HU MEI YU ANASTASIA v. KING BEST ENTERPRISE LTD.

HCA 9317/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9317 OF 1998

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J U D G M E N T

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Background:

1. On 16 February 1998, Ms Tang of the defendant company viewed the plaintiff's property at San Francisco Tower in Ventris Road which was put up for sale. It was an old building and there were plans to have it renovated. This was a selling point because the building would appreciate in value after renovation. Accordingly the plaintiff told each and every prospective purchaser, including Ms Tang, that the external walls of the buildings would be renovated and the lobby refurbished. She did not discuss as to who should bear the cost of the renovation. Also, there was a slope and a retaining wall facing the kitchen in respect of which the Building Authority had served a Building Order requiring the owners of San Francisco Tower to carry out certain investigation work and to report back to the Building Authority. The plaintiff had not informed Ms Tang about that Order.

2. The flat was newly decorated and Ms Tang was very impressed. After some negotiation, the parties signed a provisional sale and purchase agreement in respect of the property at a price of $7,600,000. Ms Tang said that she might purchase the property in the name of a company of which she was a shareholder. This was duly noted in Clause 15 of the agreement. I shall refer to this version as the First Version of the Agreement.

3. Subsequently, at Ms Tang's request, the First Version of the Agreement was amended and the defendant company replaced Ms Tang as the purchaser. The plaintiff duly initialed the amendment, though Ms Tang did not. I shall refer to this version as the Second Version of the Agreement. A copy of this version of the Agreement was faxed by the estate agent to the defendant's solicitors. According to the fax printout as well as the fax cover sheet, that was done at 4:13 p.m. on 20 February 1998.

4. It then occurred to the plaintiff that the costs for maintenance of the slope and renovation might be substantial. She discussed with her estate agent, Mr Chan, and requested an additional clause to the effect that these costs shall be borne by the purchaser to be added. Mr Chan agreed to relate her request to the defendant. Subsequently, Mr Chan informed her that the defendant agreed to the proposed addition, but on condition that the plaintiff agreed that she be bound to sell the property. The plaintiff agreed and went to Mr Chan's office to initial against the amendments. The provisional sale and purchase agreement was amended (i) by deleting Clauses 7 and 8, which provided for forfeiture of deposit or payment of liquidated damages respectively upon the purchaser's breach and the vendor's breach; (ii) by adding Clause 16 which provided that the purchaser was bound to buy and the vendor was bound to sell the property; and (iii) by adding Clause 17 which provided that the costs of renovation of the external wall and maintenance of the slope shall be borne by the purchaser. The plaintiff initialed against the deletions and amendments. I shall refer to this version as the Third Version of the Agreement.

5. On 2 March 1998, the parties signed the Formal Agreement for sale and purchase, which I shall refer to as the Formal Agreement. This agreement expressly provided that the sale and purchase shall be completed on or before 8 June 1998, that time is of the essence and that the plaintiff had the right to rescind the contract and forfeit the deposits if the defendant failed to complete. Deposits totaling $760,000 were paid pursuant to the provisional sale and purchase agreement and the Formal Agreement.

6. On 3 June, the defendant's solicitor discovered a Building Order had been registered against the property. They requested a copy of the Order from the plaintiff's solicitors. Upon their request, the plaintiff's solicitors provided a copy of the Building Order and a letter from Chesterton Petty, the manager of San Francisco Tower which showed that the owners of San Francisco Tower had, at an extra-ordinary general meeting on 29 July 1997, resolved to carry out renovation work costing $14,438,732. Despite the plaintiff undertook to pay for her share of contribution to the costs for complying with the Building Order and a proportion of the costs involved in carrying out the necessary remedial works to the slope, the defendant refused to complete. The property was subsequently resold at $5,670,000 subject to the Building Order.

7. The plaintiff sued for damages and the defendant counterclaimed for return of the deposits, alleging the plaintiff's failure to prove good title to the property because she had not discharged the encumbrance constituted by the Building Order and had not paid or agreed to pay the apportioned renovation costs. The defendant also avered that it is entitled to rescind the Formal Agreement because of the plaintiff's failure to disclose the Building Order which affected the value of the property and the renovation work.

