SINO CONSORTIUM LTD. v. MARK PROFFIT DEVELOPMENT LTD.

HCMP 4961/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4961 OF 1998

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J U D G M E N T

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Introduction

1. This action arose out of an aborted sale by the Defendant to the Plaintiff of Nos.15, 17, 19 and 21 Fa Yuen Street, Kowloon ("the Property"). The Property consists of 2 pairs of buildings, each 5 storeys high, with 2 flats per floor. The buildings are erected on KIL No.7079 and 7089 respectively.

2. The titles to the Property can be traced to 2 co-operative building societies, namely, All Up Co-operative Building Society, Limited, in respect of Nos.15 and 17, and Fa Yuen Street Co-operative Building Society, Limited in respect of Nos.19 and 21. For all relevant purposes, the title documents are the same. For convenience sake, I will only deal with those relating to Nos.15 and 17.

Title Documents

3. One starts with a Government Lease dated 17th September 1971. It was a concessionary grant and the purpose was to provide accommodation for civil servants who would be members of the Society.

4. The 17th September 1971 lease was modified by a Modification Letter. By the Modification Letter, the Lessee's covenants relating, inter alia, to restriction on alienation were replaced by the covenants set forth in the 2nd Schedule to the Modification Letter.

5. The 2nd Schedule provides that:-

Clause 2(A)

"The licences/underleases of premises in the building or buildings erected on the said piece or parcel of ground that were granted by the Former Society to the Former Members prior to [the respective dates of the Modification Letters] shall not be a breach of the restriction in Clause (2)(a) hereof"

Clause 2(B)

"The said Lessee may assign unto the Former Members undivided shares in the said piece or parcel of ground together with the right to the exclusive possession of premises in the building or buildings erected thereon subject to and together with the benefit of a deed of mutual covenant on condition that each of the Former Members on taking such assignment shall execute a First Legal Charge in a form approved by the Director on his Relevant Interest (as hereinafter defined) in favour of the Financial Secretary Incorporated ("the FSI") for securing the payment to the Government of the amount (hereinafter more particularly specified in Clause (2)(F) below) for the removal of the restriction on alienation contained in Clause (2) hereof so far as that restriction is a restriction on alienation of those undivided shares the subject of each such First Legal Charge. The condition contained in this Clause shall run with the said piece or parcel of ground and be binding on the said Lessee's successors in title and assigns.

Clause 2(C)

"In the event that any of the Former Members do not claim or are not assigned undivided shares assignable to him under the scheme of distribution of the Former Society authorised by the Registrar of Co-operative Societies pursuant to Section 43(f) of the Co-operative Societies Ordinance (and which said scheme is hereinafter referred to as "the Scheme of Distribution") within 12 months from the date of dissolution of the Former Society or within such further period of time that the Registrar of Co-operative Societies may direct (such Former Members and their successors in title being hereinafter referred to as "the Non-consenting Members") the said Lessee may and shall assign such undivided shares to a corporation to be incorporated under the Building Management Ordinance (hereinafter referred to as "the Owners' Corporation") ..."

5. Clause (2)(E) provides that a Non-consenting Member may call upon the Owners' Corporation to assign the undivided shares assignable to him under the Scheme of Distribution to the Non-consenting Member or his assign or beneficial successor even after the time limit(s) stipulated in the Modification Letters from the date of dissolution of the Former Society subject to certain conditions as provided in Clause (E).

6. Clause 2(F)(b) further provides:

"any owner (including the Owners' Corporation but only in accordance with Clause 2(C)(f) and Clause (2)(D) above) of a Relevant Interest in the said piece or parcel of ground may assign mortgage or charge underlet part with the possession or otherwise dispose of or permit or suffer any other person to use or occupy such Relevant Interest if:-

(a) in the event of there being any Non-consenting Member the Owners' Corporation has been incorporated under the Building Management Ordinance; and

(b) he/she/it shall have first paid to the Government either an amount equal to two-thirds of the existing use land value of the Relevant Interest or if the said piece or parcel of ground is economically suitable for re-development at the relevant date an amount equal to two-thirds of such sum as the Director shall on a fair and impartial valuation certify to be the full market value of such Relevant Interest at the said date it being agreed and declared that upon payment of either of the amounts as hereinbefore provided in respect of any Relevant Interest the restriction on alienation contained in Clause (2) hereof shall be null and void and shall cease to have effect but only in so far as it relates to such Relevant Interest and no further"

Lastly, the Modification Letter provides that the expression "Former Society" means the Lessee (being a society registered under the Co-operative Societies Ordinance) prior to its dissolution under Pt.VII of that Ordinance, and the expression "the Former Members" means the members of the Former Society immediately before its dissolution.

