KENSEL LTD. v. CHARMFAST INVESTMENT LTD.

HCMP 6890/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6890 OF 1999

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J U D G M E N T

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Introduction

1. The plaintiff purchaser ("the purchaser") brings this action against the defendant vendor ("the vendor") alleging that the vendor breached a sale and purchase agreement dated 25 May 1999 ("the agreement") and it claims the return of the deposit ($3,195,000) paid to the vendor earlier pursuant to the agreement. The property to be sold under the agreement was a shop on the ground floor of Po Foo Building, Percival Street, Causeway Bay, Hong Kong ("the suit property").

2. The vendor denies the claim and alleges in the Defence that it was the purchaser who breached the agreement.

The Issue

3. The purchaser's allegation was based on the following grounds, namely, the vendor's failure to answer a number of requisitions on title and the presence of unauthorised structures in the suit property. It is contended that the unauthorised structures result in a real risk of action by Government and a breach of the provisions of the deed of mutual covenant of Po Foo Building. Either of these 2 last-mentioned matters will make the vendor's title defective.

4. By the time of trial, counsel sensibly narrowed the parties' dispute to that related to the unauthorised structures. The requisitions on title are no longer relied upon. Further, the alleged breach of the deed of mutual covenant is also not relied upon. Hence, the only issue is whether the vendor was unable to show a good title to the suit property by reason of the presence of unauthorised structures in the suit property.

The Undisputed Facts

5. According to para. 9 of the Amended Statement of Claim:-

"On or about 28th September 1999, the Plaintiff inspected the internal part of [the suit property] and discovered the following unauthorised works and alterations:-

(a) the original walls separating the light well of Po Foo Building and [the suit property] have been demolished to the effect that the Property is extended into the light well which has also been enclosed (with roof top) to form an integral part of [the suit property]; and

(b) the originally approved lavatory in [the suit property] as well as the partitioning walls thereof have been removed and relocated to the space at the rear of [the suit property] underneath the staircase sofit [sic]".

6. In the floor plan attached to an assignment dated 25 April 1964 (Memorial No. 437511) ("the floor plan"), (and subject to what is stated below) the suit property is rectangular-shaped. However, there is a light well located in-between the suit property and the shop immediately next to it. Half of the light well used to protrude into the suit property whereas the other half protrudes into the other shop. Hence, the suit property used to be indented on one side resulting in it having a shape somewhat like a "C".

7. The half of the light well protruding into the suit property has been "converted into", and forms part of, the suit property, with the result that the suit property is no longer indented and appears to be a full rectangle.

8. The alteration regarding the lavatory has been spelt out in the Amended Statement of Claim (see above) and needs not be repeated.

9. It is unknown who effected the said alterations and the vendor denies any involvement or knowledge.

10. The preliminary sale and purchase agreement was dated 5 May 1999. As stated above, the agreement was dated 25 May 1999. Unlike the usual case, the title documents (or at least most of them), including the floor plan, were delivered to the purchaser's solicitors on 13 May 1999 (prior to the execution of the agreement).

11. Subsequent to the purchaser's said inspection of the suit property on about 28 September 1999, requisition on title arising therefrom was raised in a letter dated 30 September, 1999 (more than 4 months after 13 May 1999).

The Parties' Arguments

12. Before turning to the parties' respective arguments, the importance of unauthorised structures to a vendor's title has to be briefly mentioned. In this connection, the defect on title arises from the risk of enforcement action by the Building Authority under the provisions of the Buildings Ordinance, Cap. 123, or (as the case may be) from the risk of re-entry by Government because of breach(es) of conditions in Government leases. As far as I am aware, it was in the first instance decision in Spark Rich (China) Ltd. v. Valrose Ltd., HCMP No. 3739 of 1997 that direct and unchallenged evidence has been adduced as to the precise enforcement policy and practice of the Building Authority as regards such unauthorised structures.

13. It seems to be undisputed herein that, save in very exceptional circumstances, the presence of an unauthorised structure will result in a lack of good title. The vendor is obviously correct in not disputing this point in view of the Court of Appeal's decision in Spark Rich (China) Ltd. v. Valrose Ltd., CACV No. 249 of 1998 when it said:-

"[In relation to the risk of action by the Building Authority] ... whether a risk is real or not is a question of degree. How is this to be tested?

