EURO KING DEVELOPMENT LTD v. HO YU KUEN

DCCJ 1286/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1286 OF 2008

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JUDGMENT

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1.  The Defendant was at the material time the registered owner of a property known as No. 200, Yuen Kong San Tsuen, Yuen Long, New Territories, Sub-section 2 of Section A of Lot No. 1578 in D.D. 106 (“the Property”).  By a provisional agreement for sale and purchase made on 4 September 2007 (“the Agreement”), the Plaintiff agreed to purchase and the Defendant agreed to sell the Property at the price of HK$6,180,000.

2.  The Agreement expressly provides that an initial deposit of HK$200,000 shall be paid upon signing of the Agreement, which has been paid.  The Agreement further provides that the parties shall sign a formal sale and purchase agreement on or before 18 September 2007, when a further sum of HK$418,000 shall be paid as deposit.  Completion shall take place on or before 19 November 2007.

3.  The parties have not signed any formal agreement for sale and purchase.  Pursuant to the terms of the Agreement, the Plaintiff has paid the further deposit to the Defendant on 18 September 2007, who is holding a total deposit of HK$618,000.  Parties agree that they are bound by the terms of the Agreement.

4.  It is the Plaintiff’s case that it is an implied term of the Agreement that the Defendant as the vendor shall give and prove good title (paragraph 3 of the Statement of Claim).  And the Defendant has a duty as vendor to show and prove good title, including to properly answering the reasonable requisitions and objections to title raised by the Plaintiff (paragraph 5 of the Statement of Claim). This is admitted by the Defendant.

5.  The Property is and was at all material times held from the HKSAR Government under the Block Government Lease of D.D. 106.  Further, the Property is subject to the benefits and restrictions under a Building Licence No. 4664 registered in Yuen Long, New Territories Land Registry by Memorial No. 647261 (“the Building Licence”).  Upon perusal of the title deeds and documents of the Property, Messrs Yip, Tse & Tang (“YTT”) solicitors acting for the Plaintiff in the sale and purchase of the Property noticed a power of attorney has been created by the then registered owner of the Property, Wu Yat Sing (“the Licensee”) in favour of one Well Truth (Pacific) Limited (“the Attorney”) on 22 April 1998 (which is registered in Yuen Long New Territories Land Registry by Memorial No. 872391 and hereinafter called “the PA”).  YTT raised the following requisition with the Defendant’s solicitors, the Third Party herein:-

“We note that the Building Licence is granted subject to the conditions therein set out. However:-

Under condition No. 4(a) thereof, the Licensee shall not assign or otherwise dispose of the lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, whether directly or indirectly, grant of any power of attorney or otherwise howsoever unless a period of 5 years has elapsed from the date of a letter issued by the District Lands Officer confirming that these Conditions have been complied with to his satisfaction or the Licensee has paid to the Government the premium in accordance with Condition 4(d)(ii) thereof.  The relevant Certificate of Compliance was issued thereafter on 9 July 1997.  However, an Irrevocable Power of Attorney incorporating power of sale, mortgage and lease has been executed by the Licensee on 22 April 1998 i.e. less than 5 years from the date of the Certificate of Compliance.  Please adduce to us the documentary evidence of compliance of the said Condition for perusal before completion” (“the requisition”).” [letters in bold are my emphasis]

6.  The Third Party has responded to the requisition and I shall come to the answer by the Third Party later.  It is the case of the Plaintiff that the requisition has not been satisfactorily answered on or before the date for completion.  In the premises, the Plaintiff claims that the Defendant has been in wrongful repudiation of the Agreement which it has accepted.  By a letter dated 19 November 2007 by YTT to the Third Party, the Plaintiff has demanded the Defendant to refund the deposit which the Defendant has failed and/or refused to pay.  The Plaintiff brought this action to recover the deposit paid. Further, by reason of the alleged breach on the part of the Defendant, the Plaintiff has also suffered further damages in that legal costs and estate agency commission had been paid.  The Plaintiff also seeks to recover such loss from the Defendant.

