CENTURY LEGEND LTD. v. CHU CHUNG SHING INVESTMENT CO. LTD.

HCMP 606/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 606 OF 1998

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IN THE MATTER of the land and premises known as all Those 3 equal undivided 127th parts or shares of and in All That piece of ground registered in the Tsuen Wan New Territories Land Registry as Lot No. 2178 in DD449 and of and in messuages erections and buildings thereon known as Nos. 260, 262, 264, 266, 268, 270, 272, 274 and 276 Sha Tsui Road, Tsuen Wan, New Territories together with the exclusive right to the use occupation and enjoyment of the Ground Floor and Cockloft of the said No.260 Sha Tsui Road ("the said premises")

AND IN THE MATTER of the sale and purchase agreement of 7th October 1997 of the said premises and made between Chu Chung Shing Investment Company Limited, as the vendor, and Century Legend Limited, as the purchaser ("the said sale and purchase agreement")

AND IN THE MATTER of Section 12 of the Conveyancing and Property Ordinance, Cap.219, Laws of Hong Kong

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J U D G M E N T

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1. By this Vendor and Purchaser Summons (VPS) the Plaintiff (Purchaser) seeks answers to these questions:

1) Whether Defendant, the Vendor, has failed to answer satisfactorily the requisitions on its title raised by Plaintiff; and

2) Whether Defendant has failed to show and prove a good title to the suit premises; and

2. Various reliefs consequential to the determination of those questions.

PREMISES

3. The suit premises is a shop comprising the ground floor and cockloft of a building at 260 Sha Tsui Road, Tsuen Wan, N.T.A New Grant was issued on 17-4-63,the Building Authority(BA) issued an Occupation Permit on 27-7-65 and a Deed of Mutual Covenant(DMC) was entered into by the co-owners on 16-3-67.

SALE AND PURCHASE

4. Plaintiff and Defendant entered into a Provisional Agreement for Sale and Purchase(PASP) on 29-9-97.Plaintiff paid a deposit of $1 million and on 6-10-97 a further deposit of $4.6 million. On 7-10-97 a formal sale and purchase agreement (ASP) was signed with a further $4.6 million deposit paid.

5. Relevant clauses in the ASP were as follows;

Cl.3 Completion was to be on or before 5-2-98 at 5 p.m.

Cl.4 Time was of the essence

Cl.5 The Vendor was to assign the property in the capacity of beneficial owner giving the relevant covenants for title implied under the Conveyancing and Property Ordinance Cap.219 (CPO).

Cl.7 The property was sold subject to the existing tenancy - which ran to 9-11-99.

Cl.8 The property was sold "as is", the purchaser was deemed to have inspected it and no warranty was given that the construction of the building was in accordance with the Approved Plan.

Cl.10 Any requisition on title was to be delivered to the Defendant's solicitors within 7 business days after receipt of title deeds by the Plaintiff's solicitors and further requisitions arising on reply within 7 business days after receipt of reply, otherwise they were to be considered waived and the Plaintiff was deemed to have waived his right to raise requisitions on Vendor's title.

Cl.17 Incorporated into the agreement were clauses 2, 3, 4, 5, 6, 8, 9 and 12 of Part A of the 2nd Schedule of the CPO.

Cl.18 The ASP superseded all previous agreements.

Cl.22 If the Vendor failed to complete, all deposits were to be returned to the Plaintiff who could, additionally, seek damages.

Cl.25 The provisions of a 4th Schedule were incorporated into the agreement. This contained various warranties made by the Vendor including agreement that it should give the Purchaser reasonable opportunity to inspect the property twice, immediately prior to completion.

6. On 16-10-97 Defendant's solicitors sent part of the title deeds and documents and on divers dates from then until the 20-1-98 Plaintiff's solicitors perused them and sought and were provided with copies of title deeds. No problem requisitions arise from that exchange.

7. On 2-2-98 Plaintiff's solicitors sent a draft assignment, stating that they did so without prejudice to their requisitions on title. Plaintiff pursuant to Cl.25 had inspected the property on the 26.1.98. As a result Plaintiff sought an architect's report, received on 3-2-99, which showed some apparently unauthorised structural alterations to the premises. The same day Plaintiff's solicitors raised requisitions on the title on the basis of the report which they sent to Defendant and asked whether Defendant would be able to complete the sale and purchase in terms of the ASP.

8. Plaintiff pressed for an early reply on 4-2-98, as completion was on 5-2-98.The solicitors replied that Defendant's surveyor had verbally advised that the premises was "not affected by any unauthorised alterations and/or illegal structures". They confirmed their client was ready and able to complete and threatened to forfeit the deposit if Plaintiff failed to complete on time. Plaintiff replied that subject to Defendant complying with its duty under the ASP, Plaintiff was able and willing to complete.

