BRAIN FUTURE LTD. v. CENTURY CROWN LTD.

HCMP813/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.813 OF 1998

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J U D G M E N T

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Facts

1. This is a Vendor and Purchaser Summons concerning the sale of two shops in Tsuen Wan. The two shops are Shops A and B, Ground Floor, Tak Yan House, Stage 14, Tsuen Wan, Hong Kong. ("the Property")

The Agreement

2. By an Agreement dated 22nd August 1997 ("the Head Sale and Purchase Agreement"), B & L International Development Limited ("B & L"), sold the Property to the Defendant at $25.55 million. The completion was to take place on 23rd February 1998.

3. On 23rd August 1997, the Defendant advertised the Property for sale and on 31st August 1997, the Defendant entered into a Provisional Sale and Purchase Agreement with the Plaintiff. The Defendant agreed to sell the Property to the Plaintiff at $28.8 million. A formal Agreement ("the Agreement") was signed between the Plaintiff and the Defendant on 19th September 1997 in which the Defendant sold the Property as a confirmor. The completion was to take place at the same time of the sale between B & L and the Defendant, namely, 23rd February 1998.

4. The following are relevant clauses of the Agreement :

Clause 7 : "The Purchaser hereby declares and confirms that the Purchaser is fully aware that he is purchasing the Property in its present physical state and condition. The Property is and will be sold on an 'as is' basis and in the physical state and condition as it stands and no warranty or representation whatsoever has been given or is made by the Vendor or his agents regarding the physical state and condition thereof or of the building of which the Property forms part ('the Building')."

Clause 12 : "The Vendor shall show prove and give a good title to the Property pursuant to Section 13 of the Conveyancing and Property Ordinance Cap.219 at his own cost and expense."

Clause 13(a) : "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 as soon as practicable within seven (7) working days after the receipt of the title deeds 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 (in which respect time shall be of the essence of this Agreement)."

Clause 22(d) : "The Vendor has no knowledge as to whether or not any unauthorised or illegal structure or alteration exists on or within or appertains to the Property and the Purchaser, having inspected the Property, shall take the same on an 'as is' basis."

5. The title deeds of the Property were delivered to the Plaintiff's former solicitors by the Defendant's solicitors on 11th September 1997. Thereafter requisitions were raised by the Plaintiff's former solicitors and answered by the Defendant's solicitors on 8th October 1997.

Plaintiff's architect report

6. On 3rd February 1998, the Plaintiff's architect carried out an inspection of the Property. The result of the inspection is contained in a Report dated 14th February 1998. The report stated that :

" With reference to our recent site inspection for the captioned premises, we discovered that the captioned premises in fact had been altered into the present state and were different from approved plan as shown by the followings :-

(1) Substantial cockloft with area of 70 Sq.M. approx. being constructed for A/C plant installation in Shop A, such additional loading will have great burden with serious adverse effect to the structural members of the existing building.

(2) Substantial cockloft with area of 70 Sq.M. approx. being constructed for storage in Shop B, such additional loading will have great burden with serious adverse effect to the structural members of the existing building.

(3) Additional exit from the cockloft as above mentioned to the main staircase will have serious adverse effect to the fire escape for the residence of the entire building.

(4) A corrugated asbestos sheet cover with area of 5 Sq.M. approx. being constructed on the top of open yard at the rear of Shop B.

In my opinion, the above-mentioned constructions are building works which are required to obtain the approval from the Buildings Authority.

Enclosed relevant plan and photos showing the above are also attached herewith."

7. What actually had happened is that as the two shops were covered with false ceiling, the Plaintiff's architect was in fact unable to conduct an inspection of the area above the false ceiling.

Further requisition

8. On 6th February 1998, the Plaintiff's present solicitors, Chung & Partners ("Chung") took over the case.

9. On 14th February 1998, Chung sent the report to the Defendant's solicitors, Fung Law and Ng ("Fung"). Chung wrote to Fung that modifications to the Property had been noticed at the Property and asked for "your prompt clarification with proof and indicate if your client could still comply with terms of the Agreement for Sale and Purchase to complete the sale to our client."

