YES PROFIT INVESTMENT LTD v. MAINLY TONE CO LTD

HCA 2656/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2656 OF 2008

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J U D G M E N T

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Introduction

1.  This action concerns a contract for the sale and purchase of certain shop premises particulars of which will be further described below.  The defendant was the vendor and the plaintiff was the purchaser.  The contractual completion date was on 6 August 2007.  The transaction fell through because, according to the plaintiff, the defendant failed to answer or satisfactorily answer two requisitions on title, one relating to a toilet constructed in the shop which the plaintiff said involved unauthorised building works and the other relating to a part of the shop which the plaintiff said encroached upon Government land.  The plaintiff also contended that the defendant’s title to the shop was defective.  The plaintiff did not complete the purchase, and the defendant terminated the sale and purchase contract and forfeited the initial and further deposits paid by the plaintiff.  In this action, the plaintiff seeks to recover the initial and further deposits, and claims damages against the defendant for breach of contract, including damages for loss of bargain and other special damages.

2.  On the other hand, the defendant says that the plaintiff decided not to complete the purchase because it had found out that the purchase price which it had agreed to pay to the defendant was substantially above the open market price of the shop, and raised the objections on the title of the shop as desperate excuses to back out from the bargain.  The defendant counterclaims against the plaintiff for a declaration that the plaintiff was in wrongful repudiation of the contract, a declaration that it was entitled to forfeit the initial and further deposits, damages (namely, wasted legal costs incurred for the abortive sale of the shop), and other consequential relief.

Provisional Agreement for Sale and Purchase

3.  The defendant was at all material times, and still is, the owner of what may, for convenience, be described as Shop 1 on the Ground Floor of Lucky Building, Nos 186-194 Woosung Street and Nos 55-63, 67-73 Austin Road, Kowloon (“the Shop”).

4.  By a Provisional Agreement for Sale and Purchase dated 4 May 2007 (“the Provisional Agreement”), the defendant agreed to sell and the plaintiff agreed to purchase, for the consideration of HK$10,100,000, a property which was described in Clause 1 of the Provisional Agreement as follows:

“Shop 1 on Ground Floor (No.55 Austin Road), Lucky Building Nos. 186-194 Woosung St, Nos.55-63, 67-73 Austin Road, Kln.” (hereinafter referred to as “the Premises”).

5.  The Provisional Agreement was in the standard form of an estate agency called K & C Property Agency Limited (“the Agent”). Under or pursuant to the Provisional Agreement:

(1)     the plaintiff paid to the defendant an initial deposit in the sum of HK$300,000 upon the signing of the Provisional Agreement;

(2)     the plaintiff was to pay to the defendant a further deposit in the sum of HK$710,000 upon the signing of the formal agreement for sale and purchase on or before 18 May 2007; and

(3)     the plaintiff was to pay to the defendant the balance of the purchase price in the sum of HK$9,090,000 upon completion on or before 6 August 2007.

6.  Clause 3 of the Provisional Agreement provided that upon completion, the defendant was to deliver vacant possession of the Premises to the plaintiff.

7.  Clause 11 of the Provisional Agreement provided that the Premises were sold to the plaintiff on an “as is” basis.

8.  Clause 12 of the Provisional Agreement provided that it superseded all prior negotiations, representation, understanding and agreements of the parties thereto.

9.  Clause 14 of the Provisional Agreement provided and declared that the “Agent” was the agent for both the defendant and the plaintiff.

10.  Clause 16(C), which was in handwritten form, stated as follows: “附圖粉紅色部份” (English translation: the pink portion on the attached plan).  This provision, it would seem, was inserted in order to identify the subject matter of the sale and purchase under the Provisional Agreement.

11.  Attached to the Provisional Agreement is a plan marked “For Identification Purpose Only”.  The upper part of the plan is described as a “Block Plan” showing the location of KILs 8705PR, 8873, 8701, 8855, 8431, 8430, 8142 and 7214 (upon which Lucky Building is erected), and the lower part of the plan is described as a “Ground Floor” plan of Lucky Building (“the Ground Floor Plan”).  On the Ground Floor Plan, a rectangular area marked “1” (hereinafter referred to as “Shop 1”) is shaded or coloured (the copy of the plan which I have seen is a black and white photocopy).  There is also an arrow marked with the words “物業位置” (English translation: property location) pointing at Shop 1.  It is apparent that Shop 1 as marked on the Ground Floor Plan was intended by the parties to the Provisional Agreement to identify the location of the subject matter of the sale and purchase.

