EVEN GROWTH INVESTMENT LTD. v. SHING YIP INVESTMENT CO. LTD. and Others

1996 M.P. No. 2369

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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INTRODUCTION

1. The Plaintiff seeks declarations and consequential orders to the effect that the Defendant has failed to "show" good title in respect of its agreement to sell to the Plaintiff shops Numbered 1, 8 and 9 and cocklofts Numbered 1 and 3 Hillwood Court, 22-28 Hillwood Road, Kowloon ("the property"). This judgment has been prepared very quickly in order to satisfy the Plaintiff's need for a decision before the 1st of August 1996 (i.e. the date for Completion). I may add to it later so as to better express my reasons.

THE SALE AND PURCHASE AGREEMENT

2. The parties entered a provisional agreement in respect of the property ("the Agreement"). The Agreement is not in a standard form and was drafted by the parties. The purchase price was HK$33,500,000. The deposit of $6,700,000 was duly paid in three trances. The date for completion is the 1st of August 1996 (Clause 4). Other relevant terms are:

"The Vendor agrees to sell and the Purchaser agrees to purchase the property known as Shops Nos. 1, 8 and 9 on the Ground Floor together with commercial Cocklofts Nos. 1 and 2 (of the property) upon the terms and conditions hereinafter mentioned."

Clause 5

"The parties hereto agree that the Property is to be sold and purchased subject to the existing Tenancy Agreement(s) of the Property."

Clause 9

"Remarks: The existing Tenant is "Seasons Barbecue Restaurant Limited". The terms of the tenancy is up to the 28th day of February 1997. The total monthly rental of the Property is HK$325,000 exclusive of rates as shown on the hatched black plan(s) hereto annexed. The owner of the Ground Floor is SHING YIP INVESTMENT COMPANY LIMITED. The owner of the cocklofts is HO SAI HUNG and NG MIU LING and HO SAI HUNG is the shareholder of SHING YIP."

THE OCCUPATION PERMIT

3. The relevant part of the Occupation Permit for the property states:

"I hereby permit the occupation of the (property) ... for the following purposes:-

Composite Building

Ground Floor: 3 shops each with cockloft stores over for non-domestic use."

CHRONOLOGY

1996

THE ISSUES

4. The issues to be determined are:

(1) were the Plaintiff's queries ("the requisitions") property raised;

(2) if the answer to (1) is yes, was the Defendant's response sufficient.

5. The law governing these issues is set out in Active Keen Industries Limited v. Fok Chin Keong [1994] 1 HKLR 396. The parties agreed the following propositions of law applied to the present facts:

- the Agreement, being an open contract, contained an implied term that the Defendant was required to show good title to the property;

- good title does not exist where the purchaser is exposed to risk or hazard.

(1) WERE THE REQUISITIONS PROPERLY RAISED

6. The obligation on a vendor is to answer the purchaser's requisitions only if properly raised. The judgments in Active Keen Industries clearly discourage the practice, current among purchasers, of raising non-existent difficulties.

7. In summary the Defendant argued that the requisitions were not properly raised because :

- there was no warranty (express or implied) that the cocklofts could continue to be used as a restaurant after transfer of the property to the Plaintiff. The case of Hill v. Harris and Another [1965] 2QB page 601 was relied on.

- Clause 5 of the Agreement, by using the phrase "subject to", transferred the burden of the tenancy to the Plaintiff. It did not confer the benefit of the tenancy (i.e. warrant that the restaurant could continue). If the parties had intended to confer the benefit of the tenancy they would have included in the Agreement the phrase "with the benefit of".

- Clause 9 of the Agreement headed "Remarks" simply described the tenancy. This Clause did not amount to a warranty that the restaurant could lawfully continue.

- the deletion of the phrase "the Vendor has to guarantee the Purchasers rental benefit during the term of the tenancy agreement" from the Chinese version of the Agreement indicates that the parties did not intend to transfer the benefit of the tenancy [referred to as "the deleted phrase"].

8. The Plaintiff responded arguing that :

- the Agreement states the cocklofts were sold "upon the terms and conditions hereinafter mentioned". These terms include Clause 5 and Clause 9 which clearly indicate that the cocklofts were intended to remain tenanted as a restaurant for about 6 months after completion. In other words the Defendant was selling the cocklofts as a restaurant. It was not setting the cocklofts simpliciter.

