REGENT SUMMIT (HONG KONG) LTD v. SMART BUSINESS (ASIA) LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2451 OF 1997

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JUDGMENT

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1. This is a vendor and purchaser summons. The Plaintiff was the purchaser and the Defendant was the vendor of a semi-detached house in Windsor Park, a development in Kau To, Sha Tin ("the Property") under an Agreement dated 17 June 1997. I shall refer to the Plaintiff and the Defendant as the Purchaser and the Vendor respectively.

Agreement

2. The Agreement contained the usual provisions that the Vendor shall show and give a good title to the Property in accordance with s.13 of the Conveyancing and Property Ordinance, and that time was of the essence of the agreement. Deposits up to 10% of the total purchase price were paid. Completion was scheduled for 30 July 1997.

Inspections by Purchaser

3. It is common ground that prior to the signing of a preliminary agreement for sale and purchase, the Purchaser's representatives had inspected the Property and that alterations had been drawn to their attention by the estate agent.

4. There is however a dispute on the affirmations filed as to whether the estate agent had specifically informed the Purchaser's representatives that the alterations were illegal, and whether the Purchaser's representatives had accepted that. The Vendor filed two affirmations of Mr Cheung Koon Keung, the estate agent, stating that to be the case. The Purchaser has filed an affirmation of its director Mr Lui Kit Chui denying that.

5. Both parties have not sought cross-examination of those deponents on their affirmations. In the absence of cross-examination, I can give little weight to those disputed facts, and I have approached the case on the basis only of the common fact that there had been inspections of the Property by the Purchaser's representatives, and that alterations had been drawn to their attention.

Title Deeds

6. The title deeds to the Property, including the first assignment which had a plan attached to it, were delivered to the Purchaser's Solicitors on 19 June 1997, shortly after the Agreement was signed and about 6 weeks before the scheduled completion date.

Possession

7. Possession of the Property was taken by the Purchaser also about 6 weeks before completion, i.e. at about the same time as the date of the Agreement and the delivery of title deeds.

Inspection Report by Valuers

8. On 17 July 1997, a valuation report of the Property was prepared by Memfus Wong Surveyors Ltd. on the instructions of the Bank of Communications, the proposed mortgagee ("Memfus Wong's 1^st Report"). In this report, the valuers stated that they had inspected the Property and noted a number of alterations:-

They remarked in the report that it "appeared that the aforesaid extension/addition works are unauthorized and illegal and they are liable to actions to be taken by the Building Authority. Hence, we have not taken consideration [of the] value of these unauthorized additions".

Requisition

9. Although Memfus Wong's 1^st Report was prepared on 17 July 1997, it was not until 25 July 1997 that the Purchaser's Solicitors were made aware of it by the proposed mortgagee bank. The report was obtained by the Purchaser's Solicitors the next day, Saturday 26 July 1997 (i.e. 4 days before completion).

10. On 28 July 1997, the Purchaser's Solicitors wrote to the Vendor's then solicitors enclosing Memfus Wong's 1^st Report. They referred to structural alterations being found within the Property which "appeared to be illegal and unauthorized", and demanded production of consent or approval from the Building Authority as part of the Vendor's duty to show good title, which had to be discharged prior to completion scheduled for 30 July 1997.

Answer

11. On 29 July 1997, the Vendor's then solicitors replied disputing the conclusion reached by the Purchaser's Solicitors on the basis of Memfus Wong's 1^st Report, and denying that the alterations and additions in question were illegal or required consent under the Buildings Ordinance. They also said alternatively, that even if the alterations were illegal or unauthorized, they were minor, and the risk of enforcement action by Government was remote and unlikely. They required the Purchaser to complete on the scheduled completion day, i.e. the next day.

Further Inspection Reports

12. However, on the same day (29 July 1997), the Purchaser's Solicitors instructed Henry Chan Surveyors Ltd. to inspect the Property.

