STRONG & ASSOCIATES LTD. v. FLYWIN CO. LTD.

HCA5309/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5309 OF 1998

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J U D G M E N T

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1. The plaintiff as purchaser and the defendant as vendor entered into an agreement for the sale and purchase of the ground floor and cockloft of No 53 Granville Road, Kowloon, ("the Property") at a price of $63,700,000. The date of the provisional agreement was 20 August 1997. This was followed by a formal agreement dated 29 October 1997. The plaintiff paid deposits of Hong Kong $1,500,000 and $8,055,000. The completion date was to be 3 April 1998 but completion did not take place. The plaintiff issued proceedings on the same date originally claiming specific performance and damages in the alternative, as well as return of deposit and further declarations. The claim for specific performance has since been dropped. The defendant counterclaims for damages, a declaration that it was entitled to forfeit the deposits and other reliefs.

Background

2. The following facts appear from the documents or are otherwise not in dispute.

3. The Property is a clothing shop and at all relevant times, it was occupied by a tenant trading as Top Fashion. The Property originally belonged to Mark Glory Investment Ltd ("Mark Glory"). Uni-Pacific Property Consultant (Retail) Ltd ("UP"), in the person of a Mr Carmon Yeung, approached Mrs Ho Ke John Hwa, ("Mrs Ho"), the defendant's director, to buy the Property. On 6 March 1997 the defendant and Mark Glory entered into a provisional sale and purchase agreement in respect of the Property. The price was $53,500,000.00. The completion date was to be 26 September 1997.

4. In early August 1997 Mr Tony Lo Chin Ho ("Tony Lo"), another agent of UP, approached Mr Elvis Wong Hing Sun ("Mr Wong"), a director of the plaintiff. On 20 August the plaintiff entered into the provisional sale and purchase agreement to buy the Property from the defendant.

5. The provisional sale and purchase agreement had attached to it a rider relating to the user of the Property as a shop although under the Occupation Permit, the premises were for domestic use.

6. On 1 September 1997 the defendant's solicitors sent to the plaintiff's solicitors a draft sale and purchase agreement. There was considerable correspondence between the solicitors about its terms. It contained clauses designed to exclude the defendant from any liability arising out of unauthorised structures, in particular Clauses 7, 9 and 10. By Clause 7, the purchaser was to acknowledge that he had been invited to inspect the Property and was buying on the basis of his inspection; by Clause 9, the vendor was to exclude any warranty that the Property complied with the Buildings Ordinance and by Clause 10, the purchaser was to admit that he had been advised by his own solicitors to have checks carried out into the existence of any unauthorised structures, and that he would waive any claims arising out of their existence.

7. On 18 September 1997 the defendant's solicitors wrote to the plaintiff's solicitors, in connection with Clauses 7, 9 and 10, to the effect that the defendant had been given to understand that alteration works had been done but did not have details of them, and giving the plaintiff seven days to rescind the provisional agreement on this ground or be deemed to purchase notwithstanding their existence. The plaintiff's solicitors refused this on the following day.

8. Completion between the defendant and Mark Glory took place on 26 September. However the plaintiff and the defendant still could not agree the terms of the formal sale and purchase agreement between them, which was, according to the provisional agreement, to be signed on 11 September. There was much further correspondence. On 3 October, the defendant purported to give notice that it accepted the plaintiff's repudiatory breach in failing to sign the formal agreement, and forfeited the deposits. After further negotiation, the parties signed the formal sale and purchase agreement on 29 October 1997. This was a very simple agreement which contained none of Clauses 7, 9 and 10 and no stipulation as to requisitions or the time for making them.

9. In the meantime the plaintiff had paid to the defendant deposits of $1.5 million on 20 August and $8.055 million on 11 September in accordance with the provisional agreement.

10. On 20 February 1998 the plaintiff's architect inspected the Property. On 2 March, the plaintiff's solicitors sent the architect's report to the defendant's solicitors and raised requisitions on the unauthorised structures mentioned therein. The defendant's solicitors replied on 7 March, referring to their letter of 18 September and claiming that the plaintiff had accepted the alteration works. At the same time the defendant offered to bear the cost of removal of the extension portion of the works. This was not accepted by the plaintiff's solicitors. Ultimately the completion date passed without agreement. The plaintiff issued its writ on 3 April 1998 and the defendant forfeited the plaintiff's deposits on 4 April 1998.

