SPARK RICH (CHINA) LTD v. VALROSE LTD

1997, M.P. No. 3739

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3739 OF 1997

________________

________________

BETWEEN

________________

Date(s) of Hearing: 3 September, 1998

________________

JUDGMENT

________________

Introduction

1. A detached house was erected at No. 16 South Bay Road, Hong Kong over 50 years ago. It consists of 3 storeys with an enclosed basement and penthouse: see the survey report of Messrs. Ian Cullen & Associates produced by the Defendant ("the Cullen Report"). The penthouse on the roof has been used as a kitchen, a dining room, a bedroom and 2 washrooms. The suit property consists of the first floor and the penthouse of the said building. The Defendant purchased the suit property in 1987 (having been the occupying tenant thereat since 1984). It managed to sell the suit property to the Plaintiff at $73 million and a formal sale and purchase agreement was executed on 8 July, 1997 for this purpose ("the Agreement”). Pursuant to the Agreement, completion of the sale and purchase was to take place on 28 October, 1997.

2. The Agreement contained inter alia Clause 13(A) which provided that the Defendant should show and give good title to the suit property. Requisitions on title were raised by the Plaintiff's solicitors subsequent to the Agreement. By the date scheduled for completion, the Plaintiff considered that the Defendant had not sufficiently or satisfactorily answered the requisition and therefore refused to complete the transaction.

3. This action was commenced by the Plaintiff asking for various relief including a declaration that the requisitions had not been sufficiently answered and good title had not been shown and the repayment of the deposit of $7.3 million. The Defendant denies the claim and counterclaims for the Plaintiff’s breach of the Agreement and for forfeiture of the deposit and damages.

The Requisition

4. Although a number of requisitions were raised earlier, only one requisition is relevant to the determination of this case. This was stated in a letter dated 30 July, 1997 from the Plaintiff's solicitors and is as follows:-

"According to the approved plans on the [suit property] in the Buildings Department, there is no penthouse above first floor. The floor above first floor, as shown in the approved plan, is the roof with only a stairhood, a laundry, water closet room and a water tank. These approved plans also do not show the existing access stair from the ground floor to the first floor and the existing rooms on the roof. If these were unauthorized structures there is a real risk of enforcement proceedings being taken for their removal. Please adduce evidence to prove there is no such risk."

5. In various sub sequent letters, the Defendant's solicitors dealt with that requisition and gave one of the most comprehensive answers I have seen. In the 20 October, 1997 letter, they said:-

"The real issue is whether the Penthouse is an unauthorized structure, and if so, whether there is a real rather than fanciful risk or enforcement action being taken by the Buildings Department - see the Kok Chong Ho case. Having now had the benefit of inspecting the Buildings Department file and the approved plans with the assistance of an authorized person, we have been assured that the majority of the Penthouse indeed is authorized.

We would argue that there is no real risk of enforcement proceeding being taken by the Buildings Department in this case for the following reasons:-

(a)  [a report ITom Mr. S.P. Mather (“Mather”), a building surveyor (“the Mather Report”) was then enclosed and referred to];

(b)  The Penthouse has been in existence for over 40 years ... ;

(c)  In those 40 years, despite evidence of inspection by the Buildings Department, there have never been any queries, notices or orders raised ... ;

(d) The enclosure of the roofed structure has involved placing windows in the open gaps between the approved brick pillars … This work is non-structural and was done in the mid 1950's …;

(e) As late as 1955, the building was inspected by the Buildings Department ... ;

(f) One of the primary triggers for Buildings Department enforcement action is where unauthorized structures are found to be unsafe and a danger to the public .... In addition, the Penthouse stands on private property and affects no member of the public;

(g)  … the BOO [in 1987] would not comment on the existence or otherwise of unauthorized structures. Recent enquiries with the Buildings Department have resulted in a similar reply. This is indicative of the disinterest of the Government to the issue of unauthorized structures in this property.”

6. In another letter dated 24 October, 1997, the Defendant's solicitors wrote:-

"it is our view that we have established that there is no real risk of enforcement in this case. …

Taking the Penthouse as a whole, … Mr. Mather concludes that 'the likelihood is that no action would be taken by the Buildings Department unless the case was upgraded to the high priority category' ...

If we then look at what constitutes high priority in paragraph 3.3.2 of [the Mather Report], it is clear the Penthouse either does not fall within these categories or can be kept from falling into the categories by the actions of the property owner ... :-

(a) The Penthouse is in sound condition ... ;

(b) The Penthouse is over 40 years old and there is no new UBW;

(c) The [suit property] is a private property where members of the public are not affected;

(d) There is no contravention of the lease conditions."

