LEE TAK CHUN v. EAST WEAL INTERNATIONAL LTD. AND ANOTHER

1994. HCMP NO.857

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H E A D N O T E

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SALE AND PURCHASE OF LAND - REQUISITION - FAILURE TO ESTABLISH ON DOCUMENTS OR OTHERWISE THE MODE AND NUMBER OF UNDIVIDED SHARES IN THE LAND ALLOTTED TO THE UNIT INTENDED TO BE SOLD - EXTENT OF RIGHTS AND LIABILITIES RUNNING WITH EACH UNIT DEFINED BY THE PROPORTION OF UNDIVIDED SHARES ALLOTTED - IMPORTANT FOR THE EXACT PROPORTION OF THE UNDIVIDED SHARES OF EACH UNIT TO BE PROVED BY THE VENDOR WRONGFUL FORFEITURE OF DEPOSIT BY VENDOR - CLAIM OF LIEN ON PROPERTY REGISTRATION OF LIS PENDENS BY FIRST PURCHASER VALID - DECLARATION MADE SECOND PURCHASER NOT BOUND TO COMPLETE WITHOUT REMOVAL OF LIS PENDENS

HCMP No.857 of 1994

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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REASONS FOR DECISION

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1. This is a petition by the purchaser under an agreement dated 10th March 1994 ("the second agreement") for the sale and purchase of a premises situated at unit 3502 on level 35 in Tower II of Metroplaza, a complex erected on Kwai Chung Town Lot No.395, Kwai Chung ("the unit"). Prior to the second agreement, the vendor, which is the 1st Respondent herein, had entered into an agreement dated 19th January 1994 ("the first agreement") to sell the unit to the 2nd Respondent herein. In the event, the intended sale of the unit to the 2nd Respondent fell through and was not completed on or before 8th February 1994 as agreed or at all. By a letter dated 8th February 1994, the 1st Respondent gave notice to the 2nd Respondent that the deposit had been forfeited upon the termination of the first agreement. On 17th February 1994, the 1st Respondent registered at the land office against the unit a memorandum of cancellation dated a day earlier. On 3rd March 1994, the 2nd Respondent issued a writ against the 1st Respondent in High Court Action No. A2020 of 1994 seeking, inter alia, specific performance of the first agreement. The said writ was registered in the land office on 4th March 1994. The second sale of the unit under the second agreement was entered into after the registration of the lis pendens. Pursuant to the second agreement, the second sale was to be completed on 29th April 1994, 2 days after the date of the hearing of the petition herein. During the 7 weeks between the 2 sales, the price of the unit had gone up by almost $1 million.

2. By this petition, the petitioner ("2nd purchaser") is seeking, inter alia, a declaration against the 2nd Respondent ("1st purchaser") that it has no interest in the unit; and declarations against the 1st Respondent ("vendor") that there is no obligation to complete the second sale pending a final determination of the 1st purchaser's claim for specific performance and that the vendor has failed to show a good title to the unit.

3. The 2nd purchaser had also successfully applied to be joined as a defendant in the 1st purchaser's action against the vendor. However, up to the date of the hearing of this petition, no directions have been sought at all from the court as to how that action is to be proceeded with subsequent to the joinder of the 2nd purchaser. Nevertheless, the 2nd purchaser has taken out a summons in that action to strike out, inter alia, the 1st purchaser's claim for specific performance. That application was adjourned by a Master to be heard together with the petition.