11. The plaintiff's architect Mr Tong has given evidence before me and produced his report, along with computer-generated pictures, which clearly show the alterations. As set out in his report these were as follows:

(i) The shop front had been extended beyond the lot boundary and encroached onto the pavement by 0.450m. approx.

(ii) A portion of the rear ground adjoining the kitchen and part of the open yard at the rear had been trimmed down to match the existing level of the shop to form extra shop space while the void areas right above had been slabbed over for extension to the existing cockloft.

(iii) The internal staircase connecting the ground floor and cockloft had been demolished and the void area at cockloft level had been slabbed over to make way for a larger floor area.

(iv) The void area over the existing shop space abutting Granville Road had also been slabbed over as an extension to the existing cockloft.

(v) A new door opening had been formed and some new concrete steps had been added to the stair landing at mezzanine floor level, thus providing the cockloft with an alternative access via the main fire escape stair of the building.

(vi) The open yard had been fully covered up at 1/f level and the r.c. cantilevered canopy fronting Granville Road had also been enclosed and covered up.

12. While six alterations are listed, I note that they are all part of the same alteration, namely, the extension of the area of the ground floor and the corresponding extension of the cockloft to make a mezzanine floor.

13. There is no dispute that these unauthorised alterations would be subject to enforcement action by the Buildings Department and that the effect of them is that the defendant cannot show or give good title to the Property.

The Issues

14. The defendant pleads that the plaintiff had by its conduct waived its right to object, alternatively is estopped from objecting, to the existence of the alleged or any structures and/or alterations on the Property which may be unauthorised.

15. The issues before me are whether the plaintiff knew that there were such alterations and that they were or were likely to be unauthorised, and so waived its right to raise requisitions or objections to them and/or whether having failed to raise such requisitions within a reasonable time after it had been put on notice that they were or might be unlawful, the defendant was estopped from raising the requisitions which it did.

Evidence

16. It is unfortunate that, except for the architect whose evidence is not in dispute, and a second defence witness whose evidence is of little value, we have no oral evidence from anyone save the directors of the parties. They have confirmed their written statements, which of course contain the usual mixture of fact, hearsay and opinion, and they have given oral evidence and been cross-examined; but neither of them had any dealings with the other. Those who might have spoken to the dealings, Tony Lo and Carmon Yeung, have not given evidence. Nor has the occupier of the shop. There are before me statements of Tony Lo, but these have to be looked at in the light of evidence of a meeting between him and Mrs Ho; which evidence has in turn been heard de bene esse and subject to objections by Miss Eu SC for the plaintiff as to its relevance and admissibility.

Mr Wong

17. In his statement, Mr Wong says that Tony Lo approached him in about early August 1997 to buy the Property. Tony Lo told him that the occupation permit showed that the premises were for domestic purposes and showed him the approved building plan. He went to look at the Property alone to have a look at the pedestrian traffic flow which was relevant to the expectation of the rental returns which might be obtained if he bought the Property. He could not have any inspection other than a cursory external view because there was a sitting tenant whose permission he did not have. The visit took 5 minutes at most.

18. According to his oral evidence, Mr Wong went once, alone, a few days before he signed the provisional agreement. This time he went to the outside and looked at it, then went inside and pretended to be a customer. He did not have the plan with him. Then on the day he signed the provisional agreement, he went to look at the outside of the shop and observed the pedestrian traffic. That took a little over 15 minutes. He went into the shop but just for a moment because there were many people inside.

19. When his solicitors received the letter of 18 September he was told about it, but was advised that there was no basis for the demand that the plaintiff rescind within 7 days or be deemed to have accepted the Property notwithstanding the existence of the alterations. Accordingly this demand was refused. Nevertheless he was concerned to find out what the alterations were and attempted twice to inspect, with Tony Lo. On both occasions, the sitting tenant rudely refused to let them inspect the Property. He was unable to do this until Tony Lo arranged for the inspection on 20 February 1998 by the architect, Mr Tong. Even then the tenant was unco-operative. As a result he did not, up till the time when the architect produced his report, know the extent of the alterations. Tony Lo had never told him that there were any unauthorised building works. He had not dealt directly with DW1, nor with the other agent Carmon Yeung.

20. It appears from cross-examination that Mr Wong has considerable experience in property speculation. He says that the plaintiff wanted to buy the Property as an investment, to take rent from it; Tony Lo told him he could expect to get rent of $225,000 but in fact he wanted to divide the shop in the hope of getting $180,000 or $200,000 for each part. He had decided to pay out $63.7 million for the shop without a proper inspection, because he knew he was getting a shop, and that was all he needed to know; that was how his companies operated.

