NEW JOY DEVELOPMENT (HONG KONG) LTD v. THINKING ENGINEERING LTD

DCCJ 2876/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2876 OF 2013

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DECISION

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1.  New Joy Development (Hong Kong) Limited (“New Joy”) entered into a sub-sale agreement with Thinking Engineering Limited (“Thinking”) in respect of an industrial property in Kwai Chung. A dispute arose from certain late requisitions raised by New Joy about illegal structures and the sub-sale was eventually aborted. By its summons dated 17 January 2014 (“the Summons”), New Joy seeks summary judgment against Thinking to recover, principally, a sum of HK$400,000 being deposits and part payments of the purchase price paid (“the Sum”).

2.  I shall first set out the undisputed background facts as follows before dealing with the parties’ respective contentions.

Background facts

3.  The subject property is identified as Workshop A on the 25^th floor and Roof A of the building known as Henry Centre situated at No. 131 Wo Yi Hop Road, Kwai Chung, New Territories (“Property A”). On the 25^th floor, there are two adjoining units only. The other unit is known as Workshop B. According to a floor plan of the 25^th floor (“the Plan”), Workshop A and Workshop B are of similar size and the only difference is that there is a communal toilet carved out from the top of Workshop A (“the Toilet”). In other words, the total floor area of Workshop A and the Toilet is the same as that of Workshop B.

4.  Springgold Garments Limited (“the Head Vendor”) was the owner of all of Workshop A, Workshop B, Roof A and Roof B. On 22 October 2012, Thinking entered into two separate provisional agreements for sale and purchase with the Head Vendor. One relates to Property A and the other one relates to Workshop B and Roof B (“Property B”). Completion was contracted to be 5:00 pm, 25 April 2013.

5.  On 5 November 2012, Thinking entered into a formal agreement for sale and purchase with the Head Vendor in respect of Property A in the consideration of HK$3,520,000.00. On the same day, another formal agreement for sale and purchase was made between Thinking and the Head Vendor in respect of Property B in the consideration of HK$3,760,000.00. The completion date of both transactions fell on 25 April 2013.

6.  On 22 November 2012, through the introduction of an agent of Ricacorp, namely, Mr Mann Siu (“Siu”), Thinking came to know that New Joy was interested in purchasing Property A and Property B. It was soon agreed between New Joy and Thinking that the total purchase price should be HK$8,030,000.00 and completion should take place on 25 April 2013. On the following day, Siu brought to Thinking two sets of provisional agreement for sale and purchase. For the one relating to Property A, the purchaser was stated to be New Joy and the consideration was stated to be HK$4,000,000. For the one relating to Property B, the purchaser was stated to be “Ms Li Yan Ping or her nominee (individual and company)” and the consideration was stated to be HK$4,030,000.

7.  Ms Li is the sole director and shareholder of New Joy and she acquired New Joy on or about 5 October 2012.

8.  Pursuant to the two sets of provisional agreements, on 18 December 2012, New Joy and Thinking entered into a formal sub-sale agreement in respect of Property A (“the Property A Agreement”) and Thinking and Ms Li entered into another formal sub-sale agreement in respect of Property B. Ms Li executed the Property A Agreement on behalf of New Joy (“the Property B Agreement”).

9.  In both the Property A Agreement and the Property B Agreement, it was stipulated that Thinking was selling the properties as confirmor and the completion would take place between the hours of 9:30 a.m. to 1:00 p.m. on or before 25 April 2013.     

10.  The Property A Agreement provided:

(1) By clause 8, Property A was and would be sold on an ‘as is’ basis;

(2) By clause 9, on completion, Thinking should procure the Head Vendor and all other necessary parties (if any) to execute and deliver a proper assignment of Property A to New Joy or New Joy’s nominee(s) or sub-purchaser(s) subject as herein contained but otherwise free from incumbrances;

(3) By clause 26(a), Thinking should procure the Head Vendor and other necessary parties (if any) to give title to Property A in accordance with section 13A of the Conveyancing and Property Ordinance, Cap.219 (“CPO”) and should in accordance with section 13 of the CPO at his own expense prove his title to Property A.

