Spark Rich (China) Ltd. v. Valrose Ltd.

CACV 249/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 249 OF 1998

(On appeal from HCMP No. 3739 of 1997)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is the vendor's appeal from an order of Master Chung (sitting as a deputy judge of the Court of First Instance of the High Court) made on 23 September 1998, by which the judge resolved a dispute between the defendant vendor and the plaintiff purchaser in favour of the purchaser. The purchaser had raised what I will call for convenience an "unauthorised structure" objection to the vendor's title which, it claimed, had not been satisfactorily answered by the vendor before the date fixed for completion of the transaction. The purchaser therefore refused to complete, and the judge held that it was justified in doing so; hence the vendor's appeal.

The facts

2. The property the subject of the transaction was a residential unit at 16 South Bay Road, Hong Kong. It consisted of the first floor of the building, including the roof and "penthouse". The "penthouse" was a roofed structure, originally unenclosed, but subsequently enclosed by the placing of windows in the open gaps between its brick pillars and the parapet walls. This work does not appear to have been authorised by the Building Authority under the relevant provisions of the Buildings Ordinance, Cap. 123. But the Building Authority, over 40 years or more since the enclosure, has made no complaint about it.

3. The agreement between the vendor and the purchaser for the sale and purchase of the property was dated 8 July 1997. The purchase price was HKD73m and the purchaser paid a deposit of 10 per cent of this. The completion date was to be 28 October 1997.

4. On investigating the title, the purchaser's solicitors noted the problem with the penthouse. By letter dated 30 July 1997, they raised the following requisition :

"3. According to the approved plans on the property in the Buildings Department, there is no penthouse above first floor. The floor above first floor, as shown in the approved plan, is the roof with only a stairhood, a laundry, water closet room and a water tank. These approved plans also do not show the existing access stair from the ground floor to the first floor and the existing rooms on the roof. If these were unauthorized structures there is a real risk of enforcement proceedings being taken for their removal. Please adduce evidence to prove there is no risk."

5. On 28 August 1997, the vendor's solicitors answered as follows :

"3. Our client has been in possession of the Property since 1984. First, as a tenant, and then, since its purchase in 1987, as the registered owner. We are instructed that since 1984, our client has carried out no major structural works, nor altered the exterior design of the Property and that the Penthouse and access stairs were already in place at that time. In addition, through our client's relationship with the previous owner of the Property, who first occupied the First Floor flat and the Penthouse in 1954, our client was able to ascertain that the building, when originally erected in early 1954, included the Penthouse as it now stands.

Quite apart from this anecdotal evidence as to the age of the Penthouse, we note that the Deed of Mutual Covenant dated 20 May 1966 clearly indicates the existence of the Penthouse, so it is by no means of recent construction.

In the circumstances, given that the building was constructed in a form very much as it is today and is over 40 years old, we take the view that even if it does not fully conform with the original plans (copies of which we have not had an opportunity to inspect at this stage), there is very little likelihood of enforcement action being taken by the Government. Indeed, our client is aware that the building has been inspected on a number of occasions by Government departments during its ownership of the Property, the last of which was carried out by Buildings Department contractors in 1995 (see enclosed correspondence), and no queries have ever been raised regarding the Penthouse."

6. On 29 August 1997, the purchaser's solicitors replied as follows :

"3. The fact that there has not been any action taken by the Buildings Department might be because of their lack of knowledge of the existence of the illegal structures. The copy letter of 28 January 1995 showed that the inspection, if any, was carried out by a contractor with a specific instruction to make a visual survey on the structural integrity of the building and not whether there had been any breach of provisions in the Buildings Ordinance. Unless there is a letter from the Buildings Department indicating either its knowledge of the existence of the unauthorized structure, without resulting in any enforcement action or its condonation thereof, there is a real risk of enforcement proceedings."

7. On 9 October 1997, the vendor's solicitors answered as follows :

"3. Having now obtained a set of approved plans, we return to your original letter of 30 July 1997 in which you stated that the approved plans of the Property showed no penthouse above the First Floor and that the floor above the first floor comprised a roof with only a stairhood, a laundry, a water closet room and a water tank. We believe that your comment was based on a review of one of the earlier approved plans dated 24 May 1955, a copy of which is enclosed for your reference. However, upon reviewing the file for this Building at the Buildings Department, we were able to obtain a later amended approved plan dated 27 June 1955, a copy of which is also enclosed for your reference, which specifically deals with the approval of an additional roofed structure above the First Floor and this is where the Penthouse is located.

