SUN GREAT INTERNATIONAL LTD v. HUI LAI YING POLLY

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JUDGMENT

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1. In June 1994, Mr. Ng Wing Kin ("Ng") and his wife, Hui Lai Ying Polly, the Defendant herein ("Mrs. Ng") purchased the flat at Ground Floor, Block A, Lot 825 in DD 226, Tseng Lan Shue, Sai Kung, New Territories together with the garden and the car parking space ("the Property"). The purchase was made in the name of Mrs. Ng. After the purchase, extensive works which took 3 months and some $400,000 were done to the Property and the Ngs did not move into the Property at all. In September 1994, upon being notified that their Canadian immigration application had been approved, the Property was put on the market for a quick sale as the Ngs were required to land quickly in Canada. Many potential buyers came to inspect the Property and amongst them was Mr. Au Piu Chor ("Au"), a businessman. Au inspected the Property three times, twice in the company of his brother, Au Kin Chor ("Brother Au"). On 23rd September 1994, a Provisional Sale and Purchase Agreement ("Agreement") was signed by Au as purchaser and by Mrs. Ng as vendor. A deposit of $150,000 was paid at the time of signing of the Agreement and a second deposit of $574,000 was payable on 5th October 1994 with completion date set in the Agreement for 15th November 1994, when the balance of the purchase price would be payable.

2. On 30th September 1994, the Agreement was amended by the substitution of Sun Great International Ltd., the Plaintiff herein ("the Purchaser") as the purchaser in place of Au. The Plaintiff company was acquired specially by Au and Brother Au who were the beneficial owners and controllers of the company, for the purpose of holding the Property. In the afternoon of the same day when the Agreement was amended, a surveyor from C.Y. Leung & Co. Ltd. ("Surveyors") carried out an inspection of the Property for the purpose of providing a survey report for Standard Chartered Bank to which the Plaintiff Purchaser had applied for mortgage finance. On or about the 3rd or 4th October the Aus were informed by the Standard Chartered Bank that mortgage finance would not be granted as unauthorised alterations and additions to the Property had been reported by the Surveyors. Alternative finance was sought by the Aus from the other principal banker of the Au companies, namely Hang Seng Bank and there was a similar refusal to provide mortgage finance because of the unauthorised additions to the Property.

3. In the evening of the 4th of October 1994, in a long telephone conversation between Au and Ng, the question of illegal alterations and additions to the Property was discussed with Au saying that the purchase would not proceed and Ng offering to demolish the illegal additions. On the 5th of October 1994, the Plaintiff Purchaser did not pay the second deposit and refused to proceed with the purchase and demanded the return of the deposit of $150,000. The Defendant by the letter of her solicitors dated 6th October 1994 terminated the Agreement and forfeited the deposit of $150,000. Some one month later, the Property was resold by the Defendant to a third party buyer for a price said to be some $200,000 less than the Agreement price.

4. By this Action, the Plaintiff Purchaser claims against the Defendant for the return of the deposit of $150,000 and by her Counterclaim, the Defendant counterclaims that she is entitled to forfeit the deposit. Effectively, the trial is over the entitlement to the $150,000 deposit money since there is no other claim for damages and it is regretted that with this relatively small sum at stake, the parties both adamant as to their rights, found it necessary to go to full trial lasting many days to resolve the dispute.

5. The issue at the trial is whether the Defendant vendor could pass or give a good title to the Property. The Plaintiff asserted that neither on the date of completion on 15th November 1994 nor at the time of the 2nd deposit payment on 5th October 1994 could the Defendant give or pass a good title. The case of the Plaintiff is that the Property contained three substantial illegal Additions, namely the Under Balcony Addition, the Skylight Addition and the Courtyard Addition which rendered the Property liable to re-entry and forfeiture under the Crown lease, proceedings being taken under the Buildings Ordinance and proceedings being taken by the other owners under the Deed of Mutual Covenant. The Defendant does not seriously dispute the existence of the three Additions but suggests that the effect of the three Additions would not render the title to the Property bad or necessarily defective. The trial is therefore an inquiry into the three Additions, how they came about and what effect they have on the Defendant being able to pass or give a good title.