... 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 ...

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 ...

... 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" (pp. 10-11 of the transcript of judgment, per Godfrey, JA) (emphasis supplied).

The Vendor's Argument

14. In essence, the vendor's defence is that the purchaser's requisition on title relating to the unauthorised structures was raised out of time. It is argued that, since the unauthorised structures could have been discovered with due diligence, the purchaser should be deemed to have accepted the vendor's title, or to have waived its right to raise such objection when requisition has not been raised in time.

15. In relation to this defence, the following clauses of the agreement are relied upon by the vendor:-

(1) "Time shall be of the essence of this Agreement": clause 6.1;

(2) "[the purchaser] hereby declares that it has inspected and is fully satisfied and accepts in all respects the existing physical state condition and finishes of [the suit property] ...": clause 13.1;

(3) "Subject to prior appointment with the tenant [of the suit property], [the vendor] agrees to permit [the purchaser] ... and/or his surveyor to inspect once [the suit property] for valuation purposes before the Completion Date ... and that immediately before Completion shall take place, [the purchaser] shall also be allowed to enter into [the suit property] to cause a second inspection to be made": clause 15.1;

(4) "Any requisitions or objections in respect of the title ... shall be delivered in writing to [the vendor's] Solicitors within seven (7) working days after the date of receipt of the title deeds and documents by [the purchaser's] Solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence of this Agreement)": clause 18.1.

16. The vendor also relies on the following observations by the courts in relation to the time limit for raising requisitions on title. In Hillier Development Ltd. v. Tread East Ltd. [1993] 1 HKC 285, The Court of Appeal said:-

"The question of the effect of a time limit on requisitions when they go the vendor's root of title was considered in detail in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297. ... I am satisfied that those authorities only go to the proposition that where a vendor, having used due diligence, is unaware of some defect in the vendor's title, the time limit imposed in the agreement does not run against him ... " (at p. 293, per Penlington, JA).

This was accepted and followed by the Court of Appeal in Chan Chik Sum v. Great Pearl Industries Ltd. [1997] 1 HKC 27, 32A-C. The Court of Final Appeal expressly reserved its view on this matter when deciding the appeal in Jumbo King Ltd. v. Faithful Properties Ltd. and others [1999] 2 HKCFAR 279 at 294I-295C.

17. Based on the above, the vendor contends that the purchaser has either waived its right to object to title or was deemed to have accepted the vendor's title. This is because the floor plan, together with other documents of title, has been supplied to the purchaser much more than 7 working days before the requisition was purportedly raised. The relevant dates have been set out under the heading "Undisputed Facts" and will not be repeated.

The Purchaser's Argument

18. On the other hand, the purchaser argues that there is a legal duty on the vendor's part to make full and frank disclosure of encumbrances and defects in its title. In this connection, the purchaser relies on the following cases. In Active Keen Industries Ltd. v. Fok Chi-keong [1994] 1 HKLR 396, 413, the Court of Appeal said:-

"The contractual duty to answer requisitions properly is not an onerous one. All that is required of the vendor is candour and commonsense. The purchaser is not an adversary. The parties have already arrived at an agreement and, normally, it is as much in the purchaser's interest as it is in the vendor's that completion should take place. A good title, or a good marketable title, does not mean a perfect title. If there are, or might be, blemishes upon it, these should be faced squarely ... ".

19. In Pratt v. Betts [1973] 27 P & CR 398, 404, the court said:-

"What, in our judgment, is required as a reply to a requisition is a statement of the true position, not one which conceals it ... ".

Similar statements were made in, for example, Nottingham Patent Brick and Tile Co. v. Butler (1885) 15 QBD 261, 271 and Rignall Developments Ltd. v. Halil [1988] 1 Ch 190, 197.

20. The purchaser's case is in essence that "it has no knowledge of the illegal structures ... while the vendor either knew or was reckless as to the existence of illegal structures ... ": para. 18, "Plaintiff's Opening". The purchaser "contends that the vendor's director, Mr. Chan Yuk Chiu had knowledge of the same by reason of the fact that one of his other companies had actually used the premises, and he plainly had access to the title deeds ... ": para. 19, "Plaintiff's Opening".