As to your further comment that the approved plans do not show the existing access stair from the Ground Floor to the First Floor, as your client is purchasing the First Floor and the Penthouse, it is not clear to us how the access stair to the Ground Floor is relevant. In any event, we are instructed by our client that the stairs presently located in the Property accord with those drawn on the approved plans that we have obtained."

8. On 13 October 1997, the purchaser's solicitors replied as follows :

"3. The copy plan that you have enclosed showed that there was only a shelter on the roof. We understand that shelter is very different from a penthouse. A shelter cannot have any enclosing walls while a penthouse is completely enclosed. The penthouse is therefore an unauthorized structure with a real risk of enforcement proceedings being taken by the Buildings Department. Further more, if, which is disagreed, a shelter includes a penthouse, the building on the lot becomes a 4 storey building. Under the Government Lease for the lot, a 4 storey building can only cover 22.5% of the area of the lot while a 3 storey building can cover 25% of the area of the lot. There is therefore a breach of the conditions of the Government Lease with a real risk of the lot being resumed unless such condition has been modified or waived. Please therefore adduce evidence of either the necessary modification or waiver."

9. On 20 October 1997, the vendor's solicitors answered as follows :

"3A. Dealing with your argument regarding the Government Lease first, you indicate that if the shelter includes a penthouse, the building on the Lot becomes a four-storey building, resulting in a breach of the conditions of the Government Lease. There is no validity to this argument. At various stages there have been approvals for a laundry, w.c. and stairhood and then for a shelter on the roof, and whether you wish to call the structure on the roof a shelter or a penthouse (neither of which are defined terms), there has been no change to the number of storeys approved in the building.

In any event, whilst you have pointed out the site coverage permissible for 3 and 4 storey buildings, we note that the Government Lease provides that the building could have gone as high as 7 storeys with a site coverage of 20%. In the circumstances, there is no breach of the conditions of the Government Lease.

3B. The real issue is whether the Penthouse is an unauthorised structure, and if so, whether there is a real rather than a fanciful risk of enforcement action being taken by the Buildings Department - see the Kok Chong Ho Case. Having now had the benefit of inspecting the Buildings Department file and the approved plans with the assistance of an authorised person, we have been assured that the majority of the Penthouse indeed is authorised.

We would argue that there is no real risk of enforcement proceeding being taken by the Buildings Department in this case for the following reasons :

(a) We enclose the Report of Mr. S.P. Mather of David C. Lee Surveyors Limited. Prior to joining David C. Lee in May of this year, Mr. Mather worked as a building surveyor for the Buildings Department for over 19 years, including in the Department's control and enforcement section. A copy of his C.V. is also included with the Report.

Mr. Mather's Report describes the nature of the Penthouse. More importantly, the Report provides an 'insiders' view of the Department's enforcement policy, and concludes that 'the likelihood is that no action will be taken' regarding the Penthouse.

(b) The penthouse has been in existence for over 40 years and dates back to just shortly after the construction of the building itself.

(c) In those 40 years, despite evidence of inspection by the Buildings Department (discussed below), there have never been any queries, notices or orders raised or issued by any Government department regarding the Penthouse.

(d) The enclosure of the roofed structure has involved placing windows in the open gaps between the approved brick pillars and parapit walls shown on the approved plan. This work is non-structural and was done in the mid 1950's and arguably falls within the exemption for approval contained in section 28(3) of the Buildings Ordinance 1955, a copy of which is enclosed for your reference.

(e) As late as 1995, the building was inspected by the Buildings Department. The identification of unauthorised structures is a role of the Buildings Department and the Department had ample opportunity to investigate the property. Even if the primary purpose of the inspection was to investigate structural integrity, a trained inspector should have little difficulty in identifying an unauthorised structure. Notwithstanding this, no adverse reports have ever been issued by the Department.

(f) One of the primary triggers for Buildings Department enforcement action is where unauthorised structures are found to be unsafe and a danger to the public. Again, the Buildings Department have inspected this building for structural integrity and have taken no action. In addition, the Penthouse stands on private property and affects no members of the public.

(g) At the time of our client's acquisition of the property in 1987, we wrote to the Buildings Ordinance Office regarding outstanding notices and unauthorised structures. We enclose a copy of our correspondence and the reply. As you can see, the BOO at the time would not comment on the existence or otherwise of unauthorised structures. Recent telephone enquiries with the Buildings Department have resulted in a similar reply. This is indicative of the disinterest of the Government to the issue of unauthorised structures in this property."

