NATION GROUP DEVELOPMENT LTD. v. NEW PACIFIC PROPERTIES LTD.

FACV No. 7 of 2000

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 7 OF 2000 (CIVIL)

(ON APPEAL FROM CACV NO. 160 OF 1999)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1. I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Chan PJ:

2. I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ:

3. Cheong Wah Building is a twenty-one storey building in Tsuen Wan, constructed in the 1970s. The ground and first floors are used for commercial purposes, with the ground floor divided into a number of shops. The upper floors are divided into residential flats.

4. On three sides of the building, at the level of the first floor concrete slab, runs a canopy which is a cantilevered concrete structure extending beyond the boundaries of the lot and over the public footpath. It is 10 feet wide on one side of the building and 4 feet wide on the other two sides. The fourth side of the building has no canopy. Instead, it has running along it, within the confines of the lot and at first floor level, what has been called a "flat roof". This is a narrow strip of the ground floor's roof exposed as a result of the building being slightly set back at the first floor level.

The agreements

5. On 10 September 1997, the appellant entered into a provisional agreement to purchase from the respondent two of the ground floor shops together with the entire first floor, the canopy and the flat roof. The appellant and respondent are here referred to as "the purchaser" and "the vendor" respectively.

6. The provisional agreement dealt separately with one of the shops (which is not relevant to this appeal) and described the remaining property to be sold as follows :-

"Shop 12 on Ground Floor [referring to a plan], First Floor & its Canopy and the Flat-Roof [as shown coloured Pink on the Plan annexed to an Assignment registered in the Tsuen Wan New Territories Land Registry by Memorial No. 1328465], Cheong Wah Building ......"

Under the deed of mutual covenant ("DMC"), the property had been notionally divided into 228 equal undivided shares, with one share allotted to each shop and 10 shares allotted to the "first floor and its canopy and flat roof".

7. When, on 30 September 1997, the parties executed the formal sale and purchase agreement, the relevant property was described as follows :-

"ALL THOSE 11 equal undivided 228th parts or shares of and in ALL THAT Tsuen Wan Town Lot No. 190 ...... And of and in the messuages, erections and buildings thereon known at the date hereof as CHEONG WAH BUILDING ...... together with the sole and exclusive right to use occupy and enjoy FIRST ALL THAT Shop 12 on the Ground Floor of the said building and SECONDLY ALL THAT the entire FIRST FLOOR and its Canopy and the Flat Roof thereof of the said Building."

The purchase price was $65 million and, on signing the sale and purchase agreement, deposits totalling $10 million were paid by the purchaser.

The requisitions

8. What gave rise to the dispute in the present case were certain unauthorized structures consisting of cocklofts, air-conditioning units and advertising signs attached to or suspended from the underside of the canopy. Those structures covered a large part of the canopy's underside surface or "soffit", some of them being of quite substantial construction. This was particularly so in the case of the cocklofts which protruded beyond the lot's boundaries, extending the upper parts of the ground floor shops and overhanging the public footpath. They took advantage of the canopy, using it for support and as a roof.

9. The unauthorized structures attracted a requisition from the purchaser's solicitors who expressed concern as to their effect on the canopy's structural safety and as to the risk of enforcement action by the government or under the DMC.

10. The vendor's response was to cause some minor unauthorized structures which had been installed on top of the canopy to be removed. In the ensuing correspondence, it denied any risk of enforcement action and relied on clause 17(b) of the sale and purchase agreement in respect of any structural questions. Clause 17(b) provides that the Property is to be sold on an "as is" basis and excludes any warranty regarding the physical state and condition of the building.

11. The purchaser rejected that clause as irrelevant and continued to object to the unauthorized structures attached to the underside of the canopy. Its concerns were that they would be regarded as fixtures forming part of the property, making it a target for enforcement action and casting doubts on title.

12. It appears that the parties were at cross purposes in one fundamental respect. The purchaser was proceeding on the footing that it was to acquire "the sole and exclusive right and privilege to use occupy and enjoy" the whole of the canopy, including the parts to which the unauthorized structures continued to be attached. The vendor, on the other hand, believed that it had only contracted to sell rights to the exclusive use, etc, of the top surface of the canopy, so that any unauthorized structures attached to the underside were irrelevant.

