KWONG KA HUNG and Another v. LAI WAH DEVELOPMENT CO. LTD.

1994, No. A10566

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This action relates to the question of title to a property. By an agreement dated 9 August 1994 ("the Agreement"), the defendant agreed to sell and the plaintiffs agreed to purchase a property described in the following ("the property") for the consideration of $1,668,000.00:

"ALL THOSE 40 equal undivided 90th parts or shares of and in ALL THOSE 90 equal undivided 13,800th parts or shares of and in ALL THAT piece or parcel of ground situate lying and being at Kwai Chung, New Territories, Hong Kong and registered in the District Land Registry, Tsuen Wan as KWAI CHUNG TOWN LOT NO. 367 ("the Lot") And of and in the messuages erections and buildings thereon now know as "KWAI SING CENTRE" ("the Building") TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT PORTION of SHOP NO. 64 on the GROUND FLOOR of the Building (which said PORTION is known or intended to be known as SHOP 64A on the GROUND FLOOR of the Building as shown and designated "64A" on the Ground Floor Plan annexed hereto and thereon coloured Pink."

2. A sum of $333,600 was duly paid by the plaintiffs on 8 August 1994 as deposit and part payment of the purchase money.

3. The defendant became the owner of Shop 64 in the Building by virtue of an assignment dated 30 September 1993, and it took the interest as such owner subject to and with the benefit of a Deed of Mutual Covenant dated 29 April 1981 ("the DMC"). In the assignment, the defendant covenanted to observe all the covenants terms and conditions in the DMC so far as they related to or affected Shop 64.

4. By a letter dated 26 July 1994, the defendant's solicitors informed the Manager of the Building ("the Manager") that the defendant had divided Shop 64 into two shops, namely, Shop 64A (with 40/90th shares of 90/13,800th shares) and Shop 64B (with 50/90th shares of 90/13,800th shares) and had Shop 64B assigned to two purchasers and Shop 64A retained by itself.

5. By an assignment dated 25 July 1994, the defendant assigned Shop 64B to the two purchasers as joint tenants. The defendant and those purchasers also executed a Sub-Deed of Mutual Covenant dated 25 July 1994 ("the Sub-Deed"). What the defendant did by the Agreement was to sell the remaining portion of Shop 64, i.e., Shop 64A, that had been retained by it to the plaintiffs, so that the latter would become joint owners of Shop 64A. The relationship, rights and liabilities of the purchasers of Shop 64B and the plaintiffs regarding Shop 64A were to be regulated and governed by the Sub-Deed.

6. The crux of the complaint of the plaintiff was that it was against the provisions of the DMC for the defendant to have divided Shop 64 into two portions and therefore the defendant did not show and could not pass good title to Shop 64A to the plaintiffs. The plaintiffs' solicitors raised the question regarding the power or authority to divide Shop 64 into Shop 64A and Shop 64B by a letter dated 30 August 1994 sent to the defendant's solicitors who replied by letter of 1 September 1994 that the defendant had the authority to do so.

7. Paragraph (3) of the recital to the DMC provided that "For the purposes of sale the Land and the Development have been notionally divided into 13,800 equal undivided shares which have been allocated" to various parts of the Building, the particulars whereof were contained in the third column of the Schedule thereto. Under the Schedule to the DMC, Shop No.64 was allocated 90 shares.

8. The provisions in Section I of the operative part of the DMC which are most relevant for the determination of the issue before me are as follows:

"3. Each equal undivided share in the Land and the Development and the full and exclusive right and privilege to hold use occupy and enjoy any part of the Development shall be held by the person or persons from time to time entitled thereto subject to and with the benefit of the easements, rights, privileges and obligations herein contained.

4. The Owner shall at all times hereafter be bound by and shall observe and perform the covenants, provisions and restrictions herein contained and the benefit and burden thereof shall be annexed to every part of the Land and the Development and the undivided share or shares held therewith. The Law of Property (Enforcement of Covenants) Ordinance and any statutory amendments, modifications or re-enactments thereof for the time being in force shall apply to these presents.

