WOO TURHAN v. LAU HIN KWAN CAL VIN AND ANOTHER

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JUDGMENT

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1. The Petitioner and the Respondents entered into a Sale and Purchase Agreement dated 24th March 1997 ('the Agreement") whereby the Petitioner purchased and the Respondents sold the property known as the Ground floor of No. 120 Temple Street, Kowloon and the Rear Yard adjacent thereto; the Cockloft of No. 120 Temple Street, Kowloon and the Flat Roof adjacent thereto and the Cockloft of No. 122 Temple Street, Kowloon and the Flat Roof adjacent thereto ("the Property"). The purchase price was $8,500,000.00. Upon signing of the Agreement, the total deposit paid by the Petitioner to the Respondents came to 10% of the purchase price, i.e. $850,000.00 which was made up of an initial deposit of $400,000.00 and a further deposit and part payment of $450,000.00. receipt whereof was acknowledged by the Respondents in the Agreement.

The Facts

2. Under the Agreement, completion was set for 24th July 1997. It was also provided for in Clause 4 of the Agreement that time shall in every respect be of the essence of the Agreement. Clause 8 provided that the Vendor shall prove and give a good title to the Property. Clause 10 provided that after the signing of the Agreement, the Property shall as between the Vendor and the Purchaser be at the Purchaser's risk. Clause 12 provided that any requisition or objection on title shall be delivered to the Vendor's Solicitor within 7 days after the date of receipt of the title deeds by the Purchaser's Solicitors. Clause 23 stipulated that the Purchaser acknowledges he has inspected the Property agreed to be sold in its present state and condition and takes it as it stands.

3. There is no dispute that the title deeds and documents were sent by Messrs. Kevin L. H. Kwong & Co., the then solicitors acting for the Respondents in respect of the sale, to Messrs. Christine M. Koo & Co., the then solicitors acting for the Petitioner, under cover of a letter dated 25th April 1997 but only received by Messrs. Christine M. Koo & Co. the following day. There is also no dispute that requisitions on such title deeds and documents were raised by Messrs. Christine M. Koo & Co. by their letter dated 3rd May 1997 which expressly reserved the rights to raise further requisitions. The requisitions contained in that letter were answered by Messrs. Kevin L. H. Kwong & Co. by their letter dated 7th May 1997. A further requisition arising from the answer to the initial requisitions was raised by Messrs. Christine M. Koo & Co. by letter dated 14th May 1997 and answered by Messrs. Kevin L. H. Kwong & Co.'s letter of 16th May 1997. These matters are not in dispute and nothing turns on those requisitions or the answers thereto therefore there is no need to go into the detail of them.

4. Nothing of significance occurred until 11th July 1997 when, by a letter of that date, Messrs. Christine M. Koo & Co. wrote to Messrs. Kevin L.H. Kwong & Co. enclosing a copy of an Architect's report regarding the Property, drawing their attention to the Comments and Recommendation of the said report and asking for their feedback of same.

5. The Architect's report enclosed in that letter is a report by Daniel Tong of DT Chartered Architect and Associates in which it is stated that an inspection of the Property carried out on 18th June 1997 revealed the existence of certain unauthorized structure at the rear yard of the ground floor of 120 Temple Street, another unauthorized structure on the flat roof at the rear cockloft of 122 Temple Street and an internal access staircase from the ground floor of 120 Temple Street to the cocklofts of 120-122 Temple Street having been removed.

6. It should be noted at once that at the hearing before me of this matter, the position taken by the Respondents is that they do not dispute the fact that there were unauthorized structures on the Property. Indeed in paragraph 3 of the Affirmation of the Respondent Wong Tsui Mei, it is stated that the Property was purchased by them in July 1992 and at that time they already knew of the existence of the illegal structures.

7. However, on 15th July 1997, by letter of the same date, Messrs. Kevin L. H. Kwong & Co. replied to the letter from Messrs. Christine M. Koo & Co. to the effect that they were not obliged to give any comment to the Architect's report. Having said so, in the next paragraph of the same letter they denied that there were any illegal structure. Moreover, clauses 10 and 23 of the Agreement was referred to and the Caveat Emptor rule relied on to the effect that even if there were, which is denied, the purchaser takes the subject premises in the existing state. They then re-iterated that their clients are always ready willing and able to complete the transaction.

8. By a further letter dated 17th July 1997, Messrs. Christine M. Koo & Co. wrote to Messrs. Kevin L. H. Kwong & Co. stating that there is concrete proof of the illegal structures which renders the title defective and that clauses 10 and 23 cannot help the vendors. It is also stated in this letter that unless the illegal structures are removed/demolished before the completion date, the purchaser will annul the sale and the Agreement on the grounds that the vendor fails to give a good title, is in breach of the Agreement and will demand the return of the deposits paid.

