LUCKY HEALTH INTERNATIONAL ENTERPRISE LTD. v. CHI KIT CO. LTD. AND ANOTHER

HCMP 4041/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4041 OF 1997

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J U D G M E N T

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1. In July or August 1997, the Defendants, who separately owned a number of units in Sun Hing Building, Nathan Road, offered these units (the units) for sale by tender. On 12th August, the Defendants decided to accept the Plaintiff's offer of $118m. Acceptance of the offer was communicated to the Plaintiff on 12th August creating an agreement for the sale and purchase of the units on the conditions which accompanied the offer by tender. A memorandum recording this agreement was executed by the parties on 19th August and registered in the Land Registry. Completion was due on 20th November.

2. In the meantime, the Plaintiff discovered that a personal injury action which had been commenced in 1994 was pending against the incorporated owners of Sun Hing Building (the Corporation) and that the damages claimed were between $20m and $30m. The trial of the action in fact took place before Seagroatt J. on 6th to 19th October. On 21st October the Plaintiff's then solicitors drew this to the attention of the Defendants' solicitors complaining of non-disclosure. Judgment was given against the Corporation on 30th October in the sum of $25.7m together with interest and costs.

3. The Plaintiff's current solicitors were then instructed. Because of the amount involved and because of the provision of Section 17(1)(b) of the Building Management Ordinance Cap. 344 (BMO) which allows a judgment creditor to apply to the court to enforce a judgment obtained against incorporated owners of a building against any individual owner, the Plaintiff might be faced with the prospect of having execution levied against it and the units charged. The solicitors took the view that the Defendants would be unable to assign the units free from encumbrances and that the Defendants had been guilty of material non-disclosure. By letter dated 10th November, that is 10 days before the date for completion, the Plaintiff's solicitors advised the Defendants' solicitors of the position and gave notice that the Plaintiff rescinded the agreement. Return of the deposit of $11.8m was demanded within 7 days. The Defendants, hardly surprisingly, did not accept the Plaintiff's contentions. The Plaintiff therefore commenced these proceedings in which it seeks various declarations, principally, that the Defendants have not shown good title; that the Defendants would not have been able to assign the units free from encumbrances; that the Plaintiff was entitled to rescind the agreement by reason of material non-disclosure; and that the Plaintiff has effectively rescinded the agreement.

4. Mr. Denis Chang, S.C. who appeared on behalf of the Defendants, accepted that a vendor must disclose any defect in title of which he is aware. A vendor cannot rely upon a condition of sale to exempt him from this duty. Mr. Chang did not rely on Condition of Sale 26 in this case which provided that the Plaintiff "shall be deemed to have accepted the vendor's title to the property prior to the purchaser's submission of his tender". Two principal issues, therefore, arise for determination. They are whether the Defendants were aware of the proceedings and, if so, whether they were obliged to disclose that knowledge to the Plaintiff.

Knowledge

5. This issue can be disposed of quickly. The directors of the Defendants all live in Singapore. In an affirmation which was admitted in evidence for the purpose of these proceedings, Mr. Ko Teck Siang, a director of both Defendants, affirmed that the directors had no knowledge of the action which had been brought against the Corporation. Although Mr. Ko was not cross-examined (he was medically unfit to travel) I see no reason to doubt what he says about the directors' knowledge. The Defendants, however, maintained an office in the building. This was staffed by a Mr. & Mrs. Fung and at least one other assistant. This office was responsible for collecting the rent from and managing the other units owned by the Defendants. It appears Mr. Fung used to collect the rent and liaise with the tenants. Mrs. Fung had represented the Defendants on the committee of the Corporation since at least May 1992 when she was elected as first vice chairlady. Mrs. Fung (or Madam Wong as she was also known) remained as vice chairlady until 9th May 1996 when she became an ordinary committee member. After that meeting, Mrs. Fung did not attend any meeting either of the committee or of the owners generally.

6. Evidence was given by Mr. Hui Chiu Ming, the present chairman of the Corporation. He said that through Corporation's management office, notices of meetings, minutes and other matters are placed on notice boards near the building's lifts and also distributed by post or by placing in the mail boxes in the building.

