the Defendant is the vendor of property comprising an apartment and a car parking space in a development in Tai Tam, under an Agreement for Sale and Purchase dated 21 October 1997 for completion on 10 January 1998. These proceedings concern the proof of title to the car parking space.

Brief facts

In brief, the Purchaser had requested a certified true copy of carpark layout plans approved by Government as lessor, in order to verify that the car parking space to be sold was as per the approved plans, on the basis that the plans were part of the documents of title.

The Vendor provided plain copies of separate sheets making up carpark layout plans, but disagreeing that they were documents of title, did not provide a certified true copy.

When the Purchaser insisted on a certified true copy of the plans in correspondence on the day before (and also on) completion day, the Vendor's solicitors offered an undertaking to produce them after completion. This undertaking was not accepted by the Purchaser. The Agreement was terminated shortly afterwards, and proceedings were started for the return of the deposit a few months later.

Issues

The issues raised at the hearing were as follows :-

(1) since a Certificate of Compliance had been issued for the development, did the Vendor still have to prove that the title is not defeasible by supplying the carpark layout plans?

(2) if the Vendor had to do so, did the Vendor have to supply a certified true copy of the plans, or did evidence in the form of uncertified copies suffice?

(3) if the Vendor had to supply a certified true copy, was the Purchaser bound to accept an undertaking for production after completion?

(1) Effect of the Certificate of Compliance

In relation to the first issue, it is first necessary to see what is the nature of the leasehold interest agreed to be sold, and the effect of the Certificate of Compliance.

Grant of Lot by Conditions of Exchange

The development is fairly new, having been completed only in the early 1990's. The lot on which the development stands was granted by Government to the developer by way of surrender and exchange.

The "Agreement and Conditions of Exchange" was dated 26 October 1987. The General Conditions include conditions that the fulfilment by the grantee of its obligations under the Conditions shall be a condition precedent to the grant or continuance of the tenancy, and that upon any failure or neglect by the grantee to perform observe or comply with any of the Conditions, the Government shall be entitled to re-enter upon the lot or any part thereof.

The Special Conditions are, as with modern conditions, fairly numerous and detailed. As such there is, at least in theory, more opportunity for re-entry; or in other words, the title is at greater risk of defeasibility.

Special Conditions (19) and (20) deal specifically with car parking spaces. Special Condition (19) stipulates that space shall be provided within an identified area to the satisfaction of the Director of Buildings and Lands for the parking of residents' vehicles, and such space shall not be used for any other purpose.

Special Condition (20) provides:-

"A lay-out plan indicating the parking spaces to be provided within the [identified] area in accordance with Special Condition (19) hereof and approved by the Director, or a copy of such plan certified by an authorized person as defined in the Buildings Ordinance, shall be registered by the Grantee by memorial in the Land Office. No transaction affecting the [identified] area or any part thereof or any building or any part of any building erected or to be erected thereon shall be entered into prior to such registration. The Grantee shall maintain the parking spaces in accordance with the said approved plan and shall not alter the layout except with the prior written consent of the Director".

Registration of Car Park Layout Plans

In compliance with Special Condition (19), on 7 March 1989, a document described as "Letter with Certified Copy of Carpark Layout Plans" was registered at the Land Office under Memorial No. 4004772.

On 10 May 1990, a document described as "Letter with Amended Carpark Layout Plans" was registered at the Land Office under Memorial No. 4410544.

Certificate of Compliance

On 26 February 1991, the Registrar General's Department (Land Office), acting as the Government's land agent, issued a letter to the developer/grantee certifying that all the positive obligations imposed on the grantee under the said General and Special Conditions of Exchange, under which the lot was held from Government, had been complied with.

The certificate was given expressly without prejudice to any rights of Government, whether under the Conditions or otherwise, in respect of any breach or failure to observe any of the said Conditions which may exist at the date of the certificate or which may thereafter occur.

Section 14 Conveyancing and Property Ordinance

The effect of the Certificate of Compliance was to convert the equitable estate of the grantee into a legal estate by virtue of s.14(1) and s.14(3) of the Conveyancing and Property Ordinance cap.219.

Sale of leasehold interest - not defeasible by lessor

However, it is a legal estate in a leasehold interest only. It is implicit in the sale of a leasehold interest that the title is not a good title if it is defeasible by the lessor. In the context of possible re-entry by Government for breach of covenants, this point was first recognised by the Court of Appeal in Woomera Co Ltd v Provident Centre Development Ltd. [1985] 1 HKC 257, 269C et seq, and was recently affirmed by the Court of Final Appeal in Chen v Lord Energy Ltd. [1999] 1 HKLRD 205, 211B-D.