The Defendant's solicitors then enclosed another report from Mr. Roger Tudor Jones ("Jones"), a qualified architect and registered authorized person (“the Jones Report”) and contended that the Buildings Ordinance Office noted the existence of the modifications to the roof structure as early as in July, 1957 and yet took no enforcement action.

The Roof Structure

7. The suit property was described in the surveyor's report produced by the Plaintiff as follows:-

"1st Floor apartment with penthouse floor above, plus roof terrace with northerly and westerly main aspects which enjoy panoramic sea views to Repulse Bay ....

First Floor - 1,699 sq. ft. inclusive of now enclosed former balcony areas.

In addition, on the first floor there is a sizeable open terrace in the north east corner, plus a maid room of approximately 65 sq. ft. added ....

1st Floor - A living room, 1 bedroom with en-suite bathroom/toilet, second bedroom, study room, maid's room and store room.".

The structure on its roof referred to as the "Penthouse" in the solicitors' correspondence was described as follows:-

"Penthouse Level - 1,674 sq. ft. inclusive of some 590 sq. ft. of partly covered roof terrace. …”

Penthouse - Master bedroom with en-suite toilet and bathroom, dining room, kitchen, another toilet and tiled open roof terrace."

8. It can be seen from this report that the penthouse takes up a substantial part of the area of the suit property. From a usage point of view, the penthouse also forms an integral part of the suit property in that the master bedroom, dining room, kitchen and washroom are situated there.

The Mather Report and the Jones Report

9. As stated above, the Defendant's solicitors referred to and relied on the Jones Report and the Mather Report in their correspondence with the Plaintiff s solicitors. These two reports were also produced as evidence in these proceedings by the Defendant.

10. Both reports are related to the question of whether or not the Penthouse was an unauthorized structure. I do not consider that it is necessary to set out the details of these reports on this point save that both concluded that at least part of the Penthouse is most probably an unauthorized structure: see para. 2.3 and 2.4 of the Jones Report and para. 3.2.1 to 3.2.3 of the Mather Report.

11. The reports also set out what the respective authors understood to be the prevailing Government policy regarding unauthorized building works. There appears to be some difference between the authors' respective understanding. The Jones Report stated that a task force was set up by the Buildings Department. The focus of enforcement action of this task force presently centres on pre-war buildings where a high risk of injury to the public exists. On the other hand, the Mather Report stated that over this issue the Buildings Department used to adopt a "1975 policy". However, this policy was replaced by the "1988 policy". Under the latter policy, enforcement action was divided into "Immediate Enforcement" and "Prioritized Enforcement". As this aspect will be of great importance to the outcome of this action, it will be elaborated further under the heading "The Government" s Policy on Enforcement Action".

Affidavit of Mather

12. An affidavit of Mather was filed herein on 15 December, 1997 (“the Mather affidavit”). The Plaintiff objected to the Defendant relying on this affidavit. The Plaintiff's argument is that whether the requisition was satisfactorily answered is to be judged on the basis of the material relied upon by the Defendant at the relevant time.

13. The Plaintiff relied on the following cases in support of its argument that the Defendant's duty to answer reasonable and relevant requisitions must be discharged within a reasonable time and in any event before the date of completion:-

(a) Sihombing & Wilkinson: Hong Kong Conveyancing Law and Practice, Vol 1, VI, 4.1-4.2;

(b) Koh Chong-ho v. Double value Development Ltd [1993] 2 H.K.L.R 423,432;

(c) Active Keen Industries Ltd v. Fok Chi-keong [1994] 1 H.K.L.R. 396,405

14. I agree with the Plaintiff's submissions over this point. The task of a conveyancer (whether acting for the vendor or the purchaser) to decide whether a requisition was reasonably raised and/or has been sufficiently answered is already difficult enough. This is because this decision will often result in having to determine whether to proceed further with the sale and purchase transaction. In the Hong Kong context, this decision may have to be made within a relatively short period of time. It would be almost impossible to perform that task if the law were that materials not available at the time of the making of the decision can also be taken into consideration subsequently to judge the correctness of that decision.

The Government's Policy on Enforcement Action

15. Certain parts of the Mather Report are of particular importance to the determination of this point and I therefore set them out below:-

"Buildings Department - Control and Enforcement Policy

In 1975 the Building Authority adopted the following policy and procedures for the control of unauthorized building works:

(i) Complaints of unauthorized works are to be investigated and action taken against those which pose a hazard to life and limb. The remainder are to be filed for possible future action.

(ii) All buildings receiving an occupation permit after 31 July 1975 are to be kept under surveillance and immediate action instituted when unauthorized works are observed.