9. By letter of the same date, Messrs. Kevin L. H. Kwong & Co. replied maintaining that their client's title is good and that their client is always ready willing and able to complete. It further stated that if the purchaser fails to complete, the deposit and any part payment of purchase price will be forfeited.

10. There being no indication that the vendor was taking any steps to remove/demolish the illegal structures complained of, Messrs. Christine M. Koo & Co. gave notice by its letter of 22nd July 1997 (i.e. 2 days before completion) that their clients will, on the day set for completion, rescind the Agreement on the grounds that the vendor fails to give a good title to the Property free from encumbrances at the same time demanding the return of the deposit.

11. When on the day set for completion, the purchaser did not complete the transaction under the Agreement, by letter of the same date, Messrs. Kevin L. H. Kwong & Co. wrote advising that their client has exercised the rights under the Agreement to rescind and to forfeit all moneys paid thereunder, at the same time demanding the return of all title deeds and documents.

The Petition

12. The purchaser took out this Petition on 29th September 1997, as he is entitled to under Section 12 of the Conveyancing and Property Ordinance, to petition this Court for declarations that the requisitions raised in Messrs. Christine M. Koo & Co.'s letters of 11th July and 17th July 1997 have not been sufficiently answered by the Respondents, that the Respondents have failed to make or show good title to the Property and that the Petitioner was entitled to rescind the Agreement. The Petitioner further petitions for orders for the return of the deposits by the Respondents, for the costs and disbursements incurred in the investigation of title by the Petitioner, for interests and for costs.

Petitioner's Case

13. At the hearing of this matter, Mr. C. Y. Li appearing for the Petitioner based his case on the footing that since it is not disputed now that there were illegal structures on the Property, the presence of such illegal structures render the Respondent's title to the Property defective relying on the decision of Cheung J. in Homyip Development Ltd. v Chu Kang Ming Trade Development Co. Ltd. [1995] 2 HKC 458.

14. Mr. Benjamin Chain, appearing for the Respondents, did not dispute that as a proposition of law.

15. A second point advanced by Mr. Li in his submission is that the Respondents had not dealt sufficiently and satisfactorily with the matter raised by Messrs. Christine M. Koo & Co. in their letters of 11th July and 17th July 1997 and the Respondents are bound by the answers given by Messrs. Kevin L. H. Kwong & Co.'s replies to those letters. In this respect Mr. Li cites the case of Koh Chong Ho v Double Value Developments Ltd. [1993] 2 HKLR 423 for the proposition that if the requisition was not answered satisfactorily, then it did not matter whether the vendor in fact had good title. This, says Mr. Li, is sufficient to dispose of the matter in the Petitioner's favour since the Respondents now admit that there were illegal structures on the Property and which was known to them when they purchased the Property in 1992.

Respondents' Case

16. On the other hand, Mr. Chain takes the point, firstly, that the requisition raised by Messrs. Christine M. Koo & Co. in their letters of 11th July and 17th July 1997 were out of time.

17. A second point taken by Mr. Chain in argument is that if the Petitioner had raised this matter of the illegal structure earlier, then the Respondents could have complied with the removal of the illegal structures.

Requisition out of time

18. In connection with his first argument, Mr. Chain pointed me to Clause 12 (a) and (b) of the Agreement which reads:-

19. In reply to the argument that the requisition was raised out of time, Mr. Li says that the Respondents, by answering the requisition, has waived their rights under Clause 12. In so submitting, Mr. Li relies on the decision of Chan J. in the case of Ultra Eternal Ltd. v Liu Tai Cheong [1977] 1 HKC 258 in which the agreement between the parties contained a similar requisition clause as Clause 12 in our present case. There a second requisition was made 2 days before completion and was clearly out of time. However the vendor's solicitors, after pointing out that the requisition was out of time under the requisition clause, went on to give a purported answer 'as a matter of courtesy' and without in any way indicating that the answer was made without prejudice to the rejection of such requisition on the grounds of lateness. Chan J. found for the plaintiff in that case on the first requisition and therefore did not need to decide the case on the second requisition, but ruled that had it been necessary, he would have held that the defendant's solicitors had waived the non-compliance with the time restriction for raising the second requisition by answering it as a matter of courtesy. In so ruling, Chan J. had this to say at page 267:

"It is advisable that solicitors should avoid answering out-of-time requisition 'as a matter of courtesy'. Any reply to such invalid requisitions, if not accepted as a properly raised requisition, should only be 'answered' subject to very clear statement that such answer was to be wholly without prejudice to the rejection of such requisition on ground of lateness."

