LONG LIFE CHINESE HEALTH FOOD LTD v. LUEN FAT AIR CONDITION (H.K.) TRADING & ENGINEERING CO LTD

HCA 1376/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1376 OF 2013

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D E C I S I O N

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Introduction

1.  The plaintiff is the purchaser and the defendant the vendor of the property being Ground Floor including the Cockloft of Lin Cheong Building, 131 Cheung Sha Wan Road.  I shall refer to it simply as “the property” and to the two parts of it as “the Ground Floor” and “the Cockloft” respectively.

2.  The sale and purchase of the property was eventually aborted because the plaintiff raised and maintained requisitions about a notice and an order issued by the Building Authority in relation to an unauthorised structure in the property while the defendant contended that the plaintiff was precluded by a provision in the agreement from raising such requisitions. 

3.  The plaintiff began this action by writ and the matter has come to me by way of a summons issued under Order 14A for determination of certain questions of construction.  I shall set out the questions below after describing the factual background.

The sale and purchase agreement

4.  The property consists of shop premises in the Ground Floor and the Cockloft.  On 10 November 2012, the parties entered into a provisional agreement for the sale and purchase of the property for $22.5 million with a completion date of 20 May 2013.  The Ground Floor was to be sold with a tenancy for a two-year term expiring on 30 September 2014, while the Cockloft was to be sold with vacant possession.  The vendor agreed to permit the purchaser, within seven days after payment of deposits amounting to 10% of the price, to start renovating the Cockloft.

5.  The annex (printed in Chinese) to the provisional agreement (which was in an estate agent’s standard form) contained six additional conditions.  Condition 2 is of central importance in this case (“Condition 2”).  I shall set it out below together with its certified English translation and, for ease of reference, add the designations “A” to “E” to its five component sentences:

“(A) 買方聲明已親身到現場視察該物業，並清楚知道及接受該舖位內外之一切裝修狀況及清楚知道該舖內現建有閣樓，連接地下舖及閣樓有樓梯，閣樓現有加建面積。

(B) 買方知悉有關狀況部份並沒有向政府或有關當局申請。

(C) 賣方不會就有關狀況是否未經許可的改動，是否非法或違章工程，或相關事宣作出任何保證。

(D) 買方經考慮後決定接納現有狀況，願意承擔保留現有狀況的責任。

(E) 買方及其代表律師不得以該物業現狀及/或上述狀況提出任何業權質詢及/或向賣方提出索償及/或要求減樓價，亦不會因此而拒絕完成交易。”

The certified English translation reads as follows:

“(A) The Purchaser declares that it has conducted an on-site inspection of the Property in person, and clearly knows of and accepts all the internal and external fitting condition of the shop premises and clearly knows of (a) cockloft(s) constructed within the shop premises, (a) staircase(s) connecting the cockloft and the ground floor shop, and the existing extended area of the cockloft.

(B) The Purchaser knows of no application has been made to the government or relevant authorities in respect of the relevant condition section[1].

(C) The Vendor gives no warranty as to whether or not the relevant condition is amounting to unauthorized alteration, illegal or non-compliant project, or related matter.

(D) After consideration, the Purchaser has decided to accept the existing condition and is willing to undertake the liability of retaining the existing condition.

(E) The Purchaser and its legal representatives shall not raise any requisition on title and/or claim compensation and/or seek a reduction in purchase price by reason of the existing state of the Property and/or the aforementioned condition, and shall also not refuse to complete the transaction by reason thereof.”

Condition 5 of the annex provided:

“此乃必買必賣之合約，但必須基於業權妥當。”

The certified English translation reads as follows:

“This is a must buy and must sell contract, but must be premised upon the title being in good order.”

6.  Upon the signing of the provisional agreement, a deposit of $500,000 was paid by the plaintiff to the defendant’s solicitors as stakeholders.

7.  The parties subsequently executed a formal sale and purchase agreement dated 29 November 2012, when the plaintiff paid a further deposit of $1,750,000 to the defendant’s solicitors as stakeholders.  The annex to the provisional agreement was expressly incorporated as an annex to the formal agreement as well.  I shall refer below to the formal sale and purchase agreement simply as “the agreement”.

