CHAN MAN CHOI AND ANOTHER v. POON FOOK WAH AND ANOTHER

HCA 4870/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4870 OF 1998

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J U D G M E N T

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1. The defendants as vendors and the first plaintiff as purchaser agreed to sell and buy the defendants' shop in Yuen Long. Prior to completion date the first plaintiff nominated the second plaintiff to complete the transaction as purchaser. This litigation has arisen because the transaction did not proceed to completion on due date or thereafter. Both parties claim the other to have wrongfully repudiated. The plaintiffs sue for recovery of deposits and other expenditure paid. The defendants counterclaim to withhold the deposits as forfeited and sue for other expenditure incurred.

Background

2. The address of the shop is Shop J Shun Hing Building Yuen Long. It comprises a conventional shop on the ground floor to which entry is gained by a roller shutter spanning the width of the frontage and a first floor cockloft immediately above of similar dimensions. The two floors are connected by a spiral staircase. The building comprises many such shops having similar dimensions and layout.

3. The defendants are man and wife. They bought Shop J in 1995 from which date the husband used the same to carry on his business making aluminum door and window frames. Two years later, needing more space, they decided to sell. They commissioned Yick Fu Realty Co. to find a buyer at an asking price of $4.5 million.

4. The first plaintiff describes herself as a businesswoman. She had bought and sold shops in the past. She was approached. She was given the address and told it was a shop of about 500 square feet. Having made a cursory inspection of the shop from the outside she elected to proceed no further as the price was too high. Then, a few days later, the agent told her that the vendors were prepared to reduce the price below $4 million and take a tenancy on stated terms. She negotiated a deal. The upshot was that the parties entered into a provisional agreement for the sale and purchase of Shop J for $3.99 million and a tenancy back to the vendors.

5. The provisional agreement came to be superceded, in the usual way, by a formal agreement which was signed and dated 22 October 1997. As the outcome of this litigation depends upon an interpretation of some of the clauses in the formal agreement, I extract from it and record those I think are pertinent as follows:-

"4. The purchase price for the Property is set out in Part I of the Sixth Schedule hereto ("the Purchase Price").

5. (a) A deposit in the sum set out in Part II of the Sixth Schedule hereto has been paid by the Purchaser to the Vendor prior to the signing of this Agreement as initial deposit and in part payment of the purchase price (the receipt of which the Vendor hereby acknowledges and admits).

(b) A deposit in the sum set out in Part III of the Sixth Schedule hereto as further deposit and on account of the Purchase Price shall be paid by the Purchaser upon signing hereof to the Vendor.

(c) The balance of the Purchase Price in the sum set out in Part IV of the Sixth Schedule hereto shall be paid by the Purchaser on completion.

7. (a) Completion shall take place at the office of the Vendor's Solicitors on or before the date stated in the Seventh Schedule hereto ("the Completion Date"). ...

(b) Notwithstanding anything herein provided, if the completion date for sale and purchase of the Property and/or any of the date(s) stipulated for payment herein shall fall on a day which is not business day (business day shall be a day on which licensed banks are open for business in Hong Kong) or shall fall on a day on which typhoon signal No. 8 or above or a Black Rainstorm Signal is hoisted in Hong Kong at any time between 9:00 am and 5:00 pm, such date for payment or the Completion Date (as the case may be) shall automatically be postponed to the next business day or such next succeeding business day on which no typhoon signal No. 8 or above or a Black Rainstorm Signal is hoisted (as the case may be) between the aforementioned hours. The sale and purchase shall be completed between the hours of 9:00 am and 5:00 pm on or before the completion date if completion shall take place on a weekday and if such date shall fall on a Saturday then between the hours of 9:00 am and 12:30 pm.

10. (a) The Vendor shall only be required to show and give a good title to the Property at his own expense in accordance with Section 13 of the Conveyancing and Property Ordinance (Cap. 219).

12. (a) Any requisition or objection in respect of the title as required to be proved by the Vendor in accordance with Clause 10 hereof shall be delivered in writing to the Vendor's Solicitors within seven working after the date of receipt of the title deeds by the Purchaser's Solicitors and if no requisition or objection is made within such period the Purchaser shall be deemed to have waived his rights to do so.

(b) If the Purchaser shall within the time limit stipulated make any requisitions and/or insist on any objection appearing on the title deeds or otherwise which the Vendor shall be unable or (on the ground of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with, or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty to give to the Purchaser or his solicitors not less than five (5) working days' notice in writing to annul the sale in which case, unless the objection or requisition shall have been in the meantime withdrawn, the sale hereof shall at the expiration of the notice be annulled and the Purchaser shall be entitled to the return of the deposit forthwith in full but without interest costs and compensation. For avoidance of doubt, shall the sale be annulled in such manner the Vendor shall not be considered as in breach of any terms and conditions of this Agreement and the Vendor shall also have the right (if this Agreement shall have been registered at the Land Registry) to register at the Land Registry an instrument signed by the Vendor alone evidencing determination as aforesaid of the sale of the Property.