9. I accept the Defendant's argument that there was no warranty (express or implied) that the cocklofts could lawfully continue to be used as a restaurant. The case of Hill v. Harris applies.

10. However, I think the important question is not "could" the restaurant continue but "would" it continue. In other words did the parties intend that the restaurant "would" continue if it "could". I am satisfied that the parties did intend this. Clauses 5 and 9 of the Agreement make this clear. I do not consider the crossing out of the clause guaranteeing the rent helpful (even if reference to deleted parts of a contract is admissible, which I doubt). The deleted phrase deals with a guarantee only.

11. The Defendant also argued that the requisitions were not properly raised because the Occupation Permit authorised the use of the cocklofts as a restaurant. The Defendant's principal submissions were :

- the phrase in the Occupation Permit "3 shops each with Cocklofts stores over" did not restrict the user but merely described the planned user (shown on the architectural drawings). By way of example the Defendant referred to the upper section of Occupation Permit and argued that the reference there to "Church hall" did not restrict the use to a Church hall;

- the phrase "... for non domestic use" was the only restriction imposed by the Occupation permit;

- the word "store" also means shop. The restaurant is a shop and so it is permitted.

12. The Plaintiff responded arguing that:

- the terms of the Occupation Permit clearly restrict the purposes for which the building can be used ("I hereby permit ... for the following purposes..."). The cocklofts can only be used as a store over the shops.

- in the present context the word "store" means a place to store things. The word "store" appears three words after the word "shop" and so it has been used deliberately in contradistinction to the word "shop".

13. I do not agree with the Defendant that the Occupation Permit clearly permits using the cockloft as a restaurant. At the very least the position is unclear. I reject the submission that "store" means "shop" in this context. The word "store" is qualified by the word "cockloft". It is a "cockloft store". As a matter of ordinary language that conveys a small upper storage place. It is worth nothing that the definition of "cockloft" is "a small upper loft". Also the definition of "store" when it means "shop" refers to a large shop. Therefore it is an unnatural use of language to refer to a "cockloft store" if one intends a large shop in a loft.

14. In addition I accept the Plaintiff's submission that the use of the word "store" three words after the word "shop" indicates an intention to distinguish between the two words.

15. I consider that it was reasonable of the Plaintiff to be concerned about the exact status of the restaurant. The Plaintiff's request for confirmation from the Defendant that the Building Authority had approved this use of the cockloft was not a "non existent difficulty".

16. It was common ground that if the Building Authority objected to the presence of the restaurant it could impose a fine or order its closure. If the Building Authority took such action title to the property would be put at risk. In such an event the Plaintiff would risk action from the Building Authority and possibly even action by the tenant (who would be unhappy to pay rent if the restaurant was ordered to close). I agree with Miss Yuen that the Plaintiff should not be put in a position where it buys not just the property but also the risk of a lawsuit deriving from the current use of the property.

17. I should mention that the Defendant also argued that if the Occupation Permit was taken to restrict the user of the building this would have far reaching consequences. I do not agree. I consider that each Occupation Permit must be looked at in its own terms. Ultimately it will be a question of degree. A change of use from a church hall to some other non-ecclesiastic assembly hall may not be material. But in my view a change of use from a cockloft store to a commercial restaurant is such a large change that it is prudent to confirm with the Building Authority that it is permitted.

18. In conclusion I find that the requisitions were properly raised.

(2) WAS THE DEFENDANT'S RESPONSE TO THE REQUISITION SUFFICIENT

19. The effect of the Defendant's answer to the requisition was that the Occupation Permit allowed a restaurant in the cocklofts because "store" meant "shop". I have already found that answer is incorrect. Even if I am wrong in so finding I consider that the issue is far from obvious and that the Defendant should have done more than state its own interpretation of the Occupation Permit. The Defendant should have sought clarification from the Building Authority.

20. I find that the Defendant did not give an adequate or sufficient answer the Plaintiff's requisition.

CONCLUSION

21. I am satisfied that the Defendant has not "shown" good title. I find for the Plaintiff and grant the following relief claimed in the Originating Summons:

22. I make Declarations in favour of the Plaintiff in terms of numbered paragraphs (1) and (2) of the Originating Summons;

23. I make Orders in favour of the Plaintiff in terms of numbered paragraphs (3) and (4).

24. I make an Order nisi of costs of and incidental to the Originating Summons be paid by the Defendant to the Plaintiff with liberty to both parties to apply.

(Nigel Aiken)

Deputy Judge of the High Court