LUCKY SUCCESS (HK) LTD v. KO NI KWONG AND ANOTHER

HCMP 567/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 567 OF 2009

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J U D G M E N T

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Introduction

1.  This is a vendor and purchaser summons which has been very well argued on both sides.  The Plaintiff as purchaser (“the purchaser”) and the Defendants as vendors (“the vendors”) have entered into an agreement dated 22 August 2008 for the sale and purchase of a flat known as Flat A, 3^rd Floor, No. 168, Shaukeiwan Road (“the property”).  In this regard the course of events are these.  The agreed purchase price was $1.5 million.  A Provisional Sale and Purchase Agreement was signed on 12 August 2008 by virtue of which the purchaser paid an initial deposit of $50,000.  The Sale and Purchase Agreement was signed on 22 August when a further payment of $100,000 was made by the purchaser leaving over a balance of $1.35 million to be paid on the completion date of 10 October 2008.  By clause 17, time was of the essence in every respect of the Agreement.

2.  Given the issues that arise on this summons, it will be helpful to relate something of the history of the building of which the property is a part.  As is shown on the plan at Exhibit Bundle page 42, Nos. 168 and 166, Shaukeiwan Road comprise one building with two flats on each floor, one with the address 168 and the other 166.  The Occupation Permit at Exhibit Bundle page 44, which is dated 25 July 1960, shows that the first floor to the seventh floor comprise “two tenements for domestic use” and that is how the property was conveyed to the first purchasers.  From the Deed of Mutual Covenant (“DMC”) which is dated 5 August 1960 Exhibit Bundle 45-56, the entire third floor of No. 168 was owned by a Mr Mung Tik Kwong.

3.  A change occurred on 15 June 1978 as is apparent from the assignment of the property to Fan Sik Hung and Fan Sik Lam, Exhibit Bundle 57-64 which shows that the third floor of No. 168 had now been partitioned into two flats comprising Flat A and Flat B.  This is well illustrated on the plan at page 63.  The Fans continued to own the property until 3 December 1998 when they sold it to Mr Wong Chi Koi who in turn sold it on 30 April 2008 to the present Defendants, the vendors, who then entered into the Provisional Sale and Purchase Agreement to sell to the purchaser in this matter.

The Requisitions

4.  Having signed the Agreement for Sale and Purchase on 22 August, the title deeds were delivered to the purchaser’s solicitors by the vendors’ solicitors.

5.  Upon perusal of these documents and the attached plans, the purchaser’s solicitors saw that the third floor of No. 168 had been altered from its original state as laid out in the Occupation Permit and as catered for in the DMC in 1960.  The Occupation Permit only allowed for two flats on the whole of the third floor of Nos. 166-168 and now there were three.  This change to create two units at No. 168, one being the property which is at the front of the building and a Flat B at the rear, required the construction of a partition wall and the addition of kitchen and bathroom and toilet facilities for the front unit (Flat A).  In the original plan [page 63] the kitchen and bathroom and toilet facilities are at the rear of the building with separate facilities provided for each of the two flats at Nos. 166 and 168.  Following the creation of the property as Flat A at the front of No. 168, separate toilet, bathroom and kitchen facilities were needed for Flat A.  And so apart from the partition wall, alterations would have been needed to be made to the drainage system on the third floor which would have had, at the very least, to be connected up to the outflow of the kitchen, bathroom and toilet at Flat A.

6.  The purchaser’s solicitors faced with this situation were concerned to ensure that the Building Authority had given its consent to the creation of Flats A and B, where in the absence of such consent the owner of the property might be faced with an Enforcement Order which, amongst other sanctions that the Building Authority might impose could include the demolition of the partition wall and the new kitchen, bathroom and toilet in Flat A to restore the third floor to the state that it had been in when the Occupation Permit was granted in 1960.

7.  Mr Herbert Leung, who appears for the purchaser, has drawn my attention to the assignment by Wong Chi Koi to the present vendors on 30 April 2008, really to emphasise the potential difficulty that might arise with the Building Authority if no approval had been given by it for the creation of two separate flats on the third floor of No. 168.  This agreement contained at part XI a Special Condition written into it in Chinese.  The rest of the document is in English.  This is what it said:

“This flat will be conveyed on an as is basis.  The Purchaser knows this is a title deed partitioned domestic flat.  The Purchaser cannot refuse completion on the ground of the title deed partitioned flat.  Completion shall take place should there be no problem in the title deed.  No completion shall take place should there be problem in the title deed.  Vacant possession of this flat shall be delivered.”

At best the vendors had purchased the property knowing that they were purchasing a flat that had been partitioned out of an original whole unit on the third floor and the person selling to them wished to ensure that the current issues that have been raised by the purchaser in this case would not prevent the sale from going through.