13. Time shall in every respect be of the essence of this Agreement.

14. (a) If the Purchaser shall fail (other than the default of the Vendor) to complete the purchase of the Property in accordance with the terms and conditions contained herein, then all moneys paid hereunder shall be absolutely forfeited to the Vendor who may thereupon by notice given to the Purchaser but without tendering an assignment to the Purchaser determine this Agreement.

15. If the Vendor shall (for any cause other than the failure to complete the sale following the provision of determination of sale under clause 12(b) above) fail to complete the sale of the Property in accordance with the terms hereof then all money paid hereunder shall be returned forthwith to the Purchaser in full who shall also be entitled to recover from the Vendor such damages (if any) over and above all deposit(s) paid hereunder which includes and not limit to any stamp duty or duties paid or payable as the purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor for execution before taking such proceedings.

19. The Purchaser acknowledges that he had been invited to inspect the Property or has caused it to be inspected on his behalf and that he is entering into this Agreement on the basis of such inspection and of the terms hereof and not in reliance on any representation or warranty whatever written oral expressed or implied made by or on behalf of the Vendor. The Purchaser purchases with full knowledge of the physical condition of the Property and takes it as it stands. Therefore, the Property is and will be sold on an "as is" basis.

20. (a) No error, omission or misstatement herein or in any plan furnished or any statement made in the course of the negotiations leading to the contract shall annul the sale or entitle the Purchaser to be discharged from the purchase or any of his obligations hereunder. Any such error, omission or misstatement shown to be material shall entitle the Purchaser to proper compensation only.

(b) No immaterial error, omission or misstatement (including a mistake in any plan furnished for identification only) shall entitle either party to compensation.

(c) Sub-clause (a) shall not apply where compensation for any error, omission or misstatement shown to be material cannot be assessed nor enable either party to compel the other to accept or convey a property differing substantially (in quantity, quality, tenure or otherwise) from the Property agreed to be sold if the other party would be prejudiced by the difference.

(d) The Misrepresentation Ordinance applies to this Agreement.

22. (a) The Vendor hereby warrants and declares that there is no unauthorized or illegal structure or alteration in, to or above the Property or any part thereof and also that the Vendor has not received and is not aware of there being any notice from any Government or other competent authority requiring the Vendor to demolish or reinstate any part of the Property. ...

39. It is agreed between the parties that if any party fails to complete the sale and purchase according to the terms herein contained, the party in default shall be responsible to pay the estate agent's commission and all the stamp duty levied by the Collector of Stamp Duty in respect of this transaction.

41. Upon completion, the Purchaser will enter into a Tenancy Agreement with the Vendor hereby the Purchaser as the Landlord shall let the Property to the Vendor as the Tenancy for a term commencing from 23 February 1998 to 23 April 1999 at the rental of HK$14,800.00 per month. The rates, government rent, management fees and other outgoings during the said term shall be discharged by the Vendor."

THE SIXTH SCHEDULE ABOVE REFERRED TO

Part I:	The Purchase Price:	Hong Kong Dollars THREE MILLION NINE HUNDRED AND NINETY THOUSAND ONLY (HK$3,990,000.00)
Part II:	Initial Deposit:	HK$300,000.00
Part III:	Further Deposit:	HK$498,000.00
Part IV:	Balance:	HK$3,192,000.00

THE SEVENTH SCHEDULE ABOVE REFERRED TO

Completion Date: On or before the 23rd day of February, 1998.

THE ELEVENTH SCHEDULE ABOVE REFERRED TO

(1) Estate agent's commission payable by the Vendor:

Amount:	HK$19,950.00
Name of Agent :	Yick Fu Realty Co.,
Address of Agent:	Shop No. 6, Fu Yau Court, Yau San Street, Yuen Long, N.T.
H.K.I.C. No./B.R. No.:

(2) Estate agent's commission payable by the Purchaser:

Amount:	HK$19,950.00
Name of Agent:	Yick Fu Realty Co.,
Address of Agent:	Shop No. 6, Fu Yau Court, Yau San Street, Yuen Long, N.T.

6. The first plaintiff paid the deposits on due date, and both parties met their respective shares of the stamp duty and real estate fees.

