TSANG KWOK HUNG FREDERICK v. CHING LAI TUEN

DCCJ 5411/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5411 OF 2007

--------------------

--------------

Dates of hearing :  28 August and 2 September, 2008

JUDGMENT

Background

1.  Mr. Tsang seeks summary judgment against Madam Ching under Order 86 rule 1 of the Rules of the District Court for the sum of HK $230,000, being the deposit paid under an Agreement dated 5 September 2007 ("Agreement") for the sale and purchase of Unit R-4 on the 9th floor, Block 4 of Kwun Tong Industrial Centre ("Property"), wasted costs of $10,000, and a declaration that Madam Ching had acted in breach of the Agreement. 

2.  It is not in dispute that the parties entered into the Agreement for Madam Ching's sale of the Property to Mr. Tsang at the purchase price of $2,300,000.  A deposit of $230,000 was paid under the Agreement.  Completion was scheduled to take place on or before 3 October 2007.

3.  Clause 14.2 of the Agreement provides as follows:

"The Vendor declares that the Vendor has not received and is not aware of there being any notice or order from any Government or other competent authority or the Manager of the Building of which the Property forms part notifying the Vendor to demolish or reinstate any part of the Property.  If it should be discovered that such notice or order existed or having been issued or served prior to the actual date of completion, the costs for comply (sic) with such demolition or reinstatement shall be borne by the Vendor absolutely."

4.   It is not disputed that on 27 September 2007, Mr. Tsang's solicitors wrote to Madam Ching's solicitors, referring to a notice dated 27 September 2007 (“1st IO Notice") from the Incorporated Owners of Kwun Tong Industrial Centre ("Building").  The parties have referred to this letter dated 27 September 2007 as the 1st Requisition.  The 1^st IO Notice referred to the sale and purchase of the Property, and set out 2 matters “which required action" or “which required dealing with" (需要處理):

(1)  the drainage pipe from the toilet in the Property was connected to the common pipe in breach of regulations; and

(2)  an aluminium window had been installed in breach of regulations in the Property at the location of the sky-well.

5.  By the 1^st Requisition, Mr. Tsang's solicitors asked for documentary evidence that the matters identified in the 1st IO Notice have been approved by the Buildings Authority and other competent authorities, asked what steps Madam Ching would take to remove the irregularities at her cost on or before completion, and sought evidence of compliance with  the matters identified in the 1st IO Notice prior to completion.   Mr. Tsang's solicitors stated that the irregularities are title defects and encumbrances as they would attract potential lawsuit against the owner of the time being of the Property.

6.  Mr. Tsang's solicitors further stated in the letter that the sprinkler heads within the Property had been installed in breach of regulations. 

7.  On 28 September 2007, Mr. Tsang's solicitors wrote to Madam Ching's solicitors again to enclose a survey report on the Property.  They drew attention to the fact that, according to the survey report, a window was not installed in compliance with statutory requirements and required reinstatement, and the toilet was an unauthorized addition to the Property which was not shown on the approved building plans and required reinstatement.  The parties have referred to this letter of 28 September 2007 as the 2nd Requisition.  In the same letter, Mr. Tsang's solicitors enclosed a further notice from the Incorporated Owners of the Building also dated 27 September 2007 ("2nd IO Notice").  The 2nd IO Notice referred to the same matters identified in the 1st IO Notice, with an additional feature which required action or dealing with (“需要處理”): "suggest that the sprinkler heads in ceiling be installed in accordance with fire regulations”.

8.  In the 2nd Requisition, Mr. Tsang's solicitors asked that Madam Ching remove the irregularities at her cost on or before completion in order to pass good title free from encumbrances, being the potential liability of enforcement action that may be taken by the Buildings Authority and/or the Incorporated Owners or other competent authorities in respect of the irregularities identified.

The issue

9.  The issue for determination is whether the 1st Requisition and the 2nd Requisition had been answered by or on behalf of Madam Ching, and whether triable issues have been raised to Mr. Tsang's claim that Madam Ching had failed to show a good title to the Property and had acted in repudiatory breach of the Agreement. 

10.  It is Mr. Tsang's case that the requisitions had not been answered by Madam Ching, that the irregularities and defects raised in the 1st and 2nd Requisitions were not remedied by completion, that she had failed to show and prove good title to the Property on or before completion, and that she had accordingly acted in breach of the Agreement.  Mr. Tsang claims that by reason of Madam Ching's breach, he was entitled to and did refuse to complete the sale and purchase of the Property under the Agreement, and  is now entitled to the return of the deposits paid under the Agreement and to recover the wasted legal costs related to the sale and purchase. 

11.  In purported answer to the requisitions raised on behalf of Mr. Tsang, Madam Ching's solicitors denied that there were the allegedly unauthorized structures.  They claim that the survey report relied upon by Mr. Tsang was incomplete, vague and irrelevant, and that the report accepted that there were no issues of structural safety.  They also claimed that Mr. Tsang had agreed to purchase the property on an "as is" basis.

