MEXON HOLDINGS LTD. v. SILVER BAY INTERNATIONAL LTD.

CACV 76/1999

HEADNOTE

Land law and conveyancing. Whether requisition goes to root of title.

CACV 76/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 76 OF 1999

(ON APPEAL FROM HCMP 589 OF 1998)

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J U D G M E N T

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Nazareth V-P:

1. This is an appeal from the order of Findlay J made upon a vendor and purchaser summons. The appellant vendor ("the defendant") claimed inter alia a declaration that the requisitions of the respondent purchaser ("the plaintiff") in respect of title to the property concerned had not been sufficiently answered; that the defendant had failed to show good title to the plaintiff in accordance with their sale and purchase agreement ("the agreement"); and that the plaintiff as purchaser was entitled to determine and did effectively determine the agreement by a letter dated 31 January 1998 that its solicitors sent to the plaintiff's solicitors.

2. By his order made on 2 February 1999 Findlay J inter alia granted those three declarations. He also ordered that the defendant repay the plaintiff's deposit in the amount of HK$8,120,000 together with interest and costs.

The background

3. The property to which these proceedings relate is Room 3301 Lippo Tower ("the property"). It was formed by the partition of the 33rd floor of the Lippo Tower in 1992 in the context of a deed of mutual covenant dated 28 December 1992 ("the DMC"). The property then having passed through the hands of other purchasers was acquired by the plaintiff. By the agreement which was dated 29 May 1997 the plaintiff agreed to sell and the defendant to purchase the property. The purchase price was $40,600,000. The plaintiff paid a deposit of $8,120,000. Completion was to be on 31 January 1998. Clause 13 of the agreement provided that:

4. The title deeds were sent and received on 3 June 1997. They included some 127 separate documents. Among these was one of particular significance to these proceedings. It was a certificate issued by Mr Gary Chung, an architect/authorised person, dated 10 November 1992, in the following terms:

5. The seven working day period expired on 11 June 1997. It was very much later, on 6 November 1997 that the requisition with which these proceedings are concerned was raised for the first time by the plaintiff's solicitors in their letter to the vendor's solicitors. It was in these terms:

The defendant's solicitors refused to answer the requisition. In numerous letters they maintained that (i) the requisition was late; and (ii) it did not go to the root of the title.

6. In the face of that refusal, the plaintiff's solicitors instructed a Mr Andy Leung, an authorised person/architect to give his opinion on the matter. Following a preliminary indication from him, the plaintiff's solicitors arranged for a site inspection of the property through the defendant's solicitors. An inspection was carried out and by a letter dated 20 January 1998, Mr Leung confirmed that the property contravened reg. 41(1) of the Building (Planning) Regulations ("the Regulations")by failing to comply with clause 12(b)(ii) of the Code of Practice on Provision of Means of Escape, since the maximum travel distance from the property to the entrance of the escape staircase exceeded 18M.

7. I pause to mention here that the judge preferred Mr Leung's evidence to that of Mr Gary Chung. In any event, it is accepted by the plaintiff that the property contravenes the Regulations mentioned although it is submitted that there are ways in which the position can be regularised.

8. Returning to the sequence of events, notwithstanding Mr Leung's certificate, the defendant's solicitors maintained their refusal to answer the requisition. On 31 January 1998 the plaintiff accepted the defendant's "repudiation", terminated the agreement and forfeited the plaintiff's deposit of $8,120,000, which resulted in the plaintiff's originating summons.

9. The judge took the view that there was a prima facie case of unauthorised partition because no proper provision had been made for adequate means of escape. He referred to the defendant then producing evidence and arguing that in fact there was almost proper provision for adequate means of escape and that the Building Authority was therefore unlikely to take enforcement action. The judge was sceptical about this and thought that if the Building Authority was minded to be strict in any area, it would have been in relation to proper means of escape in case of fire. But he did not find it necessary to decide that point because such evidence had not then been produced and it was too late for the defendant to attempt to show good title at the hearing. The obligation was to answer requisitions and show good title before the time of completion and not afterwards.

10. He also mentioned that the defendant sought to argue that compliance could be achieved by surrendering part of Room 3301 so that the route to the nearest fire escape was reduced. He did not regard it as a satisfactory answer to say to a customer that the vendor is only able to provide a useable area less than that sold. In the end he found the situation before him the same as that in Kok Chong-ho v Double Value Developments Ltd (1993) 2 HKLR 423 (CA). There the High Court had held that a requisition regarding unauthorised structures had been satisfactorily answered because the risk of enforcement by the Government was so remote as to justify it being ignored; but the Court of Appeal decided at p.433 that no evidence had been proffered of the unlikelihood of enforcement of the legislation, and by the time the agreement was rescinded, it was too late for the vendor to rely on evidence of a practice of non-enforcement.

