DEI CHUEN HO INDUSTRIAL LIMITED v. LEUNG YIN POR AND ANOTHER

1993, MP No. 303

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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1. This is a Vendor and Purchaser Summons, brought under s. 12 of the Conveyancing and Property Ordinance, Cap. 219, arising from an Agreement in writing, dated 7th September 1992, made between Leung Yin Por and Leung Che Kin ("the Vendors") and Dei Chuen Ho Industrial Limited ("the Purchaser") in respect of 4 equal undivided 1,328th parts of land registered in the District Land Office, Tai Po, as Lot No. 1794 in DD6, being known as "Fook On Building", 51, Wan Tan Street, Tai Po, together with the exclusive right to the use and occupation of Shop 7 on the Ground Floor of that building. It is the Purchaser who brought this summons, claiming that the Vendors have wrongfully forfeited its deposit of $320,000, being 10% of the $3.2 million purchase price, after the Purchaser purported to rescind the contract on 3rd November 1992.

2. The circumstances leading up to that purported rescission are as follows.

3. Specific provision was made in clause 12 of the Agreement that time was in every respect of the essence, the date for completion being fixed as on or before 28th October 1992.

4. Clause 5 of the Agreement operated in such a way that requisitions on the Vendors' title had to be delivered to the Vendors' solicitor within 7 days of the delivery of the title deeds to the Purchaser's solicitor. The Vendors' solicitor delivered those title deeds on the very date of the contract-signing, namely, 7th September 1992. The Purchaser's solicitor was also quick off the mark, sending his requisitions to the Vendors' solicitor by letter, dated 7th September 1992, the content of which, insofar as relevant, I now set out:-

"Messrs. Samson Siu & Co.,

Solicitors,

Hong Kong.

Dear Sirs,

Re:	Shop No. 7 on the Ground Floor of Fook
	On Building, Wan Tau Street Tai Po

We thank you for your letter of the 5th instant together with its enclosures.

Upon perusal of the title deeds documents of the above premises, we have the following requisitions :-

1. OCCUPATION PERMIT

there are 24 shops/units defined in the floor plan annexed to the Assignment Memorial No. 181977 but in the Occupation Permit it is stated that there are only 4 shops for non-domestic use. Please clarify."

5. It is that requisition, numbered one ("Requisition No. 1"), and the Vendors' solicitor's attempts to answer it, which have given rise to the present proceedings. In addition to Clause 5, other clauses of the Agreement with a bearing on the topic of requisitions are those numbered 9,10 & 27. I now set out as much of those clauses as is relevant for the present case.

"5. Any requisition or objection on title shall be delivered to the Vendor's solicitors on or before whichever is the earlier of the following dates :-

(a) 7 days before the date of completion; or

(b) within 7 days after the delivery of the title deeds to the Purchaser's solicitors

The Purchaser shall be deemed to have accepted the Vendor's title if such requisition or objection on title is not delivered to the Vendor's solicitors within the times stipulated above. If the Purchaser shall make and insist on any objection or requisition on title which the Vendor shall be unable or (on the ground of difficulty delay or expense or on any other reasonable ground) unwilling to remove or comply with, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than 3 day's notice in writing to annul the sale, in which case unless the objection or requisition in question shall have been in the meantime withdrawn the sale shall at the expiration of the said notice be annulled, the Purchaser being in that event entitled to a return of all deposits and other moneys paid hereunder but without interest costs or compensation.

9. If the Purchaser shall fail to comply with any of the terms of this Agreement the deposit money paid hereunder shall be absolutely forfeited as liquidated damages (and not as penalty) to the Vendor who shall be at liberty if the Vendor sees fit without being obliged to tender and assignment to the purchaser to rescind this Agreement and to retain the said Premises or any part or parts thereof or to resell the same either as a whole or in lots and either by public auction or private contract or partly by the one and partly by the other and subject to such conditions and stipulations as to title or otherwise as the vendor may think fit. Any deficiency in price arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the Purchaser as liquidated damages and any increase in price realised by any such resale shall belong to the Vendor. This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor's rights hereunder or otherwise. On the exercise of the Vendor's right of rescission hereunder the Vendor shall have the right, if this Agreement shall have been registered in the Land Office to register at the Land Office a Memorandum signed by the Vendor alone to rescind the sale of the said Premises and to vacate the registration of this Agreement and relating to the Stamp Duty (Amendment) Ordinance the Purchaser shall indemnify the Vendor of any amounts of stamp duty chargeable and payable relating to the said premises.