7. On 30th July 1996, under s.38(1) of the Co-operative Societies Ordinance Cap.33, the Registrar of Co-operative Societies, ordered the cancellation of the registration of All Up Co-operative Building Society, Limited. Under s.38(3), the Order took effect on the expiration of 3 months. Under s.41, where the registration is cancelled under s.38, the Registrar may appoint a Liquidator of the Society. On 1st October 1996, Ng Hon Ying was appointed Liquidator under s.41 of the Ordinance.

8. The next document in the chain of title is an assignment by the Society in favour of an individual member. I use the assignment to one Iu Wai Man as an example. I understand all the assignments are in common form. The recitals are relevant. They are:-

"(A) The Assignee was a member of the society and the underlessee under an underlease ("the Underlease") dated 14th August 1994 granted by the Society in respect of the Property (as defined in the First Schedule hereto) held by the Society under the Lease (as defined in the Second Schedule hereto), which was modified by the Modification Letter (as defined in the Second Schedule hereto).

(B) An order for the cancellation of the registration of the Society was made by the Registrar of Co-operative Societies on 30th July 1996 pursuant to section 38 of the Co-operative Societies Ordinance. The order took effect on 30th September 1996.

(C) On 1st October 1996 the Liquidator was appointed by the Registrar of Co-operative Societies as the liquidator of the Society.

(D) On 14th December 1996 a deed of mutual covenant ("the Deed of Mutual Covenant") relating to the land and buildings on which the Property is situated was entered into and registered in the Land Registry by memorial No.6863874.

(E) This Assignment is made pursuant to Clause (2)(B) of the Second Schedule annexed to the Modification Letter, the First Legal Charge referred thereto being executed in favour of The Financial Secretary Incorporated by the Assignee on the date hereof"

9. The Legal Charge executed by Iu Wai Man is dated 14th December 1996. This was discharged by a Receipt on Discharge of Legal Charge dated 31st July 1997.

10. The Receipt records that

"The Chargee (FSI) acknowledges receipt of all moneys secured by the within written Legal Charge and that the Chargor has duly performed his covenants thereunder".

11. On 19th September 1997, Iu Wai Man assigned his interests to Fai Wah Co. Ltd. Fai Wah Co. Ltd. had also acquired all the other interests in Nos.15, 17, 19 and 21 Fa Yuen Street.

12. By an Assignment dated 19th September 1997, Fai Wah assigned Nos.15, 17, 19 and 21 Fa Yuen Street to the Defendant, Mark Profit Development Limited, for $192,000,000.

13. By an Agreement for Sale and Purchase dated 14th September 1998 ("the Agreement for Sale and Purchase"), the Defendant, Mark Profit agreed to sell the properties to the Plaintiff (Sino Consortium Limited) for $77,000,000. The properties were sold with vacant possession. Completion was to take place on 18th September 1998. Time was of the essence. The Agreement was preceded by a Provisional Agreement dated 12th August 1998. Deposits totalling $13m were paid.

Litigation

14. The sale was not completed. The Plaintiff refused to complete and sought reliefs on the basis that

(1) the Defendant had failed to answer requisitions sufficiently

(2) the Defendant was unable to deliver vacant possession

15. At the trial, the parties were able to come to terms regarding the deposit of $13 million paid. However, the Plaintiff continues to pursue certain declarations. Although the Defendant was no longer interested in resisting the declarations, it is accepted that the Court should only make these declarations if it is satisfied that they ought to be made.

16. I turn now to deal with the Defendant's arguments.

REQUISITION

17. The requisitions are directed to the possibility that the assignees from the Liquidator were not the former members of the Society such that there was a breach of the covenant restricting assignment to former members. Clause 2(B) of the Modification Letter.

18. Former members are defined to mean "members of the Former Society immediately before its dissolution". Under the Modification Letter, the Liquidator could only assign a relevant interest to a former member. An assignment to anyone else could be a breach of covenant. Thus, for example, if Iu Wai Man was not a former member, the assignment to him could have been a breach of covenant and a right of re-entry might arise.

19. Mr. Edward Chan S.C. who appeared for the Plaintiff has submitted that, although, according to para.2(F)(b) of the Modification letter, upon payment of the amount secured by the Legal Charge "the restriction on alienation contained in Clause (2) thereof "shall be null and void and shall cease to have effect..." that would not affect the covenant by the Society to assign to former members only. Mr. Edward Chan says that the restriction on alienation would only be lifted after the discharge, any antecedent breach would or might not have been waived.