7. On 6 January 1998, the first plaintiff nominated the second plaintiff, a company of which she is the majority shareholder and a director, to complete the purchase in place of her. As it is her alter ego and as both plaintiffs are by these proceedings suing and being sued, I shall refer to them as the plaintiffs collectively unless in the context it is not appropriate to do so.

8. Matters which were to lead to the dispute giving rise to these proceedings began on 23 January. The first plaintiff took a Mr Dickie Lau, registered architect and an authorised person as defined by the Buildings Ordinance Cap. 123 to Shop J. Her stated concern was that she needed a mortgage to complete the purchase, and the bank she was intending to apply to might resist her application to borrow any money if the security was in part an illegal structure under the Building Ordinance. Her worry was that the front of Shop J seemed to comprise an extension protruding beyond the original frontage of Shun Hing Building, and might well offend the Ordinance and its regulations. Her concern was well founded. Mr Lau was satisfied it was an illegal structure. He prepared a short report and sent it to the plaintiffs' solicitors which I repeat verbatim as follows:

WEALTHY GATE ARCHITECTS & ASSOCIATES LIMITED
3/F, PRIME MANSION, 183 JOHNSTON ROAD, WANCHAI, HONG KONG
TEL: 2803-7833 FAX: (852) 2803-7899

Job No.:	MS-707
Ref. No.:	AP/PS/001
Date:	February 4, 1998
To:	Terry Yeung & Lai Solicitors Room 1821, 18th Floor Nam Fung Centre No. 264-298 Castle Peak Road Tuen Wan, N.T.
Attn.:	Mr Ray Hung

Dear Sir,

Shop J, Ground Floor and Cockloft
Shun Hing Building, Yuen Long, New Territories

I have inspected the captioned shop on January 23, 1998 and have studied the following documents:

Documents

i)	Assignment Plan registered In the Yuen Long Land Registry By Memorial No. 315848 Dated April 11, 1986

It was found on site that the floor slab of cockloft floor was extended outward and enclosure walls were built over it.

That alternation (sic) work led to an increase in gross floor area and was contravening regulation 21 of Building (Planning) Regulations. The construction of that structure without getting prior approval and consent from the Building Authority was illegal and should have committed an offense.

Furthermore, that structure impose additional loading on the existing building and might impede its structural stability.

Yours faithfully,

...............................

LAU KAM SING, DICKIE
BA (AS) (HK), BArch (HK), HKIA,
AP (List 1), Registered Architect
DL/el

9. The plaintiffs' solicitors conveyed this report to the defendants' solicitors by letter of 6 February, including the following pertinent paragraph:

... In light of the said Report, kindly let us have the relevant approval and consent from the Building Authority so as to prove good title to the Property. ...

10. They responded by letter of 18 February which contained the following denial:

We are instructed that our client does not agree with your allegation that the above property is being affected by an unauthorised structure and does not agree with the contents of the letter prepared by your client's architects, Weathly Gate Architects & Associates Limited, on 4th February 1998 because up to this moment, there is no evidence that there exists any notice, building order or whatsoever from the Government that the property is being affected by any unauthorised structure which can be disclosed in the land search record.

However, the letter went on to reveal that certain without prejudice steps had been taken, for it concluded with the following paragraphs:

Having made out our stance clearly and without prejudice to our stance, in order to ease your client's worry, some modifications have been made in the property.

In the premises, our client believes that your client's worry has been eased and we are of the view that our client's title is good. A set of photograph is enclosed herewith for your reference.

11. Enclosed were two colour photographs taken from outside and facing the front of Shop J.

12. On 19 February the plaintiffs' solicitors responded to the effect that their request of 6 February had not been answered; further, that the modifications referred to amounted to an unauthorised alteration to Shop J which offended and was in breach of the term set out in the final sentence of clause 19 of the formal agreement, giving the second plaintiff the right to rescind and sue for damages.

13. The defendants' solicitors responded by letter of 20 February, which I reproduce in full:

20 February 1998

Dear Sirs,

Re: Shop J, Ground Floor and Cockloft, Shun Hing Building,
Yuen Long, N.T.

We refer to your letter of 19-1-1998.

In our letter to you on 18-2-1998, we have already made out our client's stance clearly. Our client has never admitted that the alleged extension of the floor slab of cockloft and the enclosure glass panel wall thereat were illegal.

Before 1994, there was metal framed canopy at the place where the alleged illegal structure exists. You may note that by a Building Order Memorial No. 606670 ("the said Order") the then owner was required to remove the metal framed canopy.

Some modifications were then carried out and by a Letter of Compliance Memorial No. 611202, the Buildings Department confirmed their agreement to without further enforcement of the said Order. Since then, no new building order or notice whatsoever has been issued against the above property.

