LUK STANLEY HO CHANG v. FOOK MAN FINANCE CO LTD

HCMP1808/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1808 OF 2005

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JUDGMENT

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1. This is a vendor and purchaser summons.  The Property is Flat A on the 4^th Floor, Kam Kok Mansion, 82-84, Kimberley Road, Kowloon.  The parties entered into an agreement dated 26 July 2005 (“the Agreement”) for the sale by the defendant and the purchase by the plaintiff of the Property at a price of $2,350,000.  Completion was to take place on 25 August 2005.

2. The Incorporated Owners of the Kam Kok Mansion (“IO”) had, at an owner’s meeting prior to the date of the Agreement, resolved to carry out major repair work and lift replacement, although the exact cost of the works had not yet been established.  The plaintiff claimed that, in terms of the Agreement, the defendant was responsible for the cost of the works, and offered to complete, subject to the deduction from the purchase price of $80,000, being the estimated cost, with that sum held by the defendant’s solicitors as stakeholder, and subject to a solicitor’s undertaking to return that sum once the works were completed.  This was refused; completion did not take place and the defendant, through solicitors, purported to forfeit the deposits already paid.

3. The plaintiff now claims :

(1) A declaration that the defendant is obliged under the terms of the Agreement for sale and purchase of the Premises to bear and pay its share (“the Share”) of the costs of the works in connection with or arising out of the resolutions of the IO of Kam Kok Mansion passed on 4 July 2005.

(2) A declaration that the plaintiff is not obliged to complete the purchase of the said premises or tender the balance of the purchase price for the said premises to the defendant or its solicitors unless and until the defendant has borne and paid the Share or the defendant’s liability to bear and pay the Share has been secured by provision of a bank guarantee or solicitors’ undertaking acceptable to the plaintiff.

(3) In the event of the defendant’s failure or refusal to bear and pay the Share or provide the bank guarantee or solicitors’ undertaking to secure its liability to bear and pay the Share a declaration that the plaintiff is entitled to deduct the sum of HK$80,000 being the best estimate of the Share (or such other sum as more accurately reflects the Share) from the balance of purchase price payable to the defendant when tendering the balance to the defendant for completion.

(4) Costs.

(5) Further and other relief.

The Agreement

4. The relevant clause of the Agreement is Clause 18 which reads :

“The Vendor warrants and declares that the Vendor has not received and is not aware of there being any outstanding notice or order from any Government or other competent authority or the Manager or resolutions passed by the Management Committee or The Incorporated Owners of the building of which the said Premises form part requiring the Vendor as one of the co-owners of the building to effect repair or renovation to any common part or facilities of the said building.  If it should be discovered that any such notice or order or resolutions existed prior to the date hereof imposing responsibility on the part of the Vendor as one of the co-owners of the building to effect repair or renovation, the Vendor’s share of the costs for such repair or renovation shall be borne and paid by the Vendor absolutely and subject as aforesaid the Purchaser shall complete the purchase of the said Premises.  The Vendor hereby undertakes to notify the Purchaser forthwith in writing upon receipt of any of the aforesaid notices or orders or resolutions.”

The resolutions

5. On 4 July 2005 the IO held an owners’ meeting.  The first matter discussed was the lift in the building.  The representative of an escalator company gave the meeting oral estimates for repair and replacement of the lift.  A majority of the meeting decided “to replace the lift”.  The second matter discussed was a number of structural and other repairs; five items in all.  A majority decided “to carry out overall major repair to the Mansion”.  The meeting then decided unanimously that the management committee be “authorised to follow up matters relating to tender invitation and the selection of contractors”.

6. This meeting was followed on 15 August by a meeting of the management committee at which the tenders were opened.  On 22 August, a further management committee meeting short-listed three tenderers, and on 14 September an owners’ meeting was held, at which the contractors were selected.  In respect of the lifts, the meeting resolved “that the lift replacement item and that the actual contract price payable to the contractor “Wu Lik” be in the net sum of $360,000”.  The various items of repairs were discussed and the meeting resolved “by overwhelming majority to carry out the above-mentioned items of maintenance and repair works and selected ‘Tak Po’ as the successful tenderer as well as authorising the management committee to negotiate the terms of contract with the successful tenderer”.

7. At the same meeting the owners further resolved that the contributions in respect of lift replacement expenses be $12,000 per unit, and the contribution in respect of the overall repairs of the Mansion be $60,000 per unit.  The contributions were to be payable in two instalments of $40,000, between 20 September and 5 October 2005, and $32,000 between 5 and 20 November 2005.  The building manager, Homechant Ltd, notified the owners of the decisions, and the requirement for payment of the contributions, on 20 September 2005.