13. A report in the form of a letter signed by Mr Henry Chan, an Authorised Land Surveyor, was made on 30 July 1997 ("the Henry Chan Report"). This stated that there was at the site a building extension measuring 1.38m (4.5 ft) by 3.05m (10 ft) that was not in accordance with the building Line shown in the plan attached to the first assignment. This building extension was indicated in a plan which shows it was at the back of the house next to the kitchen ("the back extension").

14. Also on 30 July 1997, Memfus Wong Surveyors Ltd. made a second report, this time on the instructions of the Purchaser to carry out a "condition survey" ("Memfus Wong's 2^nd Report"). This stated that the following addition and alteration works had been carried out inside the Property:-

Extensions

15. This 2^nd Report shows that there were a total of 3 extensions of the building, at the front (as per Memfus Wong's 1^st Report), the back (as per Henry Chan's Report) and the roof. I shall refer to these collectively as "the Extensions". It is the presence of these Extensions, rather than the demolition of the wall in the servant's room, that are important in the present case.

Requisition pursued

16. On 30 July 1997, the Purchaser's Solicitors wrote two letters to the Vendor's then solicitors. In the 1^st letter, the Henry Chan Report was enclosed. The Purchaser's Solicitors asserted that the (back) extension was not in accordance with the building plan attached to the first assignment and was a breach of Special Condition (7) of the New Grant.

Special Condition (7)

17. I pause here to note that SC (7) provided inter alia that the plot ratio of any building erected or to be erected on the lot shall not exceed 0.4. The plot ratio is obtained by dividing the gross floor area of the building ("the GFA") by the area of the lot on which the building stands. The GFA means the area contained within the external walls of the building on each floor level. Hence, since more floor space was created by the Extensions, there would be an increase in the GFA, which would correspondingly increase the plot ratio.

Requisition and answers

18. Returning to the first letter of 30 July 1997, the Purchaser's Solicitors referred to SC (7) and requested the Vendor to produce evidence that the GFA had not been exceeded.

19. On the same day, the Purchaser's Solicitors sent a 2^nd letter to the Vendor's then solicitors enclosing Memfus Wong's 2nd Report and asked for proof that the extensions were legal.

20. On the same day, the Vendor's then solicitors replied. They claimed that they had satisfactorily answered the requisitions on the illegal structure (in the singular) and further said:

"First, the allegations of the illegal structure and alterations in the subject premises by your production of a valuation report does not constitute conclusive evidence on the existence of such alterations in question. Second, the spirit behind the phrase in the judgment held in the notable court decision [not cited] gave guidance on the nature and the extent of the alterations and/or the illegal structures if it exists. Third, whether there is a real and immediate risk of enforcement action by the Government if such existence is proved in contravention of the Ordinance [sic]. Fourth. the alterations and/or illegal structures would fall within the meaning of "incumbrance" as defined by the court as an assertion of an adverse claim to the property by a Third Party".

21. The Vendor's then solicitors referred to completion scheduled for that very day and proposed a Vendor and Purchaser Summons to be fixed not more than 7 days from the date thereof.

22. There were two further letters from the Vendor's then solicitors later that day demanding the return of the keys.

Termination of Agreement

23. On the following day 31 July 1997, the Purchaser's Solicitors asserted that the Vendor had failed to prove good title and terminated the Agreement, demanding the return of the deposits. On the same day, the Vendor's then solicitors forfeited the deposits paid. So it is common ground that on 31 July 1997, the Agreement was terminated.

Proceedings

24. These proceedings were then commenced by the Purchaser. As part of its case, the Vendor adduced evidence in the form of two reports, one from a chartered building surveyor ("the Mather Report") and the other from a chartered architect ("the Eric Wong Report").

25. The Mather Report confirmed that the Extensions were suspected to be unauthorized building works. It accepted that the additional GFA created by the Extensions would be considered in calculating the plot ratio, and may cause it to be exceeded (in breach of SC 7). However, the surveyor could not confirm that without reference to the latest approved building plans, which apparently were not available to him at the time of inspection (nor, apparently, did he obtain access to them up to the time of the Report).