20. It follows, according to Mr. Edward Chan S.C., that if there had been an earlier breach by the Liquidator, in that he had assigned a relevant interest to a non former member, there continued to be a risk of re-entry by Government. Thus, it was critical to ascertain, by reference to proper conveyancing evidence, whether the assignment by the Societies were indeed to former members as defined in the Modification Letter.

21. There is force in this argument.

22. It may be that the fact that the assignees from the societies, such as Iu Wai Man, took the assignment as a former member, apparently entered into a Legal Charge in favour of FSI as such, and obtained a discharge of the Legal Charge, will make it impossible for Government to assert vis-à-vis an assignee from Iu Wai Man that Government was entitled to re-enter because the Society's assignment to Iu Wai Man was a breach of covenant in the first place.

23. I do not believe it is necessary for one to come to a definite view on the matter, because Mr. Chan's argument was principally directed to whether requisitions had been sufficiently answered and not whether good title had been shown. Suffice it for me to say that the answer to the requisitions is not self-evident.

24. Active Keen Industries Limited v Fok Chi-keong [1994] 1 HKLR396 is a case where the title was good, but the sale was properly rescinded because the vendors had failed to answer requisitions sufficiently.

25. I believe it was reasonable of the Plaintiff's solicitors to have raised the requisitions directed to ascertaining whether the assignees were former members.

"The contractual duty to answer requisitions properly is not an onerous one. All that is required of the vendor is candour and commonsense" Active Keen at p. 413.

26. Here, it may be that the Vendor might have sufficiently answered the requisition if it had replied stating that even if, for instance, Iu Wai Man was not a former member, Government no longer could to re-enter because of the discharge of the covenant restricting alienation when the Legal Charge was discharged. But that was not what was said in reply. Essentially, what was relied on in the answers to the requisitions was that the recitals in the Assignment from the Society to Iu Wai Man have stated, not explicitly but by necessary implication, that Iu Wai Man was a former member.

27. I turn now to examine the Requisitions raised.

28. Requisitions on 9th September 1998

"I. KOWLOON INLAND LOT NO.7079:-

3(a) we would like to draw your attention to Clause 2 of Modification letter Memorial No.6623491 that the Lessee would not assign underlet or part with possession of any part of the premises or enter into any agreement except that those Licences/underleases of the premises in the building that were granted by the Society to the Former Member prior to the 17th day of May 1996, which shall not be regarded as a breach of the restriction.

In the circumstances, we consider that you should provide us with evidence proving that the Assignees were the former members of the Society and the underleases were existed (which were made prior to 17th May 1996) so as to prove that the restriction on alienation has not been breached and the Lessee was entitled to assign the premises to the Assignees (its former members) in accordance with the Underlease and the terms of the Modification Letter.

Therefore, we insist to peruse the content of the requisite Underleases in order to clarify whether the restriction on alienation clause has been complied with. We reserve our rights to raise any further requisition on title upon perusal of the Underleases.

II. KOWLOON INLAND LOT NO.7089:-

5(a) Please see our comments as set out in item I.3(a) above.

6(a) Please see our comments as set out in item I.3(a) above".

29. Reply on 10th September 1998

"I. KOWLOON INLAND LOT NO.7079:-

3(a) The best evidence that the Assignees were the members of the Society is recital (A) on the respective Assignments where the Society acknowledged the contents of the Assignments by executing their seal thereon.

5&6 Please see our reply under item I above"

30. Requisitions on 14th September 1998

"3(a) We do not share your view. We do not consider that execution by the Society of the Assignment is conclusive evidence that the Assignees were members of the Society. The Liquidator executed the Assignment on behalf of the Society only to assign the property. No evidence has been shown that the recital of the Assignment is true and no confirmation or declaration has been made by the Liquidator that he had already checked the list of members and the underleases. In order to prove that the restriction on alienation clause has been complied with, we consider that the purchaser is entitled to ask for extrinsic evidence confirming that the Assignees were former members of the Society and the underleases (which were made prior to 17th May 1996) were those existing as at the relevant time. Please therefore let us have certified copies of the said underleases and the list of members or other documentary evidence showing that the Assignees were former members of the Society and all former members have been assigned with their undivided shares for our perusal.