7. From the minutes and other documents produced by Mr. Hui, I find that, because of her attendance at meetings, Mrs. Fung knew on 24th February 1994 that a writ had been issued against the Corporation in which the person who had been injured by a fall at the rear of the building claimed compensation. She knew from a meeting held on 10th July 1995 that the injured person was seeking "a large sum of compensation amounting to over $10m". At that meeting the owners decided to instruct solicitors to defend the case. The matter was further discussed at a meeting on 19th July 1995. At a meeting on 24th January 1997, at which Mrs. Fung was not present, it was noted that the claim was for over $30m. On 30th January 1997, it was decided that counsel would have to be instructed and some $600,000.00 raised from the owners.

8. On 15th August 1997, the Corporation's committee published a notice to the effect that the claim for over $30m had been set down for trial on 9th October and that lawyers' fees amounting to $800,000.00 had to be collected by 6th September. The notice stated "it now all relies upon the co-operation and support of all owners with a view to gathering the said sum before 5th September 1997". The matter was discussed at a meeting of the owners on 9th September when it was noted that only 1/3 of the necessary sum had been collected.

9. A number of urgent meetings followed at which the Corporation's predicament was discussed. Then, on 30th October, it was reported in a committee meeting that the injured person intended applying to the court for an order that the judgment be enforced directly against individual owners pursuant to section 17 of the BMO.

10. So, by May 1996, Mrs. Fung knew of the pending action against the Corporation and that a substantial amount of damages might be involved. I also have no doubt that, after May 1996, Mr. and Mrs. Fung were aware of the progress of the action and the steps which the Corporation was taking. This they would have learned from notices posted on the building's notice boards or from documents delivered to their mail box. In any event, as the Defendants' representatives in the building, they should have made it their business to find out not just how the action was progressing but about the business of the Corporation generally. So they had or should have had full knowledge of these matters. That knowledge became the Defendants' knowledge because it was only through Mr. and Mrs. Fung, as servants and agents of the Defendants, that the Defendants as companies could acquire such knowledge.

11. On the balance of probability, therefore, I find that the Defendants knew of the pending action; of the amount potentially involved; of the call by the notice of 15 August 1997 for contributions towards costs; and by 30th October of the threat that the judgment might be enforced against individual owners.

Was there a defect?

12. Section 17(1) of the BMO provides that

"(1) If a judgment is given or an order is made against a corporation, execution to enforce the judgment or order may issue -

(a) against any property of the corporation; or

(b) with leave of the tribunal, against any owner."

13. A number of things may be noted. First, whereas under (a) the judgment can be enforced against property of the corporation (i.e. the incorporated owners), under (b) enforcement is against the owners personally and then only with leave. Second, enforcement need not necessarily be sought against all the owners. So, third, an owner's liability would not necessarily be restricted pro rata his share in the building. Fourth, enforcement against an owner might, but not necessarily would, be by way of charging order on any units he owns in the building.

14. Unlike the cases involving the Estate Duty Ordinance and the Buildings Ordinance, where statutory charges on land are imposed, the BMO creates no charge on an owner's property. Section 17 of the BMO creates only a potential personal liability on the part of an individual owner, a liability which could be enforced against his property by way of charging order.

15. In order to ensure completion of the purchase, the Defendants made three offers in order to discharge any potential liability. The first two offers were based upon the Defendants' pro rata shares in the building. The third offer, made by letter dated 11th November, was an undertaking to satisfy the judgment, after any appeal, should leave be given to enforce the judgment against the Plaintiff. This undertaking was to be fortified by setting aside just over $33m from the balance of the purchase price or by bank guarantee. The undertaking was subject to the condition that the Plaintiff would co-operate at the Defendants' expense in opposing any application for leave to enforce the judgment.

16. Even the final offer was rejected by the Plaintiff because, according to a director, Fung Kwok Po, in paragraph 13 of his affirmation

"after completion the new owner of the Property would still have to be burdened with proceedings regarding the enforcement of the Judgment, any appeal or cross appeal and the potential claims for contribution from and against the numerous small co-owners. This was never within the contemplation of the Plaintiff at the time when it submitted the tender. This would also affect the saleability of the Property and the ability of any purchaser to obtain a mortgage thereon. This is because if a property is subject to substantial litigation, its marketability is substantially reduced for people would not like to be involved in and/or burdened with court proceedings. The purpose of the Plaintiff in purchasing the Property was for investment. The marketability of the Property which affects the price, was the dominant factor in its consideration whether to tender for the Property. If the litigation had been disclosed, the Plaintiff definitely would not have tendered for the Property."