12.  From the Ground Floor Plan, it can be seen that Shop 1 is located at the corner of Lucky Building at the junction between Woosung Street and Austin Road. Adjacent to Shop 1 along Woosung Street is a shop marked “10” (hereinafter referred to as “Shop 10”).  Next to Shop 1 along Austin Road, and to its right side, is a shop marked “2” (hereinafter referred to as “Shop 2”). There are a few more shops to the right of Shop 2 along Austin Road before one reaches the main entrance to the lobby of Lucky Building.

Renewal of tenancy

13.  At the time of the making of the Provisional Agreement, the Shop was let to one Mr Ho Kwong Ming (“the Tenant”), who was carrying on a business called “Juicy Garden” at the Shop.  The tenancy was due to expire on 9 June 2007.

14.  On 7 May 2007, the defendant and the Tenant entered into a written agreement to renew the tenancy (“the Renewal Agreement”), under which the tenancy was to expire on 1 August 2007.  In the written agreement, it was expressly provided that at the time of termination of the tenancy, all the wooden partitions, the toilet and the installations on the ceiling in or of the Shop would be preserved.

Formal Agreement for Sale and Purchase

15.  On 18 May 2007, the defendant and the plaintiff entered into a formal agreement for sale and purchase (“the Formal Agreement”).

16.  The subject matter of the sale and purchase was described in Part V of the Schedule to the Formal Agreement as follows:

“ALL THOSE 9 equal undivided 1,030^th parts or shares of an in ALLL THOSE pieces or parcels of ground registered in the Land Registry respectively as KOWLOON INLAND LOT NO.8142, KOWLOON INLAND LOT NO.7214, KOWLOON INLAND LOT NO.8431, KOWLOON INLAND LOT NO.8430, KOWLOON INLAND LOT NO.8855, KOWLOON INLAND LOT NO.8701, KOWLOON INLAND LOT NO.8873, and THE REMAINING PORTION OF KOWLOON INLAND LOT NO.8705 And of and in the messuages erections and buildings thereon now known as LUCKY BUILDING, Nos.186-194 Woosung Street and Nos.55-63, 67-73 Austin Road, Kowloon (“the Building”) TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT SHOP 1 on the GROUND FLOOR (No 55 Austin Road) of the Building” (hereinafter referred to as “the Property”).

17.  There was no floor plan attached to, or referred to in, the Formal Agreement to further delineate the exact boundaries of the Property forming the subject matter of the sale and purchase.

18.  It is not necessary to recite in detail the provisions of the Formal Agreement except to note the following:

(1) By Clause 6, the Property was to be sold on an “as is” basis, the plaintiff was to take the Property as it stood, and no warranty was given by the defendant as to the area age state structure condition user or development potential of the Property and/or any building or buildings.

(2) By Clause 8, the defendant was to give a good title to the Property.

(3) By Clause 10(1)—

“Any requisition or objection in respect of the title or otherwise shall be delivered in writing to the Vendor’s Solicitors within seven (7) working days (time whereof shall be of essence) after the date of receipt of the title deeds by the Purchaser’s Solicitors otherwise the same shall be considered as waived. If no further requisition or objection on title is raised within 7 working days of the date of receipt of a reply by the Vendor’s solicitors to the Purchaser’s requisition or objection on title (if any) such requisition or objection on title shall be deemed to have been waived by the Purchaser (in which respect time shall be of essence).”

(4) By Clause 24, the Formal Agreement superseded and annulled all representation and statements made in the course of the negotiation leading to the said agreement and all previous agreements between the parties thereto (including the Provisional Agreement) or their agents whether implied or expressed verbal or written.

19.  Upon the signing of the Formal Agreement, the plaintiff paid to the defendant the sum of HK$710,000 as further deposit and in part payment of the purchase price of the Property.

20.  In view of the fact that the Formal Agreement was entered into pursuant to the Provisional Agreement and there is no suggestion that the parties intended to change or vary the subject matter of the sale and purchase under the two written agreements, the “Premises” and the “Property” referred to in the Provisional Agreement and the Formal Agreement respectively should refer to the same premises agreed to be sold by the defendant to the plaintiff.

Delivery of title deeds, and requisitions raised and answered

21.  On 1 June 2007, the defendant through its solicitors, Hampton, Winter and Glynn, delivered title deeds and documents relating to the Property to the plaintiff’s solicitors, Li, Chow & Co.

22.  On 1 July 2007, Li, Chow & Co raised various requisitions, and those requisitions were answered by Hampton, Winter and Glynn on 17 July 2007, apparently to the satisfaction of Li, Chow & Co.

The requisition relating to the toilet

23.  The defendant has been the owner of the Shop since 1995.  It is not in dispute that at the time of the Provisional Agreement, and indeed for a considerable period of time prior to that date, there was a toilet constructed in the Shop.

24.  According to Mr Choi Hon Lug (“Mr Choi”), a director and shareholder of the plaintiff who signed the Provisional Agreement on its behalf, he carried out a physical inspection of the Shop on 4 May 2007 prior to the signing of the Provisional Agreement.  At that time, he was accompanied by Ms Mu Ngai Ching (“Ms Mu”) of the Agent. Mr Choi said that he did not notice the existence of the toilet, apparently because the door of the toilet (facing Woosung Street) was closed at the time of the inspection.

25.  Mr Choi said that he first came to know of the existence of the toilet in the Shop when he received a copy of the Renewal Agreement from Ms Mu on 8 May 2007.  He noticed that the floor plan provided by Ms Mu (presumably a reference to the Ground Floor Plan) did not indicate that there was a toilet in the Shop and thus he immediately enquired with Ms Mu as to whether the toilet was authorised and could be used.  Later, Ms Mu told him that the plans for the toilet had been submitted and approved (presumably to and by the Building Authority).

26.  On the other hand, Madam Wan Chim Ping (Madam Wan), a director of the defendant who signed the Provisional Agreement on its behalf, said that Ms Mu had told her that the purchaser had requested that the toilet in the Shop should not be demolished upon completion of the sale and purchase because the purchaser thought that it would be easier to let the Shop to a tenant running a catering business if there was a toilet in the Shop.  I note that in paragraph 14(3B) of the Amended Defence, it is pleaded that this request of the plaintiff was made on or about 6 May 2007 (ie 2 days after Madam Wan signed the Provisional Agreement).  However, from paragraph 8 to 12 of Madam Wan’s 1^st witness statement, it appears that Ms Mu made this request on behalf of the purchaser on the occasion when Madam Wan met Ms Wu at McDonald’s Restaurant at Waterloo Road and signed the Provisional Agreement on behalf of the defendant.

27.  Madam Wan further said that it was because of the plaintiff’s said request that she agreed with the Tenant that upon termination of the tenancy (as renewed), the partitions and the toilet in the Shop should be preserved.

28.  Leaving aside for the moment the minor discrepancy in the defendant’s case mentioned in paragraph 26 above, the effect of Madam Wan’s evidence is that the plaintiff somehow found out the existence of the toilet in the Shop and requested that it should not be demolished, whereas Mr Choi’s evidence is that he only came to know about the toilet when he received a copy of the Renewal Agreement.  This alleged request of the plaintiff forms the foundation of the defendant’s defence of estoppel, a matter which I shall return to later in this judgment.

29.  As it was, the toilet did not become an issue between the parties until 30 July 2007, 7 days before the contractual completion date, when Li, Chow & Co sent a letter to Hampton, Winter and Glynn stating, inter alia—

“Meanwhile, we are instructed by our client to request your client to provide us with evidence that the lavatory attached to the subject property is an alteration work approved by the relevant authorities.”

30.  It may be noted that there was, at that stage, no allegation that the toilet was unauthorised.  What the plaintiff was seeking was evidence from the defendant that the toilet had been approved by “the relevant authorities”, without specifying which authorities the plaintiff had in mind.