21. From his experience, he knew about the effect of unauthorised alterations to property on the title, and he knew about requisitions on title. However he insisted that he had not known anything about alterations or extensions until his solicitors had told him in September 1997 following receipt of the letters from the defendant's solicitors. He had never seen the sale pamphlets exhibited to one of Mrs Ho's witness statements, with handwritten comments purporting to show that parts of the cockloft were unauthorised, until he was shown that statement. Tony Lo had never shown them to him.

22. He did have the approved building plan and occupation permit; but they only came with the provisional sale and purchase agreement. He did not know if Tony Lo had had them before that, but he had not seen them.

23. Asked why he had not made an arrangement for a inspection before he signed the agreement, he said that the agent had told him that he must hurry and that there was another buyer interested. The main problem was, however, the tenant who would make it difficult for the landlord to arrange for him to inspect. He had thought about inspection when he had seen the draft agreement with its clauses concerning unauthorised alterations, and his solicitor had advised him to have an inspection done; but he could not get his architect to do it at the time.

24. He agreed that the defendant was in no better position to know what was inside the shop than he was and, therefore, it was more important for him to have his own inspection. He agreed that the overwhelming likelihood was that there must have been unauthorised alterations and that it did go through his mind that there might be such alterations. He knew that he could raise requisitions about them. However, his solicitors had told him that in the provisional agreement there was no time limit for inspection or requisitions. They had told him that such requisitions must be raised in the reasonable time, but there was no discussion as to what a reasonable time might be.

25. He was shown a newspaper advertisement dated 4 September 1997 offering to sell the Property. This had been exhibited to one of Mrs Ho's statements. He said that he had not known of it before seeing the statement.

26. He said that the advertisement was not made on behalf of the plaintiff, but by an estate agent without his knowledge. It was common for agents to do this and then, having obtained a potential buyer, to make an offer, cheque in hand. He admitted he had discussed a selling price with someone but had told the agent that the plaintiff would not sell as it had bought the Property for rental income.

27. He was asked why he did not contact the defendant to arrange for the inspection in September or October. He said that he thought that the fastest and the most convenient way was to go through the agent. However the agent was unable to contact the defendant right through to January. He understood that it was Tony Lo who had arranged the successful inspection in February.

28. He denied, of course, that he had decided to raise the requisitions because the market crashed and he had made a bad deal.

29. He agreed that he was interested in having had the unauthorised extensions removed or made legal. However he could not remember why, when the defendant had made an offer to remove part of them, his solicitors had refused. He then said that he did not know about their letter of refusal dated 7 March 1998.

30. He said that he had contacted Tony Lo at the end of October this year and told him of the date of trial; he had understood that Tony Lo would attend. However, Tony Lo did not come to a conference with Counsel. He was contacted again and said he did not want to come to the conference or the court. He said that this was because he had received a letter from the plaintiff's solicitors intimating a claim against UP.

31. Re-examined, he insisted that he had still wanted the Property in spite of the downturn in the market, and that was why his solicitors had been instructed to tell the other side to extend the time to June 1998 for completion. He had in fact in the first instance applied for specific performance.

Tony Lo

32. There were before the court three statements by Tony Lo. The effect of the first of these was simply that he had acted as agent for both vendor and purchaser with regard to this Property. He said that in October and November 1997, Mr Wong had asked him at least three times to arrange for inspection of the Property. He had contacted Mrs Ho who had told him to contact the tenant, but the tenant had refused to allow any inspection.

33. The second statement was pretty much an expansion of the first except that he said that he had been told at some stage before the defendant completed its purchase, to arrange inspection through the existing owner. He further said that he had finally persuaded the tenants to allow inspection by the architect in February.

34. The effect of the third statement, made after he had seen a supplemental statement by Mrs Ho, was that he had never seen the two sale pamphlets referred to by her. He denied that she had told him that the Property might have unauthorised additions and alterations. He denied that she had told him to tell the plaintiff about this. He denied that she had ever told him to show the building plan and occupation permit to the plaintiff of the specific purpose of dealing with the unauthorised additions and alterations. He could only remember that Mr Wong had been concerned about the use of the Property as a shop and that was why a copy of the building plan had been given to him. He personally did not know that the cockloft extension was unauthorised and Mrs Ho had never told him that.