13. This fundamental difference was first ventilated in a letter from the vendor's solicitors on 8 January 1998, the day before completion was due to take place. It read, so far as material, as follows :-

"[Your requisition] is improper for the following reasons :-

(a) What our client has contracted to sell to your client is inter alia the 1st Floor and its canopy and the flat-roof. As your [architect] has accepted, the top of the 1st Floor canopy has been cleared and indeed so is the flat-roof. Our client has not contracted to sell to your client the underneath surface and space of the canopy or that of the flat-roof which is indeed not part of the Property. Our client has no exclusive right of use and possession of the space beneath the canopy and the flat-roof including their underneath surface.

(b) If which is denied there is any loading problem caused by the structures attached to the soffit of the canopy and the flat-roof, there is no risk of any enforcement against the owner of the Property. As said the underneath space of the canopy and the flat-roof are not part of the Property. Moreover, the structures are not erected by our client or its predecessor-in-title. In this regard we would rely on the case of Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67 at 79-81. Any enforcement action will be against the owner of those structures only and such enforcement action will in no way affect the title to the property.

(c) [As to the concerns relating to the structural aspects of the canopy] We would again refer you to clause 17(b) ......"

The purchaser's solicitors joined issue, writing back on the same day as follows :-

" ...... Both sides [of the canopy] should be cleared of unauthorized structures. Your attempt to draw a distinction between the upper surface and the 'underneath' surface is artificial and misconceived. Your allegation that your client has not contracted to sell the 'underneath' surface to our client is equally misconceived ......"

Not surprisingly, completion did not occur on 9 January 1998 as contemplated by the agreement. On the next day, the vendor declared the deposits forfeited and the agreement rescinded. The purchaser countered by treating the vendor's letter as a repudiation which the purchaser accepted, demanding repayment of the deposits.

14. On 5 February 1998, the purchaser instituted proceedings claiming declarations that its requisitions had not been sufficiently answered and that the vendor had failed to show or give good title to the property. An order for the return of the deposits was sought.

The fundamental issue

15. As foreshadowed in the solicitors' correspondence, the crucial issue in the case concerns the precise identity and scope of the property contracted to be sold. When the agreement promised to the purchaser "the sole and exclusive right to use occupy and enjoy ...... the entire first floor and its canopy", did this include those parts of the canopy occupied by the cocklofts and the other unauthorized structures?

16. If the answer is "Yes", then the vendor would not have been in a position to give good title since, at the completion date, such structures excluded the owner from any (let alone the sole and exclusive) use, occupation or enjoyment of the parts which they enclosed or occupied. Such a conclusion would render largely academic the other questions (concerning the sufficiency of the answers to the requisition and the risk of enforcement action) debated in the courts below. The position would obviously be very different if the answer is "No".

The judgments below

17. The fundamental question is one that divided the judges in the courts below. Stone J considered it "as plain as a pikestaff that the intention was to assign the entire canopy structure" to the purchaser. In the light of his conclusion that the owner of the canopy faced a real risk of enforcement action because of the unauthorized structures attached to its underside, he gave judgment for the purchaser, holding that the vendor had not sufficiently answered the requisition concerning such structures and that it had not shown or given good title by the time of completion.

18. The judge was reversed by the Court of Appeal. Godfrey JA held that the contract gave the purchaser "the right to the exclusive use of ...... all the external surfaces of the canopy" although not to "any right to any part of the structure of the building". However (without dealing with the impact of this conclusion on the ability of the vendor to give good title), he went on to hold that title was not affected by any risk of enforcement action since the owner of the property was not the owner of the unauthorized building works for the purposes of the Buildings Ordinance. It was therefore not at risk of receiving any Building Authority notice in respect of such works "even though that 'owner' is entitled to the exclusive use of the external surfaces of the canopy".

19. While Rogers JA agreed as to the result of the appeal, he took a different view of the rights to the canopy being granted, holding that the vendor had agreed only to convey exclusive use of the top surface of the canopy. He stated :-

" ...... the first and simple answer was that the soffit was not part of the premises which the defendant owned, in the sense of having the right to exclusive possession, and it was not part of the property which the defendant undertook to assign to the plaintiff."