17. As I have already said, it is the duty of a vendor to disclose any defect in title or encumbrance of which he is aware. Authority for this proposition may be found in the decision of the Court of Appeal in Peyman v. Lanjani (1985) 1 Ch. 457 and in the decision of Millett J. (as he then was) in Rignall Developments Limited v. Halil (1988) 1 Ch. 190.

18. For the Plaintiff, Mr. Patrick Fung S.C. contended that even a potential liability such as that posed by section 17 of the BMO constitutes a defect or encumbrance requiring disclosure. It must be said immediately that, if Mr. Fung is right, there will be considerable consequences for conveyancers in Hong Kong. Most conveyances are of units in multi-storey buildings. It will therefore become necessary for a vendor's solicitors to make the most rigorous enquiries of the vendor and of the incorporated owners of the building in which a unit is to be purchased, to ensure that there are no outstanding claims, for example, in respect of repairs carried out to the structure of the building or to the lifts, which might at some point in the future result in enforcement against the purchaser as then owner. A purchaser's solicitors would also have to press for clarification. It seems to me the proposition has only to be set out thus starkly for it to be seen that Mr. Fung's argument is likely to be a difficult one to sustain.

19. Mr. Fung relied heavily upon the decision of Deputy Judge Cheung (as he then was) in Wah Ying Properties Limited v. Sound Cash Ltd. (1994) 1 HKC 786. In that case the plaintiff acquired certain property on 30th June 1992 from the defendant. On 30th November 1992, the plaintiff sold the property to Portwealth Properties Limited. Earlier, in 1983 and 1987, the Building Authority ordered the defendant's predecessors in title to carry out certain remedial works pursuant to section 27A of the Buildings Ordinance, the two orders being registered in the Land Office. Ultimately, the Building Authority itself carried out the remedial work and, on 10th December 1992, demanded that the defendant pay the cost of that work. The defendant not having paid, the Building Authority issued a certificate under section 33(1) of the Buildings Ordinance on 19th March 1993. The certificate was registered in the Land Office on 3rd May 1993. The Building Authority would not vacate the registration unless the plaintiff was prepared to pay the amount due. Portwealth, by then the owner, asked the plaintiff to settle the amount. In turn, the plaintiff commenced the action against the defendant, claiming that the property was not free from encumbrance at the date of assignment by reason of the two orders of the Building Authority and its subsequent demands. The issue that fell to be determined was whether, on 30th June 1992 when the property was assigned to the plaintiff, the property was encumbered.

20. Section 33(9) of the Buildings Ordinance provides that a memorial of the Building Authority's certificate may be registered against the title of any premises or land in respect of which the cost arose and upon registration, the cost shall

" (a) be recoverable by action in Court in accordance with the provisions of this section from any person who from such Land Registry register then or thereafter appears to be the owner of such premises or land: (Amended 8 of 1993 s. 2)

Provided that -

(i) the amount recovered by virtue of this subsection shall not exceed the value of that person's interest in the premises or land charged; and

(ii) where the amount so recovered is equal to the value of the premises or land the charge created under paragraph (b) shall become void; and

(b) constitute a first charge on the said premises or land which shall give the Building Authority the same powers and remedies in respect thereof as if he were a mortgagee under a mortgage by deed in common form having power of sale and lease and of appointing a receiver: (Amended 37 of 1961 s. 5)

Provided that the charge shall be void and no liability shall accrue under this subsection against a bona fide purchaser or mortgagee of the premises or land for valuable consideration who, subsequent to the completion of the works specified in the certificate and before the registration of the memorial thereof, has acquired and registered an interests in the premises or land to be charged."

