IP CHO SAU AND ANOTHER v. LEUNG KAI CHEONG AND OTHERS

HCMP 1288/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

ACTION NO. 1288 OF 1998

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J U D G M E N T

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1. These proceedings arise out of a sale and purchase agreement entered into between the plaintiffs as purchasers and the defendants as vendors on 20 October 1997 for the purchase of a property, Flat B, 9th Floor, 132 Electric Road, North Point. The purchase price was agreed at $2,630,000.00 and the completion date fixed for 5 January 1998. The agreement included the usual requirement for the vendor to show good title and included a time limit of 7 working days from the date of receipt of title deeds for the purchaser to raise any requisitions or objections in respect of title.

2. Pursuant to the terms of the agreement (and presumably the provisional sale and purchase agreement, although this does not affect these proceedings) the plaintiffs paid deposits of $100,000.00 on 6 October 1997 and a further $163,000.00 on 20 October 1997, and stamp duty of $39,450.00.

3. Meanwhile property prices in Hong Kong in late 1997 were falling substantially, and the plaintiffs were having difficulty obtaining a mortgage for a property in an old building at a price the banks clearly considered too high. They accordingly negotiated a reduction in the price by 10% to $2,367,000.00 and a postponement of the completion date to 30 March 1998. A supplemental agreement for sale and purchase to this effect was signed on 5 January 1998, the original completion date. Under this agreement, a further deposit was paid on the same day of $236,700.00, and another deposit in the same amount was payable on 18 February 1998. All the other terms of the first agreement remained the same.

4. The plaintiffs continued to look for a bank prepared to offer them a mortgage, apparently without success, and on 8 February 1998 instructed an architect, Mr Lam Ching Wah, to inspect the property. He produced a report dated 10 February 1998 giving as his opinion that a number of alterations had been made to the flat which contravened regulations made under the Buildings Ordinance. It is not in dispute that alterations have been carried out. In particular the balcony of the flat has been enclosed by building a new wall further out with windows, and inside partitioning put in to make two bedrooms out of the space thereby created. A further bedroom has been made from the kitchen with cooking now moved to the living area, in violation of the Fire Services Department Code of Practice. No permission or approval for these works has been sought or obtained from the Buildings Department, and the partitions are in breach of regulations in respect of lighting and ventilation. In short, some of these at least are illegal structures.

5. On 13 February 1998 the plaintiffs' solicitors wrote to the defendants' solicitors, enclosing a copy of Mr Lam's report and repudiating the agreement, saying:

In view of the defeasible title arising from the aforesaid illegal alterations and additional works, we are instructed to give you notice that our client shall not proceed to complete the transaction herein.

6. They also requested the return of the deposit paid.

7. By a letter dated 14 February 1998 the defendants' solicitors replied that they rejected the allegations, alternatively that the situation could be remedied by the time of completion. They also reminded the plaintiffs' solicitors of the obligation for the plaintiffs to make a further payment of deposit of $236,700.00 on 18 February 1998.

8. Further correspondence ensued in which the plaintiffs' solicitors said that they were referring the matter to the Buildings Department to confirm the situation and the defendants gave them until 3 March 1998 to pay the further deposit, saying that failure to do so would result in them treating the breach as a repudiation of the agreement. No further payment being forthcoming, the defendants by a letter dated 4 March 1998 accepted the plaintiffs' repudiation and forfeited the deposits paid, reserving their right to claim damages.

9. The plaintiffs now seek a declaration that they have validly rescinded the agreement, and that a good title has not been shown, return of their deposit and damages. Mr Ho for the defendants has not sought to argue strongly that the alterations were not illegal structures, his own expert, Mr Ng, saying in his report that "the term unauthorized works may apply", but relies on two main defences: the first, that no requisition was raised within the time limit specified in the sale and purchase agreement; and second, that the obligation to show good title was at the time of completion, not before, and the plaintiffs could not repudiate the contract earlier on an assumption that good title would not be shown.

10. There is no doubt that, on the authority of Giant River Ltd v Asie Marketing Ltd [1990] 1 HKLR 297, that the presence of unauthorized structures together with a risk of enforcement action by the government, constitutes a defect in title. The plaintiffs sought advice on this from the Buildings Department, who made it clear that, while immediate action will only be taken where there is obvious hazard to life or property, once they are aware of unauthorized building works they will be recorded for "prioritized enforcement in sequence", and this was confirmed in evidence by their Mr Ma. The defendants could not therefore say that there was no risk of enforcement, and the presence of the unauthorized structures and that risk constituted an encumbrance upon the property.