10. The response from Fung came on 15th February 1998. They said that the requisition was raised out of time and not within the seven-day period of Clause 13(a) of the Agreement. They stressed that the Plaintiff was required to complete on 23rd February 1998, failing which the deposit paid by the Plaintiff would be forfeited.

11. On 16th February 1998, Chung wrote to Fung and denied that the requisition was raised out of time. They said that the modification to the Property was only discovered by the Plaintiff after a pre-completion inspection. It was not discovered prior to or soon after the signing of the Agreement.

Defendant's architect report

12. On 19th February 1998, Fung maintained that the requisition was raised out of time but on a 'without prejudice' basis made comments to the requisition raised. Fung informed Chung that they had obtained the opinion of an architect whose report of 19th February 1998 stated that :

"1. there is no cockloft in Shop B,

2. there is no access in the main staircase of the building leading to any cocklofts alleged in the aforesaid report,

3. since access into the upper part above the ceiling is not available in Shop A, and there is no sign of any cockloft observed in the premises, apparently, the statement that a substantial cockloft is constructed in Shop A might be an unsupported allegation,

4. the corrugated asbestos sheet cover over the rear yard at the rear side of Shop A is a light weight shelter within the premises and is minor in nature. It is unlikely that the Building Authority will order removal of the same even prior approval of the Building Authority has not been obtained."

Fung stated that as there was no unauthorised structure in the Property, the requisition raised by Chung was answered. This letter further enclosed two letters from the solicitors for B & L, the head vendor. However, two wrong letters were sent.

Request and response to a joint inspection

13. On 20th February 1998, Chung wrote, among other things, that :

"(c) The property was all along actually occupied and controlled by your client/the tenants continuously after the signing of the Sale and Purchase Agreement. It would be prudent and more accurate to have a pre-completion inspection (as usually all purchaser do) to ensure whatsoever use or tempering your client/the tenants may have on the property and if the Sale and Purchase Agreement had been complied with before completion is done. Our client's inspection at over 10 days prior to completion had been most appropriate.

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

If your same expert or otherwise still cannot see or locate the problem structures and works, our client is prepared to arrange a joint inspection possibly at your client's costs."

14. On the same day, Fung received a letter from the solicitors for B & L stating that :

"1. Our client engaged a firm of surveyors to cause a thorough site inspection of the above premises on 19th February 1998.

2. Much to our surprise, it has now been confirmed that most of the alleged 'findings' mentioned in the report of Messrs. Lee, Leung & Tsang are groundless and/or non-existing.

3. There are only ordinary false ceilings within the above premises and no 'cockloft' is found within the same.

4. The alleged 'additional exit' at the main staircase is found to be non-existing.

5. Since most of the allegations contained in the report are false, we are of the view that any enforcement action against the above premises by the Building Authority as alleged in the report is only a fanciful rather than real risk."

15. A copy of this letter was sent by Fung to Chung. Fung stated that the requisition was invalid and groundless and the Defendant would treat the contract as wrongly repudiated if the purchase price was not tendered on the completion date.

16. On 21st February 1998, which was the Saturday before the completion on Monday, 23rd February 1998, Chung wrote :

" It is obvious that the purported surveyor of the Head Vendor had erred and missed the problem works/structures which were clearly shown on various photos of our client's expert report.

We repeat the latter half of our letter of 20.2.1998 particularly the part about our client being ready to arrange joint inspection."

This request was refused by Fung on the same day, they stated that :

" All the surveyors/architects had in fact made their site inspection before giving their reports and there is no point in arranging another joint inspection, given that completion of the sale and purchase is due to take place on 23rd February 1998."

Failure to complete

17. The sale was not completed on 23rd February 1998. Fung wrote on 23rd February 1998 stating that the sale was terminated and the deposit was forfeited.