9. On 5-2-98 at 11.43 a.m. Defendant's solicitors sent Plaintiff a copy of an architect's certificate stating that his survey had found that all the modifications were exempted works within the meaning of s.41(3) of the Building Ordinance and thus the premises were not encumbered by unauthorised alterations, or illegal structures. The solicitors undertook to provide a certified copy of the report in due course, but threatened that unless completion took place before 5 p.m. Defendant would forfeit the deposit.

10. Plaintiff replied that as the certificate suggested the alterations were not approved, no good title had been shown and that Plaintiff should be given reasonable time to consider the architect's findings. At 3.35p.m.Defendant's solicitors repeated that if completion did not take place before 5 p.m. the deposit was forfeit.

11. At 5.14 p.m. Defendant's solicitors called off the sale, forfeited the deposit and demanded return of the title deeds and documents. Plaintiff replied that these actions were wrongful and threatened legal proceedings. On 12-2-98 Plaintiff took out this summons.

THE ALTERATIONS

12. It was agreed that at the time the parties entered the ASP that the following modifications had been carried out at the premises:

1) The original concrete staircase connecting the ground floor with the cockloft had been demolished.

2) An opening, at a different place, had been made in the concrete floor slab and a substitute timber staircase built between the ground and the cockloft.

3) A canopy was constructed on the external wall at cockloft level to support spot lights to illuminate a signboard.

13. Later examination by the Director of Buildings confirmed these were unauthorised building works which needed prior application and consent and he demanded their removal. For the purposes of this summons that confirmation is irrelevant. The court was concerned with the position at the time the requisition was raised and was required to decide two questions only. Had Defendant satisfactorily answered the requisitions raised by Plaintiff in relation to the alleged unauthorised structures? Had Defendant failed to show or prove good title to the premises? Plaintiff submitted that if the court found in its favour on either question it had succeeded; a finding on the second question not being dependent on a favourable finding on the first question.

GENERAL LEGAL PROPOSITIONS

14. A vendor must show a good title, that is one that will enable a purchaser to hold the property against any challenger and the required standard of proof for the vendor to show good title is beyond reasonable doubt. As a general principle a purchaser ought not to be forced to buy a law suit .Unless a claim or lawsuit could be readily "laughed out of court" a slight risk of a law suit, which could not be disproved beyond a reasonable doubt, would render a vendor's title defective (KanWing-yau v. Hong Kong Housing Society [1988] 2 HKLR 187)

15. A vendor has a duty to prove and show a good title and that duty includes answering all relevant and reasonable requisitions relating to his title irrespective of the fact that in fact he has a good title (Active Keen Industries Ltd v. Fok Chi Keung [1994] 1 HKLR 396).

16. The duty to show and prove good title must be discharged well before completion date. It is too late to do so after the contractual completion date has passed even if there is such evidence.

(Mayson Development Co. Ltd v. betterfit Ltd [1992] 2 HKC 5333 and Regent Summit(H.K.)Ltd v. Smart Business (Asia) Ltd [1998] 2 HKC 718)

Plaintiff's Case.

17. Plaintiff argued that the presence of unauthorised structures, if proved, meant that the terms of the Government lease had been breached and that there had been contraventions of the Building Ordinance. In either case there was a real risk of re-entry or enforcement action by the Government, which risk would render the title defeasible. Plaintiff relied on the case of Giant River Ltd v. Asie Marketing Ltd [1990] 1 HKLR 297.

18. The purchaser's knowledge of the structural alterations at the time of his inspection would not preclude him from refusing to complete if the structures proved to be unlawful or unauthorised. Knowledge of the existence of alterations was not to be equated with knowledge of the legal consequences of alterations. It was always possible that within the life of any building alterations at variance with the approved plans could be carried out if the necessary consents were obtained, so it was insufficient that the purchaser knew of a deviant structure. It was for the vendor to show either, that the structure was legal in that the necessary consents and approvals had been obtained, or, that consent from the Building Authority was not needed. Without such proof the vendor would not have shown good title. (Homyip Investment Ltd v. Chu Kang Ming Trade development Co. Ltd [1995] 2 HKC 458).

19. The Vendor had agreed to sell in his capacity as beneficial owner, which meant he had covenanted with the Purchaser that the terms and conditions of the Government lease had been, and would be, complied with to the completion date and the land could be entered into, and held by, the Plaintiff for the remaining years under the lease.

20. Plaintiff's counsel canvassed the powers of the BA in respect of unauthorised works and emphasized its remedies of requiring the owner to reinstate, prosecuting, or itself reinstating and recovering expenses from the owner. The BA could not grant consent retrospectively to rectify unauthorised building works.

WAS DEFENDANT'S ANSWER TO PLAINTIFF'S REQUISITION SATISFACTORY

21. The only answer made by Defendant to Plaintiff's requisition raised on 4-2-98 was the production of a copy of an architect's certificate containing a simple assertion that none of the modifications constituted a breach of the BO. However, Clause 22(a) and 2(b) the Special Conditions of the Government Lease, made it clear that no building work and no alteration might be carried out without first containing the consent of the District Commissioner (District Officer).