7.  The Defendant admits entering the Agreement with the Plaintiff and that a sum of HK$618,000 as deposit has been paid.  The Defendant claims that by various letters from the Third Party to YTT, the Defendant has adequately and satisfactorily answered the requisition.  The Plaintiff is not entitled to any of the reliefs claimed.

8.  Further, the Plaintiff is in breach of the Agreement in failing to complete on the scheduled date of completion, and by reason thereof, the Defendant counterclaims for damages and a declaration that the Defendant is entitled to be indemnified by the Plaintiff against any liability that the Defendant may suffer as a result of the Plaintiff’s breach of the Agreement.  The claim for damages has been abandoned at the hearing.  The Counterclaim for declaration has been modified before trial, with consent of the parties, to a declaration that the Defendant be indemnified by the Plaintiff against any claim by the estate agent for commission or payment under the Agreement.

9.  By a Third Party Notice issued herein on 22 May 2009, the Defendant claims against the Third Party for judgement for any amount which the Defendant may be adjudged to pay to the Plaintiff.  By admission, a partial interlocutory judgment was entered for the Defendant against the Third Party on 28 October 2010 that the Third Party has to pay the Defendant any amount including costs and interest, which the Defendant may be adjudged to pay to the Plaintiff, and the Third Party do pay the Defendant’s costs of the third party proceedings up to 6 January 2010 on liability on a party and party basis to be taxed if not agreed.  On the same day, the learned Master set down the action between the Plaintiff and the Defendant before me for trial.  The Third Party has chosen not to appear in today’s trial.

10.  Both parties are represented by counsels, Mr. Liang for the Plaintiff and Miss Ng for the Defendant.  It is agreed that the following issues are before this Court for determination:-

(a) whether the creation of the PA was in breach of the restrictions in the Building Licence;

(b) whether the Defendant adequately and satisfactorily answered the requisitions in relation to issue (a) above raised by the Plaintiff in YTT’s letter dated 28 September 2007;

(c) whether the Defendant had shown good title to the Property on or before the agreed date of completion of 19 November 2007;

(d) whether the breach mentioned in issue (a) rendered the title of the Property defective.

11.  On the duty to prove and show a good title, I only need to refer to the judgment of Deputy Judge Chung (as he then was) in Liu Tak Kin v. Chan Yiu Kai [1998] 4 HKC 362, that - “There was a duty on the part of the defendants, as vendors, not only to show good title but also to answer reasonable and relevant requisitions satisfactorily within a reasonable time, and in any event before completion ….”.

12.  The principle of law is not in dispute.  In the written opening of Miss Ng, she submits that the Plaintiff bears the burden to prove its case to the satisfaction of the court in respect of all these issues.  The Defendant will not make any submission in relation to the above four issues.  On clarification with Miss Ng she confirms that the Defendant would oppose the Plaintiff’s claim but would only rely on the detail answers given by the Third Party to YTT in the correspondence, which Miss Ng has elaborated in her closing.

13.  There is only one factual witness for the Plaintiff, Mr. Chan Kin Hung (“Mr. Chan”), a director of the Plaintiff Company.  He produced in court the correspondence between YTT and the Third Party in relation to the requisition which I shall consider in greater details hereinafter.  And the Defendant also gave evidence.  Given this matter really turns on the answer to the requisition, it is more helpful if I turn directly to the terms and contents of the PA, the terms of the Building Licence, and the correspondence between YTT and the Third Party.  There is no dispute on the authenticity of the correspondence between YTT and the Third Party.

14.  Upon receipt of the requisition, by a letter dated 14 October 2007, the Third Party in reply stated that:-

“…..Condition 4(a) only restricts disposition of the lot or any part thereof within 5 years from the date of issuance of letter of compliance. As letter of compliance was issued on 9 July 1997 and the assignment by the Licensee was in 2004, there is no breach Condition 4(a) as alleged. The creation of the power of attorney does not constitute any breach as no disposal pursuant thereto was made within 5 years from the issuance of the letter of compliance.”

15.  My understanding of the Third Party’s argument, and now the argument of Miss Ng is that, Condition 4(a) only restricts disposal of interest in the Property.  Mere creation of a power of attorney would not constitute any breach as long as there is no disposal of the Property made within 5 years pursuant to PA.  It is not disputed that the first assignment of the Property was executed in 2004, more than 5 years from the issuance of letter of compliance.  It appears that YTT do not agree with the Third Party’s view.