In the premises, our client will never admit your client's allegation of illegal structures.

When your client caused inspection to be made at the above property before he entered into the Provisional Agreement For Sale and Purchase in respect of the above property on 8-10-1997 ("the said Agreement"), he was well aware of the existence of the said extension and the glass panel wall. Your client was further well aware that the area of the floor slab enclosed by the extension and the glass panel wall was never used by our client as a part of the above property. The extension was just left vacant. The extension was, as your client fully awares, just for decoration purpose and not otherwise. Our client was therefore very surprised to learn about your client's objection to the said extension nearly three months after he entered into the said Agreement with our client.

Having made out our client's clearly and without prejudice to his stance, our client has indeed caused modification to be made by removing the glass panel wall in question. What our client has done was just to remove your client's worry on that doubtful, or as your client alleges, illegal, structure. Your client will not be prejudiced by such a modification because as already said the extension was just for decoration purpose and was never used as a part of the above property.

Regarding your client's allegation for breach by our client of clause 19 of the Formal Agreement For Sale and Purchase dated 22-10-1997 ("the Formal Agreement") by failing to deliver the above property on "as is" basis, our client raises strong objection for the same. Our client has agreed to sell to your client "Shop J, Shun Hing Building, Yuen Long, New Territories". On completion, our client will be able, willing and ready to deliver the above property to your client.

If, which is not admitted, our client will commit a breach of clause 19 as aforesaid, your client will not be entitled to rescind the Formal Agreement but ONLY to a right to claim damages from our client. The extent of damages will depend on the reduction in area as alleged (which may be less than 20 square feet in our case).

In view of your adverse comments on the modification carried out by our client, please advise in writing as soon as possible before completion on 23-2-1998 if your client wishes our client to reinstate the above property by installing the original glass panel wall back to the extension. If your client wishes the same to be installed, our client is willing and able to do the same before completion.

We are looking forward to hearing from you very soon.

14. This was not acceptable to the plaintiffs, whose solicitors by letter of 21 February wrote as follows:

21 February 2000

We refer to your letter dated 20th February, 1998, upon which we have taken instructions from our client.

With due respect, we fail to discern, in the absence of any documentary evidence which your client qua vendor is obliged to prove and produce, the Letter of Compliance Memorial No. 611202 can be of any avail to your simple denial of the existence of illegal structures; given in particular that the subject matter of the Building Order Memorial No. 606670 and the said Letter of Compliance was the metal framed canopy whilst our requisitions concern the alteration work leading to an increase in gross floor area. There is even up to the moment of this letter simply no documentary evidence from your client to prove that the said alteration work was exactly the same subject matter of the said Building Order and the Letter of Compliance.

On the other hand, before our client entered the Provisional Agreement for Sale and Purchase dated 8th October, 1997, the Property together with the said alteration work was shown to our client as a whole. However, our client did not know whether or not the said alteration work was illegal. The fact that our client knew of the existence of the said alteration work and that the same was just allegedly left vacant or for decoration purpose would in no way impair your client's duty under the Formal Agreement for Sale and Purchase dated 22nd October, 1997 to prove and give good title to the Property on or before completion.

As regards the alleged modifications made to the Property, we reiterate that our client never agrees or consents the same. Under the said Formal Agreement for Sale and Purchase, the Property shall be sold to our client on an "as is" basis. Your client cannot compel our client to accept a property which is not the one she contracted for. As you may know full well that property transactions in Hong Kong depend on the uniqueness of the property itself, had it not been in the physical condition as at the time of signing the Provisional Agreement for Sale and Purchase, our client would not have decided to purchase the Property. Any reduction in price does not help. Therefore, any breach by your client of Clause 19 of the Formal Agreement for Sale and Purchase will clearly entitle our client to rescind the same and to claim loss and damage against your client.

Further, without prejudice to the aforesaid, it appears from the copy pictures as enclosed in your letter dated 18 February 1998 that there is still existing a structure extending/protruding outward from the cockloft of the Property which is obviously part of the said alteration work. Therefore, the issue of illegal structures remains unanswered by your client.

By reason of the matters aforesaid, your client has not yet sufficiently answered our requisitions and/or proved good title to the Property. In this regard, as our client is always willing, ready and able to purchase the Property which she has contracted for but not the modified one, our client is quite willing to accept an offer from your client to postpone the completion until your client could reinstate the Property to the physical condition as at the date of the Provisional Agreement for Sale and Purchase TOGETHER WITH the relevant valid approval from the Building Authority.