8.  Clause 7 of agreement provided:

“Subject to the other provisions contained in this Agreement, the Vendor shall give a good title to the Property in accordance with Section 13A of the Conveyancing and Property Ordinance and the Vendor shall prove and show a good title to the Property in accordance with Section 13 of the Conveyancing and Property Ordinance (Cap.219) …”

9.  Clause 8 of agreement provided:

“Any requisitions or objections in respect of the title or otherwise arising out of this contract shall be delivered in writing to the Vendor’s Solicitors within seven working days after the date of the receipt of the title deeds by the Purchaser’s Solicitors and further requisitions or objection on the replies given by the Vendor’s Solicitors shall be delivered in writing to the Vendor’s Solicitors within seven working days after the date of receipt of such replies by the Purchaser’s Solicitors otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the title of the Property (in which respect time shall be of the essence of the contract) …”

10.  Clause 9(b) of the agreement provided:

“The Vendor warrants that the Property is not adversely affected by any easement, right, privilege or liability of which he is aware or could have ascertained on reasonable inquiry other than:-

(i) those disclosed in this Agreement; or

(ii)   those of which the Purchaser is aware or could have ascertained on reasonable inspection of the Property.”

11.  Clause 32 of the agreement stated that the sale and purchase was also subject to the additional terms in the annex and that in the event of any contradiction between those additional terms and the preceding conditions in the agreement, the terms in the annex were to prevail.

12.  On 20 February 2013, the plaintiff entered into a provisional agreement to sub-sell the property to a third party called Able Luck Finance Limited for the price of $25.5 million.  The same annex formed part of that provisional agreement.

The requisitions

13.  On 22 April 2013, the defendants’ solicitors sent the title deeds of the property to the plaintiff’s solicitors for their perusal.  A week later, the plaintiff’s solicitors wrote to raise a number of requisitions.  By the requisitions that are material for present purposes (ie those numbered 4 and 5 in the correspondence), the plaintiff’s solicitors referred to, and enclosed with their letter, copies of two documents issued by the Building Authority to one Mr Chan Tak Shing and registered in the Land Registry against the property in 2007.  Chan Tak Shing was the defendant’s predecessor-in-title, who had sold the property to the defendant in May 2012.

14.  The first document was a notice issued by the Building Authority under s 24C(1) of the Buildings Ordinance (Cap 123) on 7 December 2006.  It stated that a structure had been erected in the backyard of the property contrary to s 14 of the Buildings Ordinance, and that if it was not demolished or altered so as not to contravene the Ordinance by 4 February 2007, the notice would be registered in the Land Registry against the property.  In their requisition, the plaintiffs’ solicitors asked “whether this Order [sic] has been complied with” (requisition no 5).

15.  The other document was an order issued by the Building Authority on 8 January 2007 which superseded the notice referred to above.  By the order the Building Authority stated that a cooling tower supporting frame attached to the external wall at the rear of the property had been erected without his approval and, pursuant to his power under s 24(1) of the Buildings Ordinance, ordered Chan Tak Shing to demolish it within 30 days.  The plaintiffs’ solicitors asked the vendor’s solicitors to advise “whether letter of compliance of this Order has been obtained” (requisition no 4). 

16.  On 2 May 2013, the defendant’s solicitors replied as follows:

“Please refer to the additional condition (2) … whereupon your client has agreed to purchase the captioned property subject to all existing unauthorised building works (including those as mentioned in the said two Orders).”

17.  On 7 May 2013, the plaintiff’s solicitors responded, raising two points.  First, Condition 2 referred to steps leading from the shop to the Cockloft and an extension area in the Cockloft, and did not cover the cooling tower supporting frame at the rear of the property.  Secondly, the words in Condition 2(E) were not wide enough to cover illegal structures subject to a demolition order.  As an exclusion clause, it was the vendor’s duty to specify the exclusion exactly.

18.  Thereafter the parties joined issue in their correspondence on whether Condition 2 covered the requisition.

19.  By the third of their letters dated 15 May 2013, the defendant’s solicitors stated that the cooling tower supporting frame had been demolished or dismantled.  Since there is evidence that the structure was still there during an inspection on 9 May 2013, if it had in fact been dismantled then the work would have been done between 9 and 15 May 2013.  No supporting document or other information was however provided by the defendant’s solicitors about the removal of the structure.

20.  On 18 May 2013, the plaintiff’s solicitors sent the defendant’s solicitors a copy of the sub-purchaser’s solicitors’ letter dated 16 May 2013 maintaining the requisition in question.  They also attached a copy of a letter from Goal d’Arch Associates (“Goal d’Arch”), a firm of architectural and design consultants, to the plaintiff’s solicitors dated 16 May 2013 asserting that there had been seven alterations to the property which seriously affected the structural safety of the entire building.  By the letter, the plaintiff demanded for the return of the deposits.

