WONG KWOK YAN AND ANOTHER v. PON CHI LOK

CACV 38/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 38 OF 2008

(ON APPEAL FROM HCMP NO. 1379 OF 2007)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of Yam J given on 30 November 2007 whereby the judge made a declaration that good title to the property, namely second floor, including the balcony appurtenant thereto together with the roof thereabove, Lot No. 1083 in DD 180, Shatin, New Territories (“the property”), had not been shown.

2.  Amongst the other orders that were made was a declaration that the plaintiffs were entitled to rescind the Provisional Agreement for sale and purchase of the property dated 29 April 2007 and that the defendant should return the initial deposit in the sum of $100,000 and the further deposit in the sum of $128,000 to the plaintiffs.  The judge further ordered that the defendant should pay liquidated damages in the sum of $100,000 to the plaintiffs.

3.  At the conclusion of the hearing of this appeal, the appeal was dismissed with costs, with reasons to be given in writing, which we now give.

The background

4.  The property was part of a building built on Lot No. 1083 which was the subject of a New Grant number 12208 to Lee Wai-tim.  As is normal, the New Grant was subject to various conditions including condition 7(b) which reads as follows:

“The fulfilment by the Grantee of his obligations under these Conditions shall be a condition precedent to the grant or continuance of the tenancy, and in the event of any default by the Grantee in complying therewith such default shall be deemed to be a continuing breach and the subsequent acceptance by or on behalf of the Government of any rent or rates or other payment whatsoever shall not (except where the Government has notice of such breach and has expressly acquiesced therein) be deemed to constitute any waiver or relinquishment or otherwise prejudice the enforcement of the Government’s right of re-entry for or on account of such default or any other rights, remedies or claims of the Government in respect thereof under these Conditions which shall continue in force and shall apply also in respect of default by the Grantee in the fulfilment of his obligations under these Conditions within any extended or substituted period as if it had been the period originally provided.”

5.  Important amongst the conditions were the special conditions and in particular special condition 5(a).  That special condition provided that the grantee:

“...having obtained this grant by way of private treaty at a concessionary premium, shall not assign, partition, mortgage, charge, demise, underlet, part with possession of or otherwise dispose of the lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, whether directly or indirectly, or whether by way of direct or indirect reservation, grant of any right of first refusal, option, power of attorney, building agreement or through a solicitor, agent, contractor, trustee or otherwise howsoever.”

6.  This restriction on alienation or dealing with the property was modified in special condition 5(d) which permitted such dealing where the grantee shall have paid to the Government an additional premium equivalent to the difference between the amount of premium (if any) paid by the grantee to the Government at the date of the grant and the full market value of the lot as at the date of the application for consent.

7.  What appears to have happened in this case is that on 14 November 1996 the grantee mortgaged the lot to Hang Seng Finance Ltd.  That mortgage was registered in the Land Registry on 21 December 1996.  Some years later on 8 August 2005 the grantee entered a Sale and Purchase Agreement with the defendant to sell the property for $1.8 million.  That agreement was registered in the Land Registry on 6 September 2005.

8.  It would appear that the grantee, seemingly acting through the same solicitors who are now acting for the defendant, applied on 14 November 2005 to pay the additional premium under special condition 5(d) so that the restrictions in special condition 5 could be made inapplicable.

9.  Apparently after the letter of 14 November 2005 had been sent to the District Lands Office, Shatin, those involved must have been alerted to the fact that the Sale and Purchase Agreement of 8 August 2005 had been in breach of clause 5(a) of the special conditions.  On 28 December 2005 the grantee and the defendant entered a Cancellation Agreement, cancelling the Sale and Purchase Agreement of August 2005.  The recital clause of the Cancellation Agreement acknowledged the breach of the special condition.

10.  By letter dated 18 April 2006 the District Lands Officer, Shatin notified the grantee, care of the defendant’s solicitors, that the premium would be $2,505,300 which would be payable before 8 May 2006.  It was stated that upon settlement of that, the special conditions in clauses 5(a), (b), (c) and (d) would be no longer applicable.  The letter concluded with the paragraph:

“Please note that this letter is without prejudice to all or any rights of the Government whether under the captioned New Grant or otherwise in respect of any breach or failure to observe any term or condition which may exist on the date hereof or which may hereafter occur.”

11.  There is no dispute that the premium was paid on 4 May 2006 but, interestingly, the Cancellation Agreement was not registered until 17 June 2006.

12.  The plaintiffs entered a Provisional Agreement for sale and purchase of the property with the defendant on 29 April 2007.  There was an initial deposit of $100,000 and a further deposit to be paid on or before 12 May 2007 of $128,000.  Completion was to take place on 22 June 2007.

13.  On 14 May 2007 the plaintiffs’ solicitors wrote to the defendant’s solicitors referring to the mortgage of November 1996 and the Sale and Purchase Agreement of August 2005 and pointing out that they would appear to have been in breach of special condition 5 and continuing:

“In order to approve good title, kindly let us have the relevant Consent(s) and/or waiver Letter given by the Shatin District Lands Office thereto.”

14.  On the same date as their letter to the defendant’s solicitors the plaintiffs’ solicitors had written to the District Lands Office, Shatin enquiring as to whether there had been any consent to the breach of special condition 5 and as to whether, if there had not been, the Government would invoke the right of re-entry into the property.

