GLADSON CHINA LTD. v. LAM ALEXANDER CHUN JUNE AND ANOTHER

HCMP3602/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3602 OF 1995

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J U D G M E N T

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The facts

1. The facts of this case are simple. The defendants were the owners of the property, known as House No.11, 22nd Street, Hong Lok Yuen, Tai Po, New Territories ("the Property"). The Property consisted of a house and a garden. By a Provisional Agreement dated 30 March 1994 ("the Provisional Agreement"), the defendants agreed to sell the Property to the plaintiff for the sum of $12,380,000. The Provisional Agreement contained the following remark :

"... As regards the additional structures erected on the above property, the owner shall produce evidence showing the legality of such structures. Representatives of the Purchaser's banker, valuer, designer may after the signing of the formal Agreement for Sale and Purchase inspect the property."

2. On 4 May 1994, the parties entered into a Formal Agreement for sale and purchase of the Property ("the Formal Agreement"). The Property is surrounded by an outer fence built in Chinese architectural style. The entrance area to the house had been extended ("the entrance porch") and the outer facade was also built in Chinese architectural style.

3. On 18 January 1995, the defendants' former solicitors, Messrs T.S. Tong & Co. ("T.S. Tong") forwarded to the plaintiff's solicitors, Messrs J. Chan, Yip, So & Partners ("Chan, Yip, So"), the title deeds and documents relating to the Property. These included the following documents :

(1) A letter dated 28 July 1988 from Hong Lok Yuen Estates Limited to the 1st defendant, offering to sell to the 1st defendant 2.69 sq.m. of "Gross Floor Area" upon payment of the sum of $24,210. The gross floor area is the area constituted by the entrance porch.

(2) An official receipt dated 8 August 1988 showing payment by the 1st defendant of the sum of $24,210.

(3) A letter dated 23 August 1988 from the District Lands Office, Tai Po to the 1st defendant, approving the plans submitted by the 1st defendant for the erection of the entrance porch subject to the following two conditions :

i) that the gross floor area of the entrance porch was to be counted for plot ratio and site coverage for the Property; and

ii) the approval of the Building Authority.

4. On 14 June 1995, the plaintiff instructed a surveyor to carry out an inspection of the Property. On 14 July 1995, the surveyor carried out the inspection and gave the finding in a report dated 23 August 1995. The report stated that the entrance porch was an unauthorized structure. It also stated three wooden pergolas including the supporting columns/posts at the garden of the Property and an extended staircase landing were unauthorized structures.

5. By a letter dated 16 August 1995, Chan, Yip, So required the defendants' solicitors, who had changed from T.S. Tong to Daniel K.F. Or & Co. ("Or"), to prove the legality of the entrance porch. The plaintiff claimed that the defendants had failed to answer the requisition and had failed to prove a good title with the Property, as a result, it rescinded the Formal Agreement by a letter dated 25 August 1995. The plaintiff is seeking a declaration that it had rescinded the Provisional Agreement and the Formal Agreement. They claim for the return of the deposit of $2,476,000.00 and $606,480.00 representing costs of investigating the title, agent's commission and stamp duty.

6. The defendants, on the other hand, claim that the plaintiff had repudiated the Formal Agreement and they are seeking loss of profit of $3,880,000.00 being the difference between the price of the Property they sold to the plaintiff and the price they actually obtained on 31 July 1996 when they resold the Property. They also claim a sum of $407,279.27 being expenses incurred in relation to the sale of the Property to the plaintiff.

The issue

7. The only issue in this case is whether the plaintiff was entitled to rescind the Formal Agreement because the entrance porch was not approved by the Building Authority. Allegations of other illegal structures in the Property are not pursued upon by the plaintiff.

The relevant clauses

8. The following two clauses are relevant for the purpose of this case. Clause 11 stated that :

"11. Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's solicitors within seven working days after the receipt of the title deeds by the Purchaser's solicitors ... otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title if requisition or objection on title ... is not delivered to the Vendor's solicitors within the time stipulated above (in which respect time shall be of the essence of the Agreement)."