Mrs Ho

35. Mrs Ho confirmed three written statements and also gave oral evidence.

36. Her evidence was that when she was buying, Carmon Yeung had told her that there were some alterations to the Property and they might be unauthorised. She did not know exactly what they were but she had made a commercial decision to buy the Property because three was a property boom. She was confident that it could be resold quickly. She had seen the Property and knew that the backyard had been roofed over. She knew that the Property was a residential building but was told that it could be used for commercial purposes.

37. Tony Lo approached her to tell her that the plaintiff was interested in buying. She had accordingly told her solicitors to arrange for the plaintiff to have a copy of the approved building plan. In order to ensure that the plaintiff would be aware of possible alterations, she had arranged for copies of the building plan and occupation permit to be sent to Tony Lo and had told him that the plaintiff should have the building plan when it inspected the Property and that he should tell the plaintiff that there were possible alterations which might not be authorised.

38. In about mid-September 1997, she had been told through her solicitors that the plaintiff wanted to inspect the Property and that this had been denied by the tenant. She was puzzled by this because she thought that inspection had already been done, but she called the tenant and asked him to allow inspection. Later Mr Yeung told her that an inspection of the Property had been arranged.

39. She had instructed the letter of 18 September giving formal notice that the plaintiff would be allowed to rescind because there were other potential purchasers who might have been prepared to complete the purchase earlier and at a higher price.

40. The parties could not reach agreement on the detailed terms of the formal agreement for sale and purchase. Following correspondence then between solicitors, her solicitors told the other side that the plaintiff would be considered to have breached the provisional agreement if they did not sign the formal agreement and that is why the formal agreement was made in the simple terms used..

41. Mrs Ho said that she did not receive any further request from the plaintiff or the agent after the signing of the agreement. Nor did she receive any complaints of refusal to allow inspection.

42. Mrs Ho said that she had found an advertisement on 4 September in the Sing Tao Daily Newspaper, offering the Property for sale at an asking price of $68.7 million.

43. She made a third statement to the effect that she had received from UP the sales pamphlets with handwritten comments (by one "Mona", an employee of UP) that part of the cockloft was unauthorised and a coloured cockloft plan showing the areas of the cockloft which had been approved. That was the extent of her own knowledge of unauthorised alterations. That was why she had arranged for copies of the building plan and occupation permit to be given to UP and why she had told Tony Lo to tell the plaintiff about the unauthorised alterations. She believed that UP or Tony Lo would have given these pamphlets to the plaintiff.

44. The rest of that statement was about the tenants and her dealings with the tenants and what the tenant knew about the new ownership.

45. Concerning the estate agents, Mrs Ho said that she had asked Carmon Yeung to testify and that he had agreed, but that she had later heard that the summons could not be served on him.

46. She had seen Tony Lo on about 20 November 2000 in the Yung Kee Restaurant. She had had a conversation with him about the case. He told her that his senior management had asked him to come forward and testify for the plaintiff because his directors were friends of the plaintiff's directors. However, the plaintiff's solicitors had said that they did not want him to give evidence because he might be cross-examined and reveal all kinds of mistakes and errors.

47. It appeared from cross-examination that Mrs Ho, like Mr Wong, was an experienced property dealer and currently involved in other property transactions and indeed disputes. She herself had been to the Property once before she signed her agreement to purchase it. She had been in and looked around as if she were a customer, and had looked at the pedestrian traffic which would affect the potential rental value. She had checked the interior against the sales pamphlets she had been given, but she had not been into the mezzanine floor. She saw that later, in about April 1997, with the agent, but not with any architect. She did not realise that most of the alterations referred to in the plaintiff's architect's report were unauthorised.

48. She insisted that the reason for telling Lo to give the purchaser the documents was twofold. One was to show that although it was a residential building, it could be used commercially. The other was to show the alterations. She knew that if there were unauthorised alterations, the buyer could rescind and that is why she took the step of asking the agent to pass this information to the buyer. The agent had told her that the plaintiff had accepted the building with the alterations. She was not thinking about litigation at that stage and she had not taken legal advice.

49. It was put to her that she would have to go to Mark Glory at this stage to arrange for inspection because she was not the owner. In fact she had gone to the shop and tried to arrange it with the staff there. She had had difficulty collecting rent from the tenant after her own completion on 26 September. The tenancy was terminated in March 1999. There was no problem with the tenants letting people in to inspect in March 1998. She had never been able to get any statement from the tenant that he had let the plaintiff in for inspection.

DW2: Mr Fung

50. This witness was a co-director of the defendant, and apparently also a paid employee. He confirmed a statement to the effect that he had visited the Property on about 20 October 97 to collect rent. Somebody in the shop had told him that UP had brought the new purchaser to inspect the Property.