The submissions

11. I turn now to Ms Audrey Eu SC's submissions on behalf of the defendant. She submits that the purchaser's requisition was outside the agreed period and does not go to the root of the title; that in any case even if it does, the plaintiff here did not use due diligence, or it would have been aware of the breach of the Building Regulations. For the legal basis of the latter submission, she relies upon Hillier Development Ltd v Tread East Ltd [1993) 1 HKC (CA) 285; 293C per Penlington JA. She seeks to reinforce that submission by invoking the sanctity of the contract with reference to the express time limit of 7 working days in clause 13 of the agreement for requisitions to be delivered, and for waiver of any requisition or objection not so delivered.

12. For his part, Mr John Griffiths SC, who with Mr Wilson Chan, appears for the plaintiff, contends that a purchaser is entitled to proof of all matters which affect the title (Qualihold Investments Ltd v Bylax Investment Ltd [1991]2 HKC 589, 591G), including proof that there is risk of enforcement action with regard to the premises, so that they may not be "quietly enjoyed"; moreover that the purchaser was unaware of the breach of the Regulations notwithstanding due diligence on its part.

13. Although counsel's submissions appear to focus upon the time limit for requisitions, the propriety of the requisition was also a matter in contention, i.e. in the sense of whether if went to the root of title. It is convenient to begin first with this matter. As indicated, Mr Griffiths contended that any breach of the fire safety requirements of the Buildings Regulations could have consequences for quiet enjoyment, a matter affecting the title.

14. The authority commonly cited with respect to requisitions going to the root of title is the following passage from Emmett on Title (19th Ed.) reproduced in Giant River Ltd v Asia Marketing Ltd [1990]1 HKLR 297, 310I which was cited to us:

The expression "which goes to the root of title" is commonly accepted as embracing not only the root, but also intermediate title in the chain of title. Where the intermediate root of title is an assignment or similar transaction, there is no difficulty in accepting it as going to the root of title. But the position is not as clear when what is in question is not of that nature and e.g. may only derogate from the ordinary incidents of the estate or interest to be transferred and acquired. The deficiency that is first relied upon here is the risk that Government might enforce the fire safety requirements of the Building Regulations. This, it is suggested before us, could be resolved in essentially two ways. One involving expenditure e.g. building an internal "cupboard" or something similar which apparently would have the effect of reducing the distance to the escape staircase in the way such calculation is made; and the other losing about 13% of the usable area of the property. The former, it seems to me, would not go to the root of title, see e.g. Active Keen Industries Ltd v Fok chi Keong [1994]2 HKC 67,83C. As to the latter unless the risk that Government might take enforcement action incompatible with quiet enjoyment, i.e. entry, could be dismissed beyond reasonable doubt, it seems it would constitute a blot on the title. Findlay J's view was that it could not be so dismissed. Even so it does not go to the root or even the chain of title, although it may go to title.

15. Upon the foregoing basis, I have reached the conclusion that the plaintiff was not entitled to raise the requisition.

16. With respect to that conclusion it is not without relevance that Mr Gary Chung's certificate was provided in the context of the partitioning exercise that created the property, and that Ms Eu was able to assert without contradiction that the defendant had received it along with the other documents of title when it purchased the property and that there was no misrepresentation or unconscionable conduct on its part.

Due diligence

17. Having reached the conclusion that the plaintiff was not entitled to raise the requisition for the foregoing reasons, it is not strictly necessary for me to address counsel's submissions on the due diligence point. However, in case I am wrong in my foregoing conclusion, I propose to do so. Counsel on both sides accepted the dictum of Penlington JA in Hillier that even if a requisition goes to the root of title, the time limit imposed in the agreement does not run against the purchaser if, having used due diligence, he is unaware of the defect in the vendor's title. Both refer to the same passage in Hillier at p.293C-D:

Mr Griffiths also relies upon the further sentence on the same page where Penlington JA was still addressing Re Tanqueray at H:

It is plain from the larger context of the foregoing citations that "vendor", where it is first used in those passages, was intended to refer to "purchaser".