12.    It was argued on behalf of Madam Ching that summary judgment should not be entered against her for the following reasons :

(1)  the requisitions raised in respect of the alleged irregularities and defects were not properly formulated;

(2)  the requisitions raised had been satisfactorily answered by Madam Ching's proposal to stakehold a sum of $50,000 out of the purchase price for repairing the alleged irregularities and defects; and

(3)  the requisitions raised had been satisfactorily answered by an indemnity provided by Madam Ching, such that there was no risk on title. 

Were the requisitions properly formulated?

13.  Counsel for Madam Ching argued that the survey report sent with the 2nd Requisition was inadequate and imprecise, as it failed to identify the relevant statutory requirements alleged to have been breached.  Counsel relies on Century Crown Ltd. v. Ho Wing Chun HCMP 2147/1998, where the court criticized the requisition raised in the case, which merely referred to the discovery of certain allegedly unauthorized structures by enclosing an architect's report. 

14.  The facts of this case are distinguishable from those in Century Crown Ltd.  The 2nd Requisition itself clearly refers to the toilet being an unauthorized addition which was not shown on the approved building plans of the Property. I do not see any vagueness or imprecision in this and it should have been clear to Madam Ching and those advising her what statutory breaches Mr. Tsang was referring to.

15.  The 2nd Requisition also drew attention to item 3.5 of the survey report, which referred to details of the window being of a particular height from the floor without a barrier, etc, such details having been identified with sufficient particularity to enable Madam Ching’s solicitors to consider and advise whether they were indeed in breach of regulations, as alleged.

16.  Even if it is right, as Counsel for Madam Ching argued, that the survey report is unclear and that the details identified in the survey report are imprecise such that the report can be ignored, the 1st Requisition and the 2nd Requisition themselves identify the irregularities set out in the 1st IO Notice and the 2nd IO Notice and seek their removal or reinstatement.  From the IO Notices themselves, there can be no doubt raised as to the matters of which Mr. Tsang complained as being irregularities.  These are: the discharge pipe leading from the toilet and connected to the common pipe, the window installed in the wall of the sky-well, and the sprinkler system in the ceiling. Moreover, the 2nd Requisition clearly refers to the toilet as an unauthorized addition which was not shown on the approved building plans of the Property.  To the extent that it is necessary to do so, Mr. Tsang's solicitors in a subsequent letter of 29 September 2007 identified the relevant provisions they relied upon in the relevant Ordinances and in the Deed of Mutual Covenant.

17.  On the facts of this case, I am satisfied that requisitions have been raised with sufficient precision and clarity in relation to the toilet alleged to be an unauthorized addition not shown on the approved building plans, the window pane and frame not having been installed in compliance with statutory requirements, as well as the 3 matters identified in the 1st IO Notice and the 2nd IO Notice.

18.  In purported answer to the requisitions, it was also claimed on behalf of Madam Ching that the IO Notices were not notices from the Incorporated Owners “to demolish or reinstate any part of the Property” within the meaning of Clause 14.2 of the Agreement.  The Defence also so pleads, that the 1st IO Notice and the 2nd IO Notice were not notices within the meaning of clause 14.2.  On the face of these notices, the Incorporated Owners set out the matters, which were stated to be in breach of regulations, to be dealt with.  Even if, taking a strict interpretation of Clause 14.2, the IO Notices do not constitute notices from “the Managers” of the Building to demolish or reinstate the parts of the Property identified, the matters stated in the IO Notices to be unauthorized and in breach of regulations clearly put the purchaser at risk of a successful assertion against him of an encumbrance.  In my judgment, the risk of action by either the Buildings Authority or the Incorporated Owners of the Building as a result of the irregularities alleged is not purely theoretical, and is one which the purchaser cannot safely be advised to disregard.  Mr. Tsang is accordingly entitled to raise requisitions in relation to the matters identified in the 1st IO Notice and in the 2nd IO Notice, irrespective of whether such Notices were notices within the meaning of Clause 14.2 of the Agreement. 

Were the requisitions satisfactorily answered by the proposal to stakehold ?

19.   I ruled, after hearing the parties at the commencement of the hearing, that the without prejudice correspondence exchanged between the solicitors in September and October 2007 are not admissible as evidence.  On the evidence which I have seen, I am satisfied that at the time when the “without prejudice” correspondence was exchanged from 28 September 2007, a dispute existed between Mr. Tsang and Madam Ching in relation to the sale and purchase of the Property and the irregularities and defects identified, and that the letter dated 28 September 2007 from Mr. Tsang’s solicitors to Madam Ching’s solicitors, expressly marked "Without Prejudice", and the reply from Madam Ching's solicitors of the same date containing the "without prejudice" offer from Madam Ching, were genuine attempts to settle that dispute, or to start negotiations to settle that dispute.   Legal proceedings may not have been commenced, but in view of normal conveyancing practices and the requisitions already raised, the likelihood of legal proceedings relating to title would have been contemplated on 28 September 2007.