21. The Deputy Judge referred to the decision of the Court of Appeal in Sinobrain Industrial Limited v. Mok Kam Ming (CA 47/92, unreported) in which section 33(9) was considered. There, the vendor insisted on a term in the assignment that the assignment be subject to two orders (not certificates) by the Building Authority which had been registered in the Land Office. The defendant, who was a sub-purchaser from the plaintiff, took the view that the term imposed a charge on the land where in law no such charge existed and should therefore not be included. The Court of Appeal held that the matter was arguable and allowed an appeal against the decision of the judge below, Leonard J. who had given judgment to the plaintiff. In his judgment, Leonard J. pointed out that the memorials simply gave notice that the Building Authority might issue a certificate which would then give rise to an apportionment of cost amongst the owners and which, if registered, would impose a charge on the land. The judge then referred to the proviso to section 33(9) and continued

"The assignment in the amended form would have given to the defendant what he had contracted to take, ie a title free from encumbrances. Even if there was by virtue of s 33, a potential future charge on the land, there was no charge yet. A potential as opposed to an actual statutory liability is not an encumbrance - Re Allen & Drisroll's Contract [1904] 2 Ch 226." (The correct citation should be 'Driscoll')

22. I think Leonard J. was saying that the term complained of did not matter because it would not have the effect of creating an encumbrance when none existed.

23. After citing that passage, the Deputy Judge continued at page 792

"Although the registration or the certificate would only impose a potential liability, I am of the view that such a potential liability in fact constitutes an encumbrance on the property. In this respect, I shall refer to the case of Rignall Development Ltd v. Halil [1987] 3 All ER 170. The defendant was the owner of a house which he had purchased knowing it to be subject to a charge relating to an improvement grant which had been paid to her predecessor in title. The charge was registered in the register of local land charges and could be removed on payment being made to the local authority. The defendant put the property up for auction and the plaintiff agreed to purchase it under a contract incorporating the National Conditions of Sale (20th Ed), condition 11 of which provided that the purchaser shall be deemed to have made local searches and enquiries and to have knowledge of all the matters that would be disclosed thereby and shall purchase subject to such matters. Special condition 5 provided that:

The property is also sold subject to any matters which might be disclosed by a search and/or enquiries of the relevant local authority either at the date of sale or at the date of completion and (whether or not he has carried out any such search and/or enquiries) the purchaser shall be deemed to buy with full notice and knowledge of such matters, and shall not raise any objection thereon or requisition relating thereto."

24. The plaintiff purchaser made no search and was unaware of the charge. When he did discover the charge he refused to complete and ultimately sought a declaration that the defendant vendor had not been able to show good title. The judge, Millett J. (as he then was), held that the defendant had failed to show a good title. After stating the well-established rule that a vendor must disclose any defect or encumbrance of which he is aware, at page 197 the judge said

"In answer to this, it was first submitted on behalf of the defendant that the conditions of grant did not create an encumbrance or burden on the property, but only a personal liability upon the owner. But the grant is repayable on demand by the owner for the time being of the property, so that the potential liability binds successive owners of the property affected-which is why it is required to be registered-and in my judgment that is enough."

25. The Deputy Judge then observed that on 30th June 1992, the date of the assignment to the plaintiff, the Building Authority's certificate had not yet been issued or registered but that the work had been completed and unless the defendant discharged the cost, the scheme under section 33(9) would eventually come into operation. At page 794, he said

"While the charge imposed by virtue of the registration of the memorial of the certificate has no effect against both the plaintiff and Portwealth, the registration certainly has an effect on Portwealth who is currently the registered owner of the property. It is rendered liable to repay the cost to the government because by virtue of s 33(9)(a), the government may recover such cost against it by way of an action. The government has refused to vacate the charge unless it is prepared to discharge the cost. Portwealth is now demanding the plaintiff to be responsible for the payment of the costs. The plaintiff now has to resort to litigation to resolve the dispute. As of 30 June 1992, there was a risk that repayment of the cost of the remedial work might be demanded from the plaintiff. It was for the defendant to show a good title to the property free from that risk and without the possibility of litigation to the plaintiff. In my view, it had failed to do so."