16.  By a letter dated 16 November 2007, YTT responded to the opinion of the Third Party as follows:-

“…..Please note that the said Condition 4(a) also restricts the grant of any power of attorney within 5 years from the date of the letter of compliance. The creation of the said irrevocable power of attorney is obviously in breach of the said Condition unless such restriction has been removed by payment of the premium in accordance with Condition 4(d)(ii) thereof. As such, we hereby repeat and insist on our requisition on title.”

17.  By a letter dated 17 November 2007, the Third Party wrote again to YTT reiterating that no agreement for sale and purchase was entered into by the Licensee within 5 years from the date of issuance of the certificate of compliance.  There has not been any breach.  And the creation of the PA cannot be regarded as disposal because the PA itself is not a document of transfer.  Thus no premium is required to be paid under the Building Licence as there is no breach. 

18.  Since it is not disputed that a vendor has a duty to prove his title before completion, the issue turns on whether the PA is in breach of the Building Licence and whether the requisition is reasonable and if it has been satisfactorily answered. 

19.  I should first deal with the interpretation of Condition 4(a) of the said Building Licence (“Condition 4(a)”), which reads as follow –

“Except as provided in sub-clauses (b), (c) and (d) hereof, the Licensee (…), having obtained this Licence on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories, shall not assign, partition, mortgage, charge, demise, underlet, part with the possession of or otherwise dispose of the lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, whether directly or indirectly, or whether by way of direct or indirect reservation, grant or any right of first refusal, option, power of attorney, building agreement or through a solicitor, agent, contractor, trustee or otherwise howsoever unless –

(i) A period of Five years has elapsed from the date of a letter issued by the District Lands Officer confirming that these Conditions have been complied with to his satisfaction, or

(ii) The Licensee has paid to the Government the premium in accordance with Condition 4(d) (ii) hereof.

20.  There are 2 possible interpretations for Condition 4(a).  First, it may mean that if the Licensee creates any power of attorney which affects the Property within five years from date of letter of compliance, he is in breach.  Secondly, it could mean that he is only in breach of the Building Licence if the creation of a power of attorney in fact disposes of his interest in the Property or part thereof.  Mr. Liang in his submission addresses me mainly on the second interpretation.  For this judgment, I would first deal with the second interpretation.

21.  Mr. Liang in his written opening submits that the PA is irrevocable except with the prior written consent of the Attorney.  And further, under the PA, the Attorney is entitled to do all such acts and things that may be necessary or expedient in connection with the Property as fully and effectively as the Licensee could do himself, including for example, to create mortgage and to grant lease.  He was arguing that this is not a simple power of attorney and some interests in the Property have been disposed of. 

22.  It would now be a convenient time to take a look at the PA in issue.  The PA authorised the Attorney, amount other things, to let out the Property, or to create a charge or mortgage on the Property.  By clause 25 of the power of attorney, the Licensee confirms that the PA shall not be revocable without the consent in writing of the Attorney.  He also declares that the rental, the proceeds of the sale arising from or any money receivable in respect of any part of the Property shall be appropriate by the Attorney towards the discharge of his indebtedness to his attorney. 

23.  I also note that the PA also authorised the Attorney to sell the Property upon compliance with the conditions contained in the Building Licence and/or any other conditions as may be imposed by the authority concerned (clause 13 of the PA).  There is no similar restriction made in respect of other powers given to the Attorney, including the said power to let out or to mortgage the Property.

24.  By the PA, the Licensee has given an irrevocable power of attorney to the Attorney. The Licensee cannot revoke it without the consent of the Attorney.  A right to let out the Property or create a charge thereon is given to the Attorney.  And the Attorney may appropriate the rent or loan.  And there is no restriction that the Attorney may not let out or create a charge on the Property within the 5 years limitation period.  So on the next day when the PA was executed, the Attorney may grant a lease of the Property which the Licensee could not stop him from doing so.  It is obvious that by the PA, some interests in the Property have been “given” to the Licensee.  While this may not be an assignment, I believe by “disposal of”, it must be wide enough to cover such arrangement.  And the addition of “power of attorney” in Condition 4(a) must be drafted to catch this situation.