8.  On 2 September 2008 the purchaser’s solicitors wrote a letter [page 110] raising two requisitions, the second of which has been answered to their satisfaction.  The relevant requisition is this:

“We noted that Occupation Permit No.H132 (copy enclosed) only allowed one tenement on the 3rd Floor of No.168 Shau Kei Wan Road, Hong Kong.  Also according to Deed of Mutual Covenant Memorial No. 321105 (relevant pages enclosed) the 3rd Floor is a single tenement floor.  However, it is noted that the said 3rd Floor was sub-divided and partitioned into 2 flats (i.e. Flat A and Flat B) and by Assignment Memorial No. 1573851 (relevant pages enclosed) (“the 1st Assignment”) Flat A was assigned to your client’s predecessor in title.  Please show us, before completion, evidence or the relevant building plans approving the partition of the said 3rd Floor into 2 flats.”

The reply from the vendors’ solicitors on 4 September [page 113] was singularly unhelpful and failed to address the issue.  It said this:

“We refer to the Occupation Permit No.H132.  It was clearly stated that the First Floor of the building is permitted to have 2 tenements for domestic use and that the Second to the Seventh Floor are the same as the First Floor.  Furthermore, we refer to the Plan annexed to Assignment Memorial No. 1573851.  The said Plan showing 2 Flats was duly certified by an authorized architect.  Therefore, our client is not obliged to produce to you any evidence to approve the said Third Floor bearing two units.”

This was not accepted by the purchaser’s solicitors who made the matter absolutely clear in their reply of 5 September [116-117]:.

“With due respect, we disagree with your answer.  We repeat our requisition.  It is clear that the 2 tenements referred to in Occupation Permit No.H132 refer to 1 tenement of No.166 Shaukeiwan Road and 1 tenement of No.168 Shaukeiwan Road.  Thus, the said Occupation Permit allowed only one tenement on the 3rd floor of No.168 Shaukeiwan Road.  This is also clearly shown on the floor plan annexed to Assignment Memorial No. 1573851.  Save that there is a signature and a chop of “沈大中建築師”on the said floor plan there is no certificate certifying that the sub-division and partition of the 3rd floor of No.168 Shaukeiwan Road into Flat A and Flat B had been approved by the Building Authority/Buildings Department or other competent governmental department.  In all events, the said signature and chop would not be sufficient to prove that the said sub-division and partition has been duly approved by a competent governmental department.  We insist that your client shall show us, before completion, evidence or the relevant building plans approving the partition of the said 3rd Floor into 2 flats.”

The vendors’ solicitors replied on 26 September and raised the prospect that the Original Occupation Permit could arguably permit two tenements at 168 and two tenements at 166.  The relevant part of their letter said this [119-120]:

“We do not agree with you that the 2 tenements referred to in the said Occupation Pert refer to 1 tenement of No.166 Shaukeiwan Road and 1 tenement of No. 168 Shaukeiwan Road.  This is only one of the three interpretations that are possible, that is:-

(i)  2 tenements of No.166 of Shaukeiwan Road; or

(ii) 2 tenements of No.168 of Shaukeiwan Road; or

(iii)    1 tenement of No.166 of Shaukeiwan Road and 1 tenement of No.168 of Shaukeiwan Road.

We have caused our own search with the Land Registry and found that there was no tenement on No.166 of Shaukeiwan Road.  Therefore, please enlighten us with authority to support your allegation that the 2 tenements are 1 of No.166 of Shaukeiwan Road and 1 tenement of No.168.  It could only be left with the interpretation of (ii) above.

In any event, as abovesaid, there is no order nor certificated been registered against the Property.  Hence the real risk of affecting the title of the Property is too remote and our client is not obliged to produce to you any evidence to approve the said Third Floor bearing two units.

We trust that we have answered your requisition satisfactorily.”

9.  The final substantive reply from the purchaser’s solicitors came on 2 October 2008 [122-123].  Given its importance I propose to set it out in its entirety:

“With due respect, we disagree with your answer.  We repeat our requisition in our previous letters to you.  We repeat that it is obvious clear that the 2 tenements referred to in Occupation Permit No.H132 refer to 1 tenement of No.166 Shaukeiwan Road and 1 tenement of No.168 Shaukeiwan Road.  In this respect, as we have pointed out in our previous letter to you dated 2nd September 2008, we reiterate that Deed of Mutual Covenant Memorial No. 321105 (“DMC”) [which is the DMC of The Remaining Portion of Shaukeiwan Inland Lot No. 451 (i.e. No.168 Shaukeiwan Road)] shows that the 3rd floor on the captioned lot is a single tenement.  This confirms our view and clearly rebuts your suggestion in paragraph 4(ii) of your answer 1.  (i.e. there are 2 tenements of No.168 of Shaukeiwan Road).  In all events, as we have raised a reasonable requisition on the sub-division of the said 3rd floor into the said property and Flat B which is disallowed by Occupation Permit No. H132, your client is obliged to prove with material evidence that the sub-division was approved or would not be objected by the Buildings Authority/Buildings Department.