(4) By clause 13, any requisitions or objections in respect of the title should be delivered in writing to the solicitors of Thinking within seven working days after the date of receipt of the title deeds by the solicitors of New Joy and further requisitions, if any, should be raised within 7 working days after the date of receipt of reply by the solicitors of Thinking to New Joy’s initial requisitions otherwise the same should be considered as waived (in which respect time shall be of the essence of the Property A Agreement);

(5) By clause 5, time should be in every respect of the essence of Property Agreement;

(6) By clause 17, if Thinking (other than due to the fault of New Joy) fail to complete the sale in accordance with the terms and conditions of the Property A Agreement, all moneys paid by New Joy to Thinking pursuant to the provisions of the Property A Agreement should forthwith be returned to New Joy in full who should also be entitled to recover from Thinking damages (if any) which New Joy might sustain by reason of such failure on the part of Thinking and it should not be necessary for New Joy to tender the balance of the purchase price nor an assignment to Thinking for execution;

(7) By clause 30, without prejudice to the other rights of the parties, if any party should fail to complete the sub-sale, the party in default should be responsible for paying all estate agents’ commissions and the stamp duty payable to the Stamp Office in respect of the transaction and the same should be recoverable against the defaulting party by other party;

(8) By paragraph (h) of the Eighth Schedule to the Property A Agreement, subject to the prior appointment and agreement by the Head Vendor, Thinking should use its best endeavours in arranging with the Head Vendor at reasonable time of the day and with prior appointment by New Joy with Thinking and the Head Vendor allow, among other things, New Joy or its agents or representatives or nominees or sub-purchasers to make one final inspection of Property A on or before the date and time of completion for the purpose of verifying delivery of vacant possession.

11.  The Third Schedule to the Property A Agreement set out the payment schedule. A sum of HK$150,000 was paid to Thinking as initial deposit and part payment of the purchase price and another sum of HK$250,000 would be paid to Thinking as further deposit and part payment of the purchase money upon the signing of the Property A Agreement. The balance of HK$3.6 million was to be paid on completion. There is no dispute that New Joy has already paid Thinking the Sum thereunder.

12.  On or about 7 January 2013, Messrs Chiu, Szeto & Cheng (“CSC”), solicitors for Thinking, delivered the title deeds and documents to Messrs So, Ho & Co (“SHC”), former solicitors for New Joy.

13.  On 20 April 2013, New Joy inspected Property A and on 22 April 2013, SHC wrote to CSC with the Plan enclosed therewith. The Plan was annexed to the assignment whereby the Head Vendor was assigned Property A. By the said letter, New Joy raised the following requisitions (“the Requisitions”):

(1) The partition wall between Workshop A and Workshop B has been demolished;

(2) There is only one main door for exit for both Workshop A and Workshop B; and

(3) The lavatory outside Workshop A had been demolished.     

14.  In the said letter, it was alleged that New Joy was refused inspection of Property A until 20 April 2013 and the Toilet was not part of Workshop A according to the Plan. SHC requested for documentary evidence to prove that the title to the Toilet.

15.  On 23 April 2013, CSC replied by way of a letter (“the First Letter”). It was alleged that New Joy had already seen the photographs of Property A prior to the execution of the provisional agreement on 23 November 2012 and should be well aware of the three matters raised in the Requisitions. CSC further highlighted that Property A was sold on an ‘as is’ basis. Lastly CSC demanded completion pursuant to the Property A Agreement.

16.  On the same date, SHC wrote back pointing out that the illegal structures affected the title to Property A. It was further pointed out that the photographs could not prove the title to the Toilet. Lastly, SHC demanded reinstatement of the unauthorized structures in accordance with the Plan with the approval of the Building Authority before completion.

17.  CSC again issued a letter to SHC on the same date (“the Second Letter”), apparently before the said letter of SHC reached them. In the Second Letter, CSC maintained that the Requisitions were raised out of time. CSC contended that the First Letter was sent not to answer the Requisitions but was for the purpose of an amicable completion only and so was on a without prejudice basis.

18.  On 24 April 2013, CSC sent a letter to SHC (“the Third Letter”) complaining about the lateness of the Requisitions and demanded completion pursuant to the Property A Agreement.

19.  On the same day, SHC sent CSC two letters to deny the lateness of the Requisitions. In any event, they contended that CSC had waived their right under clause 13 of the Property A Agreement.

20.  On 25 April 2013, at about 3:10 p.m., CSC gave SHC formal notice that the Property A Agreement was rescinded on account of the failure of New Joy to complete. CSC also gave notice of its forfeiture of the Sum with all other rights to claim damages against New Joy reserved.

21.  On 26 April 2013, SHC wrote to CSC to allege repudiation of the Property A Agreement on the part of Thinking. SHC further demanded immediate return of the Sum.

22.  For completeness, in or about July 2013, Thinking completed the transactions with the Head Vendor after an agreed postponement of the common completion date and Thinking became the registered owner of both Property A and Property B.

New Joy’s case and evidence

23.  New Joy’s case is simple. It claims that Thinking failed to show and give title to Property A on account of those matters under complaint in the Requisitions. Thinking did not answer the Requisitions adequately and satisfactorily and hence it was entitled to rescind the Property A Agreement. It claims that the Requisitions were not raised out of time and even if they were, Thinking has waived its rights to raise objection to their lateness.