The dealings between the parties

8. The parties entered into a provisional sale and purchase agreement on 27 June 2005.  This was followed by the Agreement on 26 July.  It provided for completion to take place on 25 August 2005.  On 1 August, the plaintiff’s solicitors, Messrs Hobson & Ma wrote to the defendant’s solicitors, Messrs Brian Kong & Co. with a copy of the resolutions of 4 July and asking them, in compliance with Clause 18, to stakehold sufficient funds from the balance of the purchase price for the purpose of compliance with the resolutions.  Brian Kong & Co. denied that the defendant was responsible for the repairs.  Further correspondence followed.  Having established from Homechant Ltd the approximate cost of the repairs, Hobson & Ma requested a stakeholding of $80,000.  Ultimately the plaintiff tendered cheques in settlement and requested that Brian Kong & Co. give an undertaking to hold $80,000 as stakeholder and release that sum or such lesser sum as would cover the defendant’s share of the cost of the works, or, if the cost was greater, to secure and repay the deficit. This was not accepted.  The defendant maintained its denial of liability and insisted on payment in full.  On 26 August 2005 the defendant’s solicitors wrote to the plaintiff’s solicitors purporting to terminate the Agreement and forfeit the deposits already paid.

9. The plaintiff had on 25 August 2005 issued the Originating Summons.  Originally the third prayer sought, in the event of the defendant’s failure to pay or secure the Share, a declaration that he was entitled to rescind the Agreement and an order for repayment of his deposits.  This was later amended.

The issues

10. The issue is whether the defendant is liable, as owner of the Property as at 4 July 2005, to bear the share of the cost of the major repair works and lift replacement.

11. The defendant also says that there is no provision for stakeholding, and Clause 3 of the Agreement required full payment.  Further it is said that if the plaintiff had wanted Clause 18 to cover situations where there was only a resolution to repair, but no determination of the scope of the works and the costs thereof, the plaintiff should have insisted on writing this into the agreement.  This latter point is not, I think, a separate issue, but rather it is advanced in support of the argument that the defendant is not liable.

12. It is also argued that if the defendant was liable, the plaintiff only had a potential right to claim damages; he should have tendered the full purchase price at completion, and claimed damages later once the cost of the share was established.

Liability for the share

13. The defendant argues that the resolution of 4 July 2005 neither required the defendant as one of the co-owners to effect repair or renovation, nor imposed on it the responsibility to do so.  In effect, it is argued that this resolution was only preliminary.  Tenders still had to be obtained, and the price agreed, and this was not done until the meeting of 14 September 2005.  The resolution was simply a “green light” for a further information-gathering exercised.  Once the information was obtained, the IO could still decide not to proceed if the work would cost too much.  Only at the September meeting was a resolution passed which required the individual owners to effect repairs and pay for them.  An owner is, by the definition contained in section 2 of the Building Maintenance Ordinance, Cap. 344, (“BMO”) a registered owner; and on 14 September 2005 the registered owner was the plaintiff.

14. It is also argued that changes of ownership are natural, and the parties to the Deed of Mutual Covenant, which provides for contributions by co-owners to building repairs, could not have intended that an owner registered as at 4 July would be responsible for works done in future, after the ownership had passed to another, who would take the benefit of the repairs.

15. Section 14(1) of the Building Management Ordinance provides :

“Subject to this Ordinance, at a meeting of a corporation any resolution may be passed with respect to the control, management and administration of the common parts or the renovation, improvement or decoration of those parts and any such resolution shall be binding on the management committee and all the owners.”

16. It seems to me that the effect of this provision is that, once the corporation resolves to repair the common parts of a building, that resolution becomes binding on the management committee and all the owners.  The management committee has to carry out the resolution, by getting tenders for the work, and either instructing the work, or putting the tenders to the owners for approval; but ultimately the resolution is binding on the owners and it means that the owners are responsible to pay for the work in the due proportions provided for in the DMC.  The relevant clause of the DMC concerned here is Clause 8; I need not reproduce it here.

17. I do not think it is right that the owners could change their collective mind as to whether or not to carry out repairs, once a resolution is made.  Section 18(1) of the BMO provides :

“(1) The corporation shall —

(a) maintain the common parts and the property of the corporation in a state of good and serviceable repair and clean condition;

(b) carry out such work as may be ordered or required in respect of the common parts by any public officer or public body in exercise of the powers conferred by any Ordinance;

(c) do all things reasonably necessary for the enforcement of the obligations contained in the deed of mutual covenant (if any) for the control, management and administration of the building.”

18. This provision is mandatory.  The IO is not allowed simply to let the building collapse, or the lifts crash to the bottom of the shaft.  The common parts must be maintained.  No doubt the IO could take time to establish which tender to accept and how much to pay for the works, but they must be done, and once it is decided to do them, there is no going back.

19. Counsel for the defendant seeks to characterise the resolutions of 4 July 2005 as some kind of provisional endorsement of future repairs, subject to determination of the scope and the costs of them.  In fact it is clear from the terms of the resolutions of 4 July 2005 that they were not provisional, and not intended to simply to authorise the gathering of information.  I have set them out above.  The resolutions came after the meeting had heard from the representatives of a lift company and a consulting company who had given approximate estimates of cost.  The lift company representative had presented the alternatives of repair and replacement.  The consultant had dealt with five different categories of repairs to be done, and then an owner also raised the question of waterproofing the roof.  The scope of the works was clear, and the costs were estimated orally.  The owners did not resolve to find out what the repairs would cost; they resolved to carry them out.