Building Order:

8. The plaintiff was aware that certain investigation work was required to be performed on the slope because shortly before Ms Tang viewed the property, Chesterton Petty had issued a notice about the works and the Building Order. The plaintiff said she would inform prospective buyers of the works but she could not recall if she had so told Ms Tang. I consider her an honest and credible witness, but I must find in favour of the defendant that she had not so disclosed the works required and the Building Order.

9. The Building Order was issued in the following terms:

"In exercise of the powers vested in me by section 27A of the Buildings Ordinance, I hereby declare that such natural, formed or man-made land is liable to become dangerous and I HEREBY ORDER you as the owner of the land to carry out, within a period commencing not later than 26 April 1998 and expiring on 26 August 1998 the following works:-

Investigate, analyse, report on the above natural, formed or man-made land and submit remedial proposals, such that investigation on site is commenced on or before 26 April 1998 and a report with any necessary design for remedial work is submitted to the Building authority on or before 26 August 1998 for approval."

10. Miss Po submitted that an encumbrance in relation to land invariably means some claim to the property or charge which could be imposed upon the property and as such the Building Order was not an encumbrance. Her argument is that the order itself was not a claim on the property or charge. It was only when the owners of San Francisco Towers failed to comply with that order to investigate and submit proposals, leading the Building Authority to carry out the investigation work and issue certificates under section 33(8) upon the owners' failure to pay those costs, then it became an encumbrance.

11. With respect, I cannot agree. In Lam Mee Hing v. Chiang Shu Yin [1995] 3 HKC 247, two Building Orders were registered against the property. The first one was an order to investigate and report on the slope, which was complied with. The second one was an order to carry out remedial work which was not complied with. In relation to the second order, Yeung J held:

"The second building order could only lead to one of the two possible consequences: (1) the incorporated owners complied with the order and carried out the remedial works; failing which (2) the Building Authority in the exercise of its power under s 27A(3) of the Buildings Ordinance carried out such remedial works. In either event, expenses would have to be incurred and owners of the individual units would be liable for a share of the expenses either under the deed of mutual covenant or s 33 of the Buildings Ordinance. Such shares of the expenses could be attached or charged against the title of the individual unit again either under the deed of mutual covenant or the relevant provisions of the Buidlings Ordinance."

12. The same consequence would follow in relation to the present Order, though it was only an order to investigate and report. Expenses would have to be incurred one way or the other and could be attached or charged against the title of the individual units whether under the deed of mutual covenant or under the relevant provisions of the Buildings Ordinance, if unpaid. I do not accept Miss Po's submission that only an order registered under section 33(8) could be an encumbrance. Section 27A(2D) expressly requires the Building Authority to register the Order against the property. Section 27A(3A) provides that if the Order has been registered, the cost of work or investigation shall be recoverable from the owner. Thus the owner's liability arises from the registration of the Order under section 27A and not under section 33(8). Of course, at that stage, the liability was only a contingent one. In my view, section 33(8) is concerned with quantum and not liability. I am therefore satisfied that the Order itself constituted an encumbrance of the property and unless discharged, could cause a blot or possibility of litigation to the purchaser.

13. Like Yeung J, I assume that the Building Authority would act reasonably. I do not consider there was any real risk of the property being charged with the entire costs of the investigation work or remedial work to the slope that may follow. The risk is only that the property would be charged an apportioned cost corresponding to the plaintiff's undivided shares in the interest in land. That liability could be readily discharged by an undertaking to pay such cost. But the defendant avered that the mere undertaking without having a sum being set aside on account is insufficient. Does that undertaking cure the defect in title?

14. The test of a good title is whether the facts and circumstances of the case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the encumbrance: M.E.P.C. Ltd v. Christian-Edwards [1981] AC 205. Applying this test, I am satisfied beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the encumbrance in respect of the entire cost of investigation and remedial work, but the purchaser may be at risk in respect of the apportioned cost.

15. In Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 1 HKLRD 935 at 942, Litton PJ held:

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain."

Approaching the undertaking offered by the plaintiff from the standpoint of a purchaser with robust common sense and willing and intending to see the transaction through to completion, the purchaser must come to the conclusion that with the undertaking he gets what he bargained for. However, the defendant's solicitors simply dismissed the offer of undertaking. They never requested for any security or any amount to be set aside or to be held as stake money. A willing purchaser intending to complete would, if he thought the undertaking insecure, request for some form of security. They did not. I reject the defendant's objection that a mere undertaking was insufficient. In my view, the plaintiff's offer of undertaking is reasonable and sufficient to discharge the encumbrance.