18. Chung also wrote on the same date, stating that the Defendant had failed to answer the requisition and by an express rejection of the joint inspection, it had failed to show its intention to clarify the matter contained in the requisition. The Plaintiff accepted the Defendant's repudiation of the Agreement.

No cockloft

19. On 24th June 1998, the Plaintiff's architect carried out a further inspection at the Property and confirmed that there was no cockloft in the space above the false ceiling in the two shops.

The relief

20. The Plaintiff now seeks a declaration that the Defendant had failed to answer the requisition and it had failed to show a good title to the Property. It asked for the return of the deposit.

Time for requisition

21. The first question to be asked is whether the matter raised in Chung's letter of 14th February 1998 concerning the modification of the Property is a requisition as to title. The answer must be yes, because if the modification was carried out in contravention of the approved building plan, then the issue of whether the Defendant could convey a good title to the Plaintiff would arise.

22. Under the Agreement, the Plaintiff was required to raise requisition of title within seven days of the receipt of the title deeds. The title deeds were supplied by the Defendant to the Plaintiff on 11th September 1997. Among the title deeds were the occupation permit, a tenancy agreement for Shop B, the Head Sale and Purchase Agreement between B & L and the Defendant and an Assignment dated 13th September 1997 between B & L and the former owner. Plans of the two shops were attached to this Assignment.

23. It is argued that the modifications were in the nature of latent defects which could not be discovered on an visual inspection of the Property. Mr Chong, Counsel for the Plaintiff, refers to Yandle and Sons v. Sutton [1922] 2 Ch 199 where Sargant J. held that :

"... In all these cases between vendor and purchaser, the vendor knows what the property is, and what the rights with regard to it are. The purchaser is generally in the dark. I think, therefore, that, in considering what is a latent defect and what a patent defect, one ought to take the general view, that a patent defect, which can be thrust upon the purchaser, must be a defect which arises either to the eye, or by necessary implication from something which is visible to the eye. It would not be fair to hold that a purchaser is to be subjected to all the rights which he might have found out, if he had pursued an inquiry based upon that which was presented to his eye. I think he is only liable to take the property subject to those defects which are patent to the eye, including those defects which are a necessary consequence of something which is patent to the eye."

24. I have difficulties in understanding this argument. On no account can it be said that the presence or absence of a cockloft can be in the nature of a latent defect. The presence of the false ceiling is apparent to the eye. If the Plaintiff complained that modification had been made to the Property by reason of the presence of two cocklofts at the level of the false ceiling, then clearly by the time the plans attached to the assignment were received, the Plaintiff must be in a position to raise requisition on this issue. This was not done and in my view the requisition was raised out of time.

25. Emmet on Title, 19th Edn. para.5.080 stated that if the requisition goes to the root of the title, a condition limiting the time will not preclude the purchaser from making it after the time has expired. In Hillier Development Limited v Tread East Limited [1993] 1 HKC 285, the Court of Appeal held that all that the statement (which was relied upon in Giant River Ltd v. Asie Marketing Ltd [1990] 1 HKLR 297) means is that where a purchaser, having used due diligence, is unaware of some defect in the vendor's title, the time limit imposed in the agreement for requisition does not run against him. The emphasis is on the use of due diligence.

Requisition must in any event be raised within a reasonable time

26. Even if the problem cannot be immediately detected when the title deeds were supplied on 11th September 1997, one would expect the Plaintiff to raise the requisition within a reasonable time thereafter. In considering what is the reasonable time, one must look at the length of time given to complete the sale. In this case the completion was to take place five months after the Agreement was signed in September 1997. To raise requisition on title 10 days before the completion was clearly unreasonable and the requisition was not raised within a reasonable time.

27. The Plaintiff's answer to this is that its practice was to carry out a pre-completion inspection and the matter was only discovered at the time of the pre-completion inspection. Mr Chan, Counsel for the Defendant, referred to the fact that the stock market in Hong Kong crashed in October 1997. This in turn caused a chain like reaction which drastically affected the price of real properties in Hong Kong. This was the position when the inspection was carried out. Mr Chong, on the other hand, stated that there was no cross-examination of the Plaintiff on its practice of pre-completion inspection and hence the genuineness of its practice cannot be called into question.