22. Defendant should have dealt with the requisition not simply by considering possible contraventions of the BO (which were answerable by showing that prior written consent existed) but also by considering the risk of re-entry that any modification of the premises gave rise to under the Government Lease. The Defendant had to provide reasons why, or show, there was no real, or immediate, risk of re-entry under the Government Lease, or risk of enforcement under the BO. The Defendant's response was insufficient to properly answer the requisition.

23. It is true that the requisition was raised out of time, but Defendant, in responding to it, by forwarding an answer from its own architect, apparently waived its rights in this regard. The report by Defendant's architect was an inadequate response, the more so because at the time the report was done the architect did not refer to the canopy at all. In his affirmation filed in the proceedings the architect states that when preparing his certificate he was under the mistaken impression the complaint related to the signboard and so he did not consider the status of the canopy at all. The Report sent with the Plaintiff's letter of 3.2.97 clearly described the structures that caused it concern, with reference to the Approved Plan and to photographs. It is very difficult to see how any architect could have missed recognising the canopy referred to. Thus part only of the matters raised by Plaintiff had been "answered" by Defendant.

24. Defendant's response was made a few hours before completion. Although the Plaintiff indicated it needed time to consider the architect's comments and to obtain such advice as was needed, and despite no certified copy of the report having been supplied despite their undertaking, the Defendant's solicitors insisted on completion, or immediate forfeiture of the deposit. In a rather truculent and unhelpful response to the Plaintiff's request for time, the Defendant's solicitor stated that the meaning of the architect's certificate was "loud and clear and also non-ambiguous as such that it can never be susceptible to any other interpretations ( including your own version)". In my judgment, despite this garbled protestation, the Architect's comment had neither satisfied the requisition raised, nor clarified the status of the alterations.

Defendant's arguments.

25. The Defendant contended that the requisition was out of the time limit prescribed under the ASP, which time should run from the date the title deeds were delivered on 16-10-97.It was submitted that the requisition raised did not go to the root of the title so as to allow an out-of-time requisition to be considered. The Defendant argued further that the requisition lacked necessary precision as the Plaintiff made no specific reference to the terms of the Government Lease. The Plaintiff agreed that the requisition was out of time, but argued that as it went to the root of title the time limit did not apply or, alternatively that the Defendant had waived it by responding. In my judgment the requisition is one that goes to the root of title concerning, as it does the terms of the Government lease and possible re-entry thereunder but, if I am wrong in that assessment, I consider that the Vendor's solicitors had waived the right to insist on the time limit by purporting to answer the requisition. Having embarked on an answer it should, properly, have allowed the Plaintiff time to investigate the status and effect of the structures, in the light of the assertions made by the Vendor's own architect.

26. The Defendant argued also that given the way the Plaintiff raised the requisition, the Architect's certificate was sufficient answer, as there was nothing to challenge the opinion of the architect that the works were exempted works. In my view that bald assertion by the architect could not be sufficient answer, even if the architect had considered, correctly, all the suspect structures. Counsel for Defendant argued that a reference by Plaintiff's solicitors to "the canopy projected from external wall at cockloft level'' could not be taken as a reference to the canopy at the first floor level. Given the configuration of the premises and assuming that the architect did indeed visit them, it is difficult to see how any architect could have been in any doubt as to the structures he was required to comment on.

27. Defendant complained that the late requisition meant that Defendant had little time in which to respond and that the degree of precision required in the requisition was thereby increased. For reasons already referred to I consider the requisition was raised with sufficient particularity.

28. As for the late raising of the requisition, Defendant could have requested, and expected to receive, reasonable time in which to answer the requisition. No request for time was ever made. The Vendor's solicitors immediately assumed the Plaintiff was trying to back out of the deal, despite the Plaintiff's having already forwarded the assignment preparatory to completion and despite its assurances that it was prepared to complete, subject to being informed about the suspect structures.

29. Having considered the evidence and arguments I

1) Declare that the Defendant has failed to answer sufficiently the requisitions raised by the Plaintiff

2) Declare that the Defendant has failed to show a good and valid title to the suit premises(as described in Para.2 of the Originating Summons)and in consequence of those declarations made at (1) and (2) I declare that the Plaintiff is entitled to;

3a) return of all sums paid to the Defendant as deposit and part payment on account of the purchase price paid by the Plaintiff to the Defendant

b) be indemnified against the expenses relating to arranging and entering into the said sale and purchase agreement; and

c) be indemnified against the costs of enquiry of the defendant's title

In the event of the parties being unable to agree the costs incurred in respect of 3b) and c) the amounts are to be assessed by a Master.

30. Interest on the sums ordered to be paid at 3a), b) and c) is to be paid at the commercial rate (i.e.1% over prime from time to time) from the date of the issue of the summons until judgment and thereafter at judgment rate until payment in full.

31. There will be an order nisi that the costs of these proceedings will be to the Plaintiff.