We trust our client's proposal is a generous and reasonable one. Kindly take instructions and revert to us if the same is acceptable to your client. Meanwhile, all our client's rights are hereby reserved.

15. The impasse was not resolved. The completion date 23 February was a weekday, so that 5 pm was the due time for completion. That passed uneventfully. Through their solicitors the defendants volunteered an extension of 48 hours. In the meantime the defendants had engaged their own architect, a Mr Ervin Lee, to assist. He reported as follows:

FOTTON ELA ARCHITECTS LTD.

G/F., 16 Tung Cheong Street Tai Po, New Territories Tel: 2651 3880 Fax: 2651 9999

Our Ref.:	YLO-01(S)/9802047/AS
Date:	24 February, 1998

Kitty So & Tong Solicitors
4/F., The Kwangtung Provincial Bank Bldg.,
102-108 Castle Peak Road,
Yuen Long, N.T.

Attn.: Miss Grace Tong

Dear Madam,

RE: Shop J on The Ground Floor and Cockloft,
Shun Hing Building, Yuen Long, N. T.

We are instructed by Mr Poon Fook Wah, to give a report on the extension of the cockloft above the shop front as mentioned in the letter of Messrs. Wealthy Gate Architects Associates Limited dated 4 February, 1998.

A site inspection was conducted on 23 February, 1998 and we noticed that some modification works have been carried out at the cockloft level above the shop front.

As informed by Mr Poon Fook Wah and from our site observation of the remaining marks, we are of the opinion that the previous extension did not consist a structural slab for accommodation nor storage purpose and was an enclosure which measures approximately 2ft. by to 10ft. (or 20sq. ft.) for decoration above the shop sign only. The alleged contravention of the Building Regulations as laid down in the aforesaid letter of Wealthy Gate Architects & Associates Limited regarding the extension of the cockloft in the subject property is in our opinion not found.

Yours faithfully,

_________________
Ervin Lee Siu Man
Authorised Person - List 1
Registered Architect
Director

16. That was sent to the plaintiffs' solicitors on 25 February. But there was no positive response. Subsequent letters from each side accused the other of wrongful repudiation and these proceedings were issued shortly afterwards.

17. The second plaintiff sues the defendants for the deposits of $798,000.00, estate agency fee of $19,950.00, legal fees and stamp duty and architect's fees of $25,920.00, interest and costs.

18. The defendants counterclaim against the first plaintiff or alternatively the second plaintiff forfeiture of the deposits, estate agency fee of $19,950.00 legal fees and stamp duty of $15,410.00, interest and costs.

Site Visit

19. I propose to deal with points of evidence that emerged during the course of the trial beyond the background already recorded. Before I do I want to refer to a visit I made to Shop J and the environs, accompanied by the parties and their representatives.

20. The shop is still owned by the defendants. It is one of a number having similar dimensions in Shun Hing Building. According to the plans each shop front is flush with its neighbours. Upstairs the front wall comprises an H beam about 18 inches in height with windows above. However Shop J does not conform. At ceiling height on the first floor a canopy spanning the width of the shop protrudes some four feet outwards. Side walls run from the canopy down to the ground. At the height of the H beam a steel plate extends outwards between the two side walls. The window above the H beam has been relocated between the front edges of the canopy, the side walls and steel plate. The result is an enclosure beyond and at the same height as the H beam with direct access from the cockloft, whose net useable area of 217.4 sq feet has been increased by an additional 31.4 sq feet. Downstairs the roller shutter at the shop's entrance has been relocated at the outer edge of the steel plate. The result is that the ground floor net useable area of 190.1 sq feet has been increased beyond the exterior of the building to the relocated shutter by an additional 25 sq feet.

21. One of the defendants was subsequently to say in evidence that when the transaction fell through they had the extension rebuilt as before. So, what we viewed was the same construction about which Mr Lau had adversely reported.

The Evidence

22. Miss Chan Man-choi, the first plaintiff, was called first. When Mr Lau's report revealed the extension at the front of Shop J was an illegal structure and the defendants had carried out what their solicitors had referred to as modifications to it she professed no wish to complete, as the property was no longer what she had bargained for. An attractively presented frontage had been demolished. Some unsightly skeletal frame-work remained. More importantly and unpalatably the useable areas of both ground and first floors had been significantly reduced in size. To her mind the work unilaterally undertaken by the defendants had converted the shop from a good investment to an unsound one which deficiency could not be made good by a reduction in price. So it was that when, as transpired, a representative of Yick Fu Realty said the defendants were prepared to renegotiate the price by a reduction of up to $100,000.00 she was not interested. She was prepared only to buy the shop as originally presented to her in October.