31.  In a further letter dated 2 August 2007, Li, Chow & Co sent to Hampton, Winter and Glynn a “Survey Report of the Property” prepared by RHL Appraisal Limited dated 31 July 2007, in which it was stated, inter alia, that—

“As revealed from our on-site inspection, a toilet of brickwork construction with ancillary pipes with a dimension of 2’-10” x 4’ -8” and door opening onto Woo Sung Street had been erected thereon the northwestern corner of the Property…

As the abovementioned addition and alteration works do not concur with the latest approved building plans obtained from the Building Authority.  The erection of such toilet will increase the work load and thus interfere the normal functioning of the existing drainage system.  Unless prior approval and consent from the Building Authority in respect of the abovementioned addition and alteration works has been given and presented, subject to the final decision of the Building Authority, they are considered as unauthorized structures.”

32.  In Hampton, Winter and Glynn’s reply to Li, Chow & Co dated 6 August 2007, Hampton, Winter and Glynn stated that the requisition regarding the toilet was a new requisition or objection on title which was raised out of time and accordingly such requisition or objection on title was deemed to have been waived by the plaintiff under Clause 10(1) of the Formal Agreement.

33.  By another letter to Li, Chow & Co dated 6 August 2007, Hampton, Winter and Glynn, without prejudice to its earlier letter, sent copies of a Food Factory Licence (issued to the Tenant), the Business Registration Certificate of “Juice and Sandwich” and the layout plan of the Shop prepared by the Tenant.

34.  By a further letter to Li, Chow & Co dated 9 August 2007, Hampton, Winter and Glynn, without prejudice to their contention that the plaintiff’s requisition or objection on title in respect of the toilet was raised out of time, sent a Certificate dated 9 August 2007 prepared by Mr Michael W K Yuen (Authorised Person), in which Mr Michael Yuen purportedly confirmed and certified that the addition or alteration works in respect of, inter alia, the toilet were not unauthorised structures or alterations but were exempted works under Section 41(3) and Section 41(3A) of the Buildings Ordinance and did not require approval from the Building Authority.

The requisition relating to the encroachment

35.  It is not in dispute that there was, at all material times, a raised floor platform in the Shop, and that a part of this floor platform extended beyond the proper boundary of the lots referred to in Part V of the Schedule to the Formal Agreement (“the Lots”) along Austin Road and encroached upon Government land.

36.  According to the evidence of Dr Daniel Ho, an authorised person and the plaintiff’s expert, which I accept, the raised floor platform extended beyond the boundary of the Lots along Austin Road by about 16 inches, and the area of the Shop was enlarged by about 11.83 square feet (123.88 square feet less 112.05 square feet).  These figures may not be 100% accurate, but are sufficient for the present purpose.

37.  By a letter from Li, Chow & Co to Hampton, Winter and Glynn dated 15 August 2007, Li, Chow & Co purportedly raised a further requisition on behalf of the plaintiff in respect of the encroachment. In that letter, it was stated that the encroachment was an unauthorised structure and liable to enforcement action by the Government.  Li, Chow & Co also questioned how the defendant could legally sell and assign the encroached area to the plaintiff.

38.  By a letter in reply to Li, Chow & Co dated 15 August 2007, Hampton, Winter and Glynn contended that this new requisition was raised out of time, and any objection on title was deemed to have been waived.

The sale and purchase fell through

39.  The plaintiff did not complete the purchase of the Property on the contractual completion date (6 August 2007).

40.  By the letter dated 9 August 2007 (referred to in paragraph 34 above), Hampton, Winter and Glynn on behalf of the defendant gave final notice to Li, Chow & Co that unless the plaintiff completed the purchase of the Property by 5:00 pm on 16 August 2007, the defendant would terminate the Formal Agreement and forfeit the deposits paid by the plaintiff.

41.  The plaintiff did not complete the purchase of the Property by 5:00 pm on 16 August 2007 or at any time thereafter. Accordingly, by a letter from Hampton, Winter and Glynn to Li, Chow & Co dated 16 August 2007, Hampton, Winter and Glynn on behalf of the defendant gave notice of termination of the Formal Agreement and forfeiture of the deposits paid by the plaintiff.

