PROFIT WORLD TRADING LTD v. HO SO YUNG

CACV 152/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 152 OF 2010

(ON APPEAL FROM HCMP NO. 8 OF 2009)

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BETWEEN

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal by the vendor from an order dated 24 June 2010 of Bharwaney J in favour of the purchaser in a vendor and purchaser summons taken out by the purchaser. The matter related to the sale and purchase of, inter alia, Town House No. 30 and car parking space No. 39 (“the car park”), Villa Royale, Sai Kung (collectively “the property”). The plaintiff successfully sought a declaration that the provisional agreement dated 14 June 2008 to purchase the property was terminated by the purchaser’s acceptance of the vendor’s repudiatory breach. The summons also concerned another provisional agreement relating to part of another car parking space but that is not material for the purposes of this appeal. At the conclusion of the hearing judgment was reserved which we now give.

The background

2.  The purchaser is a limited company.  On 10 June 2008, the purchaser’s representative, a Mr Hui, visited the property. Mr Hui’s evidence which the judge accepted was that on entering the ground floor level, he immediately saw a spacious and nicely decorated sitting room of about 350 square feet in area.  At one end of the sitting room and forming part of it was an area of about 100 square feet covered by a glass-roof (“the extension”) which, by letting in more natural light, made the sitting room “quite nice”.

3.  Within a few days of that visit, on 14 June 2008, the vendor and the purchaser entered into the provisional agreement for the sale and purchase of the property for $9.58 million, with completion on 17 September 2008.  A deposit of $400,000 was paid followed by a further deposit of $558,000 on 25 June 2008 when, as provided in the provisional agreement, the parties should have entered into a formal agreement but, in fact, did not.

4.  On 8 July 2008, the vendor’s solicitors delivered the title deeds and relevant documents to the purchaser’s solicitors.  It included various plans that had not been coloured leading to identification difficulties.  The purchaser’s solicitors raised requisitions (“the first requisition”) on 18 August 2008 in respect of them.  Coloured plans were obtained from the Land Registry and supplied on 23 September 2008.

5.  Although, in response to the court’s query, Mr Chong (who appeared for the vendor) informed the court that one of the plans supplied on 23 September was the plan (in appeal bundle CII/319) which was attached to the assignment to the vendor dated 8 April 2005 (“the assignment plan”), showing the layout of each floor of Town House No. 30 as well as a section plan, it would appear that the judge thought otherwise: see §4 of the judgment.  Be that as it may, nothing turns on the date the assignment plan was supplied.

6.  The completion date was postponed by agreement to 10 October 2008.  A pre-completion inspection took place on 8 October 2008.  Following that inspection the purchaser’s solicitors wrote on 9 October 2008 to complain of “alterations and/or additional structures” (which had not been disclosed) being unauthorised building works and a defect in title unless the prior approval of the Buildings Department had been obtained.  Such works included the conversion and incorporation of about one-third of the area designated in the assignment plan as car park no. 39, consisting of approximately 100 to 150 square feet (“the car park encroachment”) into and as part of the sitting room.  The purchaser raised a requisition (“the second requisition”) relating to that.

7.  On 11 October 2008, the vendor’s solicitors refused to answer the second requisition on the basis that it was out of time but enclosed an architect’s certificate to the effect that the alteration works complained of were non-structural and did not require Building Authority approval.

8.  Later the same day, the purchaser through its solicitors wrote to the vendor’s solicitors accepting the vendor’s repudiation.  Meanwhile, the vendor’s solicitors caused work to be undertaken to restore the car park to its original size thereby reducing the size of the sitting room by about a third.

9.  On 13 October 2008, the vendor’s solicitors wrote to the purchaser’s solicitors enclosing an architect’s certificate certifying that the house had been reinstated in accordance with the original building plan and requesting that completion take place that same day.

10.  The complaint relating to the extension was not raised until 18 May 2009.  Mr Hui explained that it was only when he met with the purchaser’s legal advisers that day and was shown a copy of the plan for the first time that he realized that the extension was built on and encroached upon the common area of the development.  A requisition (“the third requisition”) was then raised regarding the extension.

11.  The judge made a number of findings.  For the purposes of this appeal, it suffices to mention the following:

(1) the extension encroached upon the common area of the development;

(2) the extension was part of the property agreed to be sold;

(3) the sitting room without the car park encroachment and the extension would be an entirely different room from that seen by Mr Hui; and

(4) the car park encroachment and the extension were defects going to the root of title but were discoverable by the purchaser had it exercised due diligence.

12.  The judge held that the second and third requisitions were raised out of time because those defects which went to the root of title were readily discoverable had the purchaser exercised due diligence by viewing the assignment plan.  Nevertheless, he found for the purchaser, rejecting the submission that the vendor’s obligation to give a good title had been waived.

13.  It would be convenient to highlight a number of matters which emerged at the hearing when the assignment plan was considered in conjunction with the photographs of the ground floor level of the property:

· the access road formed the northern boundary of the property and was at right angles to the car parking space;

· at the time Mr Hui viewed the property, the front door faced the access road and opened onto the car park which occupied the space between the road and the front door;

· the car park occupied only about two-thirds of the area depicted on the assignment plan as car park 39;

· according to the assignment plan the northern and southern sides of the ground floor were not enclosed: the ground floor did not have a boundary wall at its southern end and there was no wall running east-west to form the southern end of the car park and dividing it from the rest of the ground floor;

· on the other side of the southern boundary of the property was the common area of the development;

· the front door and the immediate surrounding wall were not original features of the development;

· the original front entrance to the house was a south-facing door situated near the rear of the property and opening onto a staircase which led up to the first floor of the property;

· access to the original front entrance from the road required traversing the length of the ground floor and then making a U turn near the southern boundary;

· as originally built, there was no sitting room situated on the ground floor.