23. Mr Lau was called next. From the witness box he elaborated on his report. He said by jutting out beyond the front of the building the extension was clearly illegal. Moreover it was so constructed that it affected the structural stability of the building. To utilize the upstairs part of the extension as a work space or for storage would have rendered it dangerous. He was certain that it could not have been approved by the Building Authority. And because it was defective its continued existence may well have resulted in intervention by the Building Authority, prosecution of its owners and its ultimate removal.

24. Mr Lee was also called. He explained that by the time he had come to inspect Shop J the extension had been all but removed save for some of the framework showing where it had been. He spoke to Mr Poon Fuk-wah one of the owners who told him the extension, at least upstairs, had not been used as part of the work space or for storage. Its purpose was to support the shop's sign and to house beneath it the roller shutter. Otherwise it was decorative. Based on what he was told and what he could see he did not believe the structure was illegal.

25. The final witness was Madam Lam Kwan-chun one of the defendants. She said having sold Shop J she and her husband entered into an agreement to purchase two adjoining shops elsewhere. When they bought Shop J in 1995 the extension was already built. They did not requisition or otherwise query its legality and to this day she disputes that it was illegal. When they put the shop on the market she told the agent it was about 500 sq feet in size because that, she remembered, was what they were told two years before, when they bought. Though there was access to the upstairs extension to the cockloft in fact it was not utilized either as part of the work space or for storage and was decorative only. On the other hand she conceded that it was part and parcel of the shop space overall.

26. When the plaintiffs' mounted their challenge and produced Mr Lau's report they engaged their own architect. Mr Lee sent a staff member to inspect and himself came to look on 23 February. By then they had decided to remove the extension whilst denying its illegality. They did so not because they admitted liability but because they wanted to safeguard the sale and protect their position regarding the subsequent purchase. She confirmed that she told the agent to sound out the first plaintiff about a possible reduction in the price of up to $100,000.00 which apparently fell on deaf ears.

27. She said that prior to the demolition they had not sought the approval of the Building Authority, no authorised person was engaged to oversee the work and no structural engineer was appointed to check on structural suitability.

28. After the transaction failed they decided to reinstate the extension and did so earlier this year in its original form. No prior approval was sought and no authorized person or other professional was engaged in the construction.

29. Before leaving the evidence I believe it appropriate to reproduce the Letter of Compliance referred to by the defendants' solicitors in their letter of 20 February 1998, sent when the then owners of Shop J complied with a demand to remove an offending canopy.

30. The text is as follows:

Buildings Department
Cheuk Ngai Ching and Chan Yuet Ying, Flat J, 4/F., Wing Ho House, 24 Wan Tau Square, Tai Po, New Territories.	25 October 1994

Dear Sir/Madam,

Shop J, G/F and Cockloft, 2-8 Kin Tak Street/55-63 Hop Yick Road, Shung Hing Building, Yuen Long, New Territories.

I refer to my Order No DC 0179/94/NT which was served on you on 6 July 1994 in connection with unauthorized building works which had been carried out at the above premises. I note that modifications have been carried out to the said building works, and having taken into consideration the circumstances, I am prepared to withhold further enforcement of my order for the time being. However, I may consider issuing a new order for the complete removal of unauthorized building works in future should changes in circumstances so require.

Order No. DC 0179/94/NT is hereby withdrawn.

Yours faithfully, (R. Gartan) Senior Structural Engineer/DA for Building Authority

The Issues

31. Mr Chain representing the defendants submitted in his closing address that it was conceded on their part that the extensions amounted to an illegal structure. This was unexpected, given that in the correspondence following the plaintiffs' challenge it was hotly and continually denied, and given Mr Lee's professional view to the contrary and Madam Lam's evidence that it was not. Unexpected, yes, but surprising, no. Mr Lau's report was unequivocal, and his evidence more damning. On the other hand Mr Lee's so-called report, reliant as it was so much on the uncorroborated account of an interested party, was of no worth at all, and did its author no credit. Furthermore one requires few powers of deduction to work out that the Building Authority's decision in October 1994 "to withhold further enforcement of my order for the time being" referred to the extension in question. Finally one needs no professional expertise to realize that if a building is extended four feet beyond its boundaries as per title that extension must be contrary to title and illegal.

32. With that concession the issues are:

1. The plaintiffs having challenged the legality of the extension putting the defendants in potential breach of clause 22(a) of the formal agreement, had the defendants answered such requisition satisfactorily and in time?

2. If so, were the plaintiffs in any event entitled to call upon clause 19 and rescind or did the remedies if any lie in clause 21?