24.  New Joy relies on the express provisions of the Property A Agreement to claim the return of the Sum, damages for breach of the Property A Agreement, estate agent’s commission in the sum of HK$40,000, the conveyancing legal costs in the sum of HK$10,000 and two other declaratory relief.

Thinking’s case and evidence

25.  The thrust of the defence case is that the Requisitions were late and so it was not obliged to answer them. The defence denies any waiver given in the First Letter or at all. New Joy was obliged to complete the transaction and its refusal to do was in repudiatory breach of the Property A Agreement. Therefore, Thinking counterclaims for damages for breach of the Property A Agreement.

26.  Thinking adduced evidence to the effect that Ms Li was actually interested in purchasing Workshop A and Workshop B as a connected unit and intended to resell the connected unit quickly for a profit before the completion date. Siu says Ms Li already viewed Property A in the morning of 22 November 2012 on her own. There was only one single glass door on the 25^th floor and it was the entrance to Workshop A and Workshop B. Through the glass door, it could be seen that there was no partition between Workshop A and Workshop B and they were to all intents and purposes one single unit. I note that Ms Li accepts she made the visit on that morning but she denies having seen through the glass door because the premises were occupied at that time and it would be awkward for her to peep through the glass door.

27.  On the other hand, the defence alleges that Ms Li was a seasoned property investor and she and New Joy decided to wriggle out of the Property A Agreement merely due to the downturn of the property market.   

28.  It is worthy of note that Mr Wong, director of Thinking, accepts that the Toilet is an encroachment which used to be a part of the common area on the 25^th floor. He however maintains that the floor area of the Toilet is relatively small when compared to the floor area of Workshop A and if is to be excised from Workshop A, Workshop A would not be substantially different in quality and quantity. I note that in her reply affirmation, Ms Li only makes a bare denial in regard to this contention.

29.  The general principles relating to summary judgment applications and vendors’ obligations in conveyancing matters are well-established. Here, there are express provisions whereby Thinking expressly covenanted to show and give good title to Property A. Given the absence of debate about general principles between Ms Lau, counsel for New Joy and Mr Yao, counsel for Thinking, I should directly proceed to do my analysis of their rival contentions bearing in mind that the burden is on Thinking to show a triable issue to justify a grant of unconditional leave to defend.

Analysis – triable issues?

30.  Mr Yao submits that there are four triable issues. First, there is a question as to whether there were provisions in the Property A Agreement that imposed an obligation on the part of New Joy to raise requisitions or objections in respect of title timeously.

31.  I would have thought clause 13 of the Property A Agreement plainly provides a positive answer to the issue and I do not think Ms Lau argues otherwise. This is a non-issue.

32.  The second issue submitted by Mr Yao is whether New Joy raised the Requisitions timeously. By clause 13 of the Property A Agreement, New Joy should raise requisitions within 7 working days from the date it received from Thinking the title documents relating to Property A, i.e. 7 January 2013. The Requisitions were only raised 3 working days before completion. They were no doubt very late.

33.  Ms Lau in her written submission insists on the pleaded case of New Joy that the Requisitions were not late without giving any reasons. I cannot really see any basis of such a contention. Her focus seemingly is more on the failure of Thinking to give title to the Toilet.

34.  Mr Yao submits that the third question is whether Thinking still had an obligation to answer the Requisitions, which were late. He fairly submits that a requisition on title may be raised by a purchaser could be raised out of time if (a) it goes to the root of title and/or (b) the purchaser could not have discovered the defect even with due diligence. Ms Lau agrees to this proposition.

35.  Mr Yao relies on the dictum of Recorder Ribeiro SC (as he the was) in Big Foundation Development Ltd v Wong Shu Kei, unreported, HCMP 4536/1997, 16.6.1998 to the effect that not every unauthorized structures goes to the root of the title. Whether or not it does so depends on the nature and extent of the unauthorized structures, the risk of enforcement action that it poses and the likely consequences of any such enforcement action.

36.  Mr Yao submits that even if the matters under complaint in the Requisitions point to the existence of illegal structures, it does not necessarily mean that such illegal structures go to the root of the title. I agree with his submission (save those relating to the Toilet), particularly given the absence of expert evidence. I cannot accept the bare assertion of Ms Li that those matters under complaint (save those relating to the Toilet) would go to the root of the title.

37.  The encroachment of the Toilet calls for separate consideration. On its evidence, Thinking actually accepts that the Toilet was part of Workshop A to be sub-sold to New Joy under the Property A Agreement. The Toilet, erected in the common area of the 25^th floor of Henry Centre, has become part of Workshop A by virtue of the encroachment. Mr Yao accepts that the Toilet is erected in the common area meaning that neither the Head Vendor nor Thinking could have any title to the Toilet to give to New Joy. In the premises, I accept this requisition did go to the root of the title and prima facie New Joy was entitled to raise the same out of time.