10. On 21 October 1997, the purchaser's solicitors replied as follows :

"3B. We agree that the real issue is whether there is a real risk of enforcement proceedings by the Buildings Department. We afraid the opinion given by Mr. S.P. Mather is not sufficient to show that there is no real risk of enforcement proceedings because :-

a) He has admitted that surrounding the shelter can be unauthorized building works. He could not say otherwise without further examination of the building.

b) Erecting the other part of the penthouse was according to him unauthorized building work. It might have been classified as a prioritized enforcement on which enforcement action would be taken in sequence. The Buildings Department always reserves its right to take enforcement action at such time as it sees fit as pointed out by Mr. Mather. The risk of enforcement proceedings is not fanciful but real. It might come earlier sometimes and later in some other instances.

c) Your reliance upon the inspection in 1995 as evidence that the Buildings Department would not take action is totally unfounded. A contractor carried out the inspection (i.e. not by any official from the Buildings Department) with a specific task to carry out a visual survey on the structural integrity of the building's cantilevered structures. The contractor would not have carried out any inspection other that what it has been engaged to do. Its inspection cannot be taken as an indication that the Buildings Department would not take action against the contravention.

d) Your reliance on the letter from the Buildings Department I 1987 as an indication of the disinterest of the Buildings Department in the matter is also unfounded. The Buildings Department merely declined to advise you on the existence or otherwise of unauthorized structure.

We are strongly of the view that your client has not established that there is no real risk of enforcement proceedings against the property. Unless you can come up with better evidence, such as a letter from the Buildings Department to show that it would not take any action, your client's title cannot be accepted."

11. On 24 October 1997, the vendor's solicitors answered as follows :

"It is our view that we have established that there is no real risk of enforcement in this case.

We have provided you with a report prepared by a surveyor who is eminently qualified to give a practical opinion on the policy of the Buildings Department and risk of enforcement based on his many years of service with the Department.

Taking the Penthouse as a whole, and even taken your assumption that the enclosure of the shelter is unauthorised, Mr. Mather concludes that 'the likelihood is that no action would be taken by the Buildings Department unless the case was upgraded to the high priority category'.

If we then look at what constitutes high priority in paragraph 3.3.2 of his report, it is clear that the penthouse either does not fall within these categories or can be kept from falling into the categories by the actions of the property owner :

'(a) UBW [unauthorised building works] constituting an imminently dangerous situation where there is an obvious danger to life or property.'

The Penthouse is in sound condition, Mr. Mather reports that the property did not pose an obvious hazard to life or property and the Buildings Department's 1995 inspection for structural integrity revealed no problems.

'(b) Significant new UBW irrespective of the date of completion of the building in which the UBW have been carried out.'

The Penthouse is over 40 years old and there is no new UBW.

'(c) Such UBW or particular types of UBW in buildings, lanes, streets, areas, etc. as may be recommended for demolition or other remedial action by public bodies or government agencies.'

The property is a private property where members of the public are not affected.

'(d) Major UBW which contravene the Buildings Ordinance and lease conditions at the same time.'

There is no contravention of the lease conditions.

As to your comment regarding the Buildings Department reserving its rights, it goes without saying that this is the case as the Department cannot retrospectively approve unauthorised works. Nor does the Department have the power or discretion to issue a letter, as you have requested, to confirm that it will not take any action. On this point, we would simply say that we are required to establish that there is no real risk of enforcement. We are not required to provide your client with a guarantee that the there will be no enforcement.

To further reinforce our client's case, we enclose a report prepared by a second authorised person which concludes that it is unlikely that this property ranks as a priority for enforcement. In particular, we would draw your attention to Paragraph 2.4 where Mr. Jones indicates that from the Buildings Department's record, the Buildings Ordinance Office noted the existence of the modifications to the roof structure as early as 5 July 1957. The writer has also seen this note. Even so, after 40 years there has been no enforcement action.

Finally, we have obtained counsel's opinion which concurs with our view. We will provide you with a copy of the written opinion when available."

12. On 25 October 1997, the purchaser's solicitors replied as follows :

"With reference to your letter of 24th October 1997, while we agree with you that what you need to establish is there is no real risk of enforcement proceedings, we cannot accept that you have established the same. The existence of unauthorized building works would mean that the property is subject to a real risk of enforcement proceedings unless there is cogent evidence to show that the Buildings Department would not take enforcement proceedings.

However, we are prepared to reconsider our client's position if you can show to us the note that referred to in the penultimate paragraph of your letter and paragraph 2.4 of the report by Jones Better by Design or alternatively how to get access to the same."

