LEUNG WING FAI v. ONLINK INVESTMENTS LTD.

HCMP 474/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 474 OF 1998

____________

____________

_______________

J U D G M E N T

_______________

1. This is a vendor and purchaser summons in relation to an agreement dated 27th September 1997 made between the Defendant as the vendor and the Plaintiff as the purchaser for the sale and purchase of a property in Braemar Hill Mansions, Hong Kong (hereinafter referred to as the "property"). The Defendant has not appeared at the hearing today. Their solicitors have come off the record. The Notice of hearing today has been sent to the Defendant's solicitors by the court before the Defendant's solicitors ceased to act for the Defendant; therefore, it is to be assumed that the Defendant had been informed by their solicitors of the date of today's hearing.

2. There was also an order made by myself in June 1998 that the deponents of the affirmations filed attend for cross-examination, failing which their affirmations would not be read at the hearing. However, no one has come to cross-examine the affirmants for the Plaintiff and therefore I did not require the Plaintiff to speak to their affirmations today. As a further result of this order, I have not read the affirmations filed on behalf of the Defendant, as their deponents had not attended for cross-examination.

3. The matter started with an agreement for sale and purchase of a flat in Braemar Hill Mansions. There is evidence from the Plaintiff that when he and his wife went to inspect the property, there was an enclosed laundry area with a concrete floor slab and windows set on top of a concrete parapet. A subsequent examination of the plans for the building and the inspection of the property by the Plaintiff's architect showed that the enclosed laundry area had been built originally simply as a void, with only the concrete parapet for drying of clothes.

4. The Plaintiff's architect's first report shows quite clearly that there was an additional unauthorized floor slab and windows built in the void resulting in an additional enclosed area. According to the architect, this unauthorized additional enclosure contravened the Buildings Ordinance in the following ways:

a) unauthorized additional gross floor area;

b) unauthorized additional site coverage;

c) unauthorized change of material use;

d) unauthorized additional structure posing additional dead and live load to the existing structure;

e) unauthorized demolition of external walls;

f) unauthorized connection to the existing drainage system.

5. In view of this report, the Plaintiff's solicitors raised a requisition on the 30th October 1997 as follows:

" We are instructed that upon inspection of the premises, our client discovered that an enclosed area, which is situated next to the kitchen inside the premises, and is now used as the laundry area, does not appear in the building plans of the premises as being enclosed as such....

As a result of the inspection, we have consulted a qualified architect for advice. We are advised by the architect that the said enclosed area should be an illegal structure or alteration not permitted under the approved building plans of the premises. Under these circumstances, we would request that the vendor furnish within the next 7 days documentary evidence to show that the enclosed area is not an illegal structure or alteration and/or otherwise permitted under the approved building plans of the premises.

If the said enclosed area is indeed an illegal structure or alteration and/or otherwise not permitted under the approved building plans of the premises, the title of the vendor to the property is defective...."

6. The answer came from the vendor's solicitors nearly one month later and it was as follows:

"We are of the view that there was no real possibility that the Crown would re-enter the above property and your client had knowledge of not only the existence of the said alleged illegal structure but the consequences of the existence of the said alleged illegal structure. We further opine that once the alleged illegal structure is re-instated back to its original position there will be no question of re-entry by the Crown."

7. It is therefore seen in that answer that three points were being made by the vendor's solicitors: first, that there was no real possibility of re-entry. In relation to that point, it is well-established that it is not for a vendor's solicitor simply to assert that there was no possibility or no real possibility of re-entry. It is for the vendor's solicitors to put forward actual evidence that there was no real possibility of re-entry. Here there was no such evidence.

8. As to the second point, it is alleged that the purchaser had knowledge of the consequences of the existence of the illegal structure. There is no evidence that at any stage the purchaser had been made aware by the vendor of the legal consequences of the existence of the unauthorized building works.

9. The third point made in the answer to the requisition is the more interesting aspect of this case. What the vendor did was to instruct his own architect who provided a report on 11th December 1997. In this report, the vendor's own architect advised the vendor that there was an illegal structure at the laundry area. The vendor's architect stated that the illegal structure comprised of the addition of a floor slab about 20 sq. feet up to the original drying rack enclosure and the putting up of windows over it. That is, the external drying rack space had been converted to form an internal space for laundry. The vendor's architect advised that the illegal structure should be removed and the premises reinstated to its original condition. The vendor's architect gave the opinion that the reinstatement work would be of "minor magnitude and that it could be rectified within a week's time and at about $15,000.00. The reinstatement work if done properly will cause no adverse effect to the building structures".