51. He also confirmed that he had seen Mrs Ho having a talk with Tony Lo in the Yung Kee Restaurant in November this year but did not know what the talk was about.

Evaluation

52. I will deal first with the statements of Tony Lo. The first two of these simply confirm, more or less, the evidence of Mr Wong about the lack of inspection. The third supports his evidence and contradicts Mrs Ho particularly about the pamphlets and the instructions she says she gave him to tell the plaintiff about the unauthorized additions.

53. There is no doubt that Tony Lo was reluctant to come to court. If all else is disregarded, there remains the evidence of the solicitor Lee Chi Keung about the fruitless attempts made to serve the subpoena on him. At the least he is a witness who has avoided coming to give evidence at the last minute and for no good cause shown.

54. Mr Wong says that he contacted Tony Lo after he failed to appear at the conference. Lo told him that he did not want to come because of the letter of claim. Whether or not that is true, and whether or not Mr Lee's affirmation evidence that the solicitors had been unable to contact Lo is true, there is certainly sufficient here to suggest that his absence is not just unexplained but deliberate.

55. As to the evidence of Mrs Ho, I take the view that it is relevant in that it goes some way to explaining why this witness is absent. I do not and cannot decide whether the reasons he gave her were true. I can and do accept that he told her that he would not give evidence.

56. It seems to me that the only proper view I can take of the statements of Tony Lo is that they are unreliable and must be disregarded both as supporting Mr Wong and contradicting Mrs Ho.

57. I did not find Mr Wong a particularly impressive witness. He was obviously constrained to make some admissions in cross-examination of matters which he would rather have concealed, such as those which concerned his discussions with others of a possible asking price in connection with the advertisement. He was inconsistent as between his statement and his oral evidence on the point of when he actually received the authorised building plan. Mrs Ho, for her part, seemed credible enough.

58. I am asked to disregard a lot of what Mr Wong says because of inherent improbability. In particular, it is said that it would have made no commercial sense for him to have contracted to pay out $63.7 million without a full inspection and examination of the premises by reference to the approved building plans.

59. The difficulty with this argument is that which applies almost equally to Mrs Ho. Both she and Mr Wong are experienced property dealers. She was also prepared to contract to buy the Property for over $50 million without any more than a cursory inspection. On the face of it, if both these experienced dealers are prepared to deal in this way, it cannot be so strange.

60. There are, however, some differences. Mrs Ho says that she knew at least that there might be some unauthorized alterations while Mr Wong says he did not. She at least had with her the pamphlets with attached plans, and checked the layout against them; whereas he says that although he did receive the authorised plans, that was only when he received the provisional agreement, and he did not have any plan with him when he visited the Property. He does accept that UP and Tony Lo must have had these plans in connection with the sale by Mark Glory to the Defendant. The rider to the provisional agreement recites that the occupation permit and authorised building plan "have been forwarded" and there is no denial of this in correspondence.

61. Mrs Ho says that she was quite prepared to accept the alterations because she thought she could sell the Property in the buoyant market in any event. Mr Wong says that he intended to keep the Property for rental income rather than sell it on. This seems strange in the light of the advertisement for sale of the Property on 4 September. It seems most unlikely that some unknown estate agent would have spent money on a newspaper advertisement for sale, without instructions from the plaintiff to do so, or even without knowledge that the plaintiff wished to sell.

62. Mrs Ho says that she told her solicitors to pass on the authorised building plan to UP, and also told Tony Lo to pass this on to the purchaser so as to reveal the information about the alterations. Now Tony Lo's statements which contradict this are to be disregarded but one would have thought that if Mrs Lo were so concerned at that stage to pass on this information, it would have been included in the riders to the provisional agreement, which her solicitors drafted. Yet nothing appears from them about unauthorised alterations before their draft agreement which was sent to the plaintiff's solicitors on 1 September 1997.

63. The overall problem here is that there are no direct conflicts between Mr Wong and Mrs Ho because they never dealt directly with each other. Where Mr Wong says he did not receive documents from Tony Lo, or did not inspect, or was not allowed to inspect, there is no direct evidence to contradict him. All Mrs Ho can say are what she told others to do or what she heard from others.

Findings of Fact

64. It seems to me more probable than not that Mr Wong received the approved building plan at the outset, given that that is what he originally said in his statement. I do not believe his later assertion that he only received it with the provisional agreement.