26. As for action by the Building Authority (as distinct from possible breach of the Government Lease), Mr Mather stated that in his experience with Government, the unauthorized building works in question would come under the "Prioritized Enforcement (low priority)" classification of the current Buildings Department policy for control and enforcement of unauthorized building works.

27. The Eric Wong Report did not deal with the GFA/plot ratio question at all. It confirmed that the Extensions would be "low priority" unauthorised building works, and asserted that they did not affect the structure of the building. It denied that the demolition of the servant's room was an unauthorised building work.

Issues

28. The issues are:-

(1) No waiver of right to raise requisitions

29. In my judgment, the Purchaser has not waived its right to raise requisitions arising from the Extensions simply because its representatives had been told about the alterations when they inspected the Property before entering into a provisional sale and purchase agreement.

30. Mr. Liang for the Vendor referred me to Hillier Development Ltd v Tread East Ltd [1993] 1 HKC 285 and Lai Chi On v Strong Sing Development Ltd [1993] 1 HKC 568.

31. Both Hillier and Lai Chi On were cases where the purchasers were found to have waived their right to raise requisitions by sending draft assignments. In Hillier, the Purchaser had sent the draft assignment to the vendor without stating (whether expressly or impliedly) that the vendor's reply (to a requisition) given some 2 months ago was not satisfactory. In Lai, the draft assignment was sent 5 days before completion without any reservation of the right to raise requisitions on title deeds delivered more than half a year earlier.

32. The rationale in both cases was that since the sending of a draft assignment was a significant, if not conclusive, act implying acceptance of title, the purchaser by doing so must be taken to have waived any right to raise requisitions. The acts of the purchasers in those cases were acts which prudent purchasers would not normally perform until title had been accepted.

33. In the present case, the Purchaser was told about the alterations during the inspections of the Property before it agreed to purchase it, but there is insufficient satisfactory evidence that the Purchaser had been told, or were aware, of the effect of those alterations on the title of the Property. In Giant River Ltd v Asie Marketing Ltd. [1990] 1 HKLR 297, 313, it was held, applying Peyman v Lanjani [1985] 1 Ch 457, that before a purchaser's knowledge of facts can prejudice his legal position, he must also be aware of the legal consequences of those facts.

34. Consequently, in the absence of satisfactory evidence that the Purchaser's representatives had been told, or were aware, of the legal consequences of the alterations, the fact that the Plaintiff entered into the agreement cannot be regarded as a waiver of its right to raise requisitions on the title, or in other words, as an act showing acceptance of title in that respect.

(2) Requisition time-limit waived by Vendor

35. The requisition here was raised only 2 days before completion date. Mr. Liang argued that this was too late. Clause 18 of the Agreement provided that any requisitions or objections in respect of the title shall be delivered in writing to the Vendor's Solicitors within 7 working days after the receipt of the title deeds by the Purchaser's Solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence of this Agreement).

36. Mr. Liang further submitted that the alterations were drawn to the Purchaser's attention at the inspections, and the plan attached to the first assignment had been delivered and the Purchaser let into occupation some 6 weeks before the requisition was raised 2 days before completion. Thus even if the 7-working day provision in the Agreement did not apply, the Purchaser had still raised the requisition unreasonably late.

37. The short answer to this argument is that even if the requisition was too late, the Vendor's then solicitors had waived its right to insist on the time-limit by answering (or purporting to answer) the requisition (Emmet on Title 19^th ed. paragraph 5.080).

(3) Substance of requisition

38. I then turn to the issue of whether there was any substance in the requisition. In my judgment, there was.

39. The Property is a semi-detached house. There were three extensions found on the Property itself. At least two (the front and back extensions) were substantial ones. The effect of such extensions is to increase the GFA of the building. The increase in the GFA correspondingly increased the plot ratio, which was governed by SC (7).