21.  On the morning of 20 May 2013, the defendant’s solicitors responded by pointing out that by virtue of clause 8 of the agreement, the matters referred to in Goad d’Arch’s letter were raised out of time, and stating that completion would take place as scheduled.  Not surprisingly, completion did not take place in the end on 20 May 2013, and on the following day the parties’ solicitors wrote to each other asserting that the other side was in breach. 

The action

22.  The plaintiff issued the writ in this action in July 2013 claiming, inter alia, return of the deposit in the sum of $2,250,000 and damages.  The defendant denies liability and counterclaims for damages for breach of the agreement.

23.  On 11 February 2014, the plaintiff issued a summons under Order 14A for determination of the following questions. 

“1.(a) Whether the Plaintiff was debarred, by virtue of the Additional Condition (2) of the Provisional Sale & Purchase Agreement SP001936 of 10th November 2012 (“the PS&P”) as appended to the Sale & Purchase Agreement of 29^th November 2012 (“the S&P”) from raising any requisition(s) pertaining to the illegal structure(s) of the Property …

(b) Whether the aforesaid Additional Condition (2) is only applicable to the physical condition and not to the title of the Property;

2. Alternative to (1), whether the Plaintiff was not debarred, in spite of the aforesaid Additional Condition (2), from raising any requisition(s) pertaining to the illegal structures which have been shown to be in breach of the performance and observance of the covenants and conditions or terms and stipulations reserved and contained in the Government Lease, Extension of Government Lease, Conditions of Renewal, Conditions of Regrant, Conditions of Sale, Conditions of Exchange, Conditions of Grant, Conditions of Extension or other like document(s) (as the case may be) applicable to the Property, in particular, the Deed of Mutual Covenant of 12 April 1978 (sic Memorial Number UB 1520382);

3. Whether the aforesaid Additional Condition (2) is subject to the other overriding provision(s) of “the PS&P” & “the S&P” i.e. Additional Condition (5) of “the PS&P”, Condition(s) (7) & (8) of “the S&P”;

4. Whether the Defendant had not proved and shown a good title to the Property pursuant to Section 13 of the Conveyancing & Property Ordinance, Cap.219;

5. Alternatively to (4), whether there was such a total failure of consideration of “the S&P” that the Plaintiff is entitled to a refund of the deposit in the sum of HK$2,250,000.00.”

24.  Order 14A enables the court to determine a question of law or construction without a full trial at any stage of the proceedings.  Order 14A rule 1(1) provides:

“The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that-

(a) such question is suitable for determination without a full trial of the action; and

(b) such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein.”

25.  I had misgivings about the way in which the questions were framed.  Further, as the only affidavit evidence placed before me was an affirmation filed by the plaintiff which primarily exhibited the relevant documents, I was unsure whether the court was apprised of all material facts for the determination of the questions (see Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174 at §§20, 27).  I raised the matter with counsel at the beginning of the hearing and gave them time to consider it and take instructions.  After considering the matter at some length both counsel assured me that all the facts available and relevant for present purposes have been placed before the court and that the parties had no further relevant evidence to adduce.  On that basis I proceeded with the hearing with a view to determining the primary question between the parties, ie whether, on the true and proper construction of the agreement as a whole and in particular Condition 2, the plaintiff was entitled to raise and maintain the requisition on the demolition order concerned, ie requisition nos 4 and 5.

Discussion of requisition nos 4 & 5

26.  Clause 7 of the agreement provides that, subject to other provisions, the vendor shall give a good title to the property and shall prove and show a good title to the property.  At common law, part of that obligation consists in the vendor’s obligation to answer requisitions on and objections to title: Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, 405.

27.  As with any other commercial contract, the parties to a conveyancing transaction are free to make their own agreement and, in particular, to modify any obligation regarding the title to be shown and given by the vendor and the requisitions that may be raised by the purchaser: Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 293, 299.  Thus clause 8 of the agreement imposes temporal limits on the purchaser’s right to raise requisitions.  Condition 2 imposes “subject matter limits” on the vendor’s obligation to show and give good title and the purchaser’s entitlement to raise requisitions and objections. 