But if a vendor has to prove that his title is not defeasible, that may involve the task of proving a negative. In Woomera, Fuad, J.A. considered this in the light of the English practice, at 269:-

"The next point seems to me crucial to this appeal, and it concerns the obligation of a vendor where the sale of a leasehold is involved and there is a provision in the headlease for re-entry for breach of covenants. The obligation is put this way in Davidson's Precedents & Forms in Conveyancing (4th Ed) at p536:

Upon a sale of leaseholds on an open contract, the purchaser is entitled to require such evidence that the lease is not void or voidable, as is afforded by proof that the covenants and conditions in the lease have been performed and observed: and as the burden which such a requisition throws on the vendor is, in fact, that of proving a negative, it is usual in conditions of sale to stipulate that the receipt for the last payment of rent due before the sale, or before completion of the purchase, shall be considered as evidence of the observance and performance of the conditions and covenants.

In Williams on Vendor and Purchaser (4th Ed) at pp 405-6 the purchaser's rights are explained in the light of s 45 of the Law of Property Act 1925 (which replaced provisions in the Conveyancing Act 1881, and which has no equivalent, so we are told, in Hong Kong):

When the property purchased is held for a term of years determinable by re-entry for non-payment of rent or breach of covenant, it is, of course, important to ascertain that no cause of forfeiture under the condition for re-entry has occurred. Before the year 1882, the purchaser in such a case was entitled, in the absence of stipulation to the contrary, to require evidence that all the covenants and conditions in the lease had been duly performed and observed up to the date of actual completion of the contract. It was, however, usually stipulated that production of the receipt for the last payment of rent due before the completion of the sale should be conclusive evidence of this. At the present time, the purchaser's rights in this respect are regulated, in the absence of special stipulation, by the following provision of the Law of Property Act 1925."

Section 45(2) of the Law of Property Act 1925 provides that where leasehold land is sold, then on production of the receipt for the last payment of rent due before completion, there is a rebuttable statutory presumption that all covenants and provisions have been observed and performed.

As noted in Woomera, there is no equivalent statutory provision in Hong Kong. In any event, it is debatable whether such a provision would be of any use here, because Government leases usually contain a provision that acceptance of rent would not constitute waiver, in the absence of knowledge and an express acquiescence.

Difficulties in proving title is not defeasible

In the light of the above, Mr Mok for the Vendor has submitted that where a Certificate of Compliance has been issued, it is not necessary for a vendor to prove that his title is not defeasible. He submits that it would be impracticable, if not impossible, for a vendor to prove affirmatively compliance with each of the many continuing covenants that Government has included in modern Special Conditions e.g. that the landscaping has been maintained and kept to the satisfaction of the Director. I appreciate the force of that argument.

Prima facie evidence of performance of covenants

However, logically, the grant of a Certificate of Compliance many years ago cannot by itself conclusively prove the fact that the title is not defeasible now. I note that in Lord Energy, the Court of Final Appeal treated the issue of proof that the title was not defeasible (the first requisition there) separately from the issue of the production of a Certificate of Compliance (the second requisition). Therefore I do not accept Mr Mok's submission that the mere production of a Certificate of Compliance in our case disapplies the principle, affirmed in Lord Energy, that the vendor must show and prove that his title is not defeasible.

In my view, the answer to this problem may lie in Fry, J's formulation in Ringer to Thompson (1881) 51 LJ Ch 42 discussed in Woomera, 272A-D:- that although the vendor had to show and prove that the covenants had not been broken, he need only adduce sufficient prima facie evidence of the performance of the covenants as could reasonably be expected.

In my view, what could reasonably be expected must depend inter alia, on the nature of the covenants. Taking Mr Mok's landscaping covenant as an example, it is not to be supposed that Government would consider re-entry and render the title defeasible if it is observed that the owners had failed to trim a tree or two in the communal landscaped areas. A vendor could not reasonably be expected to adduce evidence that the trees had been regularly maintained.

What could reasonably be expected must also be considered in the light of whether the vendor knew, or ought to have known, of any breaches of covenants.

Insufficient prima facie evidence without approved layout plans

Applied to the facts of the present case, the concern of the Purchaser was to purchase a carparking space that did not breach Special Condition (20); in other words, to ascertain that the carparking space was in accordance with the approved layout, and that it had not been altered since the Certificate of Compliance.

In my view, this was a proper concern. The boundary and layout of carparking spaces are easily changed. An unscrupulous developer or subsequent owner can, if space permits, simply by re-drawing some lines on the ground at any time, squeeze say, three car parking spaces in place of two. That is not to say that it happened in this case.

But it explains why the Purchaser's concern, to verify that the carparking space it was buying was a carparking space on the approved layout plans, is not answered by the Vendor producing a Certificate of Compliance which only shows that when the Government's agent inspected the property 7 years ago, the lines on the ground had been correctly drawn. In my view, the Certificate of Compliance is not sufficient prima facie evidence that the Vendor's title to the car parking space is not defeasible.