5&6 Please see our comments under items 3(a) above"

31. Reply on 16th September 1998

"3(a) We maintain our reply of 10th September 1998. Unless you can adduce extrinsic evidence to say otherwise, we do not think that your client is entitled to raise further requisition on this point"

32. Requisitions on 17th September 1998

3a We maintain our view as mentioned in our letter dated 14th September 1998. As you are well aware, any recital within 15 years needs to be proved - this is the effect of Section 13(3) of the Conveyancing and Property Ordinance Cap.219. Your client as vendor is therefore required to produce extrinsic evidence to prove the truth of the recital. We reiterate that our requisition is reasonable since the restriction on alienation in the Modification letter would have been breached if the Assignees were not former members of the Society and the underleases were not in existence. The execution by the Society of the Assignment is not sufficient to prove the truth of the recital since there could have mistakes. Our client as the purchaser would be affected by the claim of any other former members of the Society who did not have his interest conveyed to him.

In view of the above, we insist to have certified copies of the said underleases and the list of members or other documentary evidence showing that the Assignees were former members of the Society and all former members have been assigned with their undivided shares in order to prove good title to the above premises"

33. Reply on 18th September 1998

"3(a) Our comments to this requisition have been fully given by our letters of 7th, 10th and 14th (sic) [should be 16th] of September 1998. Suffice to summarise thereof is that by virtue of the various Assignments executed by the two Societies to the respective Assignees, no reasonable conveyancer would pursue further on the identity of the Assignees as stated in the Recital of the Assignments. As a matter of good conveyancing practice but without prejudice to our reply above, we have also written to Messrs. Ng & Fang who confirmed that there are Underleases as referred to in Recital (A) of the Assignments but, since they do not form part of title deeds, have been returned to respective Assignees after completion. Therefore, the Underleases you are asking for cannot be located despite our best effort to assist you"

34. Requisitions on18th September 1998

"1. We reiterate our view that the execution by the Society of the Assignments alone is not sufficient to prove that the Assignees were former members of the Society and the underleases were in existence. Your client is under a contractual duty to prove good title to the above property which includes producing proof that the restriction on alienation clause in the Modification Letter has been complied with. In the circumstances, unless and until we receive the following documents before 5:00 p.m. today, your client shall be deemed to have failed to prove good title to the above premises and our client shall exercise its rights under the Agreement for Sale and Purchase dated 11th September 1998".

35. Reply on 18th September 1998 (3rd Letter)

"Regarding your client's allegation of our client's failure to ensure the requisitions, please note that we have replied to you by our letter this morning faxed to you at 10:57 a.m."

36. Letter to Defendant's solicitors on 18th September 1998

"We refer to your third letter of today's date. With regard to our requisition on title to the above premises, we have already taken our client's instructions and maintain our view that you have not answered our requisition on title satisfactorily. This was clearly mentioned in our second letter of today's date. In the circumstances, our client has never accepted the title of the above premises as alleged"

37. I am mindful that I have not had the benefit of any argument from the Vendor. However, I have come to the conclusion that the requisitions have not been properly answered. The recitals which are less than 15 years old do not prove themselves. s.13(4), Cap.219. They are certainly not the best evidence. The best evidence, and evidence which ought to have been supplied, was a certified list of former members, namely, members on 30th September 1996. s.12 of the Co-operative Societies Ordinance requires every registered society to keep a list of its members which is open to inspection free of charge at the registered address of the Society. Rule 10 of the Co-operative Society Rules requires a register of members to be kept.

38. There is no reason why the vendor could not provide a certified list of the members as at the date of the dissolution of the Society.

39. Moreover, Recital A simply says that the assignee was a member of the Society and holds an underlease dated some 2 years ago. That is not even an explicit statement that the assignee was a former member.

Vacant possession

40. I turn to consider the question of vacant possession.

41. Here, as a result of the compromise over the deposits, the evidence is entirely one-sided. Such evidence shows that chattels, rubbish, furniture and fixtures were found in the Property. Moreover, it is alleged that they had not been abandoned but that they were to be removed after the time fixed for completion. On such evidence, I believe the Plaintiff has also made out its case that the Defendant was unable to deliver vacant possession upon completion.

Conclusion

42. For the above reasons, I am satisfied that I ought to make the following declarations.

(1) A declaration that the requisitions of the Plaintiff in respect of the title to the Property comprised in the Agreement for Sale and Purchase have not been sufficiently answered by the Defendant.

(2) A declaration that the Defendant was unable to deliver up vacant possession of the Property to the Plaintiff on the scheduled completion date in accordance with the terms of the Agreement for Sale and Purchase as chattels, rubbish, furniture and fixtures were left in the Property.

43. I also make a consequential declaration that

(3) the Plaintiff has properly rescinded the said Agreement for Sale and Purchase.