LIM SEOW KENG AND ANOTHER v. WEALTH ASCENT LTD

HCA 1010/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1010 OF 2005

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REASONS  FOR  JUDGMENT

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1.  These proceedings are another set of proceedings where, at the heart of the issues between the parties, is the vexed question of unlawful building works, (UBWs), in residential properties in Hong Kong.  Yet again, a purchaser attempts to use UBWs, which undoubtedly constitute an enhancement of the property, as an excuse not to complete the contract.  At the conclusion of the trial I gave judgement for the Plaintiffs, with reasons to be given later.  These are my reasons for the decision.

Background:

2.  Wealth Ascent, the Purchaser, says that Ms Lim and Mr Kao, the Vendors, were unable to give a good title in relation to a residential property purchased by Wealth Ascent pursuant to a Provisional Agreement for Sale and Purchase, (the PASP).  Wealth Ascent says that because there are UBWs in the property, good title cannot be given.  Wealth Ascent seeks a refund of the deposits in the sum of $300,000.00, and liquidated damages pursuant to the contract of a further sum of $300,000.00.

3.  There is no doubt at all that the enclosure of a balcony, an extension of the dining room, the enclosure of a cable duct to create a storeroom, and the construction of additional room space on the roof, had all been carried out with out government approval and consequently amounted to UBWs.  Neither Ms Lim nor Mr Kao disputed these facts.

The parties:

4.  Mr Kao did not give evidence.  Ms Lim, his wife, is Malaysian, and came to Hong Kong from Singapore.  She and her husband met when both were at the University of Iowa, USA, where Ms Lim graduated with a bachelors degree in business administration.  Her husband is also a graduate of the same university.  They have lived in Hong Kong for at least 10 years, if not longer.

5.  Mr Kao is the deputy CEO of BBO Ltd, an international advertising agency.  He holds a significant position of responsibility in that company being responsible for the Asian region.  Ms Lim is employed by HSBC, in the Private Banking Department where she is responsible for giving advice to high net worth individuals, who have available for investment, sums between US$5 million and US$100 million.  She presented as a clearly intelligent, responsible person.

6.  Wealth Ascent appears to have been incorporated on about 24 February 2005, having a share capital in the sum of $10,000.  A Return of Allotments filed on 26 February 2005 shows that 9, 999 shares had been paid and allotted to a Mr Li Wai Man, whose address is given as “Work The First Industrial Area, Hai Wan Street, Yantian, Baoan, Shenzhen, China”.  On 9 March 2005, a Hong Kong firm, W T Hui Consultants Limited, the secretary to Wealth Ascent, notified the Registrar of Companies that Li Wai Man was the sole director of the company.  The same residential address was given for Mr Li.

7.  Li Wai Man, despite being the sole shareholder and director of Wealth Ascent, did not feature at all in the proceedings.  All transactions in Hong Kong undertaken on behalf of Wealth Ascent appear to have been taken by a Mr Lai Ming Lung, whose business card refers to a company called “Qin Jia Plastic & Electronics Factory”, and contains the same address as that of Li Wai Man.  Also involved with Wealth Ascent was a Ms Kong Kwai Chung, (also known as Jiang Guicong). 

8.  Although both Mr Lai and Ms Kong dealt with Ms Lim and Mr Kao, purporting to represent Wealth Ascent, there is no evidence at all as to any authority they may have had in that respect.

9.  The only evidence came from Ms Lim and Ms Loo.  Although a witness statement had been filed, made by Ms Kong, she was not called to give evidence.  The fact that I state are the facts that I find, the evidence not being in dispute, except as to an argument as to the credibility of Ms Lim and Ms Loo.

Wealth Ascent is introduced to the property:

10.  Ms Lim and Mr Kao purchased the property, Flat D, 2^nd Floor including the roof, Beaconsfield Court, 72 Shouson Hill Road Hong Kong some 10 years ago.  The estate agent in the transaction was Ms Loo Suet Yin of Upfront Realty.  At the time of the purchase by Ms Lim and Mr Kao, the balcony had been enclosed and the cable duct turned into a storeroom.  Ms Loo told Ms Lim and Mr Kao about these UBWs.  Not surprisingly, as these alterations enhanced the property, Ms Lim and Mr Kao were happy to purchase the property in that condition.