40. In these circumstances, in my judgment, the Purchaser's Solicitors were entitled to raise the requisition, and the Purchaser was entitled to a substantial answer. The situation could not be likened to the position in Active Keen Industries Ltd v Fok Chi Keong [1994] HKLR 396 or To Kam Kwong v Tseung Yuk Chu MP 505/97 (unrep) where the extensions were in other units in multi-storeyed buildings. Here, the three extensions were found in the Property itself the subject of the sale and purchase.

41. What the Vendor should have done when it answered the requisition was to show that notwithstanding the increase in the GFA, the permitted plot ratio was not exceeded; or, if it was exceeded, that there was only a minimal risk of Government (as lessor) taking action to enforce SC (7) and of the Building Authority taking action to enforce the Buildings Ordinance.

42. If time was necessary to ascertain these matters, the Vendor would have been entitled to take a reasonable time to do so, given that the requisition was only raised 2 days before completion, and the Henry Chan Report and Memfus Wong's 2nd Report were only provided to the Vendor's then solicitors on the date of completion. Instead, the Vendor's then solicitors dug their heels in.

(4) Answer to requisition not satisfactory

43. In my judgment, the answers provided by the Vendor's then solicitors in their letters dated 30 July 1997 were not satisfactory. Whilst they might have validly criticized the value or weight of Memfus Wong's 1st Report (of Wan Moon Ling Wandy v Sino Gain Investment Ltd [1997] HKLRD 606), they failed to address the Henry Chan Report, which was signed by an authorised land surveyor, or Memfus Wong's 2^nd Report, which was carried out on the Purchaser's instructions to carry out a "condition survey".

44. It was worthless for the Vendor's then solicitors simply to assert that there was no real or immediate risk of enforcement action and to cite the law pertaining to illegal alterations in other units of multi-storeyed buildings, but without providing any reason why there was no real risk in the circumstances of the extensions in this particular property.

45. Neither did the Vendor's then solicitors properly address the point raised on SC (7), seeming apparently to deal with it as if it were the same point as enforcement action under the Buildings Ordinance (which it is not).

46. Accordingly I cannot agree with the Vendor's then solicitors' assertion in their second letter of 30 July 1997 that they had satisfactorily answered the Purchaser's requisition.

(5) Plaintiff entitled to terminate Agreement

47. The Purchaser was thus entitled to treat the Vendor's statement as a repudiatory breach of the Agreement (which required the Vendor to show and give good title), which breach the Purchaser accepted the next day. (I pause here to note that although the Vendor's then solicitors did suggest a Vendor and Purchaser Summons, that did not have the effect of negativing the Vendor's statement of its position that it had satisfactorily answered the requisition).

48. After these proceedings were commenced, the Vendor adduced the Mather Report and the Eric Wong Report in evidence to support the assertion made by the Vendor's previous solicitors that the risk of enforcement action by the Building Authority was minimal.

49. I have considerable doubt as to the value of these reports which were not made available to the Purchaser before it terminated the Agreement. In my view, whether a purchaser is entitled to call off an agreement should depend on whether the vendor provided a satisfactory answer to the requisition prior to termination.

50. But even if these reports are considered, they do not address the plot ratio concern arising from SC (7) at all. Both deal only with the enforcement priorities of the Building Authority, which is of course, different from Government acting as lessor.

(6) Relief

51. In the light of my judgment, the Purchaser is entitled to declarations in terms of paragraphs (6), (9), (10) and (11) of the Originating Summons save that:-

52. Finally, I will make an order in terms of paragraph (12) for interest to be paid at the commercial rate (i.e. 1% over prime rate from time to time) from the date of the Originating Summons until judgment and thereafter at judgment rate until payment, and an order nisi that the costs follow the event, i.e. that the costs of these proceedings be to the Plaintiff.