10. Upon receipt of the vendor's architect's report, the purchaser's architect made response in its letter of the 18th December 1997. In this letter the purchaser's architect said that amongst other things, the addition of the concrete floor slab would inevitably have involved the structure of the existing building, thus disturbing the integral structural system. "Its removal should be subject to a satisfactory Method Statement prepared by an authorized person or registered structural engineer as normal practice in Buildings Department, Dangerous Building Section to delineate their re-instatement to render the integral structural design to their original state of stability. Such an action should take at least one month to complete. If they are to be removed in a week, that means that the removal work would only be carried out by an incompetent contractor without the supervision of a competent authorized person or structural engineer and there would be no structural analysis for their removal".

11. In concluding, the purchaser's architect said that "unless there was a competent authority approving the method statement of reinstatement work and the work was to be carried out by a registered contractor simultaneously supervised by an authorised person or registered structural engineer, there would be doubt about the structural stability of the subject premises to be maintained within twenty years".

12. On 23rd December (about 5 days after this letter from the purchaser's architect), the vendor's solicitors wrote to the purchaser's solicitors saying that pursuant to the advice of the vendor's architect, the vendor was now in the course of reinstating and/or demolishing the said unauthorized structure, and that such decoration would be completed on or before completion.

13. Completion was due on 29th December 1997, that is to say 6 days after the date of this letter.

14. On 29th December (the date of completion), the purchaser terminated the agreement for sale and purchase. In his letter of termination, the purchaser's solicitors said amongst other things that the purchaser was ready, willing and able to complete the purchase of the premises subject to good title being shown, but it was considered that the vendor had failed to show a good title, in particular, the vendor had "failed to tender documentary evidence to show that the structures and alterations in the premises have the requisite approval and consent from the Building Authority before erection and removal".

15. By an Originating Summons issued on 5th February 1998, the purchaser claims against the vendor a declaration that the requisitions raised had not been sufficiently answered, a declaration that good title to the property had not been shown, a declaration that the purchaser had lawfully rescinded the agreement by the letter dated 29th December 1997 and ordered that the Defendant return to the Plaintiff purchaser the deposit of $1,139,900.00 and for an order that the vendor pay the purchaser stamp duty paid by the purchaser, commission payable by the purchaser, costs and interest and for a declaration that the purchaser was entitled to a lien on the property for the said deposits.

16. It is clear that in the premises, certainly up to and possibly including the days after 23rd December 1997, that there were unauthorized building works on the premises. Even the vendor's own architect has acknowledged that, and has advised the vendor on the demolition of the unauthoized building works.

17. The question in this case is whether the demolition had been done before completion date, and whether it had been done properly. In both these respects, the burden is on the vendor to prove to the purchaser that the demolition had been done before the completion date, and that it had been done properly.

18. As I have said, I have not looked at the Defendant's evidence because of the order that the Defendant's deponents attend for cross-examination failing which evidence would not be read. As I have said, no representatives of the Defendant has attended today and none of the deponents has attended.

19. So the only evidence before me was that on 23rd December 1997, the vendor's solicitors said that the vendor was "now in the course of reinstating and/or demolishing the said unauthorized structure and that such decoration will be completed on or before completion". The vendor's architect had said that the demolition works would take "about a week" so there is a possibility that the demolition works might have been done on time, although there is no positive assertion by the vendor that those demolition works had been completed by the completion date. As I have said, the burden is on the vendor to prove to the purchaser that by the completion date of 29th December 1997 the demolition works had been completed. There was no such positive assertion by the vendor at any stage whether before or after completion.

20. More importantly there is no evidence that the demolition work had been properly done. A warning bell had been rung by the purchaser's architect in his letter dated 18th December 1997, and by a detailed second report prepared for the purposes of these proceedings, the architect has expounded on what needed to be done for proper demolition works. I shall not repeat here the detailed commentary which was made in relation to the reinstatement works. Suffice it to say that the purchaser's architect had said that "different construction or connection details require different approaches of reinstatement work to re-establish the structural integrity of the building structure and to comply with the relevant legislation when the rest of the building was built".

21. Amongst other things the purchaser's architect commented as follows:

a) that there has been no proper method statement for reinstatement work;

b) there was no proof of approval of reinstatement work;

c) there is no assurance nor warranty presented;

d) there is no proof of materials applied, test report on works or products by laboratory submitted;

e) no assessment of the damage to the structure due to the long existing unauthorized building works and reinstatement work.