3. If the defendants succeed in their counterclaim is it as against the first plaintiff or second plaintiff?

The Outcome

33. Clause 10(a) of the formal agreement required the defendants to show and give good title to Shop J. How was this obligation to be performed?

34. Litton JA (as he then was) dealt with that question in Active Keen Industries Limited v Fok Chi Keong [1994] 2 HKC 67. At page 79 under the sub-heading "How is good title shown?", the purchaser having raised an objection as to the vendor's title, he said:

... the vendor's solicitor must act with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed. A requisition as to title is not an occasion for the parties' solicitors to bandy propositions of law; each party must decide for himself, ...

35. Under the sub-heading "Good Title" he said at p. 81:

It must not be forgotten that, ultimately, what we are concerned with in this case is the obligation to show a good title and, on completion, to make a good title. The expression 'a good title' is incapable of a precise definition in English law, for the historical reasons which I have earlier endeavoured to explain. As Fletcher-Moulton LJ has wryly remarked in Re Atkinson and Horsell's Contract [1912] 2 Ch 1, 15: 'Now it is said that a good title is a good title. It may be so, ...'

As stated in Barnsley's Conveyancing Law and Practice (3rd Ed) at p 246: The word title is an ambiguous word, meaning different things in different contexts. Conveyancers used the word in two main senses - (1) to mean ownership, the vendor's right to the property; (2) the evidence supporting the claim to ownership, ie the proof of title in the first sense. In the expression 'good title', the word is used as equivalent to ownership; a vendor must show a title as will enable the purchaser to hold the property against any person who may probably challenge his right to it. This obligation to make a good title requires the vendor to show that he alone, or with the concurrence of some person or persons whose concurrence he can compel, can convey the whole legal estate and equitable interest in the land sold, free from encumbrances except for those disclosed by the contract.

36. Sakhrani J dealt with the same point in Jasmin Enterprises Limited v. Chan Yuk Hon [1998] CPR 456. In that case the parties had been parties to a sale and purchase agreement whose clause 12 was similar to clause 10(a) in the formal agreement in this case.

37. At p. 458 he said:

By cl 12 of the agreement it was expressly provided that the vendor should give a good title to the property purchased. It has been held that there was a heavy burden on the vendor to prove title and that the purchaser was always entitled to proof of all matters of fact which were part of or affected the title. See Qualihold Investments Ltd v Bylax Investments Ltd [1991] 2 HKC 589 and to the cases referred to by Keith J in his judgment at 592-3. And the obligation to show good title includes the obligation to answer requisitions satisfactorily (Lo Shea Chung & Anor v Lo hung Biu [1997] CPR 595 per Cheung J at 605G-H, [1997] 2 HKC 723 per Cheung J at 734A-C).

If requisitions are not answered satisfactorily, the vendor would have failed in its obligation to show good title and it does not matter if the vendor does in fact have good title. That was what happened in Active Keen Industries Ltd v Fok Chi Keong [1992-93] CPR 478, [1994] 2 HKC 67. I would also refer to what Litton JA, (as he then was), said in that case at 489H-490A (CPR), 78I-79A (HKC):

Obviously, if a purchaser raises a substantial objection as to the vendor's title and there are facts within the vendor's knowledge which, if revealed, might meet the objection, and the vendor chooses to withhold that from the purchaser, the vendor clearly cannot, on the day fixed for completion, turn round and say to the purchaser, 'Now I will both show you a good title and make you good title: you pay the balance of the purchase price today or I will rescind.' The purchaser must be given reasonable time to consider the title of the vendor and his own position; the implied obligation of showing a good title would not have been discharged by disclosure on the day fixed for completion.

Thus, it is clear that not only must the vendor answer requisitions satisfactorily, he must do so in good time before completion so that the purchaser is given reasonable time to consider the title of the vendor and his own position.

38. In the context of this case I suggest the appropriate course of action following receipt of the plaintiff's requisition would have been for the defendants to tackle the challenge hand on. That meant either accepting that the extensions were illegal or making their own enquiry by appointing their own expert. What steps would then be appropriate would depend on what he had to report.

39. Assuming as surely must have been likely that the defendants' expert would have agreed with Mr Lau the defendants then had the option of invoking clause 12(b) and annulling the sale or answering the requisition to salvage the bargain, subject to the plaintiffs' rights to compensation or rescission as may be demanded under clause 21.

40. How should the requisition, at law, be answered?

41. This proposition was considered by Yuen J in Leung Wing Fai v. Onlink Investments Limited [2000] 1 HKLRD 725. In that case, as here, the purchaser sought evidence that a particular structure was not illegal, stating the obvious that if it was the vendor's title was defective. The vendors on enquiry found the structure was illegal. Their solicitors wrote as follows:

We are of the view that there was no real possibility that the Crown would re-enter the above property and your client had knowledge of not only the existence of the said alleged illegal structure but the consequences of the existence of the said alleged illegal structure. We further opine that once the alleged illegal structure is re-instated back to its original position there will be no question of re-entry by the Crown.