25.  Hence, even if I adopt the second interpretation, the answer to the first issue in dispute must be yes, the PA is a breach of the Building Licence.  Since I have not heard full argument, it may not be an appropriate opportunity to decide if the first or second interpretation is correct.  And if the first interpretation is correct, the Defendant must be in breach.

26.  Faced with the PA, the vendor’s solicitors have acted reasonably to question if the creation of the PA is in breach of Condition 4(a).  And indeed, this concern has been particularised in the letter dated 28 September 2007 by YTT to the Third Party when it raised the requisition.  Such requisition must be reasonable. 

27.  The Third Party’s only response is that Condition 4(a) only restricts disposal of the Property and claims that the first assignment was in 2004.  But the Third Party has not responded to the question whether the PA itself is a document that disposes of interest in land.  The reply of the Third Party could not be satisfactory.

28. Further and in the alternative, I should also refer to the recital of the PA.  On page 1 of the document, it reads:-

“WHEREAS I am the registered owner of the land ….. AND WHEREAS I have requested [my Attorney] to arrange for the manage the development of the Property by the new building….. in compliance with the terms and conditions contained in the Building Licence more particularly set out in the schedule hereto AND WHEREAS the said new building has been duly completed which completion is evidenced by a certificate of compliance issued by the District Lands Officer Yuen Long AND WHEREAS my Attorney has at my request and for my benefit defrayed the construction costs and remunerations thereof of the said new building, the architect’s fees and all expenses there for, AND WHEREAS for the purpose of securing a propriety interest and performance of an obligation I owe to my Attorney, I HEREBY CREATE this IRREVOLCABLE POWER OF ATTORNEY appointing my Attorney to act for me in connection with the said premises in the manner herein appearing.”

29.  The recital of the power of attorney set out a history.  It suggests that the Attorney has provided funding to the Licensee to build the building.  And it suggests the PA was executed for the purpose of securing a propriety interest and performance of an obligation the Licensee owed to the attorney.  When reading with the irrevocable nature of the PA, and the power given to the Attorney, it must call for an explanation by the Defendant on the purpose of the PA.

30.  The answer required from the Defendant is at least confirmation that by execution of the PA, no interest has been transferred or disposed of and why.  It is not sufficient for the Defendant to answer that the Property has not been assigned within 5 years.  The Defendant has not discharged his duty to satisfactorily answer a reasonable requisition raised by the Plaintiff. 

31.  The answer to the second issue in dispute is “no”.

32.  The next 2 issues are more difficult.  I would take them together.  If the Licensee has been in breach, it is provided at page 13 of the Building Licence that the HKSAR Government shall be entitled to re-enter upon the Property and take back possession.  Is this a defect in titles of the Property that justify the Plaintiff to rescind the Agreement? Has the Defendant shown good titles?

33.  After the hearing, counsels have kindly provided me with further assistance on this issue.  I would start with a judgment from Deputy Judge Muttrie, as he then was, given in Ng Man Fai Michael and another v. Worldpart Industrial Limited and another[2001] 2 HKLRD 783.  

34.  In the Ng Man Fai’s case, the dispute also involves a property subject to the small house policy.  A building licence was granted by the government to the 2^nd defendant with a similar condition 4(a) on 22 January 1994.  On 1 April 1997, the 2^nd defendant signed a power of attorney in favour of the 1^st defendant to wholly handle the property including its sale.  On 24 April 1997, the 1^st defendant entered into a Chinese sale and purchase agreement with the plaintiffs.  The plaintiffs had paid deposits.  Completion would be within 3 months from issuance of the certificate of compliance. 

35.  On 25 March 1998, the district lands officer issued to the 2^nd defendant a demand note for the premium payable to release condition 4(a).  The premium was paid on 30 March 1998.  The plaintiffs rescinded the agreement and claimed refund of the deposit.  One of the reasons for rescission was that the power of attorney and the Chinese sale and purchase agreement were in breach of condition 4(a).  The question before Deputy Judge Muttrie was whether the defendants proved good title to the property.