65. Obviously, Mr Wong inspected the shop in some sense before he signed the provisional agreement. His own oral evidence is that he went inside on two occasions. There is no denial in correspondence of assertions that he had inspected it. However, there is no evidence to show that he did more than look inside.

66. Whether Mr Wong received the approved building plan at the outset, or only with the provisional agreement, he must, by the time he signed that agreement, have been put on inquiry as to whether or not there were some structural variations between the plan and the shop as he saw it. He had been inside the shop twice. He had looked at it from outside. Even from outside it is possible to see that there is a continuous ceiling right out to the front of the shop and that the canopy has been closed-in and roofed over. See the photographs attached to the architect's report. It should be easy enough to see by going inside the shop that the wall dividing off the back yard, shown on the plan, has been removed, and the area roofed over.

67. It may be, as it appears from the correspondence, that the only thing which concerned Mr Wong, or indeed the defendant at that stage, was the commercial use of the premises as against the domestic use allowed by the occupation permit. But there is an obvious difference between what is shown on the plan and what anyone, looking at the shop from the outside, and entering the shop, could see. As soon as Mr Wong saw the plan, whether he saw it beforehand or had it with him when he went to the shop, or only saw it when he received the provisional agreement, he must have known of these obvious differences. He must have known that the canopy had been walled on either side and roofed over. He must have known that the shopfront had been extended out onto the pavement, beyond the line of the next shop. He must have known that the wall of the backyard had been removed and the backyard roofed over. He must then have known that there was a continuous ceiling, rather than a raised central cockloft with a ladder and a void into the ceiling space before and behind it.

68. Mr Wong's visits with Tony Lo at a later stage, according to him in October, would only have served to confirm this. He says that he could not gain access but as can be seen from the photographs, the shop is open right across its front. In any event, he says that at least on one of these occasions he went inside and stood by the cashier counter.

69. The slabbing over of the void areas at cockloft level is of course one of the major alterations which, according to the architect, raises a potential risk of enforcement action by the Buildings Department. It is one of the main alterations which caused the defendant to be unable to give a good title.

70. On his own evidence, by the time he saw the draft agreement in September and took his solicitor's advice about it, Mr Wong did know that there were some alterations, but still did not know their full extent; the defendant herself did not know their full extent as appears from her solicitors' letter of 18 September. He knew that they may have legal consequences if not what the full consequences might be. He admits that his solicitors had advised him in much the same terms as those in Clause 10 (a) (b) and (c). He had experience of such matters already.

71. Clearly therefore, at least by 18 September, Mr Wong had been advised that there had been alterations and he knew that they might be such as to affect the title the defendant could give him. He was in a position to know from his own observation that what he was contracting to buy departed materially from the plan.

72. No survey was carried out until February. I accept that Mr Wong made attempts at further inspection of the shop himself, in September and/or October. He says so and Mr Fung, DW2, says that someone from the shop told him that UP had brought the new owner to inspect. However, there is no reliable evidence to contradict Mr Wong's evidence that the tenant refused to allow inspection. What Mr Fung says is at best vague hearsay and given the tenant's attitude spoken to by the architect Mr Tong, it seems likely that Mr Wong's attempts were unsuccessful. I accept, therefore, that when he went back on two occasions with Tony Lo and actually announced his intention to inspect, the sitting tenant would not let him. He never got to see inside the mezzanine floor. But as I have indicated, he did see inside the ground floor.

73. One would have thought, however, that if Mr Wong really wanted a full inspection, he should have approached the defendant for it, through solicitors. The defendant would have been in a position to arrange it after completion with Mark Glory. What really happened between the parties at that stage, in the absence of evidence from Tony Lo, is unclear.

Waiver

74. The defendant pleads that, by its conduct, the plaintiff waived its right to object to the existence of the alleged or any structures and/or alterations which may be unauthorised. For waiver, it must be shown that the plaintiff did some act of affirmation, being aware both of the existence of the unauthorised alterations, and of the legal consequences of them. See Giant River Ltd v. Asie Marketing Ltd [1990] 1 HKLR 298 where it was held:

"3. Mere knowledge of the existence of some of the unauthorized structures does not of itself operate to modify a contractual term. Before a purchaser's knowledge of the facts can prejudice his position he must also be aware of the legal consequences of those facts, and even this knowledge would not reduce the obligation of the vendor to show a good title on the date for completion.

4. Disclosure by the defendant and acts of affirmation by the plaintiff made with knowledge of their legal consequences were necessary to establish a waiver by the plaintiff. On the facts, no such waiver was established."