14.  It is not unusual for developments of the kind in question for there to be some provision in the DMC prohibiting alterations to the original development without the prior consent of the incorporated owners.  Suffice it to say that the creation of the sitting room on the ground floor itself could have been problematic but as the DMC was not in evidence, it is not a matter that needs to be addressed for present purposes.

This appeal

15.  It was unclear whether Mr Chong was challenging the judge’s finding that the property agreed to be sold included the extension.  After some hesitation, Mr Chong clarified his position: he was not seeking to reverse that factual finding and accepted that the extension was part of the subject matter of the provisional agreement.  On that basis, the matter appears to be straightforward.

16.  While the law as to requisitions appeared to have occupied a significant part of the debate below, ultimately it does not provide the key to the outcome of these proceedings.  The obligations to show and to give a good title to the property are separate and independant.  Requisitions are relevant to the former and provide the vendor with the opportunity to extricate himself from the transaction by returning the deposit in the event that requisitions throw up defects or blots on the title that cannot be cleared or rectified in time.  But what the present case is about is the vendor’s obligation to give a good title.  Once it is accepted that the extension was part of the subject matter of the transaction, the obligation was on the vendor to give a good title to it on completion.  As it was erected on the common area of the development, plainly the vendor had no title that she could give on completion.  That would seem trite.

17.  As I understand it, Mr Chong’s answer was threefold: first, the de minimus principle was said to apply; second, by failing to raise timely requisitions relating to the car park encroachment and the extension which defects were patent and discoverable by the exercise of due diligence, the purchaser had accepted the vendor’s title; and third, by submitting a draft assignment for approval, the purchaser had waived its right to a good title.

Substantial performance?

18.  In essence, Mr Chong’s submission was that as the area occupied by the extension represents approximately only 5% of the gross floor area of the property, the vendor had tendered substantial performance.  But the relevant factors to be taken into account in determining the question of substantial performance plainly would depend on the facts of the particular case.  The circumstances may require that other matters be taken into consideration.

19.  In the present case, the unchallenged evidence of Mr Hui was that the property was purchased for earning rental income, that the size of the sitting room on the ground floor had made a favourable impression on him, natural light from the extension being a “very special feature” of the room.  In those circumstances it would be wrong to decide the question of substantial performance by reference to the shortfall in terms of area only and ignoring other material considerations.  For those reasons, I consider the submission based on de minimus to be wholly misconceived.

Effect of failure to make requisitions

20.  Mr Chong’s proposition is that the purchaser’s failure to raise requisitions of defects discoverable by the exercise of due diligence amounts to an acceptance of the vendor’s title even if the defects go to the root of title.  I note that Mr Chong had unsuccessfully advanced a similar proposition in Billion Best (Hong Kong) Ltd v Amity Investment Co Ltd [2002] 1 HKLRD 392.  In the court below, it had been put on the basis of a waiver which, in essence, is the other side of the same coin.

21.  I regret that I find the proposition advanced (in its various guises) unsound.  As I have endeavoured to explain, requisitions have to do with the vendor’s obligation to show a good title.  The vendor’s obligation to give a good title is an entirely independent obligation.  In the first place, implicit in the judgment of this court in Strong & Associates Ltd v Flywin Co Ltd [2002] 1 HKC 54 is the proposition that the vendor’s obligation to give a good title is irrespective of requisitions.

22.  If Mr Chong’s proposition be correct, it would have the effect of imposing on the purchaser a positive obligation to raise requisitions timeously where the defect is patent and hence discoverable by the exercise of due diligence, even if the defect is one that goes to the root of title.  The consequence of the purchaser failing to do so would result in the vendor (who had the obligation to give a good title in the first place) reaping what would effectively be a windfall, inasmuch as the vendor would be relieved from performing what had been his obligation.  That cannot be correct as a matter of law because it would have the effect of reversing the legal burden of giving a good title.

23.  Logically, a vendor’s obligation to give a good title on completion cannot depend on whether a requisition as to defects was raised within time or was raised late or not at all.  Either he is in a position to give a good title on completion or he is not.  Requisitions cannot alter the nature of that obligation.

24.  In the present case, the vendor must have known of the defects in her title since the assignment plan (which was attached to the assignment of the property to the vendor) did not show either a wall with the front door abutting the car park or the extension.  Those defects were not disclosed to the purchaser.  Nor was there any express contractual provision excluding objection to title based on those defects which would have been the only way the vendor could have extricated herself from her title difficulty.  But that does not arise for consideration because there was no such contractual provision.  Had there been one, the court’s approach to the construction of such a provision is clear.  As Lord Hoffmann explained in Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 299 E-G:

“… It is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew. No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do… Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so.”

25.  I have no hesitation in rejecting the vendor’s proposition.  It has no foundation at law.

26.  Insofar as the question of waiver based on the submission of a draft assignment is concerned, the submission does not even get off the ground for the reasons given by the judge.

27.  Finally, I would add this observation regarding the test of ‘due diligence’ laid down by the judge in the context of requisitions but which does not impinge on this appeal.  The judge held that it required the purchaser to peruse the title deeds and plans together with his solicitor.  For my part, I have some reservations as to the correctness of that holding since it would appear that it was reached in the absence of evidence relating to the Hong Kong practice in that regard.

Order

28.  I would dismiss this appeal.  I would also make an order nisi of costs in favour of the purchaser.

Hon Cheung JA:

29.  I agree.

Hon Yuen JA:

30.  I agree with the judgment of Le Pichon JA, save that it is not necessary in this appeal to consider whether a purchaser should be expected to examine title deeds and plans together with his solicitor for the purposes of requisitions, and I express no view on the issue.

Hon Le Pichon JA:

31.  Accordingly, there will be an order in terms of §28 above.