28. The crash of the stock and property markets in Hong Kong starting from September/October 1997 is a well-known fact and the Court is inundated with litigations of that event. However, the task of the Court is to determine the rights and liabilities of the parties in accordance with legal principles. It may well be that the practice of the Plaintiff was to carry out pre-completion inspections but equally one has to recognise the rights of a vendor to a sale to have requisition as to title being raised within the time specified under the agreement, or within a reasonable time thereafter so that it can be answered in adequate time before the completion. In my view, the requisition was raised out of time and the Plaintiff was not entitled to raise the requisition.

Time for the vendor to respond

29. In this case, for the purpose of argument, even if building work had been carried out in the Property, one just cannot assume that the Defendant would not be able to answer the requisition if it was raised within time or within a reasonable time. For example, the Defendant may be able to remedy the situation by either demolishing the illegal structures or obtaining credible evidence that the structures do not contravene the Building Ordinance. This illustrates the importance of observing the time imposed for the requisition of title.

Is the requisition answered?

30. Even if the Plaintiff was entitled to raise the requisition at such a late stage, in my view the Defendant had sufficiently answered the requisition. As apparent from the evidence, the Plaintiff's architect in fact was unable to conduct a survey of the area covered by the false ceiling and yet he boldly asserted in the report of 14th February 1998 that there were substantial cockloft above the two shops which would be a great burden with serious adverse effects to the structure of the building.

31. The architect stated that the cockloft in Shop A was constructed for the air-condition plant while the one in Shop B was for storage. While it may be reasonable to assume that there was an air-conditioning system above the false ceiling in Shop A, he did not state in his report that his finding was based on an assumption. Certainly, in Shop B, I just cannot see how a professional person can state categorically that the area above the false ceiling in Shop B was used for storage.

32. Without testing the loading, the architect boldly asserted the additional loading would be a great burden. The so-called additional exits from the cocklofts to the main staircase in fact had been covered with brick and plaster for a long time. These are matters which are apparent on a visual inspection. For an architect to assert that there are exits from the cocklofts to the main staircase leaves one in great doubt as to his professional expertise.

33. The corrugated iron sheets, as is now accepted, do not affect the structure of the building.

34. Mr Chong relied on the photographs attached to the Plaintiff's architect's report which show the existence of a metal door in the area of the cockloft next to a platform at the rear of the Property. This so-called door was never referred to by the Plaintiff's architect and the Plaintiff cannot at this stage rely on the so-called door as further evidence of the presence of a cockloft.

35. Faced with the allegation of the existence of two cocklofts in the two shops, the Defendant instructed an architect and found that there was no cockloft at all. B & L also found no cockloft. Fung told Chung that there were no cocklofts. In my view this must be an answer to the requisition raised. Beyond that, I really cannot see what more is required.

Joint Inspection

36. The Plaintiff argued that the Defendant should allow a joint inspection of the Property. Mr Chong referred to the evidence of the Defendant which stated that it rejected the inspection because it doubted the good faith of the Plaintiff. While Chung as a responsible solicitor had suggested a joint inspection to clarify the dispute, in my view the rejection of the inspection by Fung was not unreasonable in the context of this case. Whether a cockloft exists or not is a question of fact. One is concerned with a structure which substantially covered the whole of the shop and not some tiny instruments which can only be discovered on a minute examination. If an architect had confirmed that there was no cockloft in existence, a person placed in the position of the Defendant would regard a further inspection as being a waste of time.