42.  The present action was commenced by the plaintiff by Writ on 17 December 2008.

Defendant’s title was defective by reason of the encroachment

43.  The first issue between the parties is whether the encroached area formed part of the Property agreed to be sold by the defendant to the plaintiff under the Formal Agreement.  It is the plaintiff’s case that the encroached area formed part of the Property which the defendant agreed to sell to the plaintiff under the Formal Agreement.  On the other hand, the defendant’s case is that the Property which it agreed to sell to the plaintiff was the shaded or coloured area on the Ground Floor Plan, ie Shop 1 as marked on that plan, and excluded the encroached area.

44.  Neither the Provisional Agreement nor the Formal Agreement clearly defined the physical boundaries of the Premises or Property which the defendant agreed to sell to the plaintiff.

45.  As earlier mentioned, the Provisional Agreement described the subject matter of the sale and purchase by reference to “Shop 1” with a given address.  Although there was a floor plan attached to the Provisional Agreement, it was stated to be “For Identification Purpose Only”.  Hence, this plan cannot be regarded as setting the precise boundaries of the Premises which the defendant agreed to sell to the plaintiff (see Pennock v Hodgson [2010] EWCA Civ 873 at paragraphs 9 to 12; Strachey v Ramage [2008] P & CR 8 at paragraph 31).

46.  In so far as the Formal Agreement is concerned, the subject matter of the sale and purchase was described by reference to a number of undivided shares of and in the relevant land and building together with the sole and exclusive right and privilege to hold use occupy and enjoy “ALL THAT SHOP 1 on the GROUND FLOOR (No.55 Austin Road) of the Building”.  There was no floor plan attached to the Formal Agreement.  It is not possible to discover, from the terms or provisions of the Formal Agreement, what were the physical boundaries of the Property which the defendant agreed to sell to the plaintiff.

47.  In these circumstances, I consider that it is permissible for the Court to look at the surrounding, objective, circumstances to determine what the parties intended the description “Shop 1” or “ALL THAT SHOP 1” in the Provisional Agreement or Formal Agreement to embrace.

48.  In my view, the most significant surrounding circumstance is that the raised floor platform appeared to be a uniform, continuous, floor slab extending from the interior of the Shop, and form an integral part of the Shop.  An objective bystander would naturally regard the raised floor platform as part and parcel of the Shop. 

49.  In the absence of any qualification in either the Provisional Agreement or Formal Agreement regarding the physical boundaries of the subject matter of the sale and purchase, I consider it to be the clear intention, objectively ascertained, of the parties that the description “Shop 1” or “ALL THAT SHOP 1” should include the whole area occupied by the raised floor platform.

50.  In coming to this conclusion, I have not attached any weight to the evidence of Mr Choi that on the occasion when he carried out an inspection of the Shop on 4 May 2007, he and Ms Mu measured the area of the Shop taking into account the whole area occupied by the raised floor platform.  This may be evidence that both Mr Choi and Ms Mu thought that the whole area occupied by the raised floor platform formed part of the Shop which the plaintiff intended to purchase form the defendant, but cannot be treated as evidence of the defendant’s intention as regards the physical boundaries of the Shop which the defendant agreed to sell to the plaintiff.  In this connection, I do not consider that there is evidence, or sufficient evidence, that Ms Mu had actual or apparent authority to make any representation on behalf of the defendant as regards the size or physical boundaries of the Shop.

51.  As earlier mentioned, there is no dispute that a part of the raised floor platform did encroach upon Government land.  In the circumstances, it is clear that the defendant did not have title to a part of the “Property” which it agreed to sell to the plaintiff under the Formal Agreement.

Plaintiff not debarred from raising or maintaining objection on title based on the encroachment

52.  The plaintiff first raised a requisition on title based on the encroachment on 15 August 2007, beyond the time limit for raising of requisitions as stipulated in Clause 10(1) of the Formal Agreement.

53.  Nevertheless, a purchaser is entitled to raise a requisition or objection on title out of time if (i) it goes to the root of title and (ii) the defect in the title could not have been discovered had the purchaser exercised due diligence (see Lucky Dragon Corp Ltd v Speedy Vantage Ltd [2009] 5 HKLRD 501 at paragraph 20).

54.  In the present case, the defendant had no title in respect of the part of the Property which encroached upon Government land. Further, the area of the encroachment, relative to the size of the Shop, is significant.  For this reason, the doctrine of substantial performance cannot have any application to the present case.  Also, I consider that the objection on title based on the encroachment does go to the root of title.