28.  It is not in dispute that the Building Authority’s order was an encumbrance on the property and the requisition raised by the plaintiff in this case would be a proper one to raise but for Condition 2.  Equally it is not in dispute that it was open to the parties to reach an agreement in advance that would have the effect of precluding such requisition and imposing the property on the plaintiff notwithstanding the defect in title.  Nor is it in dispute that to have such effect the agreement must so provide clearly.  As Lord Hoffmann said in Jumbo King Ltd v Faithful Properties Ltd at p 299G:

“Prima facie it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so.”

29.  The issue is whether Condition 2, viewed in the context of the entire agreement, has that effect.  The main argument advanced by the plaintiff is that Condition 2 does not apply to preclude requisitions arising from the Building Authority’s order because a vendor who has failed to disclose a known encumbrance or defect of title is not entitled to rely on a contractual provision such as Condition 2 to prevent the purchaser from objecting to title on the basis of the encumbrance or defect.

30.  In Rignall Developments Ltd v Halil [1988] 1 Ch 190; [1987] 3 All ER 170, 174h, Millett J described the principle as a well-established rule of equity that

“..... if there is a defect in title or incumbrance of which the vendor is aware, the vendor cannot rely on conditions such as those in the present case unless full and frank disclosure is made of its existence.”

31.  In Wah Ying Properties Ltd v Sound Cash Ltd [1994] 1 HKC 786, the sale and purchase agreement entered into in May 1992 contained the following clause:

“The purchaser acknowledges that the property is now an open site and the purchaser shall not raise any requisition as to the existence of any notice or order from any government or other competent authority requiring the vendor to demolish the property or any other government requiring repair work to be carried out in respect of the property or any part of the building, if any, under the provisions of the Buildings Ordinance (Cap.123).”

32.  In fact, the Building Authority had in 1983 ordered the predecessors-in-title of the vendor to carry out remedial work in respect of the earth-retaining structure of the property.  The order was registered in June 1987.  Another order was made in August 1987 to like effect which was registered in February 1988.  The work required had not been done by the owners but by the Building Authority, who demanded to be paid the cost of the work in December 1992 and registered the demand against the property.  The purchaser, who had already completed the purchase, brought an action against the vendor for breach of covenant of title.  Deputy Judge Cheung (as Cheung JA then was), after referring to Rignall Developments Ltd v Halil, stated (at p 795):

“Clause 16 of the Agreement would not be effective to limit the Defendant’s obligation to the giving of a good title. It had not disclosed that the remedial work had by then completed. Before the Assignment the Plaintiff’s solicitor had conducted a search of the land register and he was aware of the two orders. However, he was not aware that the Building Authority had carried out the remedial work required under the two orders.”

33.  In Modern Sino Ltd v Art Fair Co Ltd [1999] 3 HKLRD 847, the agreement for the sale and purchase of the property was entered into on 4 August 1997.  It transpired that the Building Authority had in 1985 issued an order to the then owner of the property to demolish certain unauthorised building works.  The demolition order was registered against the property.  When requisition was raised on behalf of the purchaser, the vendor relied on a letter dated 1 August 1997 issued by the Building Authority which withdrew the demolition order “for the time being”, while stressing that the works were still considered illegal and might be subject to enforcement action if circumstances so required.  Yuen J (as she then was) found that despite the letter, there was a sufficient risk of enforcement action by the Building Authority to render the title objectionable.  The vendor, however, relied on a clause in the agreement which stated that the purchaser had inspected and was fully satisfied with and accepted in all respects the existing physical state, condition and finishes of the property and the fixtures and fittings therein and “shall not make any objection or requisition thereto or in connection therewith”.  Further, no warranty or representation was given or made by the vendor on, amongst other things, the physical state and condition of the property, the area of the property and the composition of the building or manner of construction. 

34.  On the question whether the vendor could rely on such a clause, Yuen J held (at p 852):

“The issue is whether that language is sufficient to preclude the Purchaser from objecting to the title on the basis of the unauthorized building works. I find that the Purchaser is not precluded from objecting to the title on that basis. Clause 21 is not drafted as widely as Clause 18(e) in Jumbo King v Faithful Properties. Moreover, there the Court of Appeal affirmed that a vendor would not be able to rely on such a clause in the event of non-disclosure.