On this basis, he held that there was no risk of enforcement action so as to affect the vendor's ability to show and give good title.

20. Keith JA contented himself with agreeing with both Godfrey and Rogers JJA.

How the fundamental question should be answered

21. Mr Edward Chan SC, appearing for the vendor, invited the Court to adopt the approach of Rogers JA and to hold that on the agreement's true construction, the purchaser was to acquire exclusive use of only the upper surface of the canopy. He submitted that the rest of the canopy, including its underside or soffit, constituted common parts of the building. Accordingly, so he argued, the vendor was perfectly able to give sole and exclusive possession of that part of the canopy which it had contracted to sell and any enforcement action would, at most, result in a personal claim against each of the co-owners for a share of the cost of removing the unauthorized structures underneath (see Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396 at 408).

22. Mr Andrew Cheung, appearing for the purchaser, submitted that Stone J was right and that exclusive use of the entire canopy was the subject-matter of the contract, with the consequences that have been outlined above.

(i) The sale and purchase agreement

23. In deciding which (if either) of these contentions is correct, the starting-point must be the language of the sale and purchase agreement itself. On its face, the exclusive rights to be given are to the use, occupation and enjoyment of "the entire first floor and its canopy" without qualification. It therefore appears prima facie that the vendor did not seek to restrict such rights of enjoyment to the canopy's top surface.

(ii) The deed of mutual covenant

24. The provisions of the DMC (to which the contract was subject) are to similar effect. They allot 10 shares to the "first floor and its canopy and flat roof", with the parties granting to each other the exclusive use of the parts listed. The reference to the canopy as a part so listed is again unqualified, there being nothing to suggest that the covenant's application is limited to its top surface.

25. When the developer entered into the DMC as "first owner" with the "second owner" (a Madam Chow Mei Ki, the first purchaser of a flat in the building), the developer reserved to himself exclusive use of the "first floor and its canopy and flat roof" indicating that such parts of the building were not intended to form part of the common area. When, in its clause 4(p), the deed lists the areas "included" in the "common parts services and facilities", the canopy is not mentioned.

26. Indeed, as Mr Cheung submitted, it is not easy to see why (on Mr Chan's approach) it should have been intended that every surface except the upper surface of the canopy should form part of the common area. In what way could the vertical and underside surfaces (or the internal structure) of the canopy serve co-owners on the residential floors as common parts? Would they not merely be saddled with the burdens of maintaining the canopy without enjoying any identifiable benefits?

27. A reading of the title documents therefore supports a construction giving the purchaser exclusive use of the entire canopy. However, adopting the reasoning of Rogers JA, Mr Chan raised three arguments to the contrary which now fall to be considered.

(iii) The annexed plan

28. The first contrary argument is based on a floor plan. When the property was sold by the developer to the purchaser's predecessor-in-title in December 1976, it was likewise described as including the exclusive enjoyment of the entire first floor, its canopy and flat-roof, but with the added words: "as shown coloured Pink on the Plan hereto annexed." As indicated above, a similar reference to a plan had been part of the property's description in the provisional agreement.

29. The plan referred to was a two-dimensional floor plan showing the first floor (with its light wells and lift shafts) as well as the location and width of the canopy and flat-roof. Rogers JA held that use of a two-dimensional plan militated against construing the contractual grant as covering the entire canopy:-

"It seems to me that no assistance can be derived by the plaintiff from a consideration of the plans. These are two dimensional and only show the top surface of the areas. If any other surface or area were intended to be conveyed, it would have been necessary to have plans of those areas or at least cross-sectional areas."

With respect, that argument cannot be accepted. The plan complemented and did not seek to cut down the textual description of the property in the contract. Thus, it showed the interior of the first floor marked with the word "Shop". It must obviously therefore be construed as intending to depict by use of a two-dimensional floor plan what was a three-dimensional space designated for use as shop space. The fact that the contract did not also annex a sectional drawing showing the vertical dimensions of such space does not suggest otherwise. It would obviously make no commercial or even physical sense to construe the plan as limiting use of the shop space to use of the two-dimensional floor surface.