5. Every Owner shall have the full right and liberty without reference to other Owners or other persons who may be interested in any other equal undivided share or shares in any way whatsoever and without the necessity of making such other Owners or other persons a party to the transaction to sell, assign, mortgage, lease, licence or otherwise dispose of or deal with his share or interest in the Land and the Development together with the exclusive right and privilege to hold, use, occupy and enjoy such part or parts of the Development which may be held therewith but any such sale, assignment, mortgage, lease or licence shall be expressly subject to and with the benefit of this Deed.

6. The right to the exclusive use occupation and enjoyment of any part of the Land or the Development shall not be sold, assigned, mortgaged, charged, leased or otherwise deal with separately from the undivided share with which the same is held Provided Always that the provision of this Clause shall not extend to leases or tenancy the terms of which shall not exceed 7 years."

9. The underlining of the words in the clauses above was done at the request of Mr Pow, counsel for the plaintiffs, for stressing their importance.

10. It was common ground between the parties that the defendant was bound by the clause 4 to observe and perform the covenants and restrictions contained in the DMC.

11. The plaintiffs' arguments were that the equal undivided shares in the Land (which is the same as the Lot) and the Development (which is the same as the Building) went hand in hand with and were inseparable from the exclusive right and privilege to hold use occupy and enjoy ("the exclusive right to use") the part of the Building with which the undivided shares were held, and that the full right and liberty to sell and assign, etc., without reference to other owners ("the right to sell") was only applicable and available to the owner if he sold the undivided shares together with the exclusive right to use the part of the Building held with the said undivided shares. Heavy reliance was placed on the clause 6 in support of the submission that the defendant was not entitled to sell the exclusive right to use Shop 64 separately from the undivided shares with which Shop 64 was held, namely, 90/13,800th equal undivided parts or shares in the Land and the Building ("the 90 shares").

12. In common law, tenants in common of a plot of land have unity of possession in that each of them is entitled to possess the whole of the land. They hold "undivided" shares in the land. As opposed to joint owners, tenants in common are, however, owners of distinct shares, albeit in property which has not yet been divided up physically. It is not possible to point to one parcel or area of the co-owned land rather than any other as belonging to a particular tenant in common: tenants in common own specific, but undivided, shares in the land. See Elements of Land Law, by Kevin Gray, pp.302-303.

13. The owners of various units or parts of a plot of land and the building standing on it are similarly tenants in common of the land. Property law finds some difficulty in accepting an ownership of real property floating in mid-air (i.e., a flat or a unit in a building) with the owner owning neither the space beneath nor the space above and therefore dependent upon the obligations of others and his own legal rights to sustain his property (see Bramwell's Conveyancing in Hong Kong, p. 254). However, the rights and liabilities of tenants in common of different flats in buildings in Hong Kong are usually governed by a deed of mutual covenant, which also helps regulate the right and manner to sell such flats. The purchaser of a flat is normally assigned a certain number of equal undivided shares in the land and building together with the exclusive right to use the flat and the right to sell the flat without any interference from owners of other flats.

14. In the present case, it was by the DMC that the Land and the Building was notionally divided into 13,800 shares and a certain number of shares were allocated to various parts of the Building. An assignment of part of the Building, being a unit or a flat in it, is done by assigning the number of shares allocated to that part together with the exclusive right to use it. Where this is done, the owner's exclusive right to use and right to sell regarding his interest will not be interfered with by the owners of other parts of the Land and the Building.

15. The defendant's ownership, rights and obligations regarding Shop 64 were governed by the DMC. Under the clause 3, by reason of the defendant owning the 90 shares, it had the exclusive right to use Shop 64. By virtue of the clause 5, the defendant was conferred the right to sell the 90 shares allotted to Shop 64 together with the exclusive right to use that shop. The clauses 3 and 5 gave rights and did not impose obligations.