26. That a potential obligation to pay may constitute a defect or encumbrance appeared to receive some support from a decision of Godfrey J., as he then was, in Lee Siu Man v. Chu Chi Wing (1992) 1 HKC 266. The case involved section 18(1) of the Estate Duty Ordinance which reads

"Subject to subsection (2) -

(a) a rateable part of the estate duty on an estate, in proportion to the value of any property which does not pass to the executor as such, shall be a first charge on the property in respect of which estate duty is leviable;

Provided that the property shall not be chargeable as against a bona fide purchaser thereof for valuable consideration without notice."

27. Sub-section (2) is not relevant.

28. The question arose as to whether the purchaser had taken a proper objection to title where property had been acquired by deed of gift within three years and where the donors were still surviving. At page 269, Godfrey J. said

" The conclusion to which I have come is that the objection to the title is well founded. The correct view of s 18 in the circumstances of this case, leaving aside for one moment the introductory words in sub-s (1) 'Subject to subsection (2)', is that estate duty would be a first charge on the property in 'the event of the donor's death' before 5 August 1994. Does the proviso to sub-s (1) alter the position? The proviso governs sub-s (1), but subject to sub-s (2). Subsection (2) can apply only in the case where the death has already occurred 'and' the charge is accordingly no longer 'latent'. The effect is (as I read sub-ss (1) and (2)) that the Commissioner may register the charge after the death of the deceased, but cannot register a 'latent' charge.

If the Commissioner has not registered the charge (being a subsisting charge capable of registration) before the completion of the purchase, it may be that in that case the purchaser would take free from the charge, even though he may have had actual notice of the facts giving rise to the charge. But while the charge remains 'latent' and incapable of registration, I am of the opinion that a purchaser who takes with notice of the facts cannot rely on the proviso to escape the charge. Notice of the facts gives him notice of the contingent liability to the charge. In my judgment, the reference to 'notice' is not to be read as limited to notice of facts giving rise to a subsisting charge.

In the result, I conclude that the purchaser here was entitled to object to the title. It disclosed a gift made within the period of three years last past. Unless proper provision were to be made for getting over the difficulty to which that gives rise, the title was one which the purchaser was entitled to reject."

29. The judge referred to the charge as 'latent'. More importantly, perhaps, it was also potential.

30. In Chan Fung Lan v. Lai Wai Chuen (1997) 1 HKC 1 Cheung J. (as he had then become) also considered section 18 of the Estate Duty Ordinance. He accepted the construction which had been placed by Godfrey J. on the proviso. He went further, however, at page 10 where he said

"where the sale by the donee is within the three-year period of the gift when the property is subject to a potential charge for estate duty, then the title of the property is defective. The view expressed by Farrand that the defect is only a possible money liability is not helpful at all because under the terms of the provisional agreement the defendant is required to deliver the property to be sold free from incumbrance. The blot on title is not purely theoretical. It is practical and real if the donors died during the first three year of the gift."

31. Lee Siu Wai Florence v. Priway Investments Ltd. (1998) 1 HKC 228 involved two provisional sale and purchase agreements which the defendant vendor entered apparently on 2nd and 4th December 1996. Under the later provisional agreement, a formal agreement was to be signed on 18th December with completion on 15th January 1997. On 11th December, the defendant vendor's solicitors received a letter from solicitors acting for the prospective purchasers in the earlier agreement. The defendant took the view that it was not bound by the earlier agreement, entered a formal agreement with the plaintiff and did not disclose a potential claim. On 14th January, the plaintiff discovered the earlier agreement and that a writ based thereon had been registered against the defendant. The plaintiff's solicitors made objection to which the defendant's solicitors indicated that they were unable to comply on the grounds of difficulty, delay or expense. The plaintiff commenced proceedings for breach of agreement and obtained interlocutory judgment for damages to be assessed. On an appeal by the defendant, Le Pichon J. gave reasons why the defendant could not rely upon clause 21 of the agreement which made provision for annulment of the sale. Amongst other reasons, at page 233 she said

"the defendant made no attempt whatsoever to apprise the plaintiff of the potential claim made by William Sin & So on behalf of Chu and Tsui. It will be noted that the earlier agreement and the writ were not lodged for registration until 21 December, ie three day after the plaintiff and the defendant had entered into the agreement. Had the plaintiff been advised earlier, she might not have entered into the agreement or she might have chosen to negotiate different terms such as the retention of the double deposit provision and the omission of cl 21, or she could have decided to register the provisional agreement although she was under no duty to do so. See Megarry & Wade's Law of Real Property (5th Ed) p 187. By being kept in the dark, the plaintiff was lulled into inaction and refrained from taking steps that were open to her. The defendant now seeks to take advantage of its own wrong, namely its failure to disclose the latent defect of title. That it should not be allowed to do."