36.  On whether the breach of a Government Lease or licence would be a defect in title, one consideration is whether there is any real risk of enforcement action.  In his judgment, Deputy Judge Muttrie concludes that the breach of condition can be regarded as technically “jumping the gun”.  It is fanciful to assume that there is a “real risk” that Government would take enforcement action.

37.  I would refer to the judgment of Mariner International Hotels Ltd and anr. V. Atlas Ltd and anr.[2007] 1 HKLRD 413; (2007) 10 HKCFAR 1, when the principle of “real risk” is discussed in details.

“Any real risk of enforcement action or re-entry?

“There arises therefore the question of whether there was any real risk of enforcement action or re-entry. It is settled law that any contravention of the Buildings Ordinance or the regulations made thereunder is an incumbrance on title if there is a real risk that it will lead to enforcement action by the Building Authority or re-entry by the Government. Under s.24 of the Buildings Ordinance, the enforcement action open to the Building Authority for any such contravention includes demolition of the contravening works. And as to re‑entry, it is common for Government leases to contain – as the present lease does – provisions under which the Government may re-enter for any such contravention. As attested by many decisions including that of this Court in Jumbo Gold Investment Ltd v. Yuen (2000) 3 HKCFAR 52, a real risk means a risk that is not merely fanciful. This is a particular feature of the general test for proof of good title which, with the concurrence of the other members of the Court, Sir Anthony Mason NPJ and I articulated thus in Chi Kit Co Ltd v. Lucky Health International Enterprise Ltd(2000) 3 HKCFAR 268 at pp 282I – 283A :

“The burden is on the vendor to prove a good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance (MEPC Ltd v. Christian-Edwards [1981] AC 205 at p.220).  The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold ‘without any blot, or possibility of litigation to the purchaser’ (Re Stirrup’s Contract[1961] 1 WLR 449 at p.454).”

38.  The same principle has been adopted by Deputy Judge Muttrie who said –

The vendors must establish beyond a reasonable doubt that there is no risk of the Government taking any enforcement action in respect of the condition against alienation in the Building Licence.  In deciding this, I have to look at the larger picture.

I agree with the principle. 

39.  Deputy Judge Muttrie also refers to the judgment of Litton PJ in Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 2 HKC 1, at page 8G‑H, which I also agree :

“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 stand‑point 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.”

40.  With that, I come to consider if the above breach is a defect in title.  As I analysed above, under the Building Licence, the HKSAR Government is entitled to re-enter on the Property on the breach of the Licensee.  The burden rests on the Defendant to show beyond reasonable doubt that there is no risk of the Government taking enforcement action.

41.  Miss Ng submits that the PA has been registered in the Lands Registry and the Government must have been aware of its existence.  No enforcement action has been taken in the past 9 years before the Agreement.  And the breach is one of a trivial nature.  It could easily be rectified by a payment of premium to the Government.  She submits that there is no real risk that the Government would take enforcement action.

42.  Mr. Liang submits that the Ng Man Fai’s case could be distinguished. The case involves more than one owner under the same development.  Hence the chance of re-entry by Government is low.  Here we are concerned with one lot of land and one owner, the Licensee and now the Defendant.  And the Defendant has not identified any third party right that would be affected.  Accordingly, the risk is a real one and the titles are defect.

43.  He also refers me to Citiward Ltd v. Tai Ping Wing [1995] 2 HKC 181 when a building was erected in breach of the Crown lease and the vendor’s solicitors made enquiries with the Lands Department, which replied that the (then) current policy was not to enforce the relevant covenant in the Crown lease.  Rogers J (as he then was) held that although the risk of government re-entry in that case was “probably low”, the purchaser was entitled to be cautious and there was a “breach of a Crown lease” which needed to be sorted out.  Good titles had not been made out.

44.  I agree with Mr. Liang’s submission.  And in Ng Man Fai’s case, the breach is a technical one, as the owner did pay to the Government the premium after entering the power of attorney and the sale and purchase agreement.  It is a technical breach.  There is no suggestion that the breach in our case is a technical one.  The risk of enforcement may be low, but the Plaintiff is entitled to be cautious to have the matter resolved before completion. 