18. Ms Eu's submission here is that plainly there was no due diligence on the part of the plaintiff since there had been nothing new that transpired after expiration of the 7-day period for delivery of requisitions and that whatever it was that prompted the requisition after expiration could equally have done so before that. I do not accept that submission which leaves no scope e.g. for chance. Nor am I impressed by Mr Griffiths' submission that it lies ill in the mouth of the defendant to say that the plaintiff should have made the requisition earlier when the defendant itself provided the certificate which misled the plaintiff as to the very respect it purported to certify. However all of that may be, I cannot see that due diligence would have revealed the breach of the Building Regulations. I do not think that in the particular circumstances, not least that only 7 working days were allowed for the purpose, that due diligence on the part of the plaintiff would have required it to procure an investigation by an architect/authorised person into compliance with the Building Regulations without some reason to warrant it. And until Mr Leung made his report, initial or final, there was none. I conclude therefore that there was no lack of due diligence on the part of the plaintiff. However, given my conclusion that it was not entitled to raise the requisition in the first place, this does not avail the plaintiff. I would accordingly allow the appeal with an order nisi that the plaintiff have its costs of this appeal and below.

Mayo JA:

19. I have no doubt that Ms Eu, S.C. is correct in her submission that what we are concerned with in this litigation is not whether Defendant has made good title to the Plaintiff but whether it showed good title in accordance with the terms of the sale and purchase agreement entered into between the parties.

20. The critical question is whether the Defendant was entitled by virtue of clause 13 of the sale and purchase agreement to decline to answer a requisition on title raised some months after the expiry of the seven days referred to in the clause.

21. Clause 13 reads:

22. Amongst the deeds and documents which were delivered to the Plaintiff's Solicitors was a certificate given by Mr. Gary Chung an Architect. This related to the sub-division of the 33rd floor of Lippo Building in 1992. The certificate is in this form.

Partitioning of 33rd Floor
Lippo Tower
I.L. 8615, 89 Queensway, Hong Kong

Dated the 10th day of November 1992

Signed

........................................
GARY C.K. CHUNG
B.A. (AS.)B. ARCH. H.K.I.A
R.I.B.A. A.P. ARCHITECT

23. It will be noted that it is certified in the first paragraph that the sub-division is in conformity with the Building Ordinance and Regulations made under it. Amongst those regulations are the requirements relating to fire escapes.

24. In his judgment Findlay, J. held that the regulations relating to fire escapes had not been complied with. However there is nothing in the material which was before the Judge or before us to suggest any impropriety on the part of the Defendant relating to this. The Defendant does not appear to have been aware of the non compliance.

25. Mr. Griffiths, S.C. contended that the Plaintiff's Solicitors had placed reliance upon this certificate. I fear that the answer to this is that they shouldn't have done so. The whole purpose of requisitions on title is that purchasers are afforded an opportunity of raising points on the abstract of title and any muniments of title which may have been delivered to the purchasers and if they fail to avail themselves of this opportunity they must abide the consequences. This observation is made when there is an absence of any mala fides.

26. The only exception to this is if the defect in title is such as goes to the root of title. As to what defects are deemed to go to the root of title was considered in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297.

27. While it is undoubtedly the case that the non-compliance with the fire regulations constitutes an impairment of the implied covenant for quiet enjoyment of the property it can by no means be said that the defect goes to the root of title.

28. The main point on this appeal is the extent to which it is permissible for a purchaser not to be bound by a time limit imposed in a contract for raising requisitions.

29. In my view were we to hold that the Plaintiff should be entitled not to be so bound it would effectively mean that conditions of this type would become redundant. I consider that the defect of title in this case is of a peripheral nature and that the defendant was justified in declining to entertain the requisition.

30. This being the case defendant did show a good title and accordingly it was incumbent on the Plaintiff to complete the purchase under the terms of the sale and purchase agreement.

31. In my view this appeal should be allowed and the Defendant should be entitled to its costs both here and below.

Rogers JA:

32. By Agreement dated 29th May 1997, the Appellant agreed to sell the Respondent Room 3301 in the Lippo Tower. Clause 13 of the Agreement required any requisitions and objections to be made within 7 working days after receipt of the title deeds and documents from the Appellant's solicitors. It was also provided that any requisition or objection not so delivered shall be deemed to have been waived. The Clause then went on in the standard form to provide that if the Appellant could not remove or comply with any requisition, it would be at liberty to give the Respondent 7 days' notice to annul the sale.

33. The title deeds and documents were supplied on 3rd June 1997.

34. On 6th November 1997, the Respondent's solicitors wrote to the Appellant's solicitors and referred to an architect's certificate of 10th November 1992 which had been supplied with the title deeds and documents and said:

35. The certificate in question was one which was issued by the authorised person upon the sub-division of the premises into six units of which Room 3301 was one. It was stated in the certificate that the partition walls as illustrated on the attached plan were exempted works under the Building Ordinances and Regulations and did not require the approval of the Building Authority under those provisions.