30. Similarly, the word "canopy" was written on the shaded areas representing the canopy, obviously indicating that the plan's two-dimensional representation was intended to convey the existence of a three-dimensional structure which a canopy (and any other structure) necessarily is. It was accordingly not the intention of the parties that the purchaser was to be limited to the exclusive use of only "the top surface of the areas" shown in the plan.

31. An additional reason why this argument must fail is that the sale and purchase agreement itself (unlike the provisional agreement) does not annex, and does not include in its description of the property any reference to, a floor plan. As the argument depends on there being such a floor plan, it can have no application to the relevant contract which superseded the provisional agreement.

(iv) Analogy with the first floor concrete slab

32. Mr Chan argued secondly that the underside of the canopy had to be excluded from the contractual grant by analogy with the obvious need to exclude the underside of the concrete slab forming the floor of a flat in the building. No one could argue that a person buying a flat on say, the 7th floor was intended to be given the exclusive (or any) use, occupation or enjoyment of the underside of the concrete floor slab since that would involve giving the 7th floor owner use of the 6th floor owner's ceiling. The canopy, Mr Chan submitted, was but an extension of the first floor's concrete slab so that by parity of reasoning, the parties must have intended to exclude its underside from the grant.

33. Such reasoning found favour with Rogers JA who, after setting out the description of the property contained in the first assignment in 1976, stated :-

"On the face of the matter, that would give the right to the assignee to occupy those areas. It would not, for example, give the assignee the right to occupy the under-surface of the first floor, that would be the roof of the ground floor area."

I am again, with respect, unable to accept the argument. The correct approach again depends on the proper construction of the agreement. To take the first purchaser as an example, what Madam Chow acquired was one equal undivided 228th share in the Lot together with the right to the exclusive use of "Flat A1 on [the] Seventh Floor". The reason why no one would suggest that Madam Chow thereby acquired any right to use the underside of the floor slab is because the words "Flat A1 on the Seventh Floor" (or even merely the word "flat") do not, as a matter of construction, encompass the underside of the 7th floor slab. It may be different if the agreement had been to grant her exclusive use of "the concrete floor slab", but that is not what the contract was about.

34. The same is true of exclusive use of the "entire first floor" which the purchaser contracted to acquire in the present case. As Godfrey JA pointed out in the Court of Appeal, the parties must be taken to have intended that the purchaser was to be given "the right to the exclusive use of the floor and ceiling surfaces of the First Floor and of the air space between them," in other words, of the entire volume of the first floor space, but not use of the underside of the concrete slab.

35. However, a grant of exclusive enjoyment of the canopy stands on a very different footing. "The canopy" is a structure which protrudes outwards from the external walls of the building and so, unlike "flats" or "shops", does not form part of its internal volume. No constraint involving any downstairs neighbour arises. The agreement grants exclusive use of "the canopy" as a specific, named structure, without limitation or qualification. Accordingly, giving the words their natural meaning, the grant should be construed as comprehending the entire canopy.

(v) Soffit of no use to first floor owners

36. Mr Chan's third argument was that the parties must be taken to have intended to exclude the canopy's soffit from the grant because existing constraints and the physical layout in general were such that the first floor owner could not put it to sensible or legitimate use.

37. The first such constraint was to be found in Clause 4(l)(ii) of the DMC which prohibits owners from erecting or affixing "any signboard sunshade bracket fitting or thing to the exterior of the said building" without the consent of the building's Manager.

38. Secondly, since the canopy protrudes beyond the lot's boundaries, any meaningful or commercial use of its underside was said necessarily to involve a trespass to the airspace over government land, making the underside effectively unusable.

39. Rogers JA adopted a similar approach as follows :-

"If it had been intended that the soffit or the canopy was conveyed to the assignee of the first floor, then the rights that he would have acquired by reason of that soffit, seem to me to be questionable in the least. Whereas the top surface of a structure can at least be stood upon, the soffit can be used for nothing except for attaching items.

Whereas one is reluctant to apply common sense to matters relating to contracts between parties, particularly where matters of conveyancing documents and law are concerned, it could be said to be at least surprising if the soffit of the first floor canopy had been conveyed to the owner of the first floor who thus had control over whether, for example, lights or signboards could be attached to the soffit. Such lights and signboards would almost invariably relate to the shop premises on the ground floor to which that part of the soffit were adjacent. To suggest that the owner of the first floor had exclusive control over what was done in respect of signs which would be taken as relating to the shop premises on the ground floor and to lighting arrangements, which could affect only the shop on the ground floor and its exterior, would be to produce a remarkable result."

I am unable to accept such reasoning. The requirement that owners obtain consent from the Manager does not help the analysis one way or the other. If the purchaser were to acquire exclusive use of the soffit and then wished to hang a sign board from it, an application for the Manager's consent would be required. This does not suggest that the purchaser was not intended to acquire the right to such exclusive use. All it means is that the purchaser would be the only person entitled, if consent was forthcoming, to affix (or to license the affixing) of such a sign board on the soffit.

40. The objection of Rogers JA that "the soffit can be used for nothing except for attaching items" and that such attachments "would almost invariably relate to the shop premises on the ground floor to which that part of the soffit were adjacent" is unjustified. The first floor was intended for commercial purposes and its occupiers might plainly wish to use the soffit to advertise the existence of their business on the first floor, a fact that passers-by might otherwise miss. This might be done by attaching signboards or lights to the soffit if that can be done without creating any danger. They might instead, for instance, choose to paint part or all of the soffit in a distinctive way, perhaps including the logo or trademark of the business, to advertise its presence and identity. It is therefore difficult to accept that the potential for useful employment of the soffit is confined to the ground floor shops. In any case, a first floor owner with exclusive rights might derive commercial benefit from licensing use of the soffit by others, including the ground floor shops.

41. The objection that use of the soffit would necessarily involve trespass on government air space is not made out. It is reasonable to assume that the canopy and its intrusion into government airspace were shown on plans approved by the Building Authority. Such approval would extend at least to what is necessary for the reasonable maintenance of the canopy, for instance, by having it painted. As indicated above, having the soffit painted in a particular way might well be commercially valuable to the first floor owners. While such use might otherwise technically involve a trespass into government airspace (in the example given, by the thickness of a coat of paint, subject to the de minimis doctrine), it may well be possible to imply consent negativing trespass. Moreover, in so far as proposed uses may require the express consent of relevant authorities, there is no reason to suppose that such consent would not be forthcoming on a first floor owner's application.

Conclusion

42. The arguments against construing the grant as covering the entire canopy must therefore be rejected. It follows that the respondent was not in a position either to show or give good title to the property in that it was plainly unable at the completion date to provide sole and exclusive use of the underside of the canopy, much of which was enclosed by cocklofts or occupied by air-conditioning units and sign boards. Accordingly, the respondent was not entitled to forfeit the deposits and its purported rescission and forfeiture amounted to a repudiation of the agreement.

43. Since the contract was for the purchase of the entire canopy, the risk of enforcement action in respect of the attached unauthorized structures could not be excluded, notwithstanding the existence of persuasive arguments against such action being taken against the first floor owner. Moreover, since the answers given to the requisition were based on the false premise that the soffit was not included in the sale and the unauthorized structures were irrelevant, the requisition was not sufficiently answered.

44. The appeal must therefore be allowed and the orders of Stone J restored. Counsel accepted at the hearing that the costs should follow the event. Accordingly, the appellant must have its costs here and below.

Mr Justice Silke NPJ:

45. I agree with the judgment of Mr Justice Ribeiro PJ.

Lord Hoffmann NPJ:

46. I agree with the judgment of Mr Justice Ribeiro PJ. I think that Stone J was a little hard when he described the argument that the vendor was not selling the whole canopy as a non-starter. But although Mr Edward Chan's very attractive submissions got it started, in the end it came second. It requires one to accept that the underside was left unallocated by the DMC, a common part unattached to any undivided shares like the main roof. This would have been possible, but the fact is that whereas the main roof is simply not mentioned in the DMC, the canopy is. It is allocated to the same shares as the first floor and I can see no reason not to construe "first floor and its canopy" as meaning exactly that. The result is that the vendor answered the requisition on a false basis, with the consequences set out in the judgment of Mr Justice Ribeiro PJ.

Mr Justice Bokhary PJ:

47. The Court unanimously allows this appeal to restore the orders of Stone J, and awards the appellant its costs here and below.