13. On 28 October 1997 (the date fixed for completion), the purchaser's solicitors added to their earlier reply as follows :

"We have reconsidered the two expert reports that you have produced, although one of that has not been signed what your expert could establish in the reports are :-

Firstly the penthouse consists of unauthorized structures in the building;

Secondly the Buildings Department can at any time take enforcement proceedings against such unauthorized structure; and

Thirdly these unauthorized structures are in the prioritized category because they do not pose immediate danger.

Your experts can only establish no more than there may not be any risk of enforcement proceedings taken immediately. They cannot establish that there is no real risk of enforcement proceedings. This is because the Buildings Department, despite its inaction for no matter how long, as pointed out by your experts, can take enforcement proceedings at any time it likes. It can come early or it may come only some time in the very distant future. Nevertheless there will always be a threat of such proceedings. There is no defence to such proceedings when there is unauthorized structure in the building. There is therefore still a real risk of enforcement proceedings against the property. The note that you have referred to will not assist one way or another when the Buildings Department takes enforcement proceedings.

We cannot advise our client to accept your client's title to the property on the documents that you have presented."

14. Later that day, the purchaser, by its solicitors, maintaining its objection to the vendor's title, called the contract off and asked for return of its deposit (HKD7.3m).

15. On 31 October 1997, the vendor, by its solicitors, denied the validity of the purchaser's objection to the title and purported to forfeit the purchaser's deposit.

16. And so the battle lines were drawn.

The judgment below

17. The judge concluded that it was "almost a foregone decision as a matter of logic" that there was a real risk of enforcement action here. He therefore found in favour of the purchaser. Was he right?

The issue

18. It is necessary to record at this stage what is not in issue between the parties. It is not in issue that the "penthouse" is, to a significant extent, an unauthorised structure. It is not in issue that there is, accordingly, a risk that that the Building Authority might one day take some remedial or punitive action against the owner or occupier of the property of which the penthouse forms part. What is in issue is the effect of all this on the vendor's title. The parties appear to be in agreement that if the risk is real, the purchaser was entitled to withdraw from the contract.

19. Of course, whether a risk is real or not is a question of degree. How is this to be tested?

What is the test?

20. It is impossible to formulate any test as what is a real risk and what is a risk which is not real. So this is of little help. It is more helpful to state that if, in an "unauthorised structure" case, the court concludes that, beyond reasonable doubt, the purchaser will not be at risk of any successful action against him by the Building Authority, it should declare in favour of a good title shown : cp MEPC Ltd v. Christian-Edwards [1981] AC 205, per Lord Russell of Killowen at p.220 (followed here in Kan Wing-yau v. Hong Kong Housing Society [1988] 2 HKLR 187 : see per Clough J.A., at p.194).

21. Now, the burden of showing a good title falls on the shoulders of the vendor. He must, therefore, in an "unauthorised structure" case, satisfy the purchaser (or, failing him, the court) that the risk of such action is one which a purchaser can safely be advised to disregard.

22. So the test may be usefully framed as follows : If the purchaser asks his solicitor : "Can I be sure that I can safely disregard the risk?" then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor's title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority was unlikely.

Conclusion

23. In the circumstances disclosed in the exchange of correspondence between the vendor's solicitors and the purchaser's solicitors set out above, a prudent and experienced solicitor if asked by his client here : "Can I be sure that I (and any successor in title of mine) can safely disregard the risk of some action at some future time by the Building Authority over this matter of the penthouse?" would be bound to answer the question in the negative. He might perhaps add that such action would, in his view, be unlikely; he might perhaps add that, in his view, it was more probable than that such action would not be taken; he might perhaps add that the risk was small. But he could not properly exclude the possibility altogether : he could not advise the purchaser that he could be sure the risk could safely be disregarded.

24. Accordingly, the judge was right to decide here that the vendor had failed to show a good title and that the purchaser had been entitled to call the contract off.

25. That is sufficient to dispose of this appeal. But it is perhaps worth adding that in the light of this judgment a prudent vendor should always consider, before attempting to sell his property, whether his title to the property may be affected by some unauthorised building work. If so, he should refrain from entering into any contract for the sale of the property which does not contain (1) a full disclosure of the problem; and (2) an agreement on the part of the purchaser not to raise any requisition or take any objection to the title based upon the unauthorised work. Cases in which a purchaser of property may safely be advised that he can be sure he can safely disregard unauthorised building work are likely to be rare.

Result

26. The appeal must be dismissed.

Rogers, J.A. :

27. I agree and have nothing to add.

Mortimer, V-P :

28. For the reasons given by Godfrey J.A., I also would dismiss this appeal. There is nothing that I can usefully add.

29. The appeal is therefore dismissed with an order nisi for costs against vendor to be taxed if not agreed.