6. By Special Conditions of the Grant from the Crown dated 18th March 1974 as modified by a Modification Letter dated 15th April 1976 (hereinafter referred to collectively as "the Crown Lease"), it was provided that 2 houses each of 3 storeys were permitted to be erected on the lot and the maximum roofed-over area of each house was stipulated to be 700 square feet. This is the standard New Territories 700 x 3 sq. ft. type of house which is exempted from the requirements of approved building plans but so long as the built house is within the 700 sq. ft. maximum area restriction. In 1977 the house in question being Block A and its neighbouring house, being Block B were built as New Territories exempt houses where no building plans were submitted to or approved by the Building Authority. The plan attached to the First Assignment of the Property in 1977 ("the 1977 Plan") shows the layout of the Property as consisting of 3 bedrooms and with the dimensions of the flat which on calculations are shown as being just under 700 sq. ft. There is no doubt and there was really no dispute at the trial that when first built, the Property:

7. After the purchase of the Property by the Ngs in June 1994, Ng caused extensive building works to be done to the Property. At the trial, it was disputed what had been done to the Property by Ng and what additions he had caused to be made to the Property. As the good title to the Property will turn on the legality of the additions and the effect of such additions which in turn will be affected by when they were made, it will be convenient to first describe the three Additions before considering the question of who caused them to be made and when.

8. The first and most important addition is the enclosing of the whole area under the First Floor Balcony of Block A so that it adds something like 120 sq. ft. living space to the Property. This is what I call "the Under Balcony Addition".

9. The second addition is to have the living room pushed out further beyond the space under the Balcony by the erection of an aluminium and glass skylight structure. This is what I call "the Skylight Addition" which gives to the Property according to my estimation, on the basis of the measurements in the 1977 Plan which I accept as accurate, at least another 25 sq. ft. of enclosed living space.

10. The third addition is the incorporation of half of the central courtyard between Block A and Block B into the living room of the Property by moving the living room/courtyard wall into the half way line of the courtyard. This is what I call "the Courtyard Addition" and it adds about 64 sq. ft. of extra living space to the Property.

11. The evidence given at the trial by Au and Brother Au is that Ng represented to Au that Ng had made the Under Balcony Addition (as part of his turning 3 bedrooms into 2 bedrooms) and the Skylight Addition and that he had spent a great deal of money in doing so. Although Ng admitted to extensive decoration work being done and having spent $400,000 on the improvements to the Property, he denied that he had caused the Under Balcony Addition and the Skylight Addition to be made. Ng had also denied that he had made representations to the Aus that the Additions to the Property were legal and that all alterations made in the Property required no authority and that the Property contained no illegal alterations or additions. The credibility contests between the witnesses for the Plaintiff and the witnesses for the Defendant took up a great deal of the trial time, but I have no doubt that the witnesses for the Plaintiff are to be preferred. Wherever there was a conflict between the evidence for the Plaintiff and the evidence for the Defendant, I prefer the evidence given for the Plaintiff.

12. In particular I have formed a very unfavourable opinion of Ng as a witness for the Defendant and I have come to the conclusion that he is not an honest or reliable witness. At the trial, a great deal of evidence (including listening to the tape recording) was adduced about the telephone conversation between Ng and Au on the 4th October 1994. I accept the evidence of Au about this telephone conversation and I reject the evidence of Ng and Mrs. Ng on the subject. The evidence of Ng and the manner of his giving the evidence on this telephone conversation demonstrated convincingly to me that Ng was prepared to say anything to advance his cause.

13. The evidence of Mrs. Ng is of really marginal significance and she impressed me as being a compliant wife willing to support the evidence of her husband, which she heard in its entirety when she sat in court while her husband was giving his evidence. In so far as she gave any evidence which was in conflict with the evidence of Au and Brother Au, I reject her evidence. Of the witnesses for the Plaintiff, I view all of them positively and I am particularly favourably impressed by the evidence of Au, Brother Au and the young surveyor.