16. In view of the undertaking, the plaintiff's failure to disclose the Building Order was immaterial and as such did not entitle the defendant to rescind.

17. Counsel rightly did not argue on Clause 17 of the provisional sale and purchase agreement, which had been superseded by the Formal Agreement. The Formal Agreement does not contain any provision as to which party should bear the costs for the slope investigation or remedial work.

The renovation work:

18. The defendant pleaded the plaintiff's failure to pay for the apportioned renovation cost pursuant to the resolution to renovate made prior to the date of the Formal Agreement constituted an encumbrance. Miss Po submitted that as it was not pleaded how this failure constituted an encumbrance or defect or charge on the title and hence the plaintiff's failure to pay should be disregarded. This point was not taken by Mr Chan for the defendant. Mr Chan sought mainly to argue on the interpretation of Clause 16(2) of the Formal Agreement.

19. As I understand it, the defendant's pleaded case is that a resolution to renovate was passed on 29 July 1997, prior to the date of the provisional sale and purchase agreement or the Formal Agreement. Though the exact amount to be contributed by each owner had not been determined, the resolution to renovate created a contingent liability which, if not immediately, would in due course become an encumbrance against the title of the property. However, a vendor may contract out of his obligation to convey a good title. He may contract to convey only a marketable title. This is where Clause 16(2) comes into the play.

20. According to the plaintiff, she told Ms Tang about the pending renovation. There is no reason not to believe her evidence as renovation of the entire building was a selling point. She had not discussed with Ms Tang as to who should bear the cost of renovation. This part of her evidence was not in dispute. Pausing here I would say, in the absence of Clause 16(2), the plaintiff's obligation would be to convey a good title and the contingent liability created by the resolution to renovate constituted an encumbrance.

21. Then the plaintiff received Ms Tang's confirmation to change the identity of the purchaser to Ms Tang's company. After the amending the provisional agreement, which then became the Second Version of the Agreement, the cost of the renovation and the cost of maintaining the slope came to her mind. As a result of further negotiation through the estate agent, she said Ms Tang agreed to accept responsibility for the cost of renovation and maintenance of the slope. The parties then initialed on the Third Version of the Agreement.

22. Ms Tang's evidence was that when she requested to change the identity of the purchaser to her company, Mr Chan told her that the plaintiff would only agree on condition that the defendant would bear the possible renovation cost and future expenses in remedying the slope, if any. This was the first time she heard about these contingent liabilities. She did not agree then and Mr Chan told her to go to his office to talk about the matter. However, when she went to Mr Chan's office, Mr Chan told her that the purpose of the additional Clause 17 was that she should bear the cost of renovation when the flat became old and necessitated renovation. Mr Chan gave her the Third Version of the Agreement to sign, and she signed.

23. I do not think Ms Tang was an honest witness. She said there were only two versions of the provisional sale and purchase agreement and all the amendments were made on one occasion, i.e. at the Third Version of the Agreement. The documents show that there were in fact three versions. The existence of the Second Version was supported by the estate agent's fax copy to the defendant's solicitors. Mr Chan submitted that the agent had not been called and there was no evidence as to what the agent did. With respect, the copy was discovered from the defendant's solicitors. It was a contemporaneous document faxed to the defendant's solicitor when litigation was not in anybody's mind. It showed that the document was faxed on 20 February. All these facts were not disputed. If there were any question about the authenticity of this fax, the defendant's solicitors would have raised that much earlier.

24. This may not be a very crucial point. Ms Tang might have a wrong recollection rather than being dishonest. However, she made precise allegations to explain why she agreed to the additional clauses to bear the responsibility for the cost of renovation and maintenance of the slope. She made specific allegation that the clauses were introduced because she requested to change the identity of the purchaser. In fact, under the First Version of the Agreement, she was entitled as of right to change the identity of the purchaser. There was no reason why she should agree to addition of Clause 17 as a condition for changing the identity of the purchaser. The reason why she agreed to include Clause 17 was that she liked the flat so much that she agreed to the amendment on condition that the plaintiff agreed that she be bound to sell.