Here … the Vendor must have been aware of the fact that there still existed on the property unauthorised building works, which the Building Authority had ordered to be demolished in 1985 and which the Building Authority still considered illegal and subject to enforcement action, as indicated in its 1997 ‘withdrawal’ letter. …

In my judgment, it does not avail the Vendor to rely on a clause such as Cl. 21 without his having first disclosed to the potential Purchaser the fact that there were unauthorised building works on the property.”

35.  In Jumbo King Ltd v Faithful Properties Ltd, one of the issues was whether the vendor could rely on clauses in the contract to prevent the purchaser from raising an objection to title in relation to the extensive cocklofts which were unauthorised structures.  In particular, clauses 18(e) and 19 provided:

“18.(e) The Vendor does not warrant or represent that each and every ... structure (if any) on the Property or any part thereof is erected in all respects in compliance with the Building Ordinance and/or its subsidiary legislation .... The Vendor shall be under no liability whatsoever if it is discovered at any time (whether before or after Completion) that at the date hereof or before Completion, there is any ... structure in or to any part of the Property which is in contravention of the Building Ordinance and/or its subsidiary legislation ... the Vendor shall not be held responsible for the demolition, ... removal, ... or any other works relating to such illegal ... structure or for any costs or expenses of or incidental thereto whether or not such works are required by the Building Authority or other authority or body or otherwise. The Purchaser shall not be entitled to raise any requisition or objection or to rescind this Agreement or to annul the sale or to claim any compensation or damages from the Vendor by reason of or in connection with any such contravention.”

19. Notwithstanding anything to the contrary herein, the Purchaser shall be deemed to have duly inspected the Property prior to the signing of this Agreement and the Purchaser expressly declares that he is fully aware that he is purchasing the Property in its present state and user thereof and shall not make any objection as to title or otherwise or raise any requisition thereto or in connection therewith.  The Property is and will be sold on an ‘as is’ basis.  Without prejudice to the generality of the foregoing no warranty is given by the Vendor on any of the following matters, namely:-

     (a)  The physical state and condition, quality or fitness of the fixtures fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the Building;

     (b)  The physical state and condition of the Property and the Building;

     (c)  …

     (d)  …”

36.  In the Court of Appeal (whose decision is reported at [1999] 3 HKLRD 231), Godfrey JA said (at p 244H):

“A vendor whose title is, or may be, open to objection because there is, or may have been, erected on the property of which he is granting exclusive use to his purchaser some unauthorised structure is well advised to protect himself by precluding his purchaser, by contract, from raising any requisition or objection to the title based on an ‘unauthorised structure’ point. Of course, if the vendor’s contract is tricky or unfair; if by concealment or non-disclosure, he misleads the purchaser about the matter, it will be held that he has disqualified himself by his conduct from relying on any such provision.”

37.  In the Court of Final Appeal (whose decision is reported at (1999) 2 HKCFAR 279), Litton PJ (at p 295) left open the question whether the court gives relief to the purchaser in such circumstances as a matter of the proper construction of the contract or by the application of some principle of equity which empowers the court to moderate the harsh terms of the contract. He held on the facts that the vendors were entitled to rely on clause 18(e) and that the purchaser was precluded from raising the objection concerned.

38.  Lord Hoffmann NPJ said (at p 299):

“On the question of the cocklofts I agree with Litton P.J. that clauses 18(e) and 19 preclude the purchaser from basing any objection to title on this ground. Miss Eu submitted that there was a rule of equity which prevented a vendor, as a matter of law, from relying on such clauses in a case in which he knows or ought to know of a defect in title. I think that is putting the matter far too broadly. Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like. What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser. As is stated in Farrand, Contract and Conveyance (4th ed.) at p. 93, such conditions are ‘subject to the overpowering principle that the vendor must not mislead the purchaser in any way; this means that a sufficient indication of the risk must be given before the contract is made.’ This may be said to leave it unclear whether the ‘overpowering principle’ is an aid to construction of the contract or something which operates outside the contract. It probably does not matter, although for my part I think it is better regarded as a matter of construction. Thus it is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew. No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do. On the other hand, the position is different if the vendor did not actually know of the defect but had the means of knowledge, or if the matter was technically a defect in title but something which a purchaser might reasonably be prepared to accept. … As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v. Partridge [1966] 2 Q.B. 155. In the present case, however, the language of clause 18 (e) was entirely apt to cover the cocklofts. No one who had read that clause and saw the cocklofts could have failed to appreciate that he was being asked to bear the risk that they were unauthorised structures. The language seems to me perfectly clear. And therefore, in the absence of any evidence that the vendor actually knew that they were unauthorised, the purchaser was in my opinion bound by the clause.”