4. As the summons in the action is to be heard in chambers whereas the petition is to be heard in court, I sought the views of the parties on how to hear the 2 matters together. Instead of adjourning the summons to court, it was decided that the better way to deal with the situation was for the court to hear the petition first and to hear the summons immediately thereafter. It was also agreed that the parties would not seek a final determination on the petition at that hearing. The court would only be asked to rule on whether the 1st purchaser has a prima facie case against the vendor for a wrongful repudiation of the first agreement. It was accepted that if there had been a wrongful repudiation of the first agreement, the 1st purchaser would have a lien over the unit until recovery of the deposit from the vendor. It was also accepted that the vendor must have a good marketable title to convey to the 2nd purchaser and that a title that is encumbered with litigation is not a good marketable title. Whether a claim for specific performance is sustainable in the context of the pleadings in the writ if there had been a wrongful repudiation is an issue yet to be determined after the court has ruled on the preliminary issue in the petition. Thus, unless the court rules that there is not even a prima facie case for wrongful repudiation, the title would be infested with a claim for a lien and specific performance. The vendor has not taken any step to strike out the 1st purchaser's claim for specific performance, the summons having been taken out by the 2nd purchaser alone. Though not abandoning the summons, the 2nd purchaser did not proceed to seek a determination on the summons forwith after the court has ruled on the preliminary issue in the petition. In any event, by the time the hearing of the preliminary issue in the petition was concluded, it was already well passed court hours and the court was not able to deal with the said summons. Thus, it is accepted that if the court upheld a prima facie case for wrongful repudiation, a declaration that the 2nd purchaser is not obliged to complete before the claims for a lien and specific performance are removed should be made first to redress the urgency of the situation. The petition and the summons will then be adjourned for further hearing if necessary.

5. After hearing the parties on the preliminary issue, I held that a prima facie case of a wrongful repudiation and forfeiture of the deposit by the vendor has been made out. In the premises, a declaration that the 2nd purchaser is not obliged to complete the second sale on 29th April 1994 unless the lien and the lis pendens are removed prior to the time for completion was made at the conclusion of the hearing. The hearing of the petition itself was adjourned with costs reserved. I now hand down the reserved reasons for the ruling.

6. The dispute between the vendor and the 1st purchaser arose out of requisitions raised as to the manner the unit was sub-divided from the other units on level 35. Metroplaza was erected on the said lot in Tsuen Wan by one Donora Company Ltd. ("developer"). The development was sold by the developer not by units as is often the case, but by floors. It appears that the whole of level 35 was first sold to one New Dermis Company Ltd. ("confirmor") as a unit. By an assignment dated 3rd April 1993, 8 of the 12 units on that level were sold by the confirmor to the vendor in a lot. The unit is one of the 8 units sold thereunder. In the 1st agreement the unit was particularised in the second schedule as :

"ALL THAT the estate right title benefit and interest of and in ALL THOSE 20 equal undivided 31,000th parts or shares of and in ALL THAT piece or parcel of ground registered in the Tsuen Wan District Land Registry as KWAI CHUNG TOWN LOT NO.395 And of and in the messuages erections and buildings thereon known as "METROPLAZA" ("the Development") TOGETHER with the exclusive right and privilege to hold use occupy and enjoy ALL THAT UNIT 3502 on LEVEL 35 of TOWER II of the Development................SUBJECT to and with the benefit of a Deed of Mutual Covenant and a sub-Deed of Mutual Covenant respectively registered in the Tsuen Wan Land Registry by Memorials Nos. 859065 and 859066."

7. By the deed of mutual covenant dated 16th September 1992, the development was divided into 31,000 undivided shares in the land. Tower II was allotted 7,692 undivided shares. By a sub-deed of mutual covenant dated the same date, the 7,692 undivided shares allotted to Tower II were further divided amongst the 35 floors (being levels 7-13, 15-23, 25-33, 35-43 and 45- 46) in the manner provided therein. Level 35 was alloted 227 undivided shares. At some point of time it appears level 35 was physically divided into 12 units, presumably by the confimor. There is no further sub-sub-deed of mutual covenant to divide the 227 undivided shares allotted to level 35 amongst these 12 units. By the assignment dated 3rd April 1993, a total of 147 undivided shares in the land were assigned to the vendor together with the exclusive licence to use units 3501-3506 and 3511-3512. The said assignment assigned all 8 units as a lot without any subdivision of the 147 undivided shares amongst them. Thus, it is impossible to ascertain from the said assignment, as well as from the totality of all documents of title particularised supra, how many undivided shares in the land have been individually alloted to the unit, or any of the 8 units assigned.