Paragraphs 1, 2 and 3 of your answer 1, and the case cited by you which is distinguishable from the present case do not assist your client in satisfactorily answering our requisition as the sub-division of the 3rd floor which is a single tenement into 2 separate domestic units with undisputable facts that there are additional toilets, kitchens, pipes and drainage system constructed therein would surely be the target of and subject to real risk of an enforcement action or demolition order(s) by the government whether or not any order or certificate mentioned by you has been registered against it.  The Assignment plan is evidence that the 3rd floor has been sub-divided into 2 separate domestic units.  Please, therefore, approach the Building Authority/Buildings Department for the building plan(s) approving the sub-division of the said 3rd floor into Flats A and B or a confirmation letter from them that they were aware of the said sub-division and would not take any enforcement action or issue any demolition order(s).

Please note that it is your client’s obligation to show a good title to the said property.  We insist that your client shall show us, before completion, material evidence or the relevant building plan(s) approving the partition of the said 3rd floor into Flats A and B or evidence that the government would not take enforcement action or issue demolition order(s).”

On 6 October, the vendors’ solicitors replied and repeated their case about the number of tenements at 166, which in my view was again singularly unhelpful.  This is what they said at page 125:

“With due respect, we cannot agree with you.  Until now, you have still failed to support your allegation that there is 1 tenement on No. 166 Shaukeiwan Road.  We would stress that we have duly caused search on No. 166 Shaukeiwan Road and found no tenement on the said address.  Hence, unless you provide us with authority that No. 166 Shaukeiwan Road has one tenement, your allegation is unacceptable and we would therefore maintain our same view.”

10.  The vendors solicitors’ final attempt to persuade the purchaser’s solicitors that all was well was an unsigned and undated certificate by an architect and authorised person, a Mr Shum Dai Chung [see 135], to say that No. 168 had been sub-divided into two units by a non-load bearing partition wall which did not require approval from the Building Authority.  It arrived at 4.40 pm on 10 October which was the completion date [see 139].  The purchaser’s solicitors wrote to say that this was not acceptable to them and coming so late on the date of completion the vendors had therefore failed to show a good title.

11.  On 21 October, the vendors’ solicitors sent a signed version of the unsigned draft.

The Result

12.  Mr Leung for the purchaser submits that no attempt had been made to answer the requisition until at the eleventh hour an unsigned architect’s certificate was sent to say that no consent was needed for the partition wall.  What the requisition had asked for was whether approval had been obtained.  For nearly six weeks all they received was obfuscation, as the correspondence amply demonstrates, until this very late attempt to provide an answer was received just before the latest acceptable time for completion.  The effect of the unsigned certificate was to say (1) that, by necessary implication, no approval had been obtained for the partition and, (2) but, no approval was needed.  This answer could have and should have been provided sometime in mid-September instead of the unhelpful replies that were forthcoming from the vendors.  In any event this did not address the issue of the alterations to the drainage which has never been answered.  These were all very proper requisitions.  No purchaser wishes to have conveyed to him a property which contains unapproved alterations.  This requisition could have been answered promptly by the vendors who were fully aware of the problems having regard to the Special Condition attached to the assignment that they had received from their vendor in April 2008, see Special Condition XI, supra.

13.  Reliance is placed by Mr So, for the vendors, on the Court of Appeal decision of Active Keen Industries Limited v Fok Chi Keong [1994] 1 HKLR 396.  Whilst the judgment of Litton JA, in this important decision, is of general application, the fact is that in that case the unauthorised structures, being additional tenements, were in other parts of the building of which the subject property was part.  In this case I am concerned with alterations to the very property itself.  Whilst the partition wall may not become the subject of an enforcement action by the Building Authority because, being non-load bearing, it does not require approval, the addition of a kitchen and bathroom and toilet facilities, which require alterations and additions to the drainage system make it virtually certain that these would amount to structural alterations which would require approval.  This has not been addressed by the vendors.

14.  I am afraid to say that a last minute attempt by the vendors to answer the requisition by an unsigned architect’s certificate relating only to the partition wall simply will not do.  This was a very pertinent requisition which has at best only been half-answered.  It was much too late in the circumstances and it failed to deal with the even more important aspect of the additional kitchen, bathroom and toilet which would have required changes to the drainage and the structure.

15.  No purchaser is required to complete with this scanty reply to an important aspect of the conveyance.  In the circumstances, I hold that the vendors had failed to show good title by the completion date and the purchaser is entitled to the relief that it seeks in the Originating Summons.  I have already heard provisional argument on costs.  Costs will follow the event.  Although this case could have been dealt with in the District Court, the Defendants have been content to leave it in this court.  In those circumstances costs will be on the High Court Scale.