20.  In view of my ruling on the without prejudice correspondence, the only open communication from Madam Ching's solicitors in relation to the stakeholding proposal is their open letter dated 29 September 2007.  In this letter, Madam Ching's solicitors stated that "to stakehold a sum of $50,000 out of the purchase price for repair of the said structures is not necessary until and unless (they) have received the notice from the said Incorporated Owners to repair and/or reinstate the structures".  On Madam Ching's case, the notice to repair and reinstate was never received from the Incorporated Owners. 

21.  Even if Madam Ching is right in arguing that the without prejudice correspondence can be referred to, and that there was an offer to stakehold a sum of $50,000 made on 28 September 2007 or 2 October 2007 (as evident either from the without prejudice paragraphs of the letters dated 28 September 2007 and 2 October 2007 from Madam Ching's solicitors, or from their open letter of 2 October 2007 advising on the split cheques arrangement), it can be seen from the correspondence that any such offer to stakehold was subsequently withdrawn and replaced by the offer made in the "without prejudice" letter of 3 October 2007, when Madam Ching's solicitors stated that Madam Ching would only accept a sum of $20,000 to be deducted from the balance of the purchase price, as she had a quotation for the repair and reinstatement works for $20,000. 

22.  I am not satisfied that there is any arguable defence on the basis that the requisitions had been answered by an offer to stakehold $50,000 to deal with the alleged irregularities.

Were the requisitions satisfactorily answered by an indemnity provided?

23.  Counsel for Madam Ching argued that Madam Ching had provided a full indemnity to Mr. Tsang against all the costs for removal of the alleged irregularities identified.  He relies on the same "without prejudice" letters of 29 September 2007, 2 October 2007 and 3 October 2007.  I ruled that such correspondence is inadmissible, but even if I am wrong on that, the final proposal made by Madam Ching, contained in the "without prejudice" letter of 3 October 2007, was that she would only agree to a sum of $20,000 to be deducted from the purchase price, in lieu of the earlier proposal to stakehold $50,000.  I do not accept that this constitutes an offer to provide "full indemnity" to Mr. Tsang against all the costs of removal of the irregularities complained of.

24.  As counsel for Mr. Tsang correctly pointed out, the quotation to support Madam Ching's proposal to deduct $20,000 to cover the costs of repair/reinstatement works required to deal with the irregularities identified at the Property was not sent to Mr. Tsang's solicitors with the letter of 3 October 2007, nor before the scheduled completion.  The offer did not even specify the works included in the quotation so that the sum could be agreed.   Mr. Tsang was not given the opportunity to consider the reasonableness of the quotation, and whether all the alleged irregularities or repairs identified in the 1st Requisition and the 2nd Requisition were or could be covered.

25.  Counsel for Madam Ching relies on the cases of Re Heaysman’s and Tweedy’s Contract (1893) LT 89, and Lam Mei Hing v. Chiang Shu Yin [1995] 3 HKC 247, to argue that an offer to indemnify is a good and sufficient answer to a purchaser's objection and requisition to title.

26.  I regard the 2 cases cited above to be totally distinguishable from the present case.  There is no offer from Madam Ching to be responsible for all the costs of the necessary remedial works in relation to the irregularities identified.  It was restricted to the sum of $20,000 which Mr. Tsang did not consider to be adequate.  I accept the submission of Counsel for Mr. Tsang that even in the case of Re Heaysman’s and Tweedy’s Contract, the Court pointed out that the purchaser is not bound to accept the indemnity offered by the vendor.  It is clear from Chan Fung Lan v. Lai Wai Chuen [1997] 1 HKC 1 that a purchaser is not bound to accept an indemnity by way of retention of part of the balance of the purchase price as curing a defective title. On the facts of the present case, I am satisfied that Mr. Tsang is entitled to reject the limited indemnity proposed by Madam Ching to deal with the requisitions.

Conclusion

27.  Bearing in mind that it is the obligation of Madam Ching as vendor to prove good title and to satisfy the court beyond reasonable doubt that Mr. Tsang would not be at risk of a successful assertion against him of an encumbrance in the future (MEPC Ltd. v. Edwards [1981] AC 205), I do not accept that Madam Ching has shown good title to the Property.  Even if Madam Ching considers that Mr. Tsang's objections have no substance, her solicitors must act with total candor, so that Mr. Tsang can be reasonably certain that there are no facts and material relevant to the requisitions known to Madam Ching which have not been disclosed.  From the requisitions raised on behalf of Mr. Tsang, I do not consider that the possibility of impeachment of title in this case is remote and fanciful, and from the Defence filed and the evidence adduced so far, I fail to see how Madam Ching can argue that the 1st Requisition and the 2nd Requisition have been answered.  The decision of the Court of Appeal in All Ports Holdings Ltd. v. Grandfix Ltd. [2001]  2 HKLRD 630 shows that a provision for sale of property on an "as is" basis does not mean that it extends to illegal structures.  I do not see any arguable defence, nor any other reason for trial.

28.  I accordingly allow judgment to be entered in terms of paragraphs 1, 2 and 4 of Mr. Tsang's Summons dated 20 June 2008, with interest at judgment rate from the date of service of the Writ.  I will make an order nisi that Madam Ching is to bear the costs of the action and of the Order 86 application, with certificate for Counsel.