My answer to the 1st issue is therefore, that even though a Certificate of Compliance had been issued for the development, the Vendor still had to prove that the title was not defeasible by supplying the approved carpark layout plans.

(2) Certified true copy required

The next question is whether the Vendor had to supply a certified true copy of the plans. It is common ground that a certified true copy would be required if the approved layout plans were documents of title.

The Vendor submitted that only documents forming the chain of title were documents of title. In my view, that may be too narrow a formulation.

In any event, a wrongly laid-out carparking space could not only spell a risk of re-entry (which under General Condition (9)(a) could be of the offending part only). If it is (wrongly) laid out on communal area, it could also mean the absence of title to the carparking space contracted to be purchased. In my view, a purchaser is entitled to see for itself whether the carparking space which the vendor has contracted to sell is one which had been approved by the lessor. The purpose of verification is bound up with the proof of title. There are therefore not two requisitions, only one.

It may be that the Purchaser's solicitors could have been a little more patient and explained their reasons for requiring the certified true copy in more detail, but they had already given their reasons to the Vendor's solicitors three times (in their letters dated 30 October 1997, 17 November 1997 and 22 November 1997 respectively), the matter was in my view sufficiently clear and the burden was on the Vendor to show and prove its title to the carparking space in the light of Special Condition (20).

Therefore, in my view, the Vendor should have provided a certified true copy of the approved layout plans when the Purchaser asked for them in October 1997. The Purchaser did not have to accept uncertified copies (coming in 9 separate sheets to 1 plan) for its solicitors to try to piece together for themselves.

The point is not whether the Purchaser's solicitors ought to have known that these sheets came from the Land Office; the point is that the Purchaser was entitled to inspect the plans using a true copy, and one can only vouch for the truth of the copy if it had been certified.

It may well be that the supply of the plain copies answered the Purchaser's queries at the requisition stage, but that does not mean that it had to be content with them when the Vendor was required to prove its title at completion stage.

(3) Purchaser not bound to accept undertaking

There is finally the question of the undertaking. What the Vendor's solicitors wrote on the day of completion was as follows:-

"Whilst we reiterate that we are under no obligation to provide you with certified true copies of the documents that you have requested, as you have already been provided with a copy of the latest Amended Carpark Layout Plan Memorial No.4410544, and as this obviously resolves your concern, if your continued request for the certified copies is a genuine requisition, rather than simply an attempt by your client to get out of this purchase in a falling market, an undertaking by us to provide you with certified true copies of these documents after completion should be acceptable to you".

The Vendor submits that that should have been good enough. But the point is not whether a willing purchaser would have been happy with such an undertaking. The point is whether a title which depends on such an undertaking can be forced upon an unwilling purchaser.

Mr Warren Chan SC counsel for the Purchaser submitted that no undertaking was offered at all, and that the Vendor's solicitors were simply putting forward an argument. I do not accept that submission. Read as a whole, the sentence does make an offer of an undertaking, and indeed it was understood as such by the Purchaser's solicitors.

However, the Purchaser was not obliged to accept such an undertaking. There was nothing in the Agreement for Sale and Purchase, whether express or implied, that bound the Purchaser to accept such an undertaking, which gave no indication of the time "after completion" by which the certified true copies would be produced. The fact that the Purchaser had, on one previous occasion much earlier on, accepted an undertaking presented in more certain terms does not bind it to accept this one.

The fact that completion by undertaking may have been expected does not mean that such an undertaking may be forced on an unwilling purchaser. In my view, the obiter dictum of Bokhary JA in Chu Wing Yip v Leung Siu Yuk [1997] HKLRD 29, 34 has to be read in the light of the estoppel in that case.

Order

In the circumstances, I would make an order in terms of paragraphs 1-4 of the Originating Summons.

Interest under paragraph 4 is to be paid at the commercial rate of prime + 1% from the date of the Originating Summons to date of judgment, and at judgment rate from date of judgment to payment.

There will also be an order in terms of paragraph 5 and an order nisi in terms of paragraph 6.

As to paragraph 7, I would declare that the Plaintiff is entitled to a lien on the property for the amount of the deposit only, no submissions having been made to me that it is entitled to a lien for any of the other items listed in paragraph 7.

The counterclaim would be dismissed. I would add as a matter of completeness that had I found in favour of the Defendant on the Originating Summons, I would have ordered that damages be assessed in light of that procedure having been suggested in the Defendant's Affirmation, and the fact that, possibly for that reason, no directions had been given by the judge hearing the Notice of Appointment for evidence of damages to be adduced.