22. There is no evidence from the vendor that the demolition works had been done properly in compliance with the matters referred to by the architect. There is no evidence that the work had been done under the supervision of the vendor's own architect, and it would appear from the documentary evidence that the vendor's own architect's scope of work had been limited to simply advising that the demolition be done. Given that the existence of unauthorized building works has been acknowledged, if the vendor were to say that such an unauthorized building work had been removed, the burden is on the vendor to show that the removal had been properly, competently and completely performed.

23. For this reason, I would declare that good title to the property had not been shown by the vendor Defendant in accordance with the agreement when on the 29th December 1997, no or no adequate evidence was put forward by the vendor to show that such demolition works had been properly and completely done.

24. I should add that the purchaser in this case has also relied on what has been popularly known as the "as is" clause to say that the vendor was not entitled to demolish the unauthorized building works. The relevant clause in the present agreement for sale and purchase is as follows:

"In particular but without prejudice to the generality of Clause 26 hereof the property is and will be sold on an 'as is' basis."

Clause 26 provided as follows:

"The purchaser acknowledges that he has been invited to inspect the property or has caused it to be inspected on his behalf and that he is entering into this agreement on the basis of such inspection and of the terms hereof and not in reliance on any representation or warranty whatever written, oral, express or impliedly made by or on behalf of the vendor. The purchaser has full knowledge of the physical condition of the property and takes it as it stands."

25. In my view, the "as is" clause here (especially when read with Clause 26) is clear. It is clear that it is for the protection of the vendor; in other words, the vendor would not need to improve the property. It is clear to me that the "as is" clause is not a right that could be asserted by a purchaser to restrain a vendor from demolishing what is undisputed to be unauthorized building works, nor can it be used as the purchaser's justification for insisting that unauthorized building works be sold to him together with the rest of the property.

26. Finally, I should add that Mr. Sadhwani has very properly referred me to the concept of substantial performance and has sought to distinguish the case of Goldfulway Development Limited v. Well Stable Development Limited [1998] 4 HKC 679 in which I have found that it was open to a court to hold that good title could be given when a vendor offered substantial performance. In that case, I have held that it would not necessarily be safe for a vendor to assert that he had offered substantial performance by demolishing unauthorized building works in every case - each case would depend on its own facts. The test for determining substantial performance was whether the vendor would be conveying substantially what the purchaser had contracted to get. Whether a deficiency was essential and prevented substantial performance depended on

a) the nature of the defect;

b) the proportion of the whole of the land that was affected by it;

c) the purposes or uses for which the parties knew that it was being sold or ought recently to have known that it was being sold and

d) on any other matters which might reasonably have affected the decision of the purchaser to enter into the agreement or which were known by the vendor who have affected the decision.

In each case it was a matter of fact and degree.

27. In the present case there is some evidence from the purchaser that one of the reasons for his buying this property was because the enclosure was "practical and sensible". There has been no cross-examination of the purchaser on that piece of evidence. Of course, it is a question of fact in each case whether such an assertion would be enough to avoid the applicability of the concept of substantial performance, especially when the area involved (as in this case) is so small and relatively insignificant. I would prefer in this case not to make any decision based on the possible defence of substantial performance. As I have said, the failure of the vendor in the present case to prove that the demolition works had been done in time and had been done properly and completely is sufficient for the purchaser's purposes.

28. Therefore, I would make the following orders:

1) A declaration that good title to the property had not been shown by the Defendant in accordance with the agreement.

2) A declaration that the Plaintiff has lawfully rescinded the agreement by letter dated 29th December 1997.

3) An order that the Defendant do return to the Plaintiff the sum of HK$1,139,900.00 being the total amount of the deposit paid by the Plaintiff to the Defendant under the agreement.

4) An order that the Defendant do pay to the Plaintiff

a) the sum of HK$313,473.00 being the stamp duty on the agreement paid by the Plaintiff in the event that the Plaintiff is unable to get repayment from the Stamp Duty Office;

b) the sum of HK$113,990.00 being commission payable by the Plaintiff to the estate agent in relation to the agreement;

c) cost of investigation of title;

d) costs of this action to be taxed if not agreed;

e) interest on the amounts found due at savings rate from issue of Originating Summons to date of judgment and at judgment rate from date of judgment to the date of payment.

5) A declaration that the Plaintiff is entitled to a lien on the property for the said deposit and cost of investigation of title.