45.  In conclusion, I found that the breach renders the titles of the Property defective.

46.  Further, this case could be distinguished from the Jumbo Gold line of authority on the ground that the answer provided by the Third Party did not spell out the fact they relied on to suggest that the Government would not enforce their right of re-entry.  I refer to another judgment by Deputy Judge Poon, as he then was, in Far East Consortium Limited v. Singapore Hong Kong Properties Investment Limited HCA 4390 of 2001 –

“But the defendant’s solicitors had simply failed to spell out these facts in their purported reply. This distinguishes both Jumbo Gold Investment Ltd v. Leung Yun Cheong Warren & another and Mexon Holdings Ltd v. Silver Bay International Ltd. The vendor’s solicitors in those cases, unlike the defendant’s solicitors here, did state in their answer to the requisition facts which enabled the court to conclude that the risk perceived by the purchaser was fanciful or remote to the extreme. Nor can the facts assumed by Mr Shieh be readily inferred from the materials available. In the circumstances, I do not subscribe to counsel’s submission that this requisition was improperly raised. In my view, it was a proper requisition and the defendant’s solicitors had not answered it.”

46. The Third Party has not relied any fact to argue that the risk of enforcement is fanciful.  In fact, they only said in the answer to the requisition that no assignment has been effected within 5 years, and there is no breach.  They never suggest as an alternative that there is no real risk of enforcement by the Government.  Hence they could not now argue that they have satisfactorily answered the requisition because there is no real risk of enforcement.  Their answer given remains, and I so found to be unsatisfactory and by this reason alone, the Defendant has not proven their title. 

47.  It is interesting to note that on 1 November 2007, the Third Party had indeed written to the District Lands Office asking if the District Lands Office would take action for the non-compliance of clause 4(a), referring to granting of the power of attorney.  But I am not affected by the concession given by the Third Party to the HKSAR Government.  Mr. Liang indeed submits that this is a material non-disclosure on the part of the Defendant, which is a breach of the duty to show a good title.  Given that the District Lands Office only responded on 28 November 2007, after the date of completion, I accept the submission of Miss Ng that it may not be a material non-disclosure.  It remained an opinion or a reserved position of the Third Party that if they were wrong, they have to rectify the position by seeking an indulgence from the HKSAR Government.

48.  In view of the above finding, I conclude that the Defendant has failed to show good title before completion.  Further and in the alternative, the titles are defective.  The Plaintiff is entitled to treat it as repudiation on the part of the Defendant which they have accepted on 19 November 2007.  The Plaintiff should be entitled to refund of the deposit paid in the sum of HK$618,000 and legal costs he has paid for the conveyancing works in the sum of HK$12,200. 

49.  Mr. Chan confirmed that he has not paid the estate agency commission.  And according to the Agreement, only the Defendant is liable to pay the commission.  The Plaintiff is only liable if they are the defaulting party. Since I found in favour of the Plaintiff, and he has not paid the estate agent, there is no award made for this claim.

50.  And the counterclaim should be dismissed.

51.  Finally, there be interest on the judgement sum in favour of the Plaintiff at 1% above prime from 20November 2007 to today and thereafter at judgment rate until payment.  I also give an order nisi that the Defendant do pay the Plaintiff costs with certificate for counsel to be taxed if not agreed, the order nisi shall become absolute within 14 days.

52.  I was also informed that there had been a payment into court by the Defendant for the sum of HK$618,000.  I see no reason why the same should not be released to the Plaintiff in partial satisfaction of the judgement I granted.  I make an order that, unless objection was raised by the Defendant within 14 days from today, the payment into court in the sum of HK$618,000 shall be paid out to the Plaintiff and all interests, if any, be paid out to the Defendant.  If the Defendant raised objection, the objection shall be heard by me with 30 minutes reserved.

53.  The Third Party has not appeared today.  The third party proceedings is not before me.  The Defendant is directed to take out case management summons before a Master on further progress of the third party proceedings within 21 days from the judgment.