32. Mr. Chang reminded me of the four categories of defects in title as set out in Turner and Sutton in The Law relating to Actionable Non-Disclosure. Of these categories at paragraph 17.06, the authors say

"In the first, the vendor has no title to the property agreed to be sold, or to some substantial part of it, or at least there appears to be grave doubt as to whether he has a good title or not. In the second, the vendor's title, though he has one, is different in some material respect from that which the purchaser is entitled to expect from the terms and conditions of his contract. The third class is comprised of those cases in which the vendor's title, though good in essence, is found to be incumbered (using this word in a broad sense)-its quality is diminished, e.g., by mortgage or by lease or by some restrictive covenant binding upon successive owners of the property sold, whereby his use or enjoyment of the land (and the use or enjoyment of his successors) is detrimentally restricted or affected. In the fourth class the vendor's title has been affected by some notice or order served upon the vendor by lawful authority, which, if not complied with, will affect the title and constitute a burden upon it."

33. Mr. Chang said that the first two classes do not apply in this case. As to the third, for reasons which he gave, the Plaintiff cannot bring itself within it. He contended that it is the fourth class which applies to the Plaintiff's case. Mr. Fung expressly disavowed reliance upon the fourth class. Accordingly, it is not necessary for me to consider the arguments deployed by Mr. Chang in relation to the fourth class.

34. As to the third class upon which Mr. Fung said he did rely, the authors say at paragraph 7.09

"Defects in title: (3) Title encumbered

7.09 The third class of cases comprises those in which, though the basic title offered by the vendor is good, yet that title proves to be subject to some mortgage, lien, charge, easement, or other similar incumbrance. Here are included restrictive covenants binding the property, contained in previous instruments of conveyance, restricting the user of the property in the hands of successors in title. In these cases it is not the fact of restriction which forms the foundation of the purchaser's refusal to complete, but the fact that the restriction is incorporated into the title to the land sold, so as to amount to a defect in that title, the result being that the vendor is unable to give, on settlement, the title which he has contracted to give.

The following have been held to be defects in title, such as to give the purchaser the right to rescind: all mortgages, charges, liens, easements, and incumbrances of any sort on the property sold, also all covenants, or provisions contained in any deed forming a part of the vendor's title so as to be binding upon him, and his successors in title, restricting the use to be made of the property sold; and where he is the intending assignor of a lease, or an intending sub-lessor, any and every unusual covenant contained in the original or superior lease which operates as a burden on the property or a restriction upon its use for either general purposes, or the particular purposes declared in the contract, or, to his knowledge, in fact contemplated by the intended assignee or sub-lessee. The existence of any tenancy of the property agreed to be sold will be a defect in title, unless waived by the purchaser in the contract of sale or the conditions collateral thereto; and it is unsafe for the vendor, in setting up such a waiver, to rely on a notification of the mere existence of the tenancy, unless any unusual terms are notified in sufficient detail, for the old heresy that notice of the tenancy is notice of its terms is now completely exploded."

35. It will be seen at once that all the examples of defects are far removed from that of which the Plaintiff complains. The closest perhaps is that contained in a footnote to the effect that in Allen v. Smith (1924) 2 Ch. 308 there was non-disclosure of a covenant in a building society lease to pay unusual solicitors costs and surveyors fees. Even there, however, the obligation to pay arose from the documents of title and not from some extraneous source.

36. It was Mr. Chang's contention that Wah Ying Properties was wrongly decided by Deputy Judge Cheung. First, he said that the Deputy Judge wrongly construed the proviso to section 33(9), in that he did not extend it to the operation of sub-paragraph (a). Mr. Fung tended to accept that point. For my part, I am in no doubt that the Deputy Judge was wrong when he held that the current owner, a bona fide purchaser for value, was rendered liable. Mr. Fung, however, maintained that the remainder of the Deputy Judge's reasoning was correct.