14. On the basis of my view and judgment of the witnesses and their evidence, I find as a fact that:

15. As a consequence of my above finding that Ng had caused the three Additions to be made to the Property, the only serious question to be resolved is the effect of the three Additions on the title to the Property. The case of the Plaintiff is that each of the three Additions was illegal alteration of or illegal addition to the Property, whereas the Defendant disputes that the Additions were illegal, in the sense of those being in breach of the Crown Lease, the Buildings Ordinance and the Deed of Mutual Covenant.

16. In respect of the breach of Crown Lease, the issue is whether the roofed-over area of the Property with the three Additions exceeds 700 sq. ft. The most convincing evidence on this aspect came from the Mr. Stephen Ko of the Surveyors and Miss Sophie Wong of the Architect. Evidence given was to the effect that the 1977 Plan (based on which the Property was built) showed a roofed over area of 670 sq. ft., well within the permitted maximum area. There was really no challenge to that evidence and in a way this is not surprising having regard to the fact that most houses in the New Territories were built just under 700 sq. ft. and that it would be rare indeed where any person who built a NT exempt house would not make full use of the maximum permitted roofed-over area. Miss Sophie Wong gave very convincing evidence before me and I accept her evidence and in particular her evidence that:

I find as a fact that the "roofed-over area" of the Property exceeds the 700 sq. ft. permitted under the Crown Lease and that therefore the three Additions (specially the Under Balcony Addition and the Skylight Addition) rendered the Property in breach of the Crown Lease with all the prejudicial consequences arising from the breach.

17. In respect of the breach of Buildings Ordinance and the breach of the Deed of Mutual Covenant, at the trial it was not disputed that the Property was afflicted with these breaches once it had been shown that there was the breach of the Crown Lease by reason of the roofed-over area of the Property exceeding 700 sq.ft. The evidence of Mr. Ko and Miss Wong and the written material placed before the Court showed quite clearly that the three Additions, being illegal and unauthorised, would render the Property not exempt from the Buildings Ordinance and therefore in breach of the Buildings Ordinance and also in breach of the Deed of Mutual Covenant and I so find factually the matters aforesaid.

18. The establishment of the fact that the three Additions made by Ng were illegal alterations and additions is hardly surprising if one considers that the three Additions add some 200 sq. ft. to the living area space of the Property. With great respect to Counsel for the Defendant, the argument against the existence of illegal alterations was wholly unconvincing. Once it was accepted that these three Additions do exist and that they add substantially to the enclosed living area of the Property, there is really not much left to the defence.

19. The case of the Defendant finally rests on the argument that the refusal on the 5th of October 1994 by the Plaintiff to proceed with the purchase was premature and that the defects of the title were capable of being removed and that the action of the Plaintiff deprived the Defendant the opportunity of removing the defects of the title. Whilst in other circumstances, this sort of plea might deserve careful consideration, the particular circumstances of this case are such that in my judgment, this defence of the vendor is bound to fail.

20. First of all, on my finding of the facts, the Plaintiff has clearly shown that there were three illegal substantial alterations and additions to the Property which rendered the Defendant unable to give and pass a good title to the Plaintiff both on the 5th October 1994 as well as on the 15th November 1994. If at the trial the Defendant had shown with good and accepted evidence that she could have removed successfully all defects to the title either immediately on 5th October or by 15th November 1994 so that no possible reasonable objection could be raised to the title of the Property, then there might be some scope for consideration by the Court on the question of whether the Plaintiff had acted prematurely. There was no such evidence adduced for the Defendant and there is really no basis on which the Court could hold that the defects in the title were capable of being successfully removed within the relevant short period of time before completion.

21. Secondly, it is obvious that this is not a case where the Defendant vendor could force a third party to perfect its title. There was no power in the Defendant to force the Crown as landlord or the Building Authority or other owners to waive the breaches. This is therefore not the sort of case where it could be said that the vendor will undoubtedly have the right to pass a good title on completion.