8. By letter dated 2 February 1994, the 1st purchaser raised 2 requisitions with the vendor's solicitors. The relevant one reads :

"Accordingly (sic) to the Land Search Record, the undivided share allotted to the above property is 20/31,000 shares of Kwai Chung Town Lot No.395. We shall be obliged if you would let us have the memorandum of allocation of shares or sub-sub-Deed of Mutual Covenant for our perusal as we cannot ascertain the number of undivided shares of the property from the title deeds and documents sent to us under cover of your said letter."

It is not quite clear what land search record had been supplied to the 1st purchaser's solicitors at that stage that was being referred to in their requisition. A photocopy of folio no. 38 relating to the unit which contained a partly chopped and partly handwritten endorsement of "20/31,000th" before the printed words of "share of and in....." was produced before the court. It appears that the said photocopy of folio no. 38 would be the land search record supplied by the vendor to the 1st purchaser. It is clear from that record that there was no other document registered that would throw any light as to the allotment of 20 undivided shares to the unit. According to such record, apart from the deed of mutual covenant, the sub-deed of mutual covenant and the assignment dated 3rd April 1993, no other document was ever registered with the land registry relating to the allotment of undivided shares in the land. It is not disclosed in the said record as to how, when and by what means was the unit alloted 20 undivided shares. The basis for the land registry's willingness to record in the caption to the folio a reference to "20/31,000th" undivided shares in the land is unknown. The only thing that is clear is that the basis for such an allegation cannot be any document submitted to the land registry for registration. Had there been any document submitted to the land registry to evident such an allotment, one would have expected that a record of the same would have been kept by the land registry that would be reflected somewhere in the record kept in respect of the unit. As counsel for the vendor conceded, one should be slow to speculate that the information was entered onto the record by the land registry based on oral information. It would be more reasonable to infer, in the absence of any evidence to the contrary, that a legal document, or at least a written correspondence of some sort to the land registry, must have existed to enable the land registry to fill in that information on the record. As at the date of hearing, the existence or non-existence of such document is still a complete mystery. The legal representatives of the vendor was not in a position to assist the court with any information on this very issue at all.

9. By letter dated 3rd February 1994, the vendor's solicitors answered the requisition by stating that :

"We do not find it necessary to have any document to ascertain the allocation of undivided shares of the captioned property. As to the allocation of shares to the said property, it suffices for us to state that the notional allocation of the undivided shares was done by the developer."

Not surprisingly perhaps, the 1st purchaser's solicitors found the answer to be most unhelpful. By letter dated the following day, they reiterated their requisition in the following terms :

"We are surprised that you state it is not necessary to have any document to ascertain the allocation of undivided share (s) of the above premises. We further point out that all documents supplied to us to prove the title of the said premises do not state/mention the undivided shares of the premises affected. We cannot prepare the draft Assignment if we do (sic) not ascertain the undivided shares of the said premises. Please also let us have evidence that the developer has already allotted the undivided shares to each units (sic) on Level 35."

10. Surprisingly, the vendor's solicitors further answered the requisition in a letter of the same date, by saying :

"We would like to reiterate that the allocation of shares of Metroplaza including the captioned propert (my emphasis) was done by the developer and the developer has already allotted the undivided shares to each units (sic) on Level 35 by way of various assignments affecting each units (sic) on the said Level 35 (my emphasis). We are of the view that it was not mandatory to have document showing the allocation of undivided shares of a building and the allocation of shares would not in any way affect the title of the property."

It is wholly wrong for the vendor's solicitors to state twice that the undivided shares to the unit were alloted by the developer or that the undivided shares to any of the 12 units on level 35 have been alloted by the developer either by way of various assignments affecting each unit or otherwise. It is abundantly clear from the title documents disclosed that the developer only allotted undivided shares to each of the towers and floors of the development. The floors were apparently sold as a unit. When level 35 was assigned to the vendor, no undivided shares were ever allotted to any of the 8 units individually. A total of 147 undivided shares were assigned in one lot to the 8 units. Thus, it is blatantly untrue for the vendor's solicitors to allege that the developer had made allotments to each of the units on each floor and in particular to the units on level 35. In the premises, quite apart from maintaining their unhelpful stance that evidence as to how 20 undivided shares were alloted to the unit was unnecessary, the solicitors for the vendor in fact compounded the difficulty by bringing their own confusion to the situation in making allegations of facts totally inconsistent with the title documents shown to the 1st purchaser.