21. Further to the above, the purchaser argues that an assurance was given by the vendor when clause 16.1 was included in the agreement which provided that:-

"[The vendor] thereby warrants and declares that [the vendor] has no knowledge of and/or is not aware of there being any unauthorised or illegal structure or alteration in, to or above [the suit property] ... ".

It is argued that the vendor thereby impliedly assured that despite the use of reasonable care, it was unable to find any unauthorised or illegal structure.

22. In addition to the argument regarding the vendor's legal duty to make full and frank disclosure, the purchaser relies on clause 8.2 of the agreement (to be read together with clauses 16 to 18) which reads:-

"[The vendor] warrants that [the suit property] is not adversely affected by any easement, right, privilege or liability of which he is aware or could have ascertained on reasonable enquiry other than those disclosed in this Agreement".

23. By reason of the matters set out above, the purchaser submits that time for raising requisitions on title regarding the unauthorised structures would not start to run where candour and full and frank disclosure is lacking on the vendor's part. The purchaser was therefore entitled to raise the requisition despite the lapse of the prescribed time.

The Vendor's Duty of Disclosure At Law

24. The rationale and nature of a vendor's duty of disclosure at law has been explained in Thompson: Barnsley's Conveyancing Law and Practice (1996) 4th Ed., at pp. 153-4:-

"The state of the vendor's title is a matter exclusively within his own knowledge, and the purchaser is generally in the dark. The vendor is, therefore, duty bound to disclose all latent defects in his title. In this context, the word 'defect' bears an extended meaning. He must disclose any flaw in the documentary title which might affect his ownership of the property and, therefore, his right to deal with it. ... He must also disclose third party rights which prevent him from conveying free from incumbrances, ie all outstanding interests or burdens derogating from absolute ownership of the estate, irrespective of their date of creation. In this sense a defect in title simply means an incumbrance affecting the property. Within this category come the following: restrictive covenants, easements, leases, local land charges, mortgages or charges, licences arising from estoppel or acquiescence. A defect is latent if it cannot be discovered by the exercise of reasonable care on an inspection of the property. With the exception of some easements (for instance, rights of way), none of the incumbrances listed are of such a nature as to be capable of being revealed on inspection ...

The vendor's duty is occasionally expressed as a duty to disclose all material facts adversely affecting the price to be paid, such as an adverse planning decision rendering the property liable to compulsory acquisition. This statement of the duty is, however, too wide. It conflicts with the basic rule of caveat emptor, which absolves a vendor of land from any general duty of disclosure, however material the matter may be, unless it constitutes a latent defect relating to title ... ".

I accept the above passages to reflect the true state of the law regarding this matter.

25. In Emmet on Title 19th Ed., it was said:-

"The general rule of contract is that a vendor is under no duty to disclose material facts to a prospective purchaser ... and this applies to contracts for the sale of land ...

However, there is a term implied into a contract for the sale of land that a good title should be shown by the vendor ... The implication of such a term does not arise if the purchaser has knowledge, actual or constructive, at the time of contract of any irremediable defect in the vendor's title ... Consequently it may be said that a prospective vendor of land has a duty of disclosure to the extent necessary to prevent the implied term arising. In other words, a vendor should disclose to prospective purchasers any defects in his title which are latent and not patent" (para. 4.026);

"A patent defect is a defect which a purchaser might himself have discovered by a reasonable inspection of the property, provided he could have inspected the property if he had wished to do so; for instance, the ruinous condition of the buildings ... or an obvious right of way ... or a public footpath ... A latent defect may be said to be a defect which a purchaser could not have discovered by the exercise of reasonable care by the inspection of the property (eg an easement through a private underground sewer ... )" (para. 4.027).

I also accept the above to have accurately set out the relevant law.