22. Thirdly, in my judgment this is not a situation where the Plaintiff was bound to raise requisitions and give an opportunity to the Defendant to fully prove the title. When we have a situation of three new substantial illegal Additions standing on the Property, the Plaintiff is not obliged to go through the unnecessary task of the Defendant answering requisitions only for such requisitions to be rejected by the Plaintiff on the ground that the Defendant could not pass a title of a beyond reasonable doubt quality and of the kind that the Plaintiff as new owner would be able to force on a third party subsequent purchaser from the Plaintiff. In my judgment, none of the authorities cited to me by Mr. Wong for the Defendant is of assistance. The facts of this case are not analogous to the situations in these authorities. The issue here is not whether the vendor could prove good title within the reasonable time of the requisition but whether the vendor could pass a good title at all. The action of the Plaintiff only relieves the Defendant the necessity of proving good title within the requisition period but does not relieve the Defendant of the obligation of passing a good title. I find on the evidence before me that the Defendant could not pass a good title by the 15th November 1994. The Plaintiff was therefore fully justified in the action it took on the 5th of October 1994 by refusing to proceed further and by asking for the return of the deposit.

23. Fourthly, the fundamental error of the Defendant is in her contention that the defects in the title could be removed by the demolition of the three illegal Additions. The basis of the Purchaser's agreement for the purchase of the Property was what the Aus had been shown by Ng that the Property consisted of, namely the flat with its three Additions. What the Plaintiff agreed to buy was a flat of some 900 sq. ft. of enclosed area. Take away 200 sq. ft. of enclosed area, the Plaintiff would no longer be receiving what it had bargained to accept. It is a well recognised principle of conveyancing that a vendor is a trustee of the property agreed to be sold and is not at liberty to make changes to the property let alone demolish 25% of the enclosed structure of the property. I do not see how a vendor can demolish an illegal part of the property agreed to be sold and yet be able to force that property on the buyer on completion. On that basis a vendor in Hong Kong can agree to sell a house containing 60% illegal addition and yet be able to force the unwilling buyer to accept the property with only 40% of the original area after the demolition of the illegal structure consisting of 60% area. In the telephone conversation on the 4th of October, Ng repeatedly offered to demolish the illegal structures but Au refused to accept such offer. This misconception of Ng was carried on by the Defendant's lawyers at the trial on the fallacious belief that demolition would enable the Defendant vendor to force the Plaintiff to accept the purchase. A vendor who had agreed to sell is in no position to demolish any part of the building and if he could not demolish the illegal structure, how could he pass an impeachable title to the purchaser.

24. Finally, the error of the Defendant lies in not appreciating that with or without demolition of the illegal Additions, the Defendant vendor would fail in forcing completion on an unwilling purchaser unless the Defendant could persuade the Court that the title could be pressed on any doubtful future purchaser. The test is stringent and on the facts of this case, I have no doubt that the Defendant has wholly failed to pass the test. The facts of this case are wholly different from situations such as those in Active Keen where it could be said that after 28 years with the Building Authority knowing of the breach and taking no action, there was no serious risk of future proceedings. On the facts of the case as found by this Court, no prudent purchaser or his banker will accept the title to the Property. Without demolition, the illegal Additions will pose a daily threat to any future owner of the Property, coming from three possible sources, namely from the Crown as landlord, from the Building Authority and from the other owners. After demolition (if that could be satisfactorily achieved in good time before the completion date which I hold on the facts against the Defendant), the threat of prejudicial action might be somewhat diminished but it would require considerable lapse of time and favourable factual circumstances (which had not been established in this Court) before it could be shown that there is no realistic risk. In any event, the demolition would give to the Purchaser far less than it had agreed to purchase.

25. In my judgment, the Plaintiff Purchaser was fully entitled to reject the purchase and asked for the return of the $150,000 deposit. The claim of the Plaintiff for the payment of the deposit sum therefore succeeds and the Counterclaim is dismissed. The Defendant is to pay to the Plaintiff the sum of $150,000 with interest thereon at 1% above prime from 26th October 1994. The Defendant must also pay to the Plaintiff costs of the Action and costs of the Counterclaim.