10. If the Vendor shall for any cause (other than the default of the Purchaser) fail to compete the said sale in accordance with the terms hereof then the said deposit shall be returned to the Purchaser who shall also be entitled to recover from the Vendor such further damages (if any) over and above the said deposit as the Purchaser may sustain by reason of such failure on the part of the Vendor and its shall not be necessary. For the Purchaser to tender an assignment to the Vendor.

27.(1) The parties hereto are fully aware that the Purchaser's solicitors, have not yet fully studied the title deeds and documents in respect of the said Premises. If the Purchaser's solicitors shall not be satisfied with the Vendor's title and/or if the Vendor shall be unable or unwilling to comply with the Purchaser's solicitors' requisitions then the Purchaser shall have the right to rescind this Agreement whereupon the parties hereto shall sign a Memorandum or Agreement of Cancellation and all the deposit paid shall be returned to the Purchaser without interest or compensation Provided that in such event each parties shall bear and pay his own costs and expenses for and incidental to the preparation of the said Memorandum or Agreement of Cancellation."

6. The background to Requisition No.1 is that the original building plans submitted by the developer, Sing Gay Land Investment Company Ltd., ("Sing Gay Land"), to the Building Authority for approval prior to constructing Fook On Building showed four shops for non-domestic use on the Ground Floor, and it was on that basis that the Building Authority approved those building plans. The Occupation Permit issued by the Building Authority in respect of the whole of Fook On Building on 4th July 1974 specified that occupation of the Ground Floor was to be for the purposes of "4 shops for non-domestic use".

7. When Sing Gay Land made an Assignment of Shop 7 to the present Vendors on 21st November 1975 ("the first Assignment"), the plan annexed ("the Assignment plan") showed twenty-four shops on the ground floor. That Assignment plan was prepared by one "A.H. Pasty", architect and engineer, who, I am prepared to assume, was the Authorised Person for the purpose of the development.

8. On 14th November 1974, which was after the Occupation Permit but before the first Assignment, Sing Gay Land caused a Deed of Mutual Covenant to be made in respect of Fook On Building on the basis that the Ground Floor comprised twenty-five shops. Confusion would have been worse confounded if the Purchaser had raised a requisition on the discrepancy between the twenty-four shop spaces shown on the Assignment plan and the twenty-five shops referred to in the Deed of Mutual Covenant, but, fortunately, that particular discrepancy can be disregarded for present purposes, and the case is to be determined on the basis that there were twenty-four shops on the Ground Floor when Sing Gay Land made the first Assignment to the present Vendors. The only discrepancy with which the court need concern itself is that raised by the Purchaser's solicitor as Requisition No. 1.

9. Under the Originating Summons, the issue which arises for determination by me is whether the Vendors' solicitor sufficiently answered that Requisition No. 1. That was the appoach adopted by the Court of Appeal in the not dissimilar situation in Kok Chong Ho v. Double Value Developments Limited, C.A. No. 96/1991, and I can discern no justification for embarking on a different approach in the present case. What I do not have to determine is whether in fact the Vendors do have a good title - only whether they sufficiently answered the Purchaser's requisition and showed a good title, as required by the Agreement.

10. After the Purchaser's solicitor's letter of 7th September 1992 raising the requisition, the Vendors' solicitor replied on the 16th September 1992, explaining how he had written off to the government in relation to the requisition, and, that same day, he had, in fact, written to the Buildings Ordinance Office, as follows :-

16th September 1992

Building Ordinance,

Buildings and Lands Department,

11th Floor, Murray Building,

Garden Road, Hong Kong

Dear Sirs,

Re:	Permit No.NT. 78/74 dated-7-74 Shop
	No. 7 on the Ground Floor of Fook On Building
	Wan Tau Street, Tai Po Market, New Territories.

We represent Mr. Leung Yin Por of the above property in his proposed sale of same to a prominent purchaser.

Requisition has been raised by our purchaser solicitors that the enclosed above copy Occupation Permit refers to the Ground floor of the above building contains only 4 shops whereas the actual building includes 24 Shops and same also specifies in the relevant Deed of Covenant.

In the circumstances, we shall be grateful if you will kindly clarify by return if there has been omission of '2' in front of the 4 shops or otherwise.

Please kindly let us hear from you well before 24th instant to enable completion.

	Yours faithfully,
	SAMSON SIU & CO., SOLICITORS."