15.  The defendant’s solicitors replied that because of the Cancellation Agreement which had been registered and the receipt of the additional premium which had also been registered, they considered that there was no risk and/or encumbrance and that the District Lands Officer had given consent to the removal of special condition 5.

16.  The plaintiffs’ solicitors were not satisfied with that answer.  Effectively the matter has not changed since then.  By consent, the parties extended the time for completion until 6 July 2007.  The District Lands Officer has replied by letter of 6 July 2007 that the advice of the Senior Solicitor of the Legal Advisory and Conveyancing Office was being sought and that a reply would be given as soon as it was available.  The plaintiffs’ solicitors expressed themselves willing to extend the time for completion so that good title to the property could be shown.  That offer was rejected and on 9 July 2007 the defendant’s solicitors wrote indicating that the plaintiffs’ deposits had been forfeited because the plaintiffs had failed to complete the sale and purchase by 6 July 2007.

17.  The judge below held that there was still a risk of a successful assertion by the Government of the prior breach of the special conditions and that he was not satisfied, therefore, that good title had been shown.

This appeal

18.  On this appeal Mr Wong, who appeared on behalf of the defendant, argued that because the 1996 mortgage and the 2005 Sale and Purchase Agreement had been registered, the Government had had notice of the facts giving rise to the allegation of breach.  It was said, therefore, that because of the payment of the additional premium the Government could no longer rely upon those breaches.

19.  The first difficulty with that argument is that the letter of 18 April 2006 from the District Lands Officer expressly stated that there was no waiver of any rights in respect of any breaches or failure to observe any terms or conditions.  Whatever the effect on the Government of the registration of the various documents, and I leave that matter for decision on another day, no reliance can be made on the wording of the exception in clause 7(b) of the conditions of the New Grant because, far from expressly acquiescing in any breach, the District Lands Officer expressly reserved the rights of the Government in respect of any breach.  No reliance was placed by the defendant on the contents of the letter of 14 November 2005 which was not exhibited in this case and was not, apparently, available.  Furthermore, it can be observed that the Cancellation Agreement was not registered in the Land Registry until after the acceptance by the Government of the additional premium.  Thus, seemingly, the entry into any Cancellation Agreement was not a condition imposed by the District Lands Officer.

20.  Mr Wong then attempted to rely on the proposition that the risk of enforcement by the Government was so low that it should be ignored for the purpose of assessing whether the defendant had shown good title.  This court’s attention was drawn to a number of authorities including M.E.P.C. v Christian-Edwards and others [1981] AC 204 for the proposition that if the court concludes beyond a reasonable doubt that the purchaser will not be at risk of any successful assertion against him of an encumbrance, the court should declare that good title has been shown.

21.  Other cases were cited where the court had held good title had been shown but, on analysis, those cases were cited because it was said that they were analogous on the facts to the present case.  It is unnecessary to consider those authorities in any detail simply for the reason that reported decisions are authorities for propositions of law but it is of little or no assistance to cite a judgment on a question of fact.

22.  In my view, there was a clear breach of special condition 5(a) by the mortgage in 1996 and also by the Sale and Purchase Agreement in August 2005.  In respect of the latter matter, of course, the defendant and the grantee attempted to rectify the situation by the Cancellation Agreement.  On the facts known on this application it is not possible to say that the Government could not exercise its rights arising particularly from the breach constituted by the creation of the mortgage.  The fact that the advice of the Senior Solicitor is being sought demonstrates that the threat of re-entry by Government cannot be excluded.  Were the Government to re-enter the lot, or were that to be threatened, and even if any such decision could be successfully challenged, that would, at least, involve a risk of litigation.  Whilst the risk of Government re-entry might be said to be low and, no doubt, many purchasers may be prepared to take that risk, it appears to me that it cannot be said that good title has been made out.  The court cannot compel a purchaser to take a title about which there is some doubt or which might involve the purchaser in litigation.

Hon Le Pichon JA:

23.  I agree.

Hon Stone J:

24.  I agree with the Reasons for Judgment of the Vice President.

25.  A risk of re-entry does not merit the characterization ‘fanciful’ simply because it may be thought improbable – it is clearly a matter of degree in each case – and, as Rogers VP has observed, in this factual situation it would be wrong to force title upon this purchaser, whose hesitation upon these particular facts was understandable and not unreasonable.

26.  Whilst the applicable legal principles are established and well-known, cases of this type inevitably are ‘fact-sensitive’, and merely because in other reported instances a risk may have been held to be ‘fanciful’ is nothing to the point within a different factual context – and in this case, as the Vice President has pointed out, the Government expressly had reserved its rights pending the obtaining of legal advice.

27.  What is interesting about this particular instance is that there is no evidence regarding the reason for the defendant vendor being unwilling to await the government decision consequent upon such advice; in this regard counsel was asked by the court why this should have been the case, but upon instructions was unable to indicate any reason for the apparent urgency, such as, for example, being caught in a ‘chain’ situation.

28.  In this situation, therefore, the defendant can only have himself to blame for his haste, the ultimatum delivered to the plaintiff purchaser to complete and the consequent forfeiture of the deposits being unwarranted in these particular circumstances – hence dismissal of this appeal.