11. By letter of 5th February 1994, the solicitors for the 1st purchaser drew the attention of the vendor's solicitors to the prevailing state of evidence by stating, inter alia, that :

"Further, we cannot locate any evidence that "the developer has already allotted the undivided shares to EACH UNITS (s) on Level 35 by way of various Assignment (sic) affecting each units (sic) on the said Level 35" as explained in your said letter. Please note that under Assignment Memorial No. 885859 re-registered by Memorial No. 909528 147/31,000th shares of Kwai Chung Town Lot No. 395 was (sic) assigned to Units 3501-3506. 3511-3512 of the Building. There is no separate Assignments of various units of 3501, 3502, 3503, 3504... etc. Therefore you are requested to produce evidence to support your view."

12. The letter of 7th February 1994 from the vendor in answer could not be more unhelpful. It reads :

"We note that the matters raised in your said letter had along (sic) been raised by you earlier and we had dealt with each and every one of them. In the circumstances we assume that all requisitions raised in respect of the above property have been satisfactionly (sic) dealt with."

It is not clear what exactly did the vendor's solicitors meant by assuming that all requisitions had been satisfactorily dealt with, when they refused to answer the legitimate query raised consequential to the confusion brought about by their own ignorance of the contents of the title documents they had sent to the 1st purchaser.

13. Undaunted by the said reply of the vendor's solicitors, the solicitors for the 1st purchaser made a further attempt to explain the position to the vendor's solicitors by letter dated the same date. It reads :

"As explained in our previous letters, the Deed of Mutual Covenant Memorial No 859065 and Sub-Deed of Mutual Covenant Memorial No 859066 made no distinction regarding the shares between the owners of units on Level 35 of Metroplaza Tower II. We note that so far, you have not provided us with any documentary evidence for the allotment of shares to units 3501-3506, 3511-3512 on Level 35 of Tower II Metroplaza. In the circumstances you fail(ed) to provide us with evidence as to how the 147/31,000th shares of the land that your client is entitled to is divided.

With respect, your view that the notional allocation of the undivided shares was done by the developer is again unsupported. What the Developer has assigned to your client under Assignment Memorial No. 885859 and re-registered by Memorial No. 909528 is (sic) 147/31,000th parts or shares of the land. If you alleged that the Developer has allocated shares to the different units on Level 35 of the Building to the Land Registry, please let us have evidence to show the same.

Basically, the question is why and how our client is entitled to the 20/31,000the parts of shares of the Land, as you stated in the Agreement ion.for Sale and Purchase and how the rights and benefits of the respective owners of 3501-3506, 3511-3512 on Level 35 are delined and in this respect, you fall reply our requistions to our satisfaction.

As the matter can be easily resolved by your client exccuting a Sub-sub Deed of Mutual Covenant, please take your client's instructions as to whether your client (sic) to do so."

It is apparent from this further attempt that the 1st purchaser was very keen to complete the sale. So much so that its solicitors took trouble to suggest the obvious solution to overcome the difficulty. However, it appears that its enthusiasm to complete the sale was not to be complimented with the same enthusiasm from the vendor's solicitors. They replied by letter of the same date :

"Basically, your client is to be assigned of (sic) an undivided shares (sic) of and in the lot of (sic) which the Metroplaza was erected thereon (sic) by our client as Vendor in pursuance of (sic) an Agreement for Sale and Purchase dated 19th January 1994. That was what our respective clients bargained for and what our client as Vendor is capable to assign to your client.

We repeat herein that it is totally irrelevant as (sic) how the 20/31,000th or 147/3,000th (sic) was calculated. The only relevent point (is) that our client is in possession and (is the) legal owner of the undivided shares agreed to be sold and purchased (;) and our client as Vendor is capable to assign the same to your client.