11. The ingenious guess by the Vendors' solicitor that a "2" had been omitted in front of the "4 shops" turned out to be wrong, so that when the Buildings Ordinance Office replied on 26th October 1992, it was to the effect that the Sing Gay Land's orignal building plans had shown only 4 non-domestic shops.

12. On the 27th October 1992, that is to say, the day before the completion date fixed by the Agreement, the Purchaser's solicitor wrote to the Vendors' solicitor as follows :-

"Messrs. Samson Siu & Co.,

Solicitors,

Hong Kong.

Dear Sirs,

Re:	Shop No. 7 on Ground Floor of Fook On
	Building, Tai Po. New Territories

Since our requisitions on title of the above premises have not been complied with. We are instructed that the sale and purchase transaction of the said premises be postponed to a date which is within 7 days upon the said requisitions have been complied with.

Yours faithfully,

13. On a careful reading, it is difficult to fathom quite what that letter means, but, in the context of the amiable correspondence between the Vendors' and the Purchaser's solicitors up to that point, I think it was probably meant to mean that the Purchaser was offering to postpone completion until 7 days after Requisition No.1 was answered.

14. The Vendors' solicitor replied by a letter dated 2nd November 1992. It was agreed all round that the actual date, "2nd October 1992", appearing on that letter was erroneous, and should have read, "2nd November 1992". A further error occurs in the first sentence of the second paragraph where the writer refers to a ".... letter from Buildings Ordinance Office dated 26 instant.....", which, in context, obviously meant 26th October 1992. I now set out that letter to the Purchaser's solicitor with the dates corrected:-

Messrs. J. Fang & Co.,

Solicitors,

1711-1714 & 1722-1726,

Swire House,

11 Chater Road,

Hong Kong.

Dear Sirs,

Re:	Shop No. 7 on Ground Floor of Fook On
	Building, Tai Po. New Territories

We refer to your letter dated the 27th October 1992 and previous correspondence between your Mr.Yeung and our Mr.Joseph Siu concerning the requisition regarding the description of the Occupation Permit.

Confirmed by the letter from Building Ordinance Office dated 26th October, we understand that the original building plans had described only 4 non-domestic shops in respect of the lot thereon. Since there are 24 shops presently defined in the floor plan annexed to the Assignment Memorial, No.181977, we believe that the shop had been partitioned back to 1975 subject to an approval of the architect who had prepared and signed the said floor plan. As we would agree that in partitioning a non-domestic premises, it is not necessary to obtain the consent of the buildings Department. We are therefore of the opinion that such partitioning had not breached any of the conditions of the New Grant or the Deed of Mutual Covenant. The approval of the qualified architect on the said floor plan also signifies that such partitioning would not be illegal and harmful to the structure of the related building. Hence, we would hold that your requisitions have been satisfactorily answered.

Despite of the above facts, as a matter of goodwill, we are instructed to inform you that our client has consented to postpone the transaction within one week upon the reply by the developer's Solicitor whom we trust would share the same view with respect to the requisition aforesaid.

Thank you for your attention.

	Yours faithfully,
	Samson Siu & Co., Solicitors."

15. Firstly, I will comment on the penultimate paragraph of that letter. Exactly what it means is not easy to say, but of one thing I am reasonably sure, namely, it is not an acceptance of the offer embodied in the Purchaser's solicitor's letter of 27th October 1992, which never offered to fix the date for completion by reference to the "reply by the developer's solicitor".

16. That final paragraph in the Vendors' solicitor's letter, in my view, amounts to a counter-offer. The significance of that will in due course emerge from subsequent correspondence.

17. Of the rest of that letter from the Vendors' solicitor, it can fairly be said it is long on assertion but short on evidence. It gets nowhere near satisfactorily answering Requisition No.1. In particular, it contains no evidence that the works done in converting four shops into twenty-four shops on the Ground Floor did not harm the structure of the building, and no evidence that the Purchaser need have no fear about any enforcement action from the Crown.

18. That letter elicited the following reply from the Purchaser's solicitor on 3rd November 1992 :- "

"Messrs. Samson Siu & Co.,

Solicitors,

Hong Kong.

Dear Sirs,

Re:	Shop No. 7 on Ground Floor of Fook
	On Building, Wan Tau Street N.T.

We refer to your letter of the 2nd instant and regret to inform you that we cannot share your view that the partitioning/alteration of the shops was not in breach of any of the conditions in the New Grant :

We would draw your attention to H84 Land Law & Conveyancing (copy herewith). It is provided that 'the risk that the Crown might take enforcement action in respect of an unauthorized structure constituted a defect in title.'