37. Mr. Chang said that anyway the decision was per incuriam because attention was not drawn to the then decided but apparently not yet reported decision of the Court of Appeal in Active Keen Industries Limited v. Fok Chi-Keong (1994) 1 HKLR 396. The case again involved the Buildings Ordinance. The Building Authority had carried out work but not registered any certificate under section 33(9) of the Ordinance. At page 409, Litton J.A. (as he then was) who delivered the principal judgment with which the other two members of the court agreed said

"It is said by counsel for the purchaser in this case that where the Building Authority might, in the exercise of its power under s. 24(4) of the Buildings Ordinance, seek to recover part of the cost of demolishing unauthorized building works from a co-owner, this constitutes an "encumbrance" upon the property. I do not agree. The expression "encumbrance" in relation to land invariably means some claim to the property or charge which could be imposed upon the property. See for instance, Romer, J. in Jones v. Barnett [1899] 1 Ch 611 at 620: "In Wharton's Law Lexicon, I find 'incumbrance' defined as being 'a claim, lien or liability attached to property'..."

38. Then at page 410, he said

"A possibility that, sometime in the future, the owner of Flat C 9/F might have to share with the other co-owners the cost arising out of something done to the building does not affect the title to the flat: no more than if, for instance, the lifts should fail and the co-owners had to share the cost of repair or replacement."

39. Had Deputy Judge Cheung been referred to that authority, it seems likely that he might have reached a different decision. Further, the Deputy Judge placed much reliance upon the decision of Millett J. in Rignall Developments. The point about that case, however, was that a condition or conditions of an improvement grant were registered in the register of local land charges as required by the Housing Act 1974. Upon breach of condition within a period of five years, the amount of the grant would become payable upon demand by the local authority. So, as Millett J. said, there was not simply a personal obligation upon the owner for the time being. Rather, what was effectively a charge registered against the property, gave rise to the potential for payment. There seems to me to be little distinction between that situation and that of conventional covenants or easements breach of which might give rise to some monetary payment by an owner of property.

40. In my judgment, the later Hong Kong decisions to which I was referred, involving section 18 of the Estate Duty Ordinance and the earlier sale and purchase agreement, do nothing to support the decision of Deputy Judge Cheung. Section 18 of the Estate Duty Ordinance has the effect, albeit potential, of imposing a statutory charge upon the property; while the earlier sale and purchase agreement, although described as a "potential claim", was already a real threat likely to defeat the vendor's ability to convey the property at all to the purchaser.

41. Two authorities might conceivably give comfort to Mr. Fung. In Carlish v. Salt (1906) 1 Ch. 335 notice under the London Building Act 1894 was served upon the defendants by the adjoining owner of an intention to repair the party wall. As required by the Act, surveyors acting for the parties determined that the wall was a party wall, that it required repair, that the repair should be carried out by the adjoining owner, and that the defendants should pay their share of the cost. Until payment by the defendants, ownership of the wall was vested in the adjoining owner. Two days after the surveyors' award, the defendants sold their property to the plaintiff without advising of the notice or the award. In his judgment, at page 340 Joyce J. said

"It is admitted that nothing was said about the party wall notice or award previously to the date of the contract, but no fraudulent intent is imputed to the defendants. I hold that the party wall notice and the award constituted a material fact affecting the price to be paid, and in so far as they imposed a liability of uncertain amount at some future time on the owner of the premises, I am of opinion that they constituted a latent defect not in the quality of, but in the title to, the property, and ought to have been disclosed."

42. That decision has been used in support of the proposition that a vendor is under a duty to disclose any matters known to him relevant to the existence of the title or its value and which might influence the purchaser in deciding whether to buy and, if so, at what price. That proposition has not, however, found favour in two Australian cases: Dormer v. Solo Investments Pty Ltd. (1974) 1 NSWLR 428 and McInnes v. Edwards (1986) VR 161. The point, I think, is that the proceedings in Carlish derived from statutory authority; imposed an immediate, albeit unquantified, liability; and ownership in the party wall was withheld until the liability was discharged. There was thus a real and immediate liability as opposed to a potential one.