36. The Appellant's solicitors replied on 10th November 1997 drawing attention to Clause 13 of the Agreement to which I have referred and stating that the requisition was out of time. The objection as to time was persisted with although, on a without prejudice basis, the Appellant's solicitors did contend that the architect's certificate was sufficient. Eventually on the date for completion, namely the 31st January 1998, the Respondent's solicitors wrote saying that the Appellant had failed to prove and show good title, accepted the Appellant's repudiation of the Sale and Purchase Agreement and requested the return of the deposit. The Appellant's solicitors on the same day replied saying that the repudiation was wrongful and that the deposit was to be forfeited.

37. On 12th February 1998, the originating summons in this matter was issued. The first prayer was for a declaration that the requisitions and objections in respect of the title to the property as set out in the letters dated 6th November 1997, 10th November 1997, 13th November 1997, 16th December 1997, 17th December 1997, 8th January 1998 and 21st January 1998 had not been sufficiently answered.

38. Before us, no specific issue was made as to the wording of those letters and as to whether they individually or collectively constituted proper requisitions. In my view, objection might have been taken to some of them. The early ones, in particular, might hardly be said to have been requisitions. Indeed, they might be said to have related to a state of affairs in 1992. By the end, however, it might be said that the requisition or objection had been sufficiently formulated specifically by the letter of 21st January 1998 in the following terms:

39. The other declaration sought was that the Appellant had failed to show a good title to the property in accordance with the Agreement and that the Respondent was entitled to determine, and had effectively determined, the Agreement and was entitled to return of the deposit with interest as well as the costs of investigating the title.

40. The short point on the appeal is whether the Appellant is protected, in the circumstances of this case, by Clause 13 of the Sale and Purchase Agreement. On the face of the matter, the requisition was raised well after the time limited for requisitions and objections.

41. In the Court below, Findlay J. held that the requisition went to the root of title and that since the Respondent "was not negligent in failing to spot a potential defect in the vendor's title", the requisition was not out of time.

42. The real question on this appeal is whether the requisition went to the root of title. Clearly, it went to title. If the partitioning was in breach of the Fire Regulations and would have to be removed or altered to the extent that the Respondent would lose part of the premises, there would be a danger of enforcement action. Once a danger of enforcement action is established, it is not for the Court to quantify the risk provided it is not negligible.

43. Requisitions which go to the root of title may be made after the time limited in the contract has expired. Deputy Judge Cruden in his judgment in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 referred to the basic proposition stated in Emmett On Title, 19th Edition. The cases cited in the passage following reference to Emmett related back to a time when the contract would provide for delivery of an abstract of title and requisitions to be made within a period of days thereafter. Reliance upon a provision excluding requisitions thereafter would not be permitted if the abstract did not disclose matters which should have been disclosed, see for example the case of In re Cox & Neve's Contract [1891] 2 Ch. 109 at 118-9. Furthermore, if on the face of the abstract, the vendor showed no title at all to convey the same, the objection of lateness would not be permitted. An example of that is in Re Tanqueray-Willaume and Landau (1881-2) 20 Ch. D. 465 per Kay J. at 473 and the interjection by Jessel, M.R. during the course of argument at p.474.

44. The case of Hillier Development Ltd. v. Tread East Ltd. [1993] 1 HKC 285 was relied upon by the Respondent. In that case, the Judge in the Court below had apparently considered that the requisitions went to the root of title and Penlington J.A. in the Court of Appeal dealt with the matter on that basis. Even then, he held that a purchaser could only overcome a stipulation as to time if he had used due diligence and was unaware of the vendor's title or, perhaps lack of it. Since those conditions did not apply in that case, Penlington J.A. considered that the purchaser could not overcome the time limitation for raising requisitions. Nazareth V-P considered that the requisitions in that case did not go to the root of title.

45. To venture any definition of what constitutes, a root of title might be both ambitious and dangerous. Some assistance can, of course, be gained from the Williams on Vendor and Purchaser, 4th Edition at p.47. It is there said:-

46. The requisitions which have been raised, even to the extent that they can be so specified, do not relate to how the Appellant derived its interest to Room 3301. Those documents have not been challenged. On the face of the documents which had been provided, there is a clear chain leading back to the base of the title. What can be said, however, is that a query has been raised as to whether the present configuration complies with the Building Ordinance. That would in a broader sense affect the Appellant's title but it does not go to the root of its title. This can, for example, be contrasted with the Tanqueray-Willaume and Landau case where the objection taken by the purchaser went to the executor's power of sale.

47. In my view, therefore, since this objection did not go to the root of title, the learned Judge's consideration of the question of whether there was any fault upon the part of the Respondent and whether the Respondent has acted with due diligence should not have arisen. In those circumstances, I agree that this appeal must be allowed.

Nazareth V-P:

48. The appeal is accordingly allowed and the order below set aside. There will be an order nisi that the plaintiff is to have its costs of this appeal and below.

Remarks: