XCHRX BILLION PROFIT ENTERPRISES LTD. v. RISE PATH INVESTMENTS LTD. AND ANOTHER

1999. No. A711

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 711 OF 1999

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REASONS FOR JUDGMENT

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Introduction

1. The Plaintiff vendor brings this action against the 1st Defendant purchaser ("D1") claiming that it breached the agreements reached between them in failing to complete the sale and purchase of certain real properties ("the suit property"). Apart from the sale and purchase agreement ("the Agreement"), a Supplemental Agreement was entered into between the Plaintiff and D1 (collectively "the Agreements"). The 2nd Defendant ("D2") was sued by the Plaintiff on a guarantee dated 25 August, 1997

2. The Agreement entered into by the Plaintiff vendor and the D1 purchaser was dated 25 March, 1997. The suit property was sold for a total sum of $72.75 million. Completion was to be on 25 August, 1997. The parties entered into a Supplemental Agreement dated 25 August, 1997 postponing completion to 25 October, 1997. Under the Supplemental Agreement, D1 had to pay to the Plaintiff $7.275 million as part payment of the price on 25 August, 1997. Further, if D1 could not complete on 25 October, 1997, it had to additionally pay $2 million each month commencing on 26 October, 1997. The Plaintiff had the right to serve a notice of completion on D1 asking it to complete the sale. D2 was required to execute a guarantee to guarantee D1's performance of the Agreements and this was done on 25 August. 1997.

3. By the time of the hearing on 4 August, 1999, D1 has paid a total sum of $16.55 million consisting of:-

(a) $7.275 million by way of deposit;

(b) $2 million by way of additional payment (payable monthly under the Supplemental Agreement);

(c) $7.275 million by way of part payment (under the Supplemental Agreement).

4. At the end of hearing on 4 August, 1999, I concluded that there was no triable defence to the Plaintiff's claim (save as to quantum of loss) The declaratory relief claimed was granted and interlocutory judgement with damages to be assessed was entered. The following are the reasons for the decision.

The Application for Summary Judgment

5. In short, the Defendants contended that the following issues are triable:-

(a) whether D1 could raise the requisitions on title based on unauthorized use of part(s) of the suit property and/or unauthorized structures therein;

(b) if so, whether those requisitions had been satisfactorily answered;

(c) by reason of points (a) and (b) above, whether D1 could contend that good title had not been shown by the Plaintiff (and if so, whether it had been shown);

(d) whether, by reason of points (a) to (c) above, it was the Plaintiff who repudiated the 2 Agreements;

(e) whether the Plaintiff's chairman, Mr. Kenneth Fung, had orally admitted that the Plaintiff was unable to answer those requisitions and agreed to discharge D1 from the Agreement;

(f) whether the parties had abandoned the Agreements.

(1) Relevant Terms of the Agreements

6. The suit property to be sold under the Agreement consisted of:-

(a) a shop known as "Shop No. 5" in a building;

(b) 1st floor of that building;

(c) portion of the external wall of that building ("the External Wall");

(d) spaces on the ground floor of that building ("the Spaces").

In order to understand and decide on points (a) to (d) under the preceding heading, it was firstly necessary to consider some of the terms of the Agreement.

7. Clause 5 stipulated that:-

"5.01 The Vendor [the Plaintiff] shall prove its title and show a good title to the Property in accordance with the provisions of Section 13 of the Conveyancing and Property Ordinance (Cap. 219)".

8. Clause 7 provided that:-

"The Purchaser [D1] acknowledges that he has been invited to inspect the Property ... and that he is entering into this Agreement on the basis of such inspection and of the terms hereof and not in reliance on any representation or warranty ... made by or on behalf of the Vendor. The purchaser purchases with full knowledge of the physical condition of the Property and takes it as it stands."

9. Clause 8 stated that:-

"In particular but without prejudice to the generality of Clause 7, ... No warranty is given by the Vendor on any of the following ...

8.04 whether the existing use of the Property is in accordance with or in compliance with the Crown Lease or the occupation permit for the Property ... ".

10. Clause 9 can be divided into several parts. The first part stipulated that:-

"The Vendor does not warrant or represent that each and every fixture, fitting, erection and structure ... is erected in all respects in compliance with the Buildings Ordinance ... and/or any other legislation or regulation."

The next (second) part of Clause 9 stated that:-

"The Vendor does not warrant that the present use of the Property is in compliance with the Crown Lease or Occupation Permit or any legislation and the Deed of Mutual Covenant of the Building."

The third part of Clause 9 provided that:-

"The Vendor shall be under no liability ... if it is discovered at any time (whether before or after Completion) that the present use of the Property ... is not a permitted user or ... there is any fixture, fitting, erection or structure ... which is in contravention of the Buildings Ordinance ... and/or other legislation ... ".

The fourth part of Clause 9 stated that:-

"The Purchaser shall not be entitled to rescind this Agreement or to annul the sale or to claim any compensation ... by reason of or in connection with any such contravention."

(All italics and bold type are supplied).

11. Clause 10 can also be divided into different parts. The first part provided that:-

"The Property will be purchased in its physical condition at the date of this Agreement. The Purchaser acknowledges that he has been invited to inspect the Property ... ".

The second part of Clause 10 stipulated that:-

"The Vendor does not warrant that every fixture and structure on the Property is erected in compliance with the Buildings Ordinance and/or any other legislation ... and the Purchaser should rely upon his own inspection and survey and the Purchaser shall not be entitled to rescind this Agreement or claim any compensation on the ground of unauthorized alteration or illegal structure."

The third part of Clause 10 stated that:-

"The Vendor does not warrant that the present use of Property is in compliance with the Crown Lease or Occupation Permit or any legislation the Deed of Mutual Covenant of the Building and the Purchaser shall not be entitled to rescind this Agreement or claim any compensation on the ground that the present use of the Property is not in compliance ... ".

(All italics and bold type are supplied).

12. Clause 25 (which was relied upon by Mr. Kok for the Defendants) provided that:-

"Notwithstanding anything herein contained to the contrary ... the Vendor ... shall not be required to prove title and the Purchaser shall be deemed for all intent and purposes to have accepted the title to the portion of the External Wall and the Spaces which form part of the Property ... ".

(2) Requisitions on Title

13. D1's solicitors raised the following point in a letter dated 21 June, 1997:-

"... it is noted that the Occupation Permit prescribes for office use for the 1st floor ... However, it seems that the existing use is a Karaoke bar, please prove with evidence that the existing use is not in contravention of the Occupation Permit."

This was repeated again in their letter of 21 November, 1997:-

"... it is noted that the Tenant is starting its Karaoke lounge business in the said property. Please confirm whether or not the Tenant has caused any structural alteration to the said property ... and send use such satisfactory evidence that it has complied with and obtained all requisite operation in the said property ... ".

14. Without going into the details, the Plaintiff's solicitors responded to the above by relying on Clauses 8 to 10 of the Agreement.

15. Mr. Kok submitted at the hearing that Clauses 8 to 10 could not put the matter beyond argument because:-

(a) there was a duty in equity for a vendor to make full disclosure of any defect in title. If he did not do so, contractual terms like Clause 8 to 10 could not avail him ("the 'Disclosure' Point");

(b) in any event, Clauses 8 to 10 were not sufficiently clear to enable the Plaintiff to avoid a duty to show good title arising from the "user" problem ("the 'Drafting" Point").

16. In the letter dated 21 November, 1997, D1's solicitors also raised a requisition regarding a staircase and an opening in the floor slab. The title deeds were delivered to D1's solicitors on 11 June, 1997. The Plaintiff's solicitors responded on 25 November, 1997 by relying on Clauses 8 to 10 of the Agreement as well as stating that this was only raised 4 months after their last reply and two days before completion. I considered this "requisition" invalid because:-

(a) according to Clause 5.03 (which allowed for 10 days for raising requisitions), this was clearly raised out of time: see also Hillier Development Ltd. v. Tread East Ltd. [1993] 1 H.K.C. 285, 293;

(b) the "requisition" was not properly raised. It did not state that there was a basis or reason for believing that the structures were unauthorized, but rather asked for "satisfactory evidence that ... [they were] approved structure and alteration, and that the co-owners' or Manager's consent has been obtained ... ". I considered that this was more a fishing exercise than a proper requisition.

A point was made in a similar way about an alleged difference between the physical layout of the Shop and that shown in the documents. For the same reasons set out above, I would also find this point invalidly made.

The "Disclosure" Point

17. Mr. Kok argued that the need for the Plaintiff to make full disclosure of the unauthorized structure and/or unpermitted user arises from a rule in equity upon which the decisions of Rignall Developments Ltd. v. Halil [1987] 2 All E.R. 170 and Becker v. Partridge [1966] 2 Q.B. 155 were based.

18. In Rignall, the defendant's property was put up for auction and the agreement entered into contained a condition that the purchaser "shall be deemed to have made Local Searches and Enquiries and to have knowledge of all matters that would be disclosed thereby and shall purchase subject to such matters." The defendant in fact knew of a charge. When the plaintiff discovered the charge it refused to complete. The plaintiff commenced an action seeking a declaration that the defendant was not entitled to serve a notice to complete because good title had not been shown. In deciding in the plaintiff's favour, Millet J. said:-

"The defendant relied on the express terms of the contract. ... by general condition 11 the plaintiff was deemed to have searched the register and to have knowledge of the entries thereon.

It is, however, a well-established rule of equity that, if there is a defect in title or incumbrance of which the vendor is aware, the vendor cannot rely on conditions such as those in the present case unless full and frank disclosure is made of its existence ...

The leading authority is Nottingham Patent Brick and Tile Co v Butler (1885) 15 QBD 261. Wills J said:

'... It would be nothing short of a direct encouragement to fraud if a vendor were at liberty by a condition of this kind to sell to a purchaser as an absolute and unburdened freehold a property which he knew to be subject to liabilities which would materially reduce its mark value ... In honesty and in law alike he was bound to give the purchaser full and fair information what it was that he had for sale, and was inviting him to buy ... ' " (at pp. 174g to 175b).

19. In Becker, the contract contained the Law Society's Conditions of Sale which provided that "the vendor's title which has been accepted by the purchaser shall commence with an underlease ... and the purchaser shall raise no requisition or objection thereon". Unknown to the vendor, there were covenants not to make alterations or underlet without the landlord's written consent. Shortly after the purchaser went into possession, her solicitors were informed by the head lessee's solicitors of breaches of covenant in the superior underlease, namely, failure to pay rent, underletting without consent, and unauthorized alterations. In an action commenced by the purchaser for rescission of the contract, the vendor relied on the said clause of the contract and counterclaimed for specific performance. The Court of Appeal decided in the purchaser's favour holding that unless the vendor had disclosed to the purchaser defects of which he knew or ought to have known, the said clause was not a bar for rescission.

20. The vendor's duty to disclose was further discussed in Barnsley's Conveyancing Law and Practice (1996) 4th ed., pp. 153-4 where it was said:-

"The state of the vendor's title is a matter exclusively within his own knowledge, and the purchaser is generally in the dark. The vendor is, therefore, duty bound to disclose all latent defects in his title. In this context, the word 'defect' bears an extended meaning. He must disclose any flaw in the documentary title which might affect his ownership of the property and, therefore, his right to deal with it. ... A defect is latent if it cannot be discovered by the exercise of reasonable care on an inspection of the property. With the exception of some easements (for instance, rights of way), none of the incumbrances listed [restrictive covenants, leases, local land charges, mortgages or charges, licences arising from estoppel or acquiescence] are of such a nature as to be capable of being revealed on inspection ... ".

"The vendor's duty is occasionally expressed as a duty to disclose all material facts adversely affecting the price to be paid ... This statement of the duty is, however, too wide. It conflicts with the basic rule of caveat emptor, which absolves a vendor of land from any general duty of disclosure, however material the matter may be, unless it constitutes a latent defect relating to title ... ".

"No uniformity of practice exists as to the proper place in the contract for the disclosure of burdens ... provided they are properly brought to the purchaser's attention. Express reference to an adverse right, though clearly preferable, is not vital. It is very common practice to use a blanket phrase such as 'subject to the covenants, conditions, restrictions and stipulations contained or referred to' in a certain deed. ... "

(All italics and bold type are supplied).

21. Comments on the above aspects can also be found in 42 Halsbury's Laws of England (1999) 4th ed. Reissue, 41-61 (especially at para. 55-57), and Emmet on Title 19th ed., para. 1.016, 1.032, 4.026 and 4.027.

22. In Summit Investment Ltd. v. Shia Ning Enterprise Ltd., H.C.M.P. No. 1532 of 1998, I have decided that a mere discrepancy between the user described in the occupation permit and the actual user is not per se a defect in title: see pp. 5-9 of the transcript of the Summit Investment case. Unauthorized building works (which are not exempted) must have been carried out in order that s. 25(4) (and therefore s. 25(1)) of the Buildings Ordinance, Cap. 123 can be invoked to enable the Building Authority to act under s. 25(2) (and possibly also under s. 24).

23. The Defendants have not alleged (or proved) that unauthorized building works had been undertaken in relation to the karaoke business. On the other hand, the Plaintiff's solicitors did not argue that the "requisition" was not properly raised. In his written submissions, Mr. Li for the Plaintiff argued that it was nevertheless open to the Plaintiff to raise this point at the hearing. I do not agree. The requisition raised in relation to the karaoke lounge business was not so blatantly irrelevant and therefore a proper answer should be provided at least by a reasonable time before completion.

24. However, I rejected Mr. Kok's non-disclosure argument on other grounds. First, the karaoke business was not a latent defect. On the contrary, it was or ought reasonably to have been obvious to anyone who inspected (or surveyed) the suit property; the fact that D1 was able to raise this requisition speaks for itself. Mr. Kok argued that although the nature of the business was obvious, the restrictions in the occupation permit were not known to D1. I did not find this to be a valid argument, especially when D1's attention had been drawn to this potential problem by Clauses 8 to 10 of the Agreement.

25. Even if the karaoke business could be viewed as a latent defect, I did not agree with Mr. Kok that the Plaintiff had not made the requisite disclosure. First, although the relevant clauses of the Agreement were not explicit, they were clear enough for a reasonable purchaser to have been put on notice regarding (a) the user of, and/or (b) any unauthorized structure(s) in, the suit property. Not only did these clauses state that the vendor did not make any representation or give any warranty regarding these matters, the second part of Clause 10 actually stipulated the purchaser "should rely upon his own inspection and survey". As quoted earlier, it was stated in Barnsley that "Express reference to an adverse right, though clearly preferable, is not vital". The same conclusion could be reached by saying that it would be inequitable for such a purchaser to be able to allege non-disclosure when he ought reasonably to have been put on alert, and exercised due diligence, regarding this by reason of the insertion of the relevant clauses.

26. If the law were that each and every burden (in particular, illegal structure) needs to be precisely pinpointed, dispute can arise as to how far a vendor needs to disclose:-

(a) the precise nature of the illegal structure;

(b) the exact size and dimension of the illegal structure;

(c) in what way(s) the illegal structure can create a risk or doubt on the title.

27. Further, in Hong Kong, it is a usual practice that a preliminary sale and purchase agreement was entered into between the parties to be followed by a formal sale and purchase agreement. Although there was no direct evidence that such practice was adopted in the present action, I noticed that an initial deposit of $2 million had been paid prior to the Agreement, which is consistent with the usual practice of an earlier provisional agreement.

28. When doctrines of equity were called upon, it must be borne in mind that a purchaser (who, for example, had been alerted to possible "breach" of user and/or unauthorized structures by terms in the draft formal agreement) could and should inspect or survey the suit property prior to entering into a formal sale and purchase agreement which contains clauses specifically extinguishing or limiting a vendor's duty relating to user and/or unauthorized structures. If he enters into the formal agreement without doing so, he should not be heard to complain that there had been "non-disclosure".

The "Drafting" Point

29. I also did not agree with Mr. Kok's argument that the relevant clauses were not clear or wide enough to alleviate the Plaintiff from its duty to prove good title regarding "breach" of user and/or unauthorized structures.

30. Mr. Kok relied on the difference in the wordings between Clauses 8 to 10 on the one hand and Clause 25 on the other. He submitted that Clause 25 explicitly provided there was no need for the Plaintiff to prove title relating to certain part of the suit property, but Clauses 8 to 10 did not expressly say so. That is factually correct. However, differences in the wordings of different clauses, or whether something is or is not explicitly stated, are only matters to be taken into account when ascertaining their true meaning. Bearing in mind Mr. Kok's argument, I considered that the wordings of Clauses 8 to 10 were clear enough to show that in effect, the Plaintiff's duty to prove good title had been obviated in relation to "breach" of user and/or unauthorized structures. In this connection, I find that the phrase "The Purchaser shall not be entitled to rescind this Agreement or to annul the sale" in the fourth part of Clause 9 and the phrases "the Purchaser shall not be entitled to rescind this Agreement" in the second and third parts of Clause 10 to be material.

31. Mr. Kok's second argument was that Clauses 8 to 10 did not explicitly state that the Plaintiff did not need to prove good title. However, the answer to this question was whether upon a true construction, these clauses could be found to have such effect. Because of the matters stated in the preceding paragraph, I concluded that they had such effect.

(3) Admission of Repudiation/Agreement to Discharge the Defendants

32. It was alleged in the Defence and Counterclaim as well as in an affirmation filed by Mr. Kok (but not the witness himself) that in early November, 1997, the Plaintiff's chairman, Mr. Fung, orally admitted the Plaintiff's liability to repay the sums received from D1. At the hearing, Mr. Kok said that it was a Mr. Au Chi Kuen of D1 who actually heard it from Mr. Fung.

33. I did not find this part of the Defendants' case to be believable because:-

(a) D1 had not filed any evidence from the witness to confirm this. Although Mr. Kok explained this was caused by his view that such evidence was unnecessary, I considered that D1 should not be able to escape the consequence (alternatively, the Plaintiff should not be deprived of the advantage) of the lack of such evidence only because D1 chose to take such risk;

(b) in any event, I found this allegation unbelievable because of the contemporaneous correspondence between the parties' solicitors. According to exhibit "LN-3" (to the affidavit of Mr. Ludwig Ng dated 29 March, 1999), there were quite a number of letters written by them after early November, 1997. From 21 November to 27 November, 1997, two letters were written by Mr. Kok's firm and two were written by the Plaintiff's solicitors. Not only was the alleged oral admission not mentioned, the respective solicitors continued to argue whether a title problem had been created by the karaoke business and unauthorized structures. If the lay client had in fact obtained an admission of liability from the Plaintiff, these letters would have said so.

(4) Abandonment of the Agreements

34. This argument was based on the following:-

(a) under the Supplemental Agreement, D1 was either to complete the sale or to pay monthly additional payments;

(b) D1 failed to do so on or after 26 November, 1997;

(c) the Plaintiff's solicitors merely wrote a letter dated 27 November, 1997 stating that D1 had been in breach of the Agreements and reserved the Plaintiff's rights thereunder;

(d) it was not until 8 August, 1998 that the Plaintiff formally rescinded the Agreements and forfeited the sums paid.

35. Mr. Kok argued that it was open for the Court to infer that the Agreements had been abandoned after 27 November, 1997. I disagreed because, having rejected the alleged "admission" of the Plaintiff, there was no evidential basis for doing so.

(5) Quantum

36. In the Statement of Claim (and this application), the Plaintiff claimed a quantified sum of $57.15 million which consisted of:-

The contract price	$ 72,750,000
LESS
Actual price on resale	27,000,000
Deposit forfeited	7,275,000
ADD
Costs of resale	675,000
Monthly additional payment from 26.11.97 to 8.8.98	18,000,000.

37. I did not agree that final judgment in the sum claimed should be entered. The proper order should be for an interlocutory judgment with damages to be assessed because (without prejudice to any other issues to be determined at the time of assessment):-

(a) there was no evidence regarding the value of the suit property at the time of resale;

(b) there was no evidence regarding the "costs of resale";

(c) it is arguable whether the Plaintiff is entitled to claim the monthly additional payments over and above the total price payable under the Agreement (even though Clause 3 of the Supplemental Agreement so provided);

(d) it is arguable whether the Plaintiff could claim the monthly additional payment for the whole period from 26 November, 1997 to 8 August, 1998.

The Application for Security for Costs

38. In view that the Plaintiff has succeeded on liability in this action, there was no ground for ordering security for costs to be provided by the Plaintiff and this application was therefore dismissed.

Costs

39. There was no reason to depart from the normal rule that costs should follow the event. The costs of the action (including the costs of the applications) are to be paid to the Plaintiff to be taxed if not agreed.