16. The clause 6, on the other hand, restricted the defendant's right to sell its exclusive right to use Shop 64. The restriction was to the effect that the exclusive right to use Shop 64 should not be sold separately from the undivided shares with which Shop 64 was held, i.e., the 90 shares. According to the clause 6, therefore, the exclusive right to use should not be sold separately from the 90 shares.

17. What the defendant did in its assignment of Shop 64B dated 25 July 1994 was to sell the exclusive right to use a portion of Shop 64 together with 50/90th equal undivided parts or shares of and in the 90 shares. What it agreed to do regarding the plaintiffs was to sell the exclusive right to use the remaining portion of Shop 64 together with 40/90th equal undivided parts or shares of and in the 90 shares. Following the wording of the clause 6, there was no sale of the exclusive right to use a part of the Land or the Building separate from the undivided shares with which the same was held. The assignment as well the Agreement to sell to the plaintiffs were in relation to a part of the Land and the Building together with, and not separate from, a certain number of equal undivided shares in the 90 shares.

18. Mr. Pow, on behalf of the plaintiffs, argued that the defendant's original interest in the Land and Building before the assignment dated 25 July 1994 was owning the 90 shares as well as the exclusive right to use Shop 64 and the right to sell under the clause 5 but subject to the clause 6. It followed, therefore, that the defendant could only sell the exclusive right to use Shop 64 together with the 90 shares. The defendant could not split the exclusive right to use or split the 90 shares by dividing the shop into two portions and dividing the 90 shares into two portions. If the term "unit" or "commercial unit" (as defined in the DMC) had been used in the clause 6 instead of the word "part", Mr Pow's arguments might be more attractive, for the clause might be interpreted as not allowing the division of a unit or of the undivided shares with which the unit was held.

19. Shop 64 was physically partitioned into two portions. The exclusive right to use Shop 64 was divided by the defendant in the assignment dated 25 July 1994, but there is no provision in the DMC prohibiting that. Despite the assignment, it did not have the effect of partitioning (in the law of property sense) the defendant's 90 shares, because what the assignment did was only to assign 50/90th equal undivided parts or shares in the 90 shares to the assignees. That did not destroy the unity of possession of the tenancy in common amongst the co-owners of the Land and the Building. It follows that when the defendant agreed to sell Shop 64A to the plaintiffs and agreed to assign 40/90th equal undivided parts or shares in the 90 shares to the plaintiffs, it similarly did not try to partition the 90 shares. There is no express provision in the DMC forbidding that either.

20. In Halsbury's Laws of England, Vol. 36, para. 823, it is stated:

"A power expressly created in general terms by an executed instrument is not to be cut down except by express words."

The clauses 3 and 5 which expressly conferred the exclusive right to use and the right to sell such exclusive right to use on the defendant. They were rights and not obligations. The clause 6 imposed a restriction or obligation on the defendant. In my judgment, the clause 6 did not contain sufficiently clear and unambiguous words to cut down those rights in the manner as submitted by the plaintiffs. A restriction of the rights must be clear and certain. In Sheenip Industries Limited v. Champion Billion Development Limited (unreported, HCMP 1390 of 1995, 4 July 1995), Deputy Judge Yuen, when dealing with the freedom of a developer to allocate shares in property, said:

"In my judgment, the proprietary rights which the developer enjoyed as the owner of the 107/108th shares cannot be restricted except by clear wording or by necessary implication. There being nothing to indicate that there were any constraints upon his rights, he was free to allocate the 107/108th shares in whatever manner he thought appropriate."