26. I understand the purchaser's argument to be that even if the incumbrance or defect in title is patent (in other words, reasonably discoverable upon inspection), the vendor is still under a duty to make full and frank disclosure. Otherwise, the purchaser will not be bound by the contractual time limit for raising requisitions. I reject this argument firstly because it goes against the rationale and nature of a vendor's duty to disclose and, secondly, it may bring about absurd results. For example, the Hong Kong conveyancing practice is that all relevant documents of title (and not merely abstracts of title) are delivered to the purchaser for investigation of title to be carried out. If the purchaser's argument were correct, not only must the vendor deliver the documents of title, he is also under a duty to expressly draw the purchaser's attention to all possible defects in title which may appear in those documents.

27. The unauthorised structures in the present case are obvious when one cares to compare the shape of the suit property depicted in the floor plan to the actual physical layout of the suit property. They are thus patent defects which ought to be discoverable by the purchaser upon inspection of the suit property. Clause 13.1 of the agreement which provided that the purchaser has inspected the suit property shows that it was the parties' intention that the duty to exercise reasonable care to discover any patent defects lies with the purchaser and not the vendor.

28. The purchaser has (correctly) not argued that the unauthorised structures were not patent. I would have rejected this argument on the facts I found, even if it had been so argued.

The Vendor's Duty of Disclosure Under the Agreement

29. I disagree with the purchaser's argument that the provisions in the agreement, including clauses 8 and/or 16 to 18, are intended to impose on the vendor a duty over and above that arising under the common law with regard to the disclosure of any defect in title.

30. I do not agree that clause 8.2 of the agreement (whether read singly or together with other clauses therein) implies that the vendor has taken reasonable steps to find unauthorised or illegal structures. This clause only states that the vendor has no knowledge of any such structure without assuring that none exists.

31. Because of the above matters, I do not find that the vendor has breached its duty under the agreement with regard to the unauthorised structures in the suit property.

Conclusion

32. By reason of the matters aforesaid, I find that the purchaser has waived any objection to title or was deemed to have accepted title when it failed to raise requisition on title relating to the unauthorised structures within the prescribed time limit. There is accordingly no valid ground for the purchaser not to perform the agreement and its failure to do so amounted to a repudiation of it. The vendor was entitled to and did accept the repudiation.

33. The purchaser's claim is therefore dismissed.

The Witnesses' Credibility and Findings of Fact

34. I consider the credibility of the witnesses to be of limited relevance (or value) to the determination of this action. Insofar as it is necessary to do so, I find the defence witnesses to be truthful and reliable.

35. As regards the plaintiff's 2 witnesses, Mr Dennis Lee Wai Sing (the estate agent engaged by the purchaser) and Mr Leong Siu Hung Edwin (the purchaser's director),

(a) Mr. Lee testified in cross-examination in effect that there were no difficulties in obtaining an opportunity to inspect the suit property and the unauthorised structures were easily discoverable;

(b) Mr. Lee asserted that the inspection of the suit property on 28 September 1999 was routine, it was purely for the purpose of considering the suitability of the suit property for use as a restaurant and he usually has a camera with him. I do not accept these assertions;

(c) Mr. Leong agreed in cross-examination that he was aware that unauthorised structures were sometimes found in old buildings in Hong Kong.

In relation to (c) above, the purchaser accepts that the suit property was located in an old building.

36. To avoid any doubt, the findings of fact I made are:-

(1) the vendor was not involved in nor (before 30 September 1999) was it aware of the unauthorised structures in the suit property;

(2) the unauthorised structures are patent and reasonably discoverable upon inspection of the suit property;

(3) the purchaser has not used due diligence to find out whether unauthorised structures were present in the suit property;

(4) the purchaser has defaulted (without good reason) to perform the agreement by failing or refusing to complete the sale and purchase;

(5) the vendor was entitled to and did accept such repudiation of the agreement.

Counterclaim

37. As stated above, only a Defence has been filed. When the purchaser opened its case at trial, counsel indicated that if the court should find in the vendor's favour, the parties may have to further argue the issue relating to the forfeiture of the deposit paid earlier by the purchaser. The parties indicated that there may be a need for a counterclaim to be put forward after Judgment has been pronounced.

Costs

38. There is no valid reason to depart from the usual rule that costs should follow the event. There will accordingly be a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) that costs of this action be paid by the purchaser to the vendor to be taxed if not agreed.