Clause 34 stated that :

"34. Notwithstanding anything hereinbefore contained to the contrary, the Vendor warrants or represents that each and every fixture, fitting, erection, structure and building works on the Premises or any part or parts thereof is erected in all respects in compliance with the Building Ordinance and/or its subsidiary legislation and/or any other legislation or regulation. The Vendor shall be liable if it is discovered before completion of this sale and purchase that the present use of the Premises or any part or parts thereof is not a permitted user or that at the date hereof or before completion, there is any erection, structure, fittings fixture and/or buildings works (if any) in any part or parts of the Premises which is in contravention of the Building Ordinance and its subsidiary legislation and/or other legislation or regulation, the Vendor shall be held responsible for the demolition, alteration, removal, reinstatement, reinforcement and/or any other works relating to such illegal erection, structure, fixture, fittings and/or building works (if any) of for any costs and expenses of and incidental thereto whether or not such works are required by the Buildings Authority or other authority or body or otherwise. The Purchaser shall be entitled to rescind this Agreement."

The plaintiff's primary case

9. The primary case now relies by the plaintiff is based on clause 34 of the Formal Agreement. The clause is a long one and it consists of four provisions : the first three related to the obligation of the vendor and the fourth one related to the right of the purchaser.

The vendor's obligations :

(1) It represented that all the structures in the Property were in compliance with the Building Ordinance.

(2) It agreed to be liable if it was discovered before completion that there were structures built in contravention of the Building Ordinance.

(3) It agreed to be responsible for the demolition of the illegal structures whether or not such works were required by the Building Authority.

The purchaser's rights

10. The right given to the purchaser under clause 34 was that he was entitled to rescind the Formal Agreement.

11. There is no dispute that the entrance porch was built without the approval of the Building Authority. The plaintiff argued that therefore it was entitled to rescind the Formal Agreement under clause 34.

The defendants' argument

12. Ms To, counsel for the defendants, argued that the plaintiff's right to rescind under clause 34 was restricted only to those structures the existence of which were unknown to the plaintiff. That, upon discovery of these structures, the defendants were required to demolish or reinstate them failing which the plaintiff could then rescind. As the entrance porch was already known to the plaintiff at the time when the Formal Agreement was made, it was not covered by clause 34 and there was no breach of the clause. Further, even if clause 34 covered structures known to the plaintiff, it only amounted to a breach of a warranty and representation which would only entitle the plaintiff to damages.

Construction of clause 34

13. In my view, the first part of clause 34 is clear. It does not envisage any distinction between structures discovered before or after the Formal Agreement. The representation by the plaintiff related to "each and every structure".

14. In the overall picture, the entrance porch was a very minor part of the Property. The Property had a gross floor area of about 2,150 sq.ft. and a garden of 2,800 sq.ft. It is not an exaggeration to describe the dispute relating to the entrance porch as a trivial matter indeed. It could easily be demolished and approval sought from the Building Authority to rebuild it before completion. It is tempting to construe clause 34 as requiring the purchaser to give notice to the vendor to demolish the illegal structure and it is only after the vendor had refused to do so that the purchaser's right to rescind can be exercised. However, on a proper construction of the clause, much requirements cannot be imposed. It will read too much into this clause when the words are simply not there. I think the ultimate sentence of the clause shows that it is for the purchaser to decide what he should do. If there are illegal structures, it may choose to ignore them and proceed to completion. It is also given the option to complete but requiring the vendor to demolish the illegal structures. Finally, it is given the right to rescind the agreement in any event.

15. Ms To argued that the clause was drafted by the vendor's own lawyers and that it is difficult to envisage that they would allow such wide powers to be given to the purchaser. The intention of the drafters of the clause is clearly something that cannot be taken into account when one construes the document. Further, if there is any uncertainty regarding the clause, then it should be construed against the party who prepared the document.

16. As a result and rather reluctantly, I have to come to the conclusion that by reason of the express provision contained in clause 34, the plaintiff was indeed entitled to rescind the Formal Agreement.

Requisition not answered

17. The further ground relied upon by the plaintiff in terminating the Formal Agreement is that the defendants had not answered the requisition. In 1995, when the transaction was carried out, two cases had decided that the presence of an illegal structure within a free standing house constituted a defect in title : Giant River Limited v. Asie Marketing Limited [1990] 1 HKLR 297 and Hom Yip Investment Limited v. Chu Kang Ming Trade Development Company Limited [1995] 2 HKC 458. Reference is also made to the case of Spark Rich (China) Limited v. Valrose Limited, CACV249 of 1998 in which the Court of Appeal formulated the test as follows :

"... If the purchaser asks his solicitor : 'Can I be sure that I can safely disregard the risk?' then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor's title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority was unlikely."

The plaintiff submitted that its solicitors were entitled to raise requisitions concerning the legality of the entrance porch. The requisition was not answered. Or's letter of 30 August 1995 stated that :

"... we are unable to produce to you documents to support the legality of the structure and the consent by the Building Authority to the erection of the porch ..."

Delay and waiver

18. In the present case, the requisition regarding the entrance porch, was clearly raised out of time. It was beyond the seven day period after the documents of title were sent to the plaintiff's solicitors. In fact, it was Or who first raised the question of the entrance porch in a letter dated 14 August 1995. It referred to the completion date and asked Chan, Yip, So to inform them in advance whether they would like the entrance porch to be demolished pursuant to clause 34. In turn, Chan, Yip, So by a letter dated 16 August 1995, asked them to produce the proof of legality of the entrance porch.

19. While the acquisition was raised out of time, Or had actually responded to this requisition. In the letter dated 22 August 1995, it stated that :

"We refer to the clause 34 in the Agreement for Sale and Purchase signed by the Vendors and Purchasers dated 4th May 1994 which expressly dealt with your complaint that ..."

Clause 34 was then cited. The letter continued :

"... It is plainly stated in the paragraph that our client's duty is only confined to demolish the relevant erection upon your request and your client knew about the status of the said erection before he entered into the said Provision Agreement and he agreed to have his remedies provided for and also limited by the said clause in the said Agreement for Sale and Purchase."

20. Ms To argued that before this letter was received by Chan, Yip, So, they had actually received a letter dated 23 August 1995 from Or stating that :

"As completion is imminent, we hereby confirm that except for the question of the demolition of the porch, all requisitions raised by you have been answered."

This cannot be an answer to the question of waiver because it is clear from the letter of 22 August 1995, Or had actually responded to the requisition. There was never any protest that the requisition was raised out of time or that Or's response was without prejudice to the right of the purchaser. To put the matter beyond doubt, Or by a letter dated 30 August 1995 stated that :

"We take it that save and except the requisition regarding the porch all the other requisitions have been answered satisfactorily, therefore the dispute is confined to the requisition regarding the porch. This requisition was answered that (sic) though we are unable to produce to you documents to support the legality of the structure and the consent by the Building Authority to the erection of the porch, our client's obligation is clearly spelt out in the said Clause 34."

Or relied on clause 34 to be the answer to the requisition.

Other arguments

21. Ms To argued that the court should approach the case on the basis of a willing vendor and a willing purchaser and if purchaser had offered a solution to the problem which a purchaser might be expected to expect, it would not be entitled to rescind. A number of cases were referred : Active Keen Industries Limited v. Fook Chi Keung [1994] 1 HKLR 396, Pacific South (Asia) Holdings Limited v. Million Unity International Limited [1997] HKLRD 1238, Woomera Company Limited v. Provident Centre Development Limited [1985] 1 HKC 257 and Ma Yuk Lin v. Talisgold Industrial Limited v. Wong Kiu Ngor, HCA1590 of 1998.

22. Ultimately, the case turns on the construction of the terms of the Formal Agreement. Unlike many of the agreements one found in property disputes, the parties here had expressly agreed to clause 34. They are bound by the clause and the plaintiff is entitled to avail itself of the provisions.

Conclusion

23. Accordingly, there shall be judgment to the plaintiff as claimed and the defendants' counterclaim is dismissed.

Costs

24. In my view, this is an appropriate case where the parties should each bear its own costs of the litigation. Accordingly, there shall be an order nisi to this effect.