In Savill Brothers, Ltd. v. Bethell [1902] 2 Ch D 523 at 537-8, CA, Stirling LJ said:

"It is a settled rule of construction that, where there is a grant and an exception out of it, the exception is to be taken as inserted for the benefit of the grantor, and to be construed in favour of the grantee: see Sheppard's Touchstone, 7th ed. p. 100; Earl of Cardigan v. Armitage (1823) 2 B. & C. 197; Bullen v. Denning (1826) 5 B. & C. 842, 850. If, then, the grant be clear, but the exception is so framed as to be bad for uncertainty, it appears to us that, on this principle, the grant is operative and the exception fails. The question, therefore, is whether the exception is good."

21. I have no hesitation that the clause 6, on its plain and clear meaning, did not prohibit the defendant from doing what they did regarding the assignment dated 25 July 1994 or what they agreed to pass to the plaintiffs under the Agreement. Mr Pow sought to rely on the fact that the DMC did not contain any clause allowing division of the shares or part of the Land and Building to argue that the clause 6, when read together with the rest of the DMC, should have the effect of such a prohibition. In the DMC, there is no provision, for example, allowing shares allocated to a certain floor of a building to be split in a manner prescribed, or allowing a sub-deed to be made. Nonetheless, not expressly granting a right to do a thing is very different from expressly prohibiting it. I do not consider the absence of such provisions in the DMC as being tantamount to or should be construed as prohibiting the defendant from doing what it did. Mr Pow was not able to refer me to any other provisions in the DMC or any other circumstances which would make me feel that the construction of the clause 6 as contended by him should be adopted as being proper or by necessary implication.

22. The effect of the restriction imposed by the clause 6 is that no right to use any part of the Building shall be sold separately from the undivided shares with which that part is held. It covers the situation if, for example, the owner of a top floor flat and a roof top assigning the roof top without any of the undivided shares with which the flat and roof top are held, which was exactly the case shown in the judgment of Godfrey J in Lai Wing-ho & Anr v. Chan Siu-fong [1993] HKLR 319, where the learned judge held that no right capable of subsisting as a legal estate passed to the purported assignee.

23. Each of the co-owners in the Land and the Building are bound by the clauses 3 and 5 to respect the rights conferred by those clauses to the others.

24. In the circumstances, I hold that the defendant was willing able and ready to pass a good title to the plaintiffs regarding the property agreed to be sold under the Agreement, namely, 40/90th equal undivided shares in the 90 shares and the exclusive right to use Shop 64A. The Sub-Deed was validly made regarding the split of Shop 64 into Shop 64A and Shop 64B with an allocation to the respective shops 40/90th and 50/90th such shares in the 90 shares.

25. In the letter of the plaintiffs' solicitors dated 30 August 1994, the plaintiffs raised a requisition on the issue now decided by me against them. Although the letter in reply from the defendant's solicitors was crisp, I must say that the requisition had been answered satisfactorily and sufficiently.

26. In view of my above decision, the questions whether there was a waiver of the right to make requisition and objection under the Agreement and whether the plaintiffs were rightly deemed to have accepted the defendant's title do not arise for consideration, but I think I should also make known my views regarding the questions, in the event of this matter going further.

27. Clause 12 of the Agreement provides as follows:

"Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's Solicitors within SEVEN working days after the receipt of the relevant title deeds and documents by the Purchaser's Solicitors otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title to the Property if requisitions or objection on title not delivered to the Vendor's solicitors within the time stipulated above (in which respect time shall be of the essence of the Agreement). Provided that the Purchaser shall within 5 working days raise further requisitions on the Vendor's reply to any of the requisitions raised by the Purchaser pursuant to this clause, failing which the Purchaser shall be deemed to have accepted the Vendor's title and if the Purchaser shall make and insist on any objection or requisition in respect of the title or otherwise which the Vendor shall be unable or (on ground of difficulty delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the Vendor shall be defective either party shall notwithstanding any previous negotiation or litigation be at liberty on giving to the other party or his Solicitors not less than SEVEN days notice in writing to annul the sale in which case unless the objection or requisition shall have been in the meantime withdrawn the sale shall at the expiration of the notice be annulled the Purchaser being in that event entitled to a return of the deposit in full forthwith but without costs or compensation and if that return is made within seven days, without interest and in full satisfaction of all claims of the Purchaser and the parties hereto shall at their own cost enter into and cause to be registered at the Land Registry an Agreement for Cancellation."