11.  Some two years ago or so Ms Lim and Mr Kao carried out the further UBWs, extending the dining area, (this was done by the incorporation of a planter box into the dining area), and the construction of additional room space on part of the roof.

12.  The evidence of Ms Lim as to the first occasion when Ms Loo brought prospective purchasers to the property, (it is not in dispute that they were Mr Lai and Ms Kong), was that she was ill and did not speak with Mr Lai or Ms Kong personally. 

13.  On that occasion, 1 March 2005, Ms Loo accompanied Mr Lai and Ms Kong to the property.  Ms Loo’s evidence was that Mr Lai introduced Ms Kong as the daughter of his boss from China.  Ms Loo told them it was common for apartments in Beaconsfield Court to have UBWs, and in particular drew their attention to the additional structure that had been erected on the roof.  Her evidence was that Mr Lai said that they did not mind the unauthorised structures, as they had dogs, and would like to keep them on the roof.  Ms Loo said that she showed them around Beaconsfield Court and pointed out other apartments in Beaconsfield Court with UBWs.

14.  Ms Loo said that two days later Mr Lai expressed sufficient interest in the property that she was able to negotiate a price of $19 million which was agreeable to Ms Lim and Mr Kao.  Mr Lai asked to have a second viewing of the property on 6 March 2005, after which it was expected that the PASP would be signed.

15.  Ms Loo’s evidence was that Mr Lai was particularly concerned, after showing her a newspaper article, that solicitors might abscond with any deposit money, and wanted to pay a small deposit, with a more substantial deposit to be paid by way of a cheque payable directly to Ms Lim and Mr Kao, which cheque would be held by Ms Lim and Mr Kao’s solicitors until completion.  This conversation took place in a restaurant prior to their visiting the property at about 9 p.m.

16.  On 6 March 2005, at about 9 p.m. Ms Loo, Mr Lai, and Ms Kong arrived at the property.  Ms Lim said that she and her husband showed them around the property, explaining the various advantages of the property, which included the UBWs.  She said that Mr Lai was particularly impressed with the roof structure as he had dogs and would let the dogs stay on the roof.  It was Ms Lim’s evidence that as she had been told of UBWs when she purchased the property, so she told these prospective purchasers.  She believed that the UBWs enhanced the desirability of the property, and that she had no reason to hide them.  That was a view which appeared to be confirmed by Mr Lai’s statements relating to his dogs and the attraction of the roof and its structure. 

17.  After some discussion Ms Loo drafted the PASP, using a form that had been supplied by Mr Lai.  The newspaper article about defaulting solicitors was shown to Ms Lim and Mr Kao, and Mr Lai repeated his concern about solicitors absconding with funds.  The parties agreed that an initial deposit of $300,000 would be paid that day, and a further deposit of $3,500,000 would be paid by means of a cheque payable directly to the vendors, and held by their solicitors as stakeholders, that sum to be paid upon the signing of the formal sale and purchase agreement on 24 March 2005.

18.  The net effect of the provisions of the PASP was that, until the time required for completion, when the cheque for the further deposit payable to the vendors would be handed over, the total cash outlay on the part of the purchasers, was only $300,000, or less than 1.6% of the purchase price.

The terms of the PASP:

19.  The PASP contained a number of terms which are relevant to the issues that arise for consideration.  I pause to note that although an additional clause 21 had been added in these terms which reads:

“The Chinese version of this agreement prevails”,

both counsel referred to the English version only and neither suggested that there should be any difference in meaning between the Chinese and English versions.

20.  The PASP, signed on 6 March 2005, provided for a deposit of $300,000 to be paid on the signing of the agreement.  Upon signing the formal agreement for sale and purchase on or before 24 March 2005, a further deposit of $3,500,000 was to be paid.  The balance was to be paid on completion on 13 April 2005.