38.  On the other hand, I am satisfied that New Joy could not have discovered those matters under complaint within time with due diligence. There is no evidence of any request for inspection of Property A by Ms Li and/or her agents before 20 April 2013. I cannot accept Ms Li’s assertion that she was not allowed to inspect Property A until 20 April 2013.

39.  I therefore come to the conclusion on the evidence that the Requisitions save the one relating to the Toilet were late and prima facie Thinking was entitled to refuse to answer them.

40.  However, there is an issue of waiver. Suffiad J in Chinawell Management Limited v Strong Huge Corporation Limited [2012] 1 HKLRD 79 had this to say about a late requisition:

“… for when faced with a late requisition, a vendor has certain options opened to it. Firstly, he may insist on his rights not to answer the late requisition, but in so doing runs the risk that if he was wrong about the requisition being out of time, he would be in breach of his duty to answer even if he had a good answer to offer. Secondly, he may choose to answer the requisition, in which case he is deemed to have waived his rights as regards the requisition being out of time. Thirdly, and this is usually the preferred option, the vendor may answer the late requisition on a without prejudice basis.”

41.  Suffiad J further referred to the dictum of the late Jerome Chan J in Ultra Eternal Ltd v Lu Tai Cheong [1997] 1 HKC 258 at 267 for the salutary reminder that solicitors should avoid answering out-of-time requisitions as a matter of courtesy unless they do so with a very clear statement that such answer was to be wholly without prejudice to the rejection of such requisition on ground of lateness.

42.  At the end of the First Letter, I can find the usual clause “All our client’s rights herein are reserved”. It being the first response to the Requisitions, no complaints was ever made about the lateness of the Requisitions. I do not accept that the general reservation of rights clause in the First Letter could qualify as a clear statement to preserve Thinking’s rights to reject the Requisitions on ground of lateness. I am of the view that by the First Letter, Thinking waived their rights under clause 13 of the Property A Agreement to take issue of the lateness of the Requisitions.

43.  Even with the waiver, that is not the end of the matter. Thinking was only obliged to answer meritorious requisitions. I am yet to be convinced the merit of the requisition relating to the demolition of the partition wall between Workshop A and Workshop B and the requisition relating to the lack of an independent entrance to Workshop B. For the former, I require more cogent evidence to be convinced that it would actually cause a blot on the title to Property A and for the latter, I cannot understand how it would affect the title to Property A. It seems to me that it is only a very minor matter on the premises of Workshop B.  I am not satisfied that these two requisitions were meritorious and Thinking was obliged to answer them.

44.  Then I have to consider the reasonableness of the requisition about the Toilet. The defence seeks to invoke the de minus rule and Mr Yao argues that substantial performance could still have been tendered. I bear in mind that CSC did not give any substantive answer to this requisition relating to the Toilet.

45.  Very little submissions were advanced by both counsel about this matter. Ms Lau pertinently refers to me the case of Continental Zone Ltd v More Glory International Ltd, unreported, HCMP 446/2012, 18.4.2013.

46.  I would agree that the burden of proving substantial performance rests on Thinking. I also note that Thinking did not offer to tender substantial performance by excising the Toilet from Workshop A. What is before this court is the bare assertion of Mr Wong to the effect that Workshop A would not be substantially different in quality and quantity without the Toilet and a bare denial of Ms Li in this regard. There are indeed other material considerations other than the shortfall in terms of area in the question of substantial performance: Profit World Trading Ltd v Ho So Ying [2011] 2 HKLRD 773 per Le Pichon JA at §§18-19.

47.  Ms Lau submits that Workshop A without the internal toilet would be very much different in its market value. I am unable to accept this submission without relevant evidence. I note that Thinking actually paid the Head Vendor more purchase price for Workshop B, which was without any toilet at all. 

48.  I find that substantial performance is a triable issue. It is determinative of the merit of the requisition relating to the Toilet, the question as to why Thinking was obliged to answer the same and also the question as to whether Thinking was able to give title to Property A and could have tendered substantial performance of the Property A Agreement.

49.  That being my conclusion, I need not really deal with the last issue identified by Mr Yao, namely, whether the Requisitions were adequately and satisfactorily answered. The only answer given by Mr Yao to this issue is that the Requisitions were late and so this issue gives rise to a hypothetical question only. I cannot agree with him.

Conclusion and Orders

50.  I am of the view that this action should be allowed to go to trial and summary judgment is inappropriate. I therefore grant Thinking unconditional leave to defend.

51.  I further make a costs order nisi that costs of and occasioned by the Summons be in the cause, with certificate for counsel.

52.  Lastly, I thank counsel on both sides for their succinct submissions.