25. Her account that Mr Chan purposely lied to her that her liability to bear the renovation cost was for possible renovation in the future because the building was old is incredible. If renovation works become necessary in future, it must be the liability of the defendant as the owner of the building to pay those costs. There was no point to make that a term of the sale and purchase agreement.

26. Clause 16(2) of the Formal Agreement provides as follows:

"The vendor and the Purchaser hereby agree that if any notice or demand shall be issued and/or served or made by any competent authority upon the Vendor on or before the actual date of completion requiring the vendor personally or as one of the co-owners of the building of which the Property forms part to make payment for the following, such relevant costs thereof shall be borne and paid by the Purchaser absolutely despite as to whether the fact that the responsibility to perform the same shall have been determined or adjudicated after the actual date of completion :-

(a) repair and/or maintenance to any common part of the building of which the Property forms part;

(b) repair and/or maintenance to retaining wall(s) and/or slope(s) to which the co-owners of the building of which the Property forms part are responsible; and

(c) monetary contribution to the costs in respect of (a) and (b) above.

This clause shall survive completion.

27. The peculiar point to note in this clause is that it provides expressly that notice or demand for payment of the costs of repair or maintenance to any common part of the building received before completion shall be borne and paid by the purchaser whether responsibility to perform shall have been determined or adjudicated after the actual date of completion. The usual provision is for the vendor to be responsible for all demands for payment for such costs received before completion and for the purchaser to be responsible for the same thereafter.

28. A fair reading of this clause is that the defendant agreed to pay the renovation costs even if the demand for payment were received before completion. The inference is that the parties foresaw an impending liability for renovation costs, which could even be an imminent one maturing before completion and decided to make express provision for that event. This inference lends credence to the plaintiff's account and suggests that Ms Tang's account that the cost of works referred to in Clause 17 of the provisional agreement was in respect of future works when the building became old is incredible.

29. What is important is the Formal Agreement and not the provisional agreement which has been superseded. However, the analysis shows that Ms Tang is not to be believed. I therefore accept the plaintiff's evidence that she had disclosed the renovation work to be carried out and that as a result of subsequent negotiation, the defendant freely agreed to be responsible for the renovation costs as a condition for the plaintiff's undertaking to sell.

30. On the above facts, I find that the plaintiff contracted to convey a title subject to the contingent liability for renovation costs. Hence this contingent liability could not be an encumbrance on the nature of the title agreed to be conveyed. The plaintiff had therefore shown and proved a good title. There was no non-disclosure on the part of the plaintiff. Whether the plaintiff is obliged to pay or to undertake to pay the renovation costs falls to be determined on Clause 16(2). On a fair interpretation of that clause, the defendant has assumed liability for such costs. Accordingly, the defendant is in breach of the Formal Agreement.

Quantum:

31. On quantum, the ordinary rule is that the vendor is entitled to recover the difference between the contract price and resale price less the deposits forfeited. I have found that the Building Order constituted an encumbrance. It is therefore the plaintiff's obligation to discharge that encumbrance before she is entitled to recover the full damages on the above formula. Thus the cost of the plaintiff's undertaking, i.e. the cost of the investigation and reporting plus the remedial work shall be discounted from the damages she could recover.

32. An alternative approach will come to the same result. Under the formal resale agreement, the plaintiff sold subject to the Building Order. Thus the resale price should be adjusted upwards to include the cost of the investigation, reporting and remedial work.

33. As the events turned out, the incorporated owners spent $641,810 in preparing the report with recommendation on remedial works to the Building Authority to discharge the Building Order. These costs were settled by the sinking fund kept by the incorporated owners, resulting in no liability to any individual owner. A resolution was passed on 14 March 2000 to collect $900,007.24 for the purpose of the remedial work. The new owner of the property contributed $5,528.30 in respect of his share. I accept this as the value of the plaintiff's undertaking. Accordingly I assess the plaintiff's damages as $1,164,471.70, being the difference between the purchase price and resale price less the deposit forfeited and the cost of remedial work/value of the undertaking.

34. Accordingly, I grant a declaration that the plaintiff had lawfully rescinded the Formal Agreement and that the deposits totalling $760,000 was lawfully forfeited by the plaintiff. I also enter judgment in favour of the plaintiff against the defendant in the amount of $1,164,471.70 with interest at half judgment rate from the date of writ until judgment and thereafter at judgment rate until payment, with costs to be taxed if not agreed. The defendant's counterclaim is dismissed.