As Deputy High Court Judge Cruden put it at page 313D:

"The English Court of Appeal in Peyman v. Lanjani [1985]1 Ch 457 has more recently applied these principles to a case where the purchaser had even proceeded so far as to go into possession. On the question of knowledge the Court of Appeal held that before a purchaser's acts could amount to an irrevocable election to affirm the contract, it is not sufficient for him merely to have knowledge of the facts which may give rise to an election. The purchaser in addition must know that on those facts the law gives him the right to affirm or rescind. It is only where the purchaser has that factual and legal knowledge that it is open to consider whether by his actions he had elected to affirm or rescind."

See also Regent Summit (Hong Kong) Ltd v. Smart Business (Asia) Ltd [1998] 2 HKC 718.

75. It is to be noted that in Giant River Ltd, on the facts, the plaintiff's managing director knew of illegal alterations to some basements; she had seen them and the defendant's managing director had told her they were illegal but she inferred that this was not a big problem. He had not told her of a roofed-over inner court, which was in his knowledge. Neither side then knew of unauthorised alterations to balconies. The learned judge found that the plaintiff's managing director, though she was aware that the basement was illegal, was unaware of the legal implications of that fact on title. He further commented at page 316E-F:

"I have reviewed the facts established in evidence in the light of the equitable principles already set forth. After doing so I find that the plaintiff by its conduct in respect of the basements has not waived the defendant's contractual obligation under clause 10 to show good title. I am further satisfied that even if that were not the position, there has clearly not been any waiver by the plaintiff of the defendant's same obligation in relation to the roofed-over inner Court. On the latter ground alone, the defendant would have failed to show good title."

I mention this last point because, as I have indicated, it seems to me that the six listed alterations had one overall effect. If the plaintiff had requisitioned on the difference between the plan and the actuality, all would have been revealed. It would not be possible in this case to say that the plaintiff has only waived his right to make requisitions in respect of part of the alterations but not others. It is all or nothing.

76. The only act which might amount to waiver is the signing of the formal agreement for sale and purchase. I accept that the payment of further deposit on 11 September could not stand as such because this payment was required by the provisional agreement. It is necessary to look at the state of Mr Wong's knowledge when he signed the formal agreement.

77. As I have indicated, Mr Wong knew that what he was buying was markedly different from what was on the plan. It is said that he did not know the full extent of the alterations and therefore he could not know the full extent of the legal effect of them. Now it may be that to the extent that he is not an architect, he did not know the full extent of the alterations. However, I do not see that he was in any different position from any other layman, looking at a property he intends to purchase and comparing it with a plan, and seeing, for instance, that a room had been converted to a bathroom, or that an open balcony had been closed in, or an open carport under a building walled off to make a room or the like. He may not know the architectural or legal effect of what he sees, but he can see that what he is getting is different from what the appropriate authority has authorised.

78. Obviously a buyer who has notice of some alteration like that from his own observation must realise, even if he does not know anything about the law relating to the "root of title", that the difference between the reality and the plan may affect -

"the power of the vendor to sell or to give a purchaser what is intended by the contract he shall have" 'Emmett On Title' (19th ed.) paragraph 5.080

He can and should raise a requisition on it. If that were not so, then no requisition could be raised without an architect's report to back it. If he does not raise any requisition, then certainly where there is a time limit for raising requisitions, he cannot rely on the fact that the defect goes to the root of title to rescind the contract. See Wong Man Kit Raymond v. Chan Nam Fan, Miscellaneous Proceedings No. 4391 of 1997 where Stone J held:

"I do not accept that a clear and obvious matter which goes to the root of the Vendor's title can, in effect, be clasped to the Purchaser's breast for opportunistic use in any subsequent emergency - and in this context, perhaps, there can be no greater emergency in the eyes of the Hong Kong speculator than the fall of the property market subsequent to purchase. It follows, therefore, that in my judgment a problem going to root of title does not, as Mr Chain contended, serve in itself to render the provisions of Clause 10(a) otiose. To the contrary. In my view the time limit in Clause 10(a) fails to bite only in those circumstances where the problem with title could not have been discovered within the relevant contractual period for the raising of requisitions."

That was, incidentally, a case where a balcony had been converted into a bathroom.

79. It has been suggested that the state of Mr Wong's knowledge was such that he could not have made a specific requisition as required by Chan Chik Sum v Great Pearl Industries Ltd [1997] 1 HKC 27, but it seems to me that so long as he had the plan and was raising a requisition based on it, he could not have been criticised for making an unnecessary or speculative requisition. See Wan Moon Ling Wandy v Sino Gain Investment Ltd [1997] 1 HKC 592.