39.  In Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268, there was a pending claim for damages for personal injuries against the incorporated owners of the building when the agreement for sale and purchase of the property (which formed part of the building) was entered into.  The question was raised whether a clause in the agreement prevented the purchaser from objecting to the title on the basis of the liability or potential liability of the owners arising out of that personal injuries action.  Clause 26 of the agreement provided:

“The Purchaser shall not be entitled to raise any objection or requisition in respect of the title to the Property and shall be deemed to have accepted the Vendor’s title to the Property prior to the Purchaser’s submission of his tender. The Purchaser further declares confirms undertakes and warrants that the Purchaser shall complete the purchase of the Property in accordance with the terms contained herein irrespective of whether the Vendor’s title to the Property is good or defective notwithstanding any rule of law or equity to the contrary.”

Bokhary PJ and Sir Anthony Mason NPJ stated (at 287D):

“Clauses of this kind have not been regarded as compelling a purchaser to accept a defective title when the vendor has failed to disclose defects of which he was aware (Becker v. Partridge [1966] 2 QB 155 at 171, per Danckwerts LJ). This result has been attributed to a rule of law which overrides the contractual provision. But the preferable view expressed by Lord Hoffmann NPJ (with whom Li CJ and Nazareth NPJ concurred) in Jumbo King Ltd v. Faithful Properties Ltd (1999) 2 HKCFAR 279 at 299, is that the question is one of construction of the relevant contractual provision. His Lordship said ….

That is the case here.  The respondent was not aware of the risk it was being asked to take.  It was not aware of the defect.”

40.  In Ip Kam Wah v Fair City Group Ltd [2005] 4 HKLRD 168, the question again arose whether the vendor could rely on a contractual provision to preclude a requisition on illegal structures.  The clause concerned provided:

“The Property shall be sold at its ‘as is condition’. The Vendor gives no warranty that there is no unauthorised or illegal structure, or addition or alteration to or appertaining to the Property. The Purchaser confirms that he has inspected or have been afforded with the opportunity to inspect the Property prior to the entering into this agreement and shall make no objection to title and refuse to complete the purchase, or otherwise make any claim for compensation in the event there is any unauthorised or illegal addition or alteration to, or structure or appertaining to the Property.”

Deputy Judge A To (as To J then was) held that the matter was one of construction, that there was no overpowering principle and that “ultimately, as regards any term of the contract providing for a waiver of the right to raise requisition, the question is what have the parties agreed in the light of all the surrounding circumstances and the factual matrix” (p 183D, §24).  In the result, he held that the purchaser was prevented by the clause from objecting to title on the basis of the illegal structures concerned.

41.  In Channel Green Ltd v Huge Grand Ltd (CACV 174/2013; 29 December 2014), the purchaser refused to complete the purchase of certain shops in a building because of the existence of breaches of the Government lease and of the Deed of Mutual Covenant in respect of the building arising from certain unauthorised additions or alterations.  The vendor relied on two clauses in the contract as a bar to the objections, which provided:

“30. The Property is sold on an ‘as is’ basis to the purchaser. The purchaser has inspected and understands the existing state of the Property, and the purchaser shall not raise any questions/inquiries or refuse to complete or delay completion of transaction on the ground that there are any unauthorized additions, alterations or illegal structures on the Property.

31. On or before the date of completion, if the Property receives any demolition order, repair order or other order issued by any governmental department, the expenses for the discharge of such orders and the cost of carrying out such works shall be borne by the purchaser.”

The Court of Appeal held that the purchaser was barred from raising the requisitions in question.  I shall return to the cases of Jumbo King, IP Kam Wah and Channel Green since they were relied upon by the defendant.

42.  I too would approach the question in this case as a matter of construction.  The authorities show that in construing a sale and purchase agreement, the court should lean heavily against an interpretation that would enable the vendor to mislead the purchaser, or would impose a defect of title on the purchaser of which the vendor was aware but which he had failed to disclose. 