21.  The PASP was not in the form usually used by Ms Loo, but on a form that had been supplied to her by Mr Lai.  Ms Loo adopted the form, adding her companies logo to the top left-hand corner.  The following clauses are particularly relevant:

“4      The said Premises is to be sold to the purchaser or its nominee(s), sub-nominee(s) free from encumbrances and the completely said title deeds.” (sic)

“7      Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale or the said title deeds is incomplete in the manner herein contained, the Vendors shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the payment of stamp duty of this agreement and the Purchaser shall not take any further action to claim damages or to enforce specific performance.” (sic)

“11    The said Premises is sold to the purchaser on an “as is” basis.”

“12    This agreement supersedes all prior negotiations, representation, understanding and agreement of the parties hereto.”

An annexure contained the following additional clause:

“19.   The cheque for the further deposit should be drawn in favour of the owners of this property.”

The events leading to the issue of proceedings:

22.  Shortly after the PASP was signed a surveyor called at the property stating that he was instructed by the prospective mortgagee to undertake an inspection of the property.  That was a deceit.  He was in fact instructed by Wealth Ascent.  Not surprisingly, his inspection produced a report setting out the details of the UBWs that had been pointed out to the Mr Lai and Ms Kong

23.  On about 24 March 2005, Ms Lim checked with her solicitors as to the signing of the formal agreement for sale and purchase.  She was informed that Wealth Ascent had changed solicitors, but that although the formal sale and purchase agreement had not been signed, the cheque for the further deposit had been sent. 

24.  The cheque was not from Wealth Ascent.  Neither was it from Mr Lai nor Ms Kong.  Neither was it from Mr Li, the sole shareholder and director of Wealth Ascent.  Instead it came from a person called Hui Wai Man, Raymond.  There is no evidence whatsoever as to any association he might have had with Wealth Ascent, or any of the persons purportedly representing that company, neither was any explanation given as to why he should have drawn the cheque.

25.  Completion of the transaction was due on 13 April 2005.  Although the surveyor’s inspection had been carried out on 10 March 2005, he did not prepare his report until 11 April 2005.  The next day the solicitors for Wealth Ascent sent the surveyor’s report to the purchaser’s solicitors stating that Wealth Ascent wished to cancel the transaction due to the UBWs.  Ms Lim was informed on the afternoon of 12 April 2005.

26.  Wealth Ascent did not complete the purchase on the due date.  Shortly thereafter the Ms Lim and Mr Kao formally rescinded the contract.  Wealth Ascent registered the PASP against the title to the property in the Land Registry.  On 31 May 2005, the writ in these proceedings was issued.  The statement of claim was a straightforward claim for a declaration that the PASP had been rescinded, that Ms Lim and Mr Kao were entitled to forfeit the deposit of $300,000, and for removal of the registration of the PASP from the title.

27.  A Defence was filed in which Wealth Ascent relied upon the UBWs as a basis for contending that requisitions as to title had not been properly met, and a Counterclaim was filed seeking a declaration that Wealth Ascent had rescinded the agreement, a return of the deposit, and liquidated damages in the sum of $300,000, pursuant to clause 7 of the PASP.  A reply and defence to the counterclaim was filed in which a collateral agreement in relation to the UBWs was clearly pleaded.

The credibility of Ms Lim and Ms Loo:

28.  Mr Ho made a submission, based upon the cross-examination of Ms Lim and Ms Loo, that neither was worthy of credit.  In assessing the credibility of Ms Lim and Ms Loo I have had regard to the evidence establishing the background of the persons involved with Wealth Ascent. 

29.  Evidence was put before me that in proceedings issued in this court in October 2004, under HCA 2281/2004, a company brought a claim for specific performance in relation to a PASP in respect of a property at Marina Cove in Sai Kung. 

30.  It is plain from the papers in that case that a Ms Kong, under the name Jiang Guicong, was a party to proceedings in which that person was sued in circumstances virtually identical to the present proceedings.  The assertion made by Ms Lim, in her evidence filed before trial, was that the person named in those proceedings was the same Ms Kong involved in these proceedings.  There was no denial of that assertion by Ms Kong.  The evidence as such for me to be satisfied on the balance of probabilities that she was the same person, and consequently plainly had a knowledge of and experience in property transactions involving UBWs.