80. Whether or not Mr Wong knew that the difference between what he could see and what was on the plan were unauthorised alterations, he knew, because he had been told, that there were alterations which may be unauthorised. I do not see that the plaintiff can rely on the defendant's failure to give full and frank disclosure on this, because it is clear from the letter of 18 September that they disclosed all they knew. He knew from his own experience and what his solicitors told him that unauthorised alterations could affect the title. He knew that he could make requisitions on title. It seems to me that he must have known, as an experienced property dealer, that if there was a defect in the title, it might enable him to rescind the contract.

81. That, I find, was the state of Mr Wong's knowledge when he signed the formal sale and purchase agreement. I conclude that by doing so on behalf of the defendant, he waived its right to raise requisitions or objections to the alterations.

Estoppel

82. Having found for the plaintiff on the waiver point, I do not really need to consider the estoppel point but for completeness, I will do so.

83. The plaintiff was on notice from September 1997 onwards that there were some unauthorised alterations but did not raise any requisitions until 2 March 1998.

84. There was no stipulation as to a time limit for raising objections in the formal agreement. It was an open contract. In Active Keen Industries Ltd. v. Fok Chi Keong [1994] 2 HKC 67 it was held:

"(1) In an open contract, it was clearly an implied term that the vendor had an obligation to answer requisitions and to show a good title before the completion date. This obligation arose by necessary implication from the contract itself and accorded with good sense. This obligation, falling on the vendor, to properly answer requisitions, if reasonably raised by the purchaser, must be discharged within a reasonable time."

Ms Eu SC for the plaintiff says that "reasonable time" is determined with reference to completion date.

85. Mr Huggins SC, for the defendant, argues that there was a duty on the plaintiff to raise requisitions within a reasonable time after being put on specific notice by the defendant of the likely need to do so. There was a duty on him of "due diligence". He further argues that the principles relating to "due diligence" set out in Mexon Holdings Ltd. v Silver Bay International [1999] 3 HKC 756 (CA) and 2000 1 HKLRD 935(CFA) and Hillier Development Ltd. v Tread East Ltd [1993] 1 HKC 285 apply. However these cases relate to due diligence in the situation where there is a time limit for requisitions and the purchaser makes them out of time. If they go to the root of title, he can still make them out of time so long as he has not failed, through lack of due diligence, to make them in time. The situation is different here where there is no time stipulation. Ms Eu argues that these cases have no application here.

86. It seems to me that if the obligation is on the vendor to properly answer requisitions and to show a good title before the completion date, the corresponding obligation on the purchaser must normally be to give the vendor a reasonable time before the completion date to do so. There is authority for that in Chan Chik Sum v Great Pearl Industries Ltd [1997] 1 HKC 27 at 31I.

87. However it is difficult to see how a requirement of "due diligence" could be ruled out here. Given the state of Mr Wong's knowledge, as I have found it, then surely once he was (a) put on notice that there might be unauthorised alterations; and (b) knew that what he was contracting to buy differed from the authorised plan, it would be his duty to satisfy himself as to the true position. If he did not, he could hardly rely later on his wilful ignorance and failure, having been put on inquiry not just by what he was told, but by what he could work out for himself from his own observations, to make those inquiries.

88. I accept that the position might have been different if the only knowledge Mr Wong had was that which came from the defendant. In those circumstances, then unless he was subject to a time limit for requisitions, it may well be that he could properly sit on his hands and await developments.

Conclusion

89. I conclude that the plaintiff has waived its right to object and is estopped from objecting to the existence of the unauthorised structures.

90. It follows that the plaintiff's action must be dismissed with costs.

91. The defendant seeks a declaration that it was entitled to forfeit the sum of $9,550,000 as deposit. This amounted to 15% of the price. There has been no specific argument as to whether it may be regarded as liquidated damages or in part as a penalty, though Ms Eu SC did mention that question in her opening in relation to the inquiry as to damages which would have followed had the plaintiff been successful. The matter is not specifically covered in the pleadings. There will be a declaration in the terms sought.

92. There will also be an order that the lis pendens registered against the Property be vacated.

93. The defendant is awarded damages for the wrongful registration of the Writ in this action as a lis pendens (to be assessed by a Master).

94. Costs of the action and counterclaim be to the defendant, to be taxed if not agreed.