43.  It is notable that sub-clause (A) of Condition 2 refers to three specific aspects of the condition of the property, namely, the existence of the Cockloft within the shop premises, the staircase connecting the Cockloft and the Ground Floor, and the extended area of the Cockloft.  So it is clear that the parties paid particular attention to these three matters in terms of unauthorised works.  However, although (as Mr Leung accepted) the defendant knew of the existence of the demolition order which was indeed among the title deeds of the property subsequently delivered to the plaintiff, there was inexplicably no mention of it or of the relevant structure in Condition 2 at all.  A reasonable potential purchaser might be led into thinking that there was nothing other than the three matters specifically mentioned that the vendor knew as a fact to be unauthorised.  The express mention of certain unauthorised works in the clause makes it all the more surprising that an actual demolition order relating to a different unauthorised structure was not disclosed.

44.  Sub-clause (B) stated the plaintiff knew that part of the relevant condition of the property had not been authorised, but there is no evidence, and no basis to suggest, that it knew of the demolition order.  There was some suggestion in the correspondence that the purchaser should have carried out a search at the Land Registry and since the order was registered, should be deemed to have notice of it.  The point, however, was not taken by Mr Leung, who submitted instead that knowledge of the purchaser of the existence or otherwise of the demolition order is “beside the point”.

45.  Sub-clause (C) stated that the defendant gave no warranty as to whether or not the relevant condition amounted to unauthorized or illegal works.  It is not entirely clear what “relevant condition” means. In any event, this clause is negative in effect.  It simply provides that no warranty was given by the vendor.  But the plaintiff does not have to rely on a warranty in order to object to a title defect.  Clause 4 of the provisional agreement provided that the property was to be sold free from encumbrances. Clause 7 of the formal agreement provided that the vendor had to give good title to the property.  Condition 5 of the annex stated that the basis of the contract was the title being in good order.  The defendant has to identify a contractual provision that binds the plaintiff to accept the title notwithstanding the defect in question.

46.  Moreover, Condition 2(C) must be read together with clause 9(b) of the Agreement whereby the defendant warranted that the property was not adversely affected by any liability of which he was aware, other than those disclosed in the agreement and those of which the plaintiff was aware or which the plaintiff could have ascertained on reasonable inspection of the property.  As I have stated there is no evidence to show that the plaintiff was aware of the demolition order when it contracted to purchase the property (ie 10 November 2012), or even by the time when the formal agreement was entered into (ie 29 November 2012).  The defendant has not adduced any proper evidence to that effect.  Nor is the order or the illegal nature of the works in question something that the plaintiff could have discovered by inspecting the property.  On its own terms, therefore, there was a material warranty in clause 9(b) which was breached by the existence of the demolition order.

47.  I do not think that there is a contradiction between Condition 2(C) and clause 9(b) such that, by virtue of clause 32, the former must be treated as overriding the latter.  Clause 9(b) set out a specific warranty that there was no liability affecting the property of which the defendant was aware.  Condition 2(C) was a general clause negativing warranties as to whether or not the relevant condition was unauthorized or illegal works.  There is no inconsistency, in my view, for the vendor to say to the purchaser: “I do not warrant whether or not any part of the property is an illegal structure, but I warrant there is no liability affecting the property, such as arising from a demolition order, of which I am aware.”  Nothing in Condition 2(C) stated that the defendant gave no warranty as to whether or not any enforcement order had been received. 

48.  Condition 2(D) stated that the plaintiff accepted the existing condition of the property.  That is a risk it was entitled and willing to take, but the scope of the risk it had undertaken depends on the terms of the clause.  The “most express language”[2] is required if a vendor wishes to shift to the purchaser risks arising from serious defects in title of which the vendor had actual knowledge but which he had not disclosed to the purchaser.  In my view sub-clause (D) does not mean that the plaintiff was prepared to assume liability under any existing enforcement order against the plaintiff of which the defendant was aware.  To have that meaning the sub-clause would have to be much clearer and more explicit than it is.

49.  Condition 2(E) stated that no requisition could be raised in respect of the “existing state” or “the aforementioned condition”.  The “aforementioned condition” appears to be a reference to the three specific matters mentioned in Condition 2(A).  The reference to “existing state”, on the other hand, is a general term.  As Lord Hoffmann said in Jumbo King, as quoted in paragraph 38 above, it is “inconceivable” that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he was aware.  In the absence of some very special circumstances I would be most reluctant to hold that a general agreement not to raise requisition on title arising from the existing condition of the property precluded the purchaser from objecting to a defect which the vendor knew of but failed to disclose before the contract.