In view of above, we are instructed to give notice to your client through your goodselves which we hereby do that our client is now exercising its rights under clause 27(1) of the Agreement for Sale and Purchase dated 7th September 1992 to rescind the said Agreement. Kindly therefore let us have your draft Agreement for Cancellation for our approval.

Yours faithfully,"

19. Assuming for the sake of argument that the Vendors' solicitor had not satisfactorily answered Requisition No. 1 and had not shown the Purchaser a good title on or before 3rd November 1992, I am of the view that the Purchaser's solicitor's letter of 3rd November 1992 effectively rescinded the Agreement, entitling the Purchaser to the return of its deposit. As the Vendors never accepted the offer I have described in the Purchaser's solicitor's letter of 27th October 1992, but, instead, came up with their own unaccepted counter- offer in their letter of 2nd November 1992, I am satisfied that, on normal contract principles, the Purchaser was entitled to, and did effectively rescind the Agreement by its letter of 3rd November 1993, bearing in mind, that time was of the essence of the contract and the completion date of 28th October 1992 fixed by the Agreement was past.

20. I will now consider the question whether, on or before 3rd November 1992, the Vendors had in fact shown a good title. A discrepancy between what is stated in an Occupation Permit on the one hand, and what features in a Deed of Mutal Covenant and the plan annexed to a first assignment from a developer on the other hand, can involve a point on title. Kok Chong Ho, already referred to, was such a case. The point was dealt with, in particular, at p.16 of the unpublished version of that judgment, where there is a reference to "...the defect in the Vendor's title due to the non-approval of the extra flats...." [As an aside, I express the hope that the Editor of the Hong Kong Law Reports will, before too long, include that judgment in the Reports, since it is on a frequently litigated topic. Active Keen Industries Limited v. Fok Chi Keung, MP No.3761/1992 where judgment was delivered on 31st December 1992, and Octorich Limited v. Liu Sin Ming, MP No.977/1992 where it was delivered on 7th May 1993, are two recent instances where the Kok Chong Ho case fell to be considered.]

21. The issue raised by Requisition No.1 is essentially about unauthorised structures, thus bringing Clause 36 of the Agreement into play. That too makes it plain that unauthorised structures give rise to questions of title. I now set out Clause 36.

36.(1) The Vendor acknowledges that he has been advised by the Vendor's Solicitors that any unauthorised structure in the said Premises should be disclosed to the Purchaser and the risks involved in the non- disclosure of the unauthorised structure may include but not limited to the title being held defective, the Crown exercising its right of re-entry, taking enforcement action or requiring payment of a penalty or premium to 'regularize' the unauthorised structures.

(2) The Vendor hereby represents, warrants and declares that there is no unauthorized structure in the said Premises or any part thereof. If it should be discovered that any unauthorized structure exists, the costs for 'regularizing' the unauthorised structure shall be borne by the Vendor."

22. According to Counsel for the Vendors, his clients have sufficiently answered Requisition No1, since the discrepancy relates only to partitioning, and partitioning is a form of building works which enjoy exemption from approval by the Building Authority by virtue of s.41(3), of the Buildings Ordinance, the relevant part of which I now set out :-

"41 Exemptions.

............

(3) Building works other than drainage works, ground investigation in the scheduled areas or site formation works not involving the structure of any building may be carried out in any building without application to or approval from the Building Authority :

Provided that nothing in this subsection shall permit any building works to be carried out in contravention of any regulation."

"Building works", as defined by s.2 of the Buildings Ordinance, includes

"..... any kind of building construction, site formation works, ground investigation in the scheduled areas, foundation works, repairs, demolition, alteration, addition and every kind of building operation, and includes drainage works."

23. If there were evidence that the only reason for the discrepancy between the Occupation Permit, the original building plans, and the Assignment plan was the mere erection of partitions, I would agree with the Vendor's Counsel that such works fell within the ambit of the exemption conferred by s.41(3), because the putting up of such partitions would not involve the structure of the building.

24. In the case before me, however, there is simply no evidence that the conversion of the 4 shops contemplated by the Occupation Permit into the 24 shops shown on the Assignment plan was confined to the putting up of partitions. The critical factor determining exemption under s.41(3) in the present case is whether or not the partitioning involved any alteration to the structure of Fook On Building. What the Vendors have failed to show by any evidence is that the partitioning did not involve such alteration to the building's structure.