43. As Holland J. said in Dormer, the duty on a vendor is to disclose a "presently existing latent defect of title".

44. In the light of what appeared to be overwhelming authority against him, Mr. Fung sought to make essentially two points. First, he said that cases decided elsewhere than in Hong Kong and textbooks from other jurisdictions may not necessarily cover the situation which prevails in Hong Kong. He pointed out that none of the cases appear to have any equivalent to section 17 of the BMO. In Chan Fung Lan, Cheung J. took the view that in Hong Kong the furnishing of security in relation to title is not appropriate because of the high speed and high volume of transactions. Further, in Roseric Ltd. v. West River Development (1993) 2 HKC 404, I myself held that the rule in Bain v. Fothergill should not apply in Hong Kong because of the differences between Hong Kong and England. The law, said Mr. Fung, should, therefore, be looked at in the light of Hong Kong conditions and the law should more properly be that as enunciated by Deputy Judge Cheung in Wah Ying Properties.

45. Second, Mr. Fung said that the definition referred to by Litton JA. in Active Keen, that an encumbrance is "a claim, lien or liability attached to property", is in fact a short hand way of saying "attached to the owner for the time being of property". He contended that it is not the property itself which comes under an obligation but rather the owner. He said action over a covenant or easement, for example, will not be brought against the land in rem but rather against the owner who, in some circumstances, will be obliged to pay a sum of money.

46. Therefore, as I understood the argument, the possible obligation imposed upon an owner under section 17 of the BMO is essentially no different from an obligation arising from a statutory charge or mortgage or from covenants conventionally found in title deeds.

47. As I said at the time, I find Mr. Fung's proposition to be novel. It has not, as far as I am aware, been canvassed in any authority or textbook. This is perhaps hardly surprising because it is well-established that an encumbrance is something which attaches to or affects the land. That an encumbrance will often give rise to a financial liability on the part of an owner is equally well understood. What is not well understood, at least by me, is that the reverse is also true if Mr. Fung is correct, namely that a liability personal to the owner qua owner somehow translates into an encumbrance on his property.

48. It is, I accept, very unfair if a purchaser in circumstances such as these finds that there is the possibility of him being asked to pay a very substantial sum indeed. The liability is, however, potential because it will only crystallise with leave from the court. While it is not for me to predict how a court would deal with a situation such as this, it seems likely that a court may be reluctant to give leave to enforce a judgment against a bona fide purchaser for value without notice or might limit liability pro rata.

49. I am, therefore, against Mr. Fung. It seems to me that the point is almost unarguable in the light of the decision of the Court of Appeal in Active Keen. Further, I do not think he can get the support from the decision of the Deputy Judge Cheung that he seeks. The "potential liability" arising from registration of the Building Authority's certificate comprised a first charge on the property as well as a personal liability on the owner for the time being. So there was an immediate claim or charge attaching to the property, and an existing as opposed to a potential liability. Second, any liability is swept away by the proviso in situations where the property has been purchased prior to registration by a purchaser for value. Because of his incorrect analysis of the effect of the proviso, the Deputy Judge considered the personal liability in the context of registration. I do not think his conclusion can be sustained.

50. In my judgment, there was no defect or encumbrance which the Defendants were under a duty to disclose. I find that they showed good title and that they were able to pass that title free from encumbrance on the date appointed for completion. The Plaintiff's claim must therefore fail.

51. It is not necessary for me, in the circumstances, to determine 3 other issues. For the sake of completeness, however, I would have found that the agreement between the parties was made on 13th August when acceptance of the Plaintiff's tender was communicated to it. The document executed on 19th August was no more than a memorandum or memorial of what the parties had done.

52. As to whether there was an obligation on the Plaintiff to accept the undertaking given by the Defendants, the authorities were reviewed by Cheung J. in Chan Fung Lan and he came to the conclusion that a "purchaser is not bound to accept an indemnity as curing a defective title". With respect, I agree.

53. Finally, on the authorities, e.g. Peyman v. Lanjani, it is clear that a purchaser may rescind, without waiting for the completion date, when he becomes aware of an irremovable defect in title.

54. The Plaintiff's claim is therefore dismissed.

55. I make an order nisi that the Defendants should have their costs.