50.  Mr Leung who appeared for the defendant relied on Jumbo King, Ip Kam Wah and Channel Green, where the terms in question were held to be effective to preclude an objection on title arising from illegal structures.  But each case has to be decided on its own facts.  In Jumbo King, as Litton PJ stated, neither party knew the cocklofts were actually illegal structures, though both parties were aware of the possibility that some or all of the cocklofts were unauthorised (see p 292D-F).  So there was no failure by the vendor to disclose a defect he actually knew, and having regard to the words they used the court concluded both parties contracted on the basis that the purchaser was to take the risk.  As can be seen from the last part of the passage quoted in paragraph 38 above, the absence of evidence that the vendor actually knew the cocklofts were  unauthorised was of some importance to the conclusion of Lord Hoffmann in that case.

51.  In Ip Kam Wah, the central question of fact was the purchaser’s knowledge of the title defect.  Despite that the proceedings were begun by originating summons, Deputy Judge To found that the purchaser knew the unauthorised structure in question existed before he signed the agreement and that his assertions on affirmation to the contrary were “practically moonshine and incapable of belief” (§13).  On this basis, it was not surprising, if I may respectfully say so, that the deputy Judge did not find it significant whether the vendor had knowledge of the defect and concluded that the purchaser could not have been misled in any way.

52.  In Channel Green, there was no suggestion that the purchaser had been misled or that he was not aware of the risks he was being asked to assume (§44).  There were findings that the vendor had disclosed the unauthorised structures prior to the provisional agreement (§41) and that the purchaser had knowledge of the potential problems (§§23, 40).  See also §§34, 38-39, 89 and 94-95 of the first instance decision (HCMP 2052/2011).  The issue that arises in this case was therefore quite irrelevant on the facts of that case.

Conclusion on requisition nos 4 & 5

53.  It follows from the above that the plaintiff, in my view, was entitled to raise, and not debarred by Condition 2 from raising, requisition nos. 4 and 5 concerning the apparently outstanding demolition order.

Removal of the structure

54.  This however is not quite the end of the matter for there is a suggestion by Mr Leung that even if the plaintiff was entitled to raise and maintain the requisition, it had been sufficiently dealt with by the defendant’s solicitors’ letter dated 15 May 2013, which asserted that the structure had been demolished or dismantled and invited the defendant to inspect by prior appointment.  The defence did plead that the steel frame had been dismantled by 15 May 2013 and aver that there was in the circumstances no risk of enforcement action being taken by the Building Authority.  But regrettably the point was not mentioned at all in Mr Leung’s skeleton argument so neither Mr Cheung nor the court had prior notice of it. 

55.  For his part Mr Cheung referred to All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630, §21 and argued that the defence nevertheless failed because the order had to be complied “to the satisfaction of the Building Authority” and there was no evidence to that effect.

56.  In my view it would be unsatisfactory for the point to be decided in the context of this application.  I am far from satisfied that all relevant evidence, facts and matters are before me so far as this issue is concerned.  Nor has the point been formulated in the Order 14A summons as one of the questions for determination.

Requisition based on letter from Goal d’Arch

57.  Further, Mr Cheung argued that the plaintiff was in any event entitled to rescind the agreement as the requisition raised on 18 May 2013 based on the letter from Goal d’Arch (see paragraph 20 above) was not satisfactorily answered.  However that letter mentioned a number of alleged alterations or dangerous conditions which are hardly self-explanatory.  It was raised only two days before the completion date as a result of which there was little explanation of them in the correspondence.  Nor is there any further elaboration in the evidence filed as to what the problems were.  

58.  Further, after asking for a lengthy period during the hearing to take instructions, Mr Leung said the defendant intended to amend its defence by adding a plea that by virtue of clause 8 of the agreement, the requisition raised in the plaintiff’s solicitors’ letter of 18 May 2013 by reference to Goal d’Arch’s letter was out of time.  No draft pleading was provided.  The point was not in Mr Leung’s skeleton argument.  Again, the matter is not the specific subject of any of the questions in the Order 14A summons at all.

59.  In these circumstances it would be wholly undesirable for me even to begin to deal with these points on the present summons.

Conclusion

60.  In these circumstances, the only determination I ought to make is to answer Question 1(a) as follows: No, so far as requisition nos. 4 and 5 are concerned.

61.  I decline to determine the other questions set out in the Order 14A summons.

62.  There will be an order nisi that the defendant is to pay the plaintiff forthwith the costs of and relating to the summons.