31.  Evidence was put before me that in proceedings issued in this court in September 2005, under HCA 1713/2005, a company called Concept Hero Ltd was sued in circumstances identical to the present case.

32.  The evidence established that the sole director of Concept Hero was one Hui Wai Man, Raymond.  I have examined his signature on the Companies Registry documents, and the PASP involved in that case.  I am satisfied, on the balance of probabilities, that he is the same person who drew a cheque for $3,500,000, being the further deposit paid in this case.  Significantly, the PASP in that case contained a provision virtually identical to Clause 19 of the PASP in this case, requiring the cheque to be drawn in favour of the vendors personally, thereby enabling the purchaser to undertake the transaction with a minimal cash contribution until the last possible day.

33.  The precise involvement of Raymond Hui with Wealth Ascent has not been explained.  But again it is plain that he is a person who is thoroughly familiar with the concept of UBWs in the purchase of property.

34.  I accept completely that assertions such as oral representations are easily made and that the Court must examine carefully the circumstances in which they were made and the conduct of the parties making such representations.

35.  In particular it was argued that it was significant that the documentation did not record the fact that any of the alterations were illegal alterations, although the fact that the alterations exist, (with one exception), were set out in a “Particulars of Property” form apparently required under the Real Estate Agents Ordinance.  The omission, of one item or the fact of illegality, from the prescribed form does not lead me to disbelieve the evidence by Ms Lim or Ms Loo. 

36.  There is a perfectly sensible reason why the fact of illegal alterations, although an enhancement to the property, are not recorded, either in the PASP or a prescribed form.  While being a clear enhancement to the property UBWs are a matter which may raise concern with a prospective mortgagee. Consequently, it is quite common for parties in such transactions to avoid bringing UBWs, known to all parties, to the mortgagee’s attention.

37.  The one alteration was omitted from the information sheet, the enclosed duct creating a storage area, was such a minor matter that its omission did not lead me to disbelieve the witnesses.  In the absence of any evidence to the contrary the attack upon credibility failed completely and I accept entirely the evidence given to me by the plaintiffs’ witnesses.

A collateral contract:

38.  The case for Ms Lim and Mr Kao, and duly pleaded in the Reply, was that there was a collateral contract whereby Wealth Ascent accepted the UBWs, and impliedly agreed to make no requisition on, or objection to, the title to the property based upon the UBWs.

39.  The evidence of Ms Lim and Ms Loo was clear and unchallenged.  As I have already said I had no doubt as to their credibility.  It is beyond doubt that all of the UBWs, with the possible exception of the ducted storage area, were clearly explained, as UBWs, to the representatives of Wealth Ascent, and accepted by them as UBWs.  I am satisfied that the ducted storage area was shown to Mr Lai and Ms Kong, and that they accepted it as an enhancement to the property without being concerned as to whether or not it constituted an UBW.

40.  Mr Ho contended first that by virtue of Clause 12 of the PASP, the “entire agreement provision” there could be no collateral contract, for such a collateral contract would constitute the variation of a contract by parol evidence.  It is beyond doubt that that is a rule of law: see Cato v Thompson (1882) 11 QBD 616 and Jacobs v Batavia and General Plantations Ltd [1924] 1 Ch 287.

41.  But it is equally clear that neither the parol evidence rule, nor an “entire agreement” clause, will preclude reliance upon a collateral contract: see Deepak Fertilisers and Petrochemical Corp v ICI  [1998] 1 Lloyds Rep 113; Chitty on Contracts, 29^th Ed, Vol 1 para 12-102, and The Interpretation of Contracts, Lewison para 3.10.

42.  Mr Ho next contended that there was no consideration to support a collateral contract.  I reject the argument.  There was every reason not to include details of the UBWs in the PASP.  To do so would unnecessarily alert a potential mortgagee to a problem that was in reality nonexistent.  All of those involved knew that that was the situation.  The clear consideration for the collateral contract is that pleaded, namely in consideration of the Vendors and the Purchasers entering into the PASP.