55.  Further, I accept Mr Choi’s evidence that he only learned about the encroachment when he was advised of the same by Mr Joseph Y K Leung, an authorised person, who was instructed to inspect the Shop on 13 August 2007.  I should mention that Mr Joseph Y K Leung’s instruction came about because, apparently, the defendant had on 9 August 2007 produced the certificate from Mr Michael Yuen stating that the alterations and additions relating to the construction of the toilet were exempted works and did not require approval from the Building Authority. It is not in dispute that there were similar encroachments in other ground floor shops in Lucky Building along Austin Road, and there did not seem to be anything which would have alerted the plaintiff to the existence of the encroachment.  I do not consider that the plaintiff should have discovered the existence of the encroachment earlier by the exercise of due diligence.

56.  For the above reasons, I consider that the plaintiff was entitled to raise the requisition on title based on the encroachment on 15 August 2007.  The requisition was not properly answered by the defendant, the only answer being that it was raised out of time.  The defendant’s title of the Property was defective, and the defect goes to the root of title.  It follows that the plaintiff was entitled not to complete the purchase of the Property on 16 August 2007.

Other issues arising out of the toilet

57.  The above conclusion renders it unnecessary to resolve the many issues arising out of the toilet which were ventilated at the trial.  However, for the sake of completeness and in view of the possibility that this matter may go further, I shall express my views briefly.

58.  First, it seems to me clear that the construction of the toilet involved a contravention of Regulation 36 of the Building (Planning) Regulations, Cap 123F, in that the toilet was not provided with a window or lantern light satisfying the requirements of sub-paragraphs (2) and (3) of that regulation.  For this reason, the works for the construction of the toilet could not be exempted works under Section 41(3) of the Buildings Ordinance, Cap 123 (1997 version), because that section does not permit any building works to be carried out in contravention of any regulation.

59.  Second, I accept the evidence of Dr Daniel Ho that the drainage connection between the toilet bowl and the manhole was probably by means of an underground soil pipe the laying of which would require the cutting of ground beams.  The alternative drainage arrangement postulated by Mr Michael Yuen would involve the laying of an exposed soil pipe leading from the toilet bowl to the manhole, but the contemporaneous photographs of the toilet and the Shop do not show, so far as one can see, any exposed soil pipe.  For this reason, I am unable to accept the evidence of Mr Michael Yuen on the alternative drainage arrangement.  I also accept the evidence of Dr Daniel Ho that the drainage works involved in the laying of the underground soil pipe could not be exempted works under Section 41(3A) of the Buildings Ordinance because the works would involve the structure of the building (as they required the cutting of ground beams).

60.  Third, while the risk of enforcement action being taken by the Building Authority might not be high, I am unable to say that the risk was fanciful.  Accordingly, there was technically a defect in title.

61.  Fourth, the defect does not go to the root of title.  The toilet and the drainage connections could be demolished or removed and the Shop reinstated without much difficulty or expense.  According to the Dr Daniel Ho, the plaintiff’s expert, it would cost HK$10,680 to remove the toilet and the encroachment and reinstate the Shop.  Mr Michael Yuen’s evidence is that it would cost no more than HK$10,000 to remove the toilet and reinstate the Shop. In this connection, I do not consider that the plaintiff can rely on Clause 6 of the Formal Agreement, which provided that the Property was to be sold on an “as is” basis.  If the defendant could not deliver the Property on an “as is” basis at completion, this might give rise to a claim in damages (an issue which I do not have to decide in the present case), but this has nothing to do with the question of whether the defect goes to the root of title.

62.  Fifth, the plaintiff could have discovered the defect in title earlier by the exercise of due diligence.  As mentioned above, Mr Choi was aware of the existence of the toilet on 8 May 2007.  He also had the Ground Floor Plan at that time, which was attached to the Provisional Agreement.  The Ground Floor Plan did not indicate the existence of any toilet in Shop 1.  He was alerted to the possibility that the toilet might involve unauthorised building works, but was assured by Ms Mu that the plans for the toilet had been submitted and approved.  Mr Choi said that he was satisfied with this assurance because Ms Mu told him that it was based on what she had been told by the defendant.  The plaintiff did not call Ms Mu to give evidence at the trial, and I am not prepared to give any weight to her statutory declaration dated 20 January 2009 on this matter.  I reject the plaintiff’s allegation that it was misled by the defendant that the toilet was authorised. The plaintiff could easily have investigated the issue of whether the toilet involved unauthorised building works, as shown by its subsequent conduct starting from 30 July 2007, instead of relying on a bare assertion made by Ms Mu. In all, I consider that the defect in title could have been discovered by the plaintiff within the time stipulated in the Formal Agreement for the raising of requisitions had the plaintiff exercised due diligence.