28. It was common ground between the parties that the title deeds relating to the property were delivered to the plaintiffs' solicitors on 1 August 1994, although the Agreement was made only on 9 August 1994. The stipulated deadline for raising requisitions and objections was therefore 10 August 1994, seven working days from 1 August.

29. The history relating to requisitions is as follows. By a letter of 3 August 1994, the plaintiffs' solicitors raised three requisitions, but none related to the issue in this action decided by me ("the issue"), save that they demonstrate that the plaintiffs' solicitors were in possession of the DMC and a copy Sub-Deed and they noticed that the defendant had partitioned or divided Shop 64 into Shops 64A and 64B. The issue did not arise from the answers given to the three requisitions, and the deadline therefore remained till 10 August 1994. It was by a letter dated 30 August 1994 that the plaintiffs' solicitors enclosed a letter of 25 August 1994 from the solicitors for the Manager, raising the question of authority to divide Shop 64 for the first time. The defendant's solicitors by their letter of 1 September 1994 replied that they did not agree with the Manager's solicitors on the point and that the defendant had the authority to so divide. On 12 September 1994, when the plaintiffs' solicitors had copies of the correspondence between the defendant's solicitors and the Manager's solicitors, they learned that the Manager proposed to take out proceedings to have the issue decided. By letter of 12 September 1994, the plaintiffs' solicitors sought to postpone the completion of the Agreement to await the outcome of the Manager's threatened proceedings. By letter of 13 September 1994, the defendant's solicitors insisted on complying with the completion on 15 September 1994, which was the date fixed by the Agreement. By letter dated 12 September 1994, which was received by the defendant's solicitors on 14 September 1994, the plaintiffs' solicitors sent a draft assignment and requested details as to how the balance of the purchase money was to be split. By letter dated 15 September 1994, the defendant's solicitors returned the assignment as approved and provided the information as to the payment of the balance of the purchase money. By a subsequent letter dated 15 September 1994, the plaintiffs purported to rescind the Agreement and demanded the return of the $336,000.

30. Various stages of the history, looked at in conjunction with the provisions of clause 12 of the Agreement, have to be examined. The deadline for requisitions was 10 August 1994. The three requisitions raised by the letter of 3 August 1994 did not allude to the issue, nor did the replies to those requisitions do so. It follows that the added time for further requisitions on the replies conferred by the proviso to clause 12 of the Agreement was not applicable. The deadline remained 10 August 1994 had the plaintiffs wished to raise the issue. The plaintiffs were therefore deemed by the clause to have waived the right to raise requisitions or objections, and the plaintiffs were also deemed to have accepted the defendant's title.

31. Mr Pow, however, argued that insofar as the issue went to the root of the defendant's title and (if decided in favour of the plaintiffs) rendered the defendant's title defective, then the plaintiffs were not bound by the time requirements prescribed by clause 12 of the Agreement. He further argued that although the plaintiffs' solicitors had all the relevant documents a careful perusal of which would give rise to the issue being raised, the issue was not covered by any decided authority and they were only apprised of the Manager's threat of proceedings as late as 12 September 1994.

32. In Hillier Development Ltd. v. Tread East Ltd. [1993] 1 HKC 285, at 293D & H, when similar arguments supported by authorities were raised by counsel, Pennington JA had this to say:

"I am satisfied that those authorities only go to the proposition that where a vendor (sic.), 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. ..."

"Here it seems to me, the situation is entirely different in that the matter now complained of, ie the sale by Oliver Paris to one of its own directors at what seems to be an undervalue, was obvious from the papers already in the possession of the purchaser's solicitors at the time the agreement was entered into. It certainly became clear to the mortgagee's solicitors who were in possession of no more information than the purchaser. I do not think that the proposition contended for by Miss Chow applies in this instance and that the purchaser's solicitors were under a duty to make requisition within the time stipulated in the agreement."