20. I do not see that the intention of the parties to the DMC comes into the picture.  Their intention, as may be seen from a reading of the relevant clause, is that all the owners pay their due proportions of the cost of repairs.  The money has to come from somewhere.  The arrangements made between individual owners on change of ownership are simply irrelevant to the rest of the owners, so long as someone pays.

21. It seems to me, therefore, that once the IO resolved to carry out repair works, which they did at the meeting on 4 July 2005, their resolutions, by the operation of section 14 of the BMO became binding on the individual registered owners and both required them and imposed responsibility on them to effect the repairs.  Liability was fixed.  The individual owners were liable to pay in the proportions provided for in the DMC, the cost of those repairs, even though the quantum of that cost had not yet been established.

22. It follows that Clause 18 of the Agreement applies, and the defendant, as vendor is liable to pay for those costs.

Stakeholding

23. It is true that the Agreement makes no provision for stakeholding and that Clause 3 requires payment in full on completion.  Clause 4 also requires that the vendor show and give a good title.  If there is an outstanding requirement to pay for repairs, the IO will be able to seek recovery of it from the owner from the time being of the Property.  After completion, that would be the plaintiff.  So the liability would be an encumbrance on the title.  A possible way to complete the title, and allow the defendant to give a good title clear of the encumbrance, would be by way of stakeholding and undertaking, as suggested by the plaintiff’s solicitors.  Counsel for the plaintiff refers, in this connection, to the case of Lam Mei Hing & Anor v. Chiung Shiu Yin [1995] 3 HKC 247, where the court ordered an undertaking and a stakeholding to allow completion where the encumbrance was a building order.  I do not see any practical difference between a building order and the resolution here.

24. Counsel also refers to the case of Hui Mei Yu Anastasia v. King Best Enterprise Ltd, HCA9317/1998, in which there was a somewhat similar situation.  Before completion, it was discovered that there was in existence a building order and the owners’ incorporation had resolved to carry out renovation works, though the cost of those works had not been established.  The resolution to renovate was seen as a contingent liability which, if not immediately, would in due course become an encumbrance.  That case differs factually from this one, not least in that the agreement there put the liability on the purchaser to pay if a notice or demand had been issued, served or made by any competent authority prior to completion.  Further, an undertaking had been offered, but simply dismissed.  In dealing with the undertaking, which he held to be reasonable and sufficient to discharge the incumbrance, Deputy High Court Judge To referred to this dictum of Litton PJ in Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 1 HKLRD 935 at 943 :

“A good title does not mean a perfect title, free from every possible blemish.  Whenever a question like this arises, it must be approached from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain.”

Here, there was no question of re-writing the Agreement.  The proposal of a stakeholding coupled with an undertaking was a reasonable way of dealing with the problem.

25. I do not see that there is anything in the argument that if the plaintiff had wanted Clause 18 to cover a situation where there was only a simple resolution to repair, but no determination of scope or costs, he should have insisted on writing it into the Agreement.  On my finding, the resolution to repair was enough to fix liability on the defendant for the purpose of Clause 18.

Potential claim for damages only

26. For the reasons given above in relation to the question of the stakeholding, I do not see that the plaintiff was under a duty to pay up first and claim damages afterwards.  There was an incumbrance, and he was entitled to have it removed before he completed.  That is the effect of Clause 18; the costs are to be “borne and paid by the Vendor absolutely and subject as aforesaid the Purchaser shall complete the purchase”.  I do not see that it is necessary to go into any question of whether Clause 18 should be construed as a term or a condition.

27. It is also argued that the plaintiff had accepted the defendant’s repudiatory breach, if breach there was, by not paying the full balance and by issuing the Originating Summons on 25 August 2005, and he cannot now revive the Agreement.  There is nothing in this.  The plaintiff through solicitors held himself out as willing and able to complete, subject only to agreement as to the proposed stakeholding and undertaking.  The Originating Summons as originally drawn only sought return of the deposits in the event of the defendant’s failure to bear and pay the costs or provide a bank guarantee or solicitor’s undertaking to bear and pay them.  I do not see that that could be regarded as acceptance of repudiation.

28. In fact, each side appears to have been willing to complete, subject to the other’s bearing the cost of repairs estimated at $80,000.  In fact the cost was established in September 2005 at $72,000.  Either figure represents around 3% of the purchase price.  One cannot but feel that there is an element of the ridiculous here.

Result

29. There will be judgment for the plaintiff in terms of the 1^st and 2^nd prayers of the Originating Summons, and in terms of the 3^rd prayer as amended to read :

“In the event of the defendant’s failure or refusal to bear and pay the Share, a declaration that the plaintiff is entitled to deduct the sum of HK$72,000.00 from the balance of purchase price payable to the defendant when tendering the balance to the defendant for completion.”

30. The costs will be to the plaintiff, to be taxed if not agreed.  Since the judgment is to he handed down the costs order is nisi.