63.  Sixth, by virtue of Clause 10(1) of the Formal Agreement, the plaintiff was deemed to have waived the defect in title arising from the toilet, and could not rely on such defect as an excuse not to complete the purchase of the Property.

64.  Lastly, I do not consider that the matters mentioned in paragraphs 26 to 28 above could give rise to any estoppel preventing the plaintiff from relying on the defect in title arising from the toilet (assuming that the Plaintiff is otherwise entitled to do so).  Even if I accept Madam Wan’s evidence that the plaintiff had requested that the toilet should not be demolished, such request could not amount to a representation by the plaintiff that it would accept or waive any defect in title arising from the toilet.

Relief

65.  As mentioned in paragraph 56 above, I consider that the plaintiff was entitled not to complete the purchase of the Property on 16 August 2007, and the defendant’s purported termination of the Formal Agreement and forfeiture of the deposits paid by the plaintiff were wrongful.

66.  Accordingly, the plaintiff is entitled to recover the initial deposit of HK$300,000 and further deposit of HK$710,000 paid to the defendant.

67.  Further, the plaintiff is entitled to recover the wasted conveyancing costs, including costs of investigation of title, in the amount of HK$18,500 (page 975 of Trial Bundle D).  The other documents relied upon by the plaintiff (pages 976 to 982 of Trial Bundle D) all appear to relate to costs incurred in connection with this litigation.

68.  The plaintiff also claims professional fees incurred for preparation of reports for requisition purpose.

(1)     RHL Appraisal Ltd’s receipt dated 1 August 2007 (page 971 of Trial Bundle D) was issued in relation to a “Valuation Report” which could not have been prepared for raising any requisition.

(2)     The same comment applies to RHL Appraisal Ltd’s receipt dated 23 December 2008 (page 972 of Trial Bundle D).

(3)     At page 973 of Trial Bundle D is an invoice from Jones Lang LaSalle dated 6 September 2007 issued to Standard Chartered Bank (Hong Kong) Limited, the proposed mortgagee.  Jones Lang LaSalle prepared a valuation report of the Property dated 6 August 2007.  It is obvious that the fee payable to Jones Lang LaSalle was not incurred for the preparation of any report for requisition purpose.

(4)     Lastly, at page 974 of Trial Bundle D is an invoice for HK$5,000 from Joseph Y K Leung & Associates dated 14 August 2007 for the preparation of an Assessment Report.  The plaintiff relied on Joseph Y K Leung & Associates’ report dated 13 August 2007 to raise the requisition relating to the encroachment.  I would allow the plaintiff’s claim for the professional fee of HK$5,000 charged by Joseph Y K Leung & Associates.

69.  In all, I allow the plaintiff’s claim in respect of wasted conveyancing costs, including costs of investigation of title, in the total amount of HK$23,500.

70.  Lastly, the plaintiff claims damages for loss of bargain, based on the difference between the open market price of the Property as at the date of wrongful repudiation (16 August 2007) and the contract price (HK$10,100,000).  The plaintiff relies on the evidence of Mr Ian Cullen and contends that the open market price of the Property as at 16 August 2007 was HK$10,860,000.  The defendant says, however, that the open market price of the Property as at 16 August 2007 was only HK$7,024,000, and relies on the evidence of Mr Ip Wan Chak for this purpose.

71.  At the trial, the parties agreed that it was not necessary for the valuation experts to give evidence or be cross examined, and the parties were content to simply make submissions on the contents of the valuation reports prepared by the respective valuers.