42. The vendors then proceeded to have the offending structure demolished and looked to the purchaser to complete on due date. The purchaser refused, claiming the vendor had failed to show a good title.

43. Yuen J said at p. 729:

The question in this case is whether the demolition had been done before completion date, and whether it had been done properly. In both these respects, the burden is on the vendor to prove to the purchaser that the demolition had been done before the completion date, and that it had been done properly.

44. And at p. 730:

As I have said, the burden is on the vendor to prove to the purchaser that by the completion date of 29 December 1997 the demolition works had been completed. There was no such positive assertion by the vendor at any stage whether before or after completion.

More importantly there is no evidence that the demolition work had been properly done. A warning bell had been rung by the purchaser's architect in his letter dated 18 December 1997, and by a detailed second report prepared for the purposes of these proceedings, the architect has expounded on what needed to be done for proper demolition works.

... ...

There is no evidence from the vendor that the demolition works had been done properly in compliance with the matters referred to by the architect. There is no evidence that the work had been done under the supervision of the vendor's own architect, and it would appear from the documentary evidence that the vendor's own architect's scope of work had been limited to simply advising that the demolition be done. Given that the existence of unauthorised building works has been acknowledged, if the vendor were to say that such an unauthorised building work had been removed, the burden is on the vendor to show that the removal had been properly, competently and completely performed.

For this reason, I would declare that good title to the property had not been shown by the vendor defendant in accordance with the agreement when on 29 December 1997, no or no adequate evidence was put forward by the vendor to show that such demolition works had been properly and completely done.

45. I respectively agree with Yuen J's findings on the facts of the case tried before her.

46. Reverting to the case before me, the defendants did appoint their own architect to test the plaintiffs' challenge. But of course that was a wasted exercise given that by the time he arrived they had removed the extension. That itself was the clearest indication that they admitted its illegality, for why otherwise remove it? But instead of exhibiting candour as per Litton JA's direction in Active Keen, their solicitors wrote the letter of 18 February the relevant parts of which I have already reproduced on pages 9 and 10 of this judgment. Of course there is in that letter a patent misrepresentation of the law, for illegal structures are not limited to those the subject of "any notice building order or whatsoever from the Government that the property is being affected by any unauthorized structure which can be disclosed in the land search record."

47. The letter goes on to record:

"Having made out our stance clearly and without prejudice to our stance, in order to ease your client's worry some modifications have been made in the property.

In the premises our client believes that your client's worry has been eased and we are of the view that our client's title is good."

48. Notwithstanding the lack of candour and misrepresentation of the law, does that paragraph amount to a proper answer to the plaintiffs' requisition?

49. The answer I suggest is a resounding 'No'.

50. The nature and extent of the illegal extension and the manner of the construction called into question the structural stability of the building. This is clear from Mr Lau's report and evidence. This necessitated, as in Leung Wing Fai, proper controls to ensure that structural stability was restored.

51. Madam Lam admitted that there were no such controls. The defendants' obligations extended a good deal beyond reporting "some modifications have been made", expressing the belief "your client's worry has been eased". To show good title, the burden was on them to show that the removal of the unauthorised building work had been properly, competently and completely performed. And they failed to do so.

52. The result as I find is that the defendants did not answer the plaintiffs' requisition satisfactorily. This gave the second plaintiff as nominee of the first plaintiff the right to rescind the formal agreement and now to recover its loss under clause 15.

53. For the sake of completion I should add that were the defendants to have shown and given good title the plaintiffs were not, in my view, entitled to rely on clause 19 and insist on Shop J being sold to them without demolition of the unauthorised structure. The last part of the last sentence may not be read in isolation from the rest of the clause. Clause 19 was designed to protect the defendants from having to improve the shop. Were the defendants to have responded properly to the plaintiffs' requisition their, the plaintiffs' remedies, if any, would have lain in clause 21.

54. Judgment now follows.

55. The defendants shall refund to the second plaintiff deposits paid amounting to $798,000.00 and liquidated damages in the sum of $45,870.00, together with interest on $843,870.00 at 111/2% from 23 February 1998 to 14 July 2000 and thereafter at the judgment rate.

56. The defendants' counterclaim is dismissed.

57. The defendants shall pay to the plaintiffs their costs taxed if not agreed.

58. The order for costs shall be nisi at first instance.