Law on pre-completion inspection

37. Mr Chong relied heavily on the case of Smart International Industrial Ltd v. Twinkle Step Investment Ltd [1999] 1 HKC 767. In that case the purchaser insisted to inspect the property on the date fixed for the completion, to ensure that the fixtures and fittings specified in the contract of sale were not removed by the vendor and that it would obtain vacant possession of the property. The Court of Appeal, by a majority, held that the purchaser was entitled to do so. It is clear from the judgments of Godfrey JA and Rogers JA, who gave the majority decision, that the basis of the decision was a narrow one and confined to the facts of the case. Godfrey JA at p.772 held that :

"I propose to confine my own opinion to the particular facts of this case. ... The entitlement is founded, as the purchaser contends (in my view, rightly) on the duty of the vendor to co-operate with the purchaser in bringing the transaction to a successful conclusion. There is, no doubt, an alternative: to hold that the purchaser, although denied the opportunity to inspect the property on completion in order to satisfy himself that he is getting what he contracted to buy, must nevertheless complete the purchase. If he finds that has not got what he contracted to buy, he may then sue the vendor claiming damages for breach of contract. Like the Canadian County Court judge, I regard this alternative as 'ridiculous'." (emphasis added)

Rogers JA held that :

"I would be very hesitant to say that, in the absence of specific provision, a purchaser has a right of inspection of the property. In most circumstances, it is reasonable to assume that the vendor would give the purchaser an opportunity to inspect. Indeed, the failure to do so without giving good reason is a matter which would be liable to attract suspicion.

The real matter of complaint, it seems to me, lies not in the failure on the part of the vendor to allow inspection as such, but in the failure of the vendor to perform its obligation to deliver the property contracted to be delivered at the same time as the purchaser performed its obligations. This might be categorised as a failure to perform the mutual obligation contemporaneously." (emphasis added)

38. The Court of Appeal reviewed the approach in Canada and other jurisdictions on the question of a purchaser's right to inspect the property. It is not necessary for me to go through the same grounds. The Court of Appeal decision is binding on me. What is abundantly clear is that the decision does not affect the existing conveyancing law and practice on requisition as to title.

Plaintiff never denied the right to inspect

39. Furthermore, the Plaintiff in this case had never been denied the right to inspect the Property. It had inspected the Property and prepared a report on it. This report turned out to be wrong. The Plaintiff cannot rely on something which it had commissioned but turned out to be wrong, and then turned around and said the Defendant had not given it an opportunity of attending the Property so as to tell the Defendant's architect why he had missed finding the problem or the cocklofts. If there is any hardship or absurdity involved in this case, it must be created by the Plaintiff itself.

40. In Pang Chor Ying Annie v. Lifton Investment Ltd [1993] 2 HKC 57, on the date of the completion, the purchaser discovered that fixtures and fittings that were included in the sale were removed by the vendor. The purchaser's solicitor recalled the balance of the purchase price which had been tendered for the completion of the sale and indicated that it was not prepared to complete because of the breach of the obligation of the vendor. The vendor forfeited the purchaser's deposit. Litton JA held that :

"..., the matter can only be resolved by going back to first principles. The agreement 17 February 1990 comprises the whole bargain as between the parties, and it must be construed as a whole. Although the property, as described in part V of the schedule, is the flat, the carparking space and the undivided share of the land and the building, there is an undoubted obligation falling on the vendor to deliver to the purchaser all the items of furniture identified in sch VIII. The contract is not 'severable', as counsel for the vendor contends. The vendor's obligation on completion was to deliver possession of the flat, the carparking space and the items of furniture specified in part VIII. The obligations under the agreement were concurrent and mutual: see Camberra Investment v Chan Wai-tak [1989] 1 HKLR 568, 574C. The performance by the vendor of her obligations triggered those of the purchaser, and vice versa. When it became clear to the purchaser that the vendor was unable to fully discharge her obligations under the agreement, the purchaser was entitled to withhold its performance." (emphasis added)

41. In the present case, it just cannot be said that the Defendant was unable to fully discharge its obligations under the Agreement which would entitle the Plaintiff to withhold its performance.

Conclusion

42. In the end, I find that it was the Plaintiff who failed to perform its obligation under the Agreement by not tendering the balance of the purchase price. The Defendant had properly terminated the Agreement and forfeited the deposit. The Plaintiff's application is dismissed with costs nisi to the Defendant.