We reiterate the last paragraph of our letter dated the 7th February 1994 and expect your client to complete the sale and purchase in accordance-with the term(s) of the aforesaid Agreement for Sale and Purchase."

Despite the difficulty in understanding the language used, the further answer of the vendor's solicitors to the requisition appears to be saying that all the vendor has to prove is that it is capable of assigning 20 undivided shares in the land. That view was founded on the opinion that the only matters the vendor has to prove are legal ownership and possession of 20 undivided shares in the land; and that it is capable of assigning the same to the purchaser. That was the reason for their persistent contention that the vendor does not have to prove the manner in which the 20 undivided shares came to be allotted to the unit. That is indeed the stance of the vendor at the hearing as well.

14. By letter dated 8th February 1994, the 1st purchaser' solicitors maintained that the requisitions had not been satisfactorily answered and that the vendor has failed to show a good title to the unit. The said letter also contained an offer to extend the time for completion to enable the vendor to perfect the title in the manner suggested by the 1st purchaser's solicitors. It is apparent that the 1st purchaser was very keen to purchase the unit. Unfortunately, the offer was interpreted by the vendor's solicitors as a request for postponement of the completion date which they refused to entertain in their reply of even date. Notice of forfeiture of the deposit was also given by the vendor's solicitors via the same reply.

15. The main issue in contention between the vendor and the 1st purchaser is : whether in the circumstances that prevailed immediately before the time for completion it is necessary for the vendor to provide information, or documents if they exist, to the 1st purchaser relating to the alleged allotment of the 20 undivided shares in the land to the unit.

16. Clause 9 of the 1st agreement provides, inter alia, that "The Vendor shall show a good title to the Property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap.219) at his own expenses and he shall at the like expense make and furnish to the Purchaser such certified copies of any deeds or documents of title, wills and matters of public record as may be necessary to complete such title." It is, therefore, not sustainable for the vendor to contend that it had fully complied with this obligation if it can be reasonably inferred that there exists a document of some sort that evident the allotment of the 20 undivided shares to the unit that had not been disclosed by it to the 1st purchaser at all. None of the title documents delivered by the vendor discloses when, how and in what manner the 147 undivided shares in the land that were globally alloted to the 8 units assigned to the vendor by the developer were further subdivided to give rise to an allotment of 20 undivided shares to the unit. But according to the land registry record, 20 undivided shares had already been alloted to the unit at the time title documents were delivered to the 1st purchaser. In the premises, it would be reasonable for an inference to be drawn that there existed a document that was made known to the land registry by unknown means ( unknown because none was registered) evidencing such an allotment that had not been disclosed by the vendor. Such a document, if it exists, would either be a "deed" or would be part of some "public record" within the ambit of clause 9. An answer that the issue is irrelevant is hardly a proper or satisfactory discharge of its obligation under clause 9 which was the provision upon which the requisition was founded. Nor could that answer be a proper or satisfactory answer to a requisition raised for a copy of such document.Furthermore, the allegation made by the vendor's solicitors as to how the 20 undivided shares were alloted by the developer, which is blatantly incorrect, only serves to confuse the matter if not also brought about a cloud of mystery and suspicion over the position in respect of the allotment of the said shares. If such a document did not exist, the proper way to answer the requisition would be to state that it did not exist and then go on to explain how the 20 undivided shares were alloted.

17. The contention by the vendor's solicitors that the issue raised by the 1st purchaser's solicitors relating to the allotment of the 20 undivided shares to the unit is irrelevant is arguably unsustainable. Many of the rights and liabilities of an owner of a unit vis-a-vis other co-owners depend solely on the exact proportion in the undivided shares of the land his unit was legally and validly allotted. Thus, it is singularly important for the exact proportion of the undivided shares of each unit to be proved by a vendor. The importance lies not in whether the vendor is capable to assign a particular number of undivided shares to the purchaser, though that is of course not unimportant as well. The importance lies in the definition of the exact extent of rights and liabilities that run with the unit. Thus, even if the vendor is capable to assign 20 undivided shares to the 1st purchaser at completion, it would still be in breach of the 1st agreement if it transpired that in fact 19 or 21 undivided shares were in fact and in law allotted to the unit. The rights and liabilities of the 1st purchaser in respect of the unit would, in those circumstances, be quite different from that purported to be assigned. In the premises, I am satisfied that not only is it arguable that the requisition as to the allotment of the 20 undivided shares to the unit a relevant and proper one to raise, it is difficult to see how it could be contended that the issue was irrelevant.