20. This part of Chan J. 's judgment is clearly obiter. Be that as it may, it is a correct statement of the law (see Emmet on Title [19^th ed.] para. 5080).

21. Coming back to the present case, quite apart from the fact that the letters dated 15^th and 17^th July 1997 from Messrs. Kevin L.H. Kwong & Co. had not the least indication that they were without prejudice to the rejection of the requisition on the grounds of lateness, nowhere in these 2 letters was reference made to the fact that the requisition was outside the time limit contained in Clause 12 of the Agreement. It was in such circumstances that these 2 letters answered the requisition raised by denying the existence of any illegal structures.

22. For this reason I hold that by answering the requisition in this manner, Messrs. Kevin L.H. Kwong & Co., acting on behalf of the Respondents at that time, had waived the non compliance with time restriction for raising the requisition as stipulated for in Clause 12 of the Agreement.

Removal of the illegal structures

23. The second point taken by Mr. Chain was that had the requisition been made earlier, the Respondents could have taken action to remove the illegal structures. On the facts of this case, I am unable to see how Mr. Chain could even advance this argument for the following reasons.

24. Firstly, nothing in the letters of 15^th and 17^th July 1997 from Messrs. Kevin L.H. Kwong & Co. suggested that the Respondents were prepared to remove the illegal structures. Indeed those letters flatly denied the existence of any illegal structure. It now appears from the Affirmation of Wong Tsui Mei, one of the Respondents herein, that the Respondents had never denied the existence of illegal structures on the Property and that they had told a Mr. Zuki Chan of their former solicitors, Messrs. Kevin L.H. Kwong & Co. about same. Furthermore, the Respondents were never consulted by their former solicitors when the letter of 15^th July 1997, denying the existence of the illegal structures, were written in answer to the requisition raised. If true, it may well be that the Respondents recourse is to go against their former solicitors for negligence, however, it does not change the fact that the stands taken on their behalf by Messrs. Kevin L.H. Kwong & Co. at the time was such that there was no reason for the Petitioner to think that the Respondents would remove the illegal structures. Nor was the suggestion ever made by the Respondents' then solicitors to delay completion date by agreement to enable the Respondents time to remove the illegal structures.

25. For these reasons, I am unable to see how this argument can avail the Respondents now.

Encumbrance on Title

26. As a subsidiary point to his second argument, Mr. Chain submitted that in a property sale worth $8.5 million, the expenses for removing the illegal structures on the Property would be but a small fraction of the purchase price. The implication of that, if I understood him correctly, was that the failure to remove the illegal structure should not affect the Respondents' title to the Property.

27. It is clear from the judgment of Litton J.A. in Active Keen Industries Ltd. v Fok Chi Keung [1994] 2 HKC 67 that the existence of an unauthorized structure in a flat or inside a house would constitute an encumbrance because the service of an order under Section 24 of the Buildings Ordinance Cap. 123 would in law be effective against the individual owner and could bring in its train the consequences that eventually the cost of the removal is charged against the title of the individual owner. The consequence of not complying with a Section 24 order will invariably lead to the registering of a charge against the property which is a direct consequence of the unauthorized work. Thereby such unauthorized work constitute an encumbrance.

28. Applying that to the present case, when the illegal structures were not removed by the time for completion, they constituted an encumbrance such that the Respondents could not give a good title to the Property.

Conclusion

29. For the reasons given above, I come to the conclusion that the requisition raised on behalf of the Petitioner by Messrs. Christine M. Koo & Co. in their letters of 11^th and 17^th July 1997 have not been sufficiently answered by the Respondents and that the Respondents have failed to show a good title to the Property. In the circumstances, the Petitioner was entitled to give notice to, and did rescind the Agreement as was done by their letter of 22^nd July 1997, two days before the completion date.

30. Although the completion date is long past, I do not see that to be a reason not to grant the Petitioner the declarations sought by him in his Petition. I therefore make an Order in Terms of the Declarations sought in prayer 1, 2 and 3 of the Petition.

31. There will be an order that the Respondents do repay to the Petitioner the sum of HK$850,000.00 being the amount of the total deposits paid by the Petitioner in this matter. I further order the Respondents to pay the costs and disbursements incurred by the Petitioner in the investigation of title to be assessed by a Master if not agreed and interests upon such sum at judgment rate from the date of this Petition until payment. The Petitioner is entitled to the costs nisi of this application.