72.  Mr Ian Cullen’s valuation is based on an analysis of 7 comparables in his second report dated 22 May 2013.  I am unable to accept his analysis for three main reasons:

(1) One of the comparables that Mr Ian Cullen relies upon is the subject sale and purchase transaction in respect of the Property in May 2007 at the price of HK$10,100,000 (C5).  Mr Ian Cullen makes a positive adjustment of 9.5% on account of “Time Lag” for the purpose of deriving the unit rate as at 16 August 2007.  The problem with the use of the subject sale and purchase transaction as a comparable is that it assumes that the contract price properly reflected the open market price of the Property as at May 2007.  However, it is questionable whether this assumption is valid, in view of the valuation given by Jones Lang LaSalle that the open market price of the Property as at 6 August 2007 was only HK$6,700,000.  Jones Lang LaSalle also considered various comparables before arriving at its valuation.  Even if one disregards any adjustment on account of “Time Lag”, the substantial difference between Jones Lang LaSalle’s valuation and the contract price is something which should have been considered, but was apparently not considered, by Mr Ian Cullen.  It may be that Mr Ian Cullen would have good reasons to disagree with Jones Lang LaSalle’s valuation, but that issue was never explored at the trial.

(2) Of the 7 comparables analysed, Mr Ian Cullen has decided to give no weight to 2 of them on the basis that they “appear out of line” (in that the unit rates of the 2 comparables are substantially lower than the units rates of the remaining 5 comparables).  This treatment, however, begs the question of whether it was the remaining 5 comparables which were “out of line”.

(3) In respect of the 5 remaining comparables, Mr Ian Cullen has given a weighing factor of 8 out of 17 (ie more than 47%) to the subject sale and purchase transaction in respect of the Property. The weighing factor given to this “comparable” compounds the problem mentioned in (1) above.  Also, Mr Ian Cullen has given a weighing factor of 6 out of 17 to another comparable (C4), and a weighing factor of 1 out of 17 to each of the other 3 comparables (C1, D5 and D7).  Mr Ian Cullen has not, however, provided any objective justification for these weighing factors.

73.  The plaintiff also relies on the fact that after the termination of the Formal Agreement on 16 August 2007, the Property was apparently put on the market again and the asking prices were much higher than HK$10,100,000.  I note that the asking prices varied very considerably (from HK$12,800,000 to HK$18,000,000) and there was in fact no concluded transaction for the sale and purchase of the Property.  I do not see how the asking prices can be regarded as any evidence of the open market price of the Property.

74.  On the other hand, Mr James Lee for the plaintiff has made various criticisms of the valuation of Mr Ip Wan Chak.  His valuation of HK$7,024,000 is, however, close to the valuation of Jones Lang LaSalle (HK$6,700,000).

75.  In all the circumstances, I am not satisfied that the plaintiff has proved, on the balance of probabilities, that the open market price of the Property as at 16 August 2007 was higher than the contract price of HK$10,100,000.  It follows that I am not prepared to make any award of damages to the plaintiff for loss of bargain.

76.  Of the various declarations sought by the plaintiff, I would grant a declaration that the plaintiff is entitled to an equitable lien on the Property for the initial and further deposits and damages which I consider the defendant is liable to return or pay to the plaintiff.  I decline to make the other declarations sought by the plaintiff because they are not necessary.

77.  The defendant’s counterclaim is dismissed.

Interest and costs

78.  I order the defendant to pay the total amount of HK$1,033,500 to the plaintiff together with interest at the prime rate quoted by HSBC from time to time plus 1% per annum from 16 August 2007 to the date of judgment and thereafter at judgment rate to the date of payment.

79.  As to costs, I reckon that at least 50% of the time at the trial was spent on the issues of whether or not the works for the construction of toilet were exempted works, and whether they involved contraventions of building regulations.  Although I have come to the conclusion that the plaintiff was not entitled to raise the requisition in respect of the toilet out of time and must be taken to have waived any defect in title arising from the toilet, I have accepted the evidence of Dr Daniel Ho in preference to that of Mr Michael Yuen on the technical issues.  In all the circumstances, I am not prepared to apportion the costs by reference to the issues raised at the trial, and I order the defendant to pay the plaintiff’s costs of the action and of the counterclaim, to be taxed if not agreed.

80.  Lastly, I wish to thank counsel for their assistance in this matter.