18. Counsel for the vendor referred me to the unreported decision of Godfrey J., as he then was, in Goodtex Land Company Limited v. Lung Kwong Emporium Company Limited, M.P. No. 2234 01 1993 (decision delivered on 3rd September 1993), to contend that a deed of mutual covenant is not a necessary document to prove title. The building in question in that case was comprised of 6 floors, all of which were initially owned by one owner. The original owner sold off the building floor by floor to different purchasers between 1959 and 1961. In those early days deeds of mutual covenant are not as common an occurrence as nowadays. Thus, not surprisingly, when the floors were sold there was no deed of mutual covenant or any other document executed to define or regulate the rights and liabilities between the new co-owners of the building. However, the conveyance on sale in respect of each floor did stipulated that what was being conveyed was an undivided one-sixth share in the land coupled with "the exclusive right and full privilege to use possession occupation and enjoyment of the X floor of the said building". The first conveyance on sale failed to contain any reservation to the original owner of her rights to the other floors to the exclusion of the first purchaser. Thus, it is arguable that all subsequent conveyances of the other floors would always be subject to the right of the first purchaser (and perhaps other subsequent purchasers) to use the other floors. It was on that basis that the purchaser raised a requisition on title in 1993 in an intended sale and purchaser of one of the floors in that building. The intended vendor answered that the right to exclude the first and all other purchasers should be treated as impliedly reserved. The intended vendor's contention was upheld by the court. It was held that as a matter of commercial necessity such a right does have to be implied as the conveyances on sale could not be made to work without such an implied reservation. The court also observed that the floors had been enjoyed in accordance with the title for more than thirty years without any of the potential problems alleged by the intended purchaser ever arising. On that basis, it was held that there was no defect in title. I fail to see how that decision can assist the vendor's contention that a vendor does not need to provide evidence as to how an alleged number of undivided shares were allotted to a unit in a multi- storey building. The decision has no bearing on the importance or otherwise of establishing the manner and particulars of the allotment of undivided shares in the land. There is no room to imply from any of the title documents that there had been a legally valid and binding allotment of any particular number of undivided shares in the land to the unit. The only inference one can draw from the documents provided is that there should exist another document dealing with the allotment that had not been disclosed by the vendor. If no such document exists, than it becomes a complete mystery as to the means deplored to bring about a legally valid and binding subdivision of the 147 undivided shares the vendor had obtained from the developer for the 8 units.

19. I am satisfied that there is an overwhelmingly strong case of a wrongful repudiation of the 1st agreement by the vendor and of a wrongfully forfeiture of the deposit after a refusal to answer proper and reasonable requisitions raised on the title. However, whether it would be appropriate to claim specific performance of the 1st agreement in the context of the statement of claim in the 1st purchaser's action against the vendor is a matter yet to be considered and determined in the other summons, if the 2nd purchaser still intends to proceed with it. As the 1st purchaser has a good cause of action against the vendor for a lien on the property for the recovery of the deposit, prima facie the lis pendens is capable of being registered against the unit. In any event, there is no application from the vendor to remove the lis pendens. Though the title is suffering from an identical prima facie blot in th 2nd sale under the 2nd agreement, the 2nd purchaser's stance on this issue is neutral and has not seek to base its application for the preliminary relief on that basis at the hearing. The only remedy sought at the hearing was for a determination of the obligation of the 2nd purchaser to complete the sale on 29th April 1994 in view of the 1st purchaser's claim against the vendor in respect of the unit. In the premises, the proper order to make is to declare that the 2nd purchaser is not obliged to complete on 29th April 1994 unless the lien and the lis pendens are first removed prior. to such completion. A declaration to that effect was accordingly made at the conclusion of the hearing on 27th April 1994 with costs reserved.