43.  I am satisfied that the collateral contract pleaded has been established, and that by that collateral contract Wealth Ascent agreed that it would not make any requisition or objection to the title to the property, that relied upon the UBWs.

The requisitions as to the UBWs:

44.  Mr Ho contended that Wealth Ascent was entitled to make requisitions on the title to the property in relation to the UBWs.  Mr Chan’s initial submission was that as the contract was an open contract, the vendors had no obligation to answer requisitions. 

45.  However in the course of argument Mr Chan was obliged to acknowledge that even in an open contract there was clearly an implied term that the vendor had an obligation to answer requisitions and to show a good title before the completion date.  This obligation arose by necessary implication from the contract itself and accords with good sense: see Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67.  In this respect it must be remembered that a good title may not necessarily be a perfect title, (see para 49 below).

Do the UBWs constitute an “encumbrance”:

46.  Mr Ho contended that the existence of the UBWs constituted an encumbrance on the title of the property, and that by virtue of Clause 4 of the PASP, the vendors were required to resolve the issue of the UBWs in order to give title that was free from encumbrances.

47.  There is no doubt that the Building Authority had not given approval to any of the UBWs.  It is equally beyond doubt that that the policy of the Building Authority is that it will take steps in relation to UBWs if it becomes aware of UBWs.  The power of the Building Authority includes power to enter upon premises and to restore premises to their original structural condition, and charge the cost of the restoration upon the owner.  If payment is not made by the owner of the amount involved, the Building Authority may register a charge against the title to the property to enable it to recover the sum due.

48.  It is clear that a charge, registered against the title by the Building Authority, in relation to charges incurred in the restoration or removal of UBWs, will constitute an encumbrance upon the title to the property: see Jones v Barnett [1899] 1 Ch 611.  However, until the time when such steps are taken by the Building Authority, and the necessary charge registered against the title UBWs, the UBWs do not constitute an encumbrance on the title.  As well be seen below I am of the view that there is no real risk of enforcement action in relation to the UBWs in this case.

49.  While a query as to whether the configuration of a building complies with the Building Ordinance, or the presence of UBWs, will, in a broad sense, affect the vendor’s title, it will not necessarily go to the root of title: see Mexon Holdings Ltd. v Silver Bay International Ltd. [2000] 2 HKC 1.  The relevant principle is stated by Litton PJ in Mexon in the following terms

“A good title does not mean a perfect title, free from every possible blemish.  Whenever a question like this arises, it must be approached from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain.”

50.  The reality of life in Hong Kong is that, in the absence of a formal complaint, and in the absence of any real risk to life or property arising from UBWs, the Building Authority is unlikely to exercise its powers in relation to UBWs that constitute an enhancement to a residential property.

51.  The evidence before me establishes that virtually every property in Beaconsfield Court had UBWs similar to those of the subject property.  Ms Lim and Mr Kao lived in the premises for over 10 years.  During that time  no steps were taken by the Building Authority in respect of the UBWs that were there when they bought the property. 

52.  It is not without significance that Wealth Ascent did not suggest that it had taken the matter up with the Building Authority.  Having regard to the evidence that its representatives found the UBWs to be an enhancement of the property it would be highly unlikely that they would do so.  Having regard to the nature of the UBWs, the large number of UBWs the Beaconsfield Court, the length of time the UBWs have been there, and the fact that to date no steps have been taken by the Building Authority, I am completely satisfied that there is no real risk of enforcement action being taken by the Building Authority.

53.  I accordingly conclude that the existence of the UBWs did not prevent Ms Lim and Mr Kao from giving good title to the property. Consequently, the existence of UBWs did not provide a basis upon which Wealth Ascent was entitled to rescind the PASP.

Conclusion:

54.  The foregoing reasons I was satisfied that the defence to the action, and counterclaim both failed.  I accordingly entered judgement for the Plaintiffs.

Costs:

55.  There will be an order nisi that Wealth Ascent must pay the Plaintiffs costs of the proceedings to be taxed on a party and party basis.