25. An argument advanced on behalf of the Vendors to the effect that the words "not involving the structure of any building" in s.41(3) control only "site formation works" does not square with the interpretation of s.41(3) which found favour with the Justices of Appeal in the Kok Chong Ho case, at p.12, where they note that s.41(3) "...... confers exemption from approval by the Building Authority on building works (other than inter alia drainage works) not involving the structure of any building ...... carried out in any building ......".

Bearing in mind that one of the main purposes of the Buildings Ordinance is the safety of buildings, it strikes me as reasonable that, whereas building works involving the structure of any building should require the approval of the Building Authority, non-structural works, normally, should not. On the interpretation of s.41(3), I respectfully disagree with the obiter observations made in the Octorich case.

26. On the view I take, the Vendors' solicitor's letter of the 2nd November 1992 made too sweeping an assertion when it stated, " The approval of the qualified architect on the said floor plan also signifies that such partitioning would not be illegal and harmful to the structure of the related building." Approval by the architect is neither here nor there when it comes to considering whether partitioning involved structural alterations. The approval necessary where partitioning affects the structure of a building is that of the Building Authority, not the architect. If such approval was necessary from the Building Authority, the Purchaser, in common with the other co-owners, would run the risk of enforcement proceedings under s.24 of the Buildings Ordinance, in similar fashion to the buyer in the Kok Chong Ho case. It is to be noted, too, that in the Kok Chong Ho case, the discrepancy between the Occupation Permit and the first assignment by the developer went back for 30 years; in the case before me, where the discrepancy occurred something like 18 years ago, the risk must be a fortiori.

27. On the mixed fact and law question whether the Vendors' solicitor had, on or before 3rd November 1992, satisfactorily shown that the alteration made to the Ground Floor in connection with partitioning was non-structural and hence needed no approval under the Building Ordinance, I hold that he had not.

28. A further line of defence put forward on the Vendors' behalf was to the effect that conveyancers in Hong Kong would regard the risk of enforcement proceedings in the circumstances of the present case as so remote as not to constitute a defect in title. Once again, the Vendors rely on assertion, rather than evidence. As no evidence was adduced in relation to the practice of conveyancers in Hong Kong, the Vendors were unable to satisify me that the Purchaser was being unreasonable in treating Requisition No.1 as unanswered.

29. In my judgment, the Vendors failed to make a satisfactory answer to Requisition No.1 and show they had a good title on or before 3rd November 1993, so that, in the circumstances I have described, the Purchaser was entitled to rescind the Agreement by its solicitor's letter of 3rd November, 1992.

30. I regard it as in the nature of unproductive labour to set out the post-rescission correspondence, i.e. after 3rd November 1993. Suffice it to say that, even by 24th November 1992, when the Vendors' solicitor sought by a letter of that date to turn the tables on the Purchaser by claiming the Vendors were the ones entitled to claim rescission, the Vendors were still unable to show a good title.

31. On rescission by the Purchaser, the Vendors, in compliance with Clause 27(1) of the Agreement, should have returned the Purchaser's deposit of $320,000 to the Purchaser forthwith. If the Vendors had carried out their contractual duty by returning the deposit immediately, they would have incurred no obligation to pay any interest to the Purchaser. By failing to return the deposit, the Purchasers are in breach of the Agreement, and in my judgment are liable to pay the Purchaser interest on the deposit from the 3rd November 1992 until judgment. The Vendors are not entitled to blow hot and cold by seeking to claim the benefit Clause 27(1) can confer on a vendor while at the same time trying to avoid the obligation that same Clause imposes.

32. On the level of interest the Vendors must pay on the withheld deposit, I make an order nisi it should be at the rate of 7% per annum.

33. A further head of damage for which I hold the Vendors liable relates to payment of the Purchaser's costs payable to its solicitor in respect of his investigation of the Vendors' title. That head, in my view, comes within Clauses 10 and 11 of the Agreement.

34. Brief mention can now be made of the Active Keen Industries and the Octorich cases. In the Active Keen case, the Building Authority had, in effect, acquiesced in the existence of otherwise-illegal structures of long- standing, so that they did not, in practice, amount to a defect in the title tendered to a prospective purchaser. In the Octorich case, the Occupation Permit could reasonably be construed in such a way that there was no conflict between it and other documents of title relied or by the vendor in that case. Neither of those two cases is helpful to the Vendors on the facts of their case.

35. This is a Judgment handed down pursuant to 0.42, r 5B. I make an order nisi that costs are to follow the event.