At p. 297G, Nazareth JA said:

"What puts the acceptance of the title beyond argument is that the draft assignment was sent by the purchaser's solicitors to the vendor's solicitors on 24 July 1990, prior to the second requisition and contemporaneously with their enquiry as to how the payment cheque should be split."

33. Although the issue was not covered by authorities, it must have been obvious to the plaintiffs' solicitors, being in possession of the DMC and copy Sub-Deed, as it was obvious to the Manager. The plaintiffs' solicitors knew the division of Shop 64 into two portions as early as 3 August 1994. The Agreement was signed despite that knowledge on 9 August 1994. The plaintiffs' solicitors came to apprehend the issue upon receipt of the letter dated 25 August 1994 from the Manager's solicitors, and what the plaintiffs' solicitors did was to ask the defendant's solicitors to peruse that letter. The plaintiffs' solicitors did not seem to take the issue seriously, at least not until 12 September 1994 when they received the copy correspondence passed between the Manager's solicitors and the defendant's solicitors, learning that the Manager threatened proceedings. And yet, when the defendant's solicitors insisted on completion on 15 September 1994 (as stipulated by the Agreement) by letter of 13 September 1994, the plaintiffs' solicitors on 14 September 1994 provided a draft assignment for approval and sought information as to how payment of the balance of the purchase money was to be made.

34. I am of the view that the plaintiffs' solicitors should have raised a requisition on the issue within the time allowed by clause 12 of the Agreement after they had received the DMC and the copy Sub-Deed on 1 August 1994, since they must have perused those documents by 3 August 1994 when they raised the three requisitions. Yet the plaintiffs signed the Agreement dated 9 August 1994. Vague allusion to the issue only by the letter of 25 August 1994 did not comply with the time allowed by clause 12 of the Agreement, despite the fact that the issue was not covered by decided authorities. The Manager should have been in the same position regarding the documentation giving rise to the issue. The Manager was notified of the division of Shop 64 by the letter of 26 July 1994, and its solicitors raised the issue on 10 August 1994. While the Manager maintained its stance on the issue after lengthy arguments in correspondence with the defendant's solicitors, the plaintiffs' solicitors seemed to give way when receiving the defendant's solicitors' letter of 13 September 1994. The following day, they tendered a draft assignment for approval and sought information as to payment. This act could only be consistent with the defendant's title having been accepted. I am of the opinion that the plaintiffs have waived their right to object to the title shown by the defendant, and they were, and must be, properly deemed to have accepted the defendant's title.

35. The right to annul the sale given to both parties by the proviso to clause 12 of the Agreement where the title of the defendant was defective was not available to the plaintiffs either. First, the defendant's title was deemed to have been accepted. It was the plaintiffs' choice whether to accept a defective title, and insofar as they were properly deemed to have accepted the title, defective or not, they were barred from relying on the right to annul. Secondly, the plaintiffs never gave the required seven days' notice to annul the sale. Their solicitors' letter of 15 September 1994 purported to rescind the Agreement forthwith, just a few hours at most before the time fixed for completion. There were no circumstances which justified the extension of the period for seven days' notice beyond the completion date. On these points, I also hold for the defendant.

36. Even if I am wrong in my interpretation of clause 6 of Section I of the DMC and the defendant should not be held to have been able to pass a good title to the plaintiffs, in my judgment, the plaintiffs' right to challenge title was barred by their being deemed to have accepted the title, in all the circumstances of this case.

37. Counsel for the parties agreed that the question whether the defendant was entitled to forfeit the whole of the deposit and part payment should be tried separately. There be liberty to apply regarding that issue.

38. I make an order nisi that the defendant do have the costs of the hearing before me.