11. This is not, however, something which would have been apparent from the title deeds, and, again on the authority of Giant River, not only does it go to the root of the title, the time limitation for requisitions in the agreement cannot apply. This seems to me to be a matter of common sense. The time limitation is intended to relate to defects or queries arising from matters apparent on the title deeds themselves. If the purchaser's attention is drawn to something which he could not have known earlier, then it would be unjust to allow the vendor to rely on such a clause. This view was taken by Penlington JA in Hillier Development Ltd v Tread East Ltd [1993] 1HKC 285 where, at p. 293, after referring to Giant River and the earlier English authorities, he said:

I am satisfied that those authorities only go to the proposition that where a [purchaser], having used due diligence, is unaware of some defect in the vendor's title, the time limit imposed in the agreement does not run against him.

12. "Due diligence" in my view applies in relation to the title deeds and obvious matters which should be investigated. There is no reason in a case such as this for a purchaser to suspect that any part of the property is an unauthorized structure, liable to enforcement proceedings, unless it is drawn to his attention. Even then, it would be unconscionable to enforce a time limit which did not permit a reasonable period to make proper enquiries.

13. It follows that I find that, at the date of the plaintiffs' letter of 13 February 1998, they were entitled to raise a requisition as to the status of the building works and the risk of enforcement.

14. However, the plaintiffs did not do that. Instead of raising a requisition they announced that they did not intend to perform the agreement and repudiated it. In spite of the defendants' solicitors' attempts to revive it, they stuck to their guns, refused to pay the further deposit "until the title problem in question is resolved", and thereafter failed to proceed with the agreement at all.

15. Mr Ho says that they were not entitled to do that. Even if they are right and a defect in title is apparent or suspected, the obligation of the vendor is to show good title at the date of completion and not before. If this is right, then any purported repudiation of the contract prior to that must be an unlawful repudiation and a breach of the agreement.

16. I have a lot of sympathy with this argument. By electing to repudiate the contract six weeks or so before the completion date they denied the defendants the opportunity of rectifying the situation so that a good title would be shown at completion. The plaintiffs say that they would in any event have been unable to do so, and point to the evidence of their architect and that of Mr Ma that it usually takes 60 days for the Buildings Department to reply to requests for building works and exemptions, and even longer to have any work actually carried out, which would have gone over the date of completion. That may be so, but it is still requiring me to make a presumption that nothing could have been done, that no urgent request for exemption from the regulations could not have been dealt with or a statement obtained to the effect that there was no realistic possibility of enforcement. Even if I did make such presumption, were the plaintiffs still entitled to say, at a time before that at which good title must be shown, "We do not think that you will be able to show good title, so we are putting an end to the agreement now"? I do not think they were.

17. As Deputy Judge Robert Ribeiro QC said in Chu Wing Ning v Ngan Hing Cheung and anor HCA9409 of 1991 (unreported) :

It had long been established that the vendor generally only needs to establish a good title by the date of contractual completion and that it is no defence to an action for specific performance or damages that he had no title at the date of the sale and purchase agreement.

18. Although that case was concerned with a failure to sign the formal sale and purchase agreement, the same principle must apply to any attempt to claim a lack of title at any time before completion. The plaintiffs are bound by the terms of the agreement up to and including the date of completion, and only then, if good title has not been shown, can they decline to proceed further. Any failure on the part of the purchasers to comply with those terms prior to that must be a breach of the agreement.

19. The situation might be different if, instead of treating the agreement as at an end by their letter of 13 February, they had properly raised a query as to the alterations to see whether the defendants could rectify the matter. It was certainly not clear at that point, when all they had was a short report from their architect saying that there were unauthorized building works, but on the basis of that they moved with almost indecent haste to terminate the agreement. This situation is very different from that found to be the case by Godfrey J in A-Mayson Development Co Ltd v Betterfit Ltd [1992] 2 HKC 533, where he considered that there may be circumstances in which a purchaser may call off the contract at once, without waiting to see if the can prove good title on completion. In that case, however, not only was the vendor in breach of the sale and purchase agreement by failing to provide documents of title in accordance with the agreement, but a requisition had been made, and the purchaser only called off the contract when it became apparent that the vendor would not be able to show good title. In this case no such opportunity was given.

20. It is in my view not open to the plaintiffs to say, in support of their argument that the defendants have still not rectified the matter. Once they have called off the contract the defendants are entitled to consider that the matter is at an end, and there are relieved of any further obligations under it, including proving title or rectifying matters such as this.

21. I am accordingly satisfied that the plaintiffs are not entitled to the declarations and relief sought, and their originating summons is dismissed. I understand that it has been agreed by counsel that, should the defendants be successful, there should be an order that they are to have damages to be assessed. I accordingly make that order, with damages to be assessed by a Master. There will also be an order nisi that the defendants are to have their costs of these proceedings to be taxed.