(iii) In every case where a complaint is received about unauthorized works in progress, an inspection will be made immediately and a Cease Works Order issued to prevent needless expense by the owner. Where the works are in contravention of the Buildings Ordinance, a Section 24 Order will automatically follow the Cease Works Order regardless of whether the building is pre or post-1975.

This '1975' policy was subsequently reviewed and replaced in 1988 by a new system of priorities for the control and enforcement of unauthorized building works. Under this system unauthorized building works (UBW) were classified into either a High Priority group for which enforcement action would be taken as a matter of priority, or a Low Priority group for which enforcement action may be deferred. The criteria for distinguishing the two groups were:

(i) High Priority

(a) UBW constituting an imminently dangerous situation where there is an obvious danger to life or property.

(b) Significant new UBW irrespective of the date of completion of the building in which the UBW have been carried out.

(c) Such UBW or particular types of UBW in buildings, lanes, streets, areas, etc. as may be recommended for demolition or other remedial action by public bodies or government agencies. (d) Major UBW which contravene the Buildings Ordinance and lease conditions at the same time.

(ii) Low Priority

UBW not covered by the High Priority group will fall into the Low Priority group for which no enforcement action will be taken for the time being. Cases in this group will, however, be upgraded when it is considered appropriate to do so.

Under the Buildings Department's current interpretation of this 1988 Policy, unauthorized building works (UBW) are classified into two groups, on which enforcement actions will be taken as follows:

(i) Immediate Enforcement - all UBW which pose an obvious hazard to life or property and significant new UBW fall into this group, on which immediate enforcement action will be taken. The owners will b; advised to rectify the situation, failing which a statutory order will be served. In case the order goes into default, prosecution action will be instituted.

(ii) Prioritized Enforcement - UBW not posing an obvious hazard to life or property fall into this group, on which enforcement action will be taken in sequence.

In addition in order to contain the growth of UBW, the Buildings Department will take immediate enforcement action against all UBW found under construction or newly completed. The following measures are adopted to monitor and verify new UBW ...

At the time of inspection, the present unauthorized building works at the Penthouse did not appear to pose an obvious hazard to life or property … have been in existence for some considerable time ...

In such circumstances it is our belief that the present unauthorized building works at the Penthouse, would come under the ‘Prioritized Enforcement’ (low priority) classification of the current Buildings Department policy …".

16. No issue was taken by the Plaintiff regarding the accuracy of the above passages in the Mather Report. The Plaintiff, however, pointed out that the passages in the Jones Report over this issue are different. I agree with the Plaintiff s argument that those passages in the Jones Report cannot stand together with those in the Mather Report. I also agree -with the Plaintiff that the J ones Report over this aspect appears to be an over-simplification. Insofar as there is any variance between the Jones Report and the Mather Report over this question, I agree with the Plaintiff that the Mather Report is to be preferred.

Relevant Legal Principles

17. The legal principles relating to how a vendor can show and give good title (irrespective of whether he has good title) are:-

(a) there is a duty on his part to show and give good title, either under common law or in accordance with express stipulations in the sale and purchase agreement: -

· Hong Kong Conveyancing Law and Practice, VoL 1, VI, 2-4;

(b) a good title is one which can at all times and in all circumstances be forced on an unwilling purchaser in an action for specific performance:-

· Kan Wing-yau v. Hong Kong Housing Society [1988] 2 H.K.L.R. 187, 193;

(c) whether a sufficiently good title had been shown depends on a conclusion or inference as to fact, and in accordance with the stringent test:-

"... if the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown.":

MEPC Ltd v. Christian-Edwards [1981] AC. 205 cited in Kan Wing-yau, above, at p. 194;

(d) the duty to show good title includes a duty to sufficiently answer reasonable and relevant requisi·tions within a reasonable time and in any event before completion (see above):-

· Hong Kong Conveyancing Law and Practice, Vol. 1, VI, 4.1-4.2;

· Koh Chong-ho case, above;

· Active Keen Industries Ltd case, above;

(e) in the context of an unauthorized structure, a title is defective if there are breaches of the Buildings Ordinance and the Buildings Regulations and which involved a real risk of enforcement action by the authorities:

· Giant River Ltd v. Asie Marketing Ltd [1990] 1 H.K.L.R. 297,309;

· Dei Chuen Ho Industrial Ltd v. Leung Yin-por and anor. [1993] 2 H.K.C. 495,504;

· Active Keen Industries Ltd case, above;.

· Homyip Investment Ltd v. Chu Kan Ming Trade Development Co. Ltd [1995] 2 H.K.C. 458,465.

18. The Defendant did not take issue with these legal principles but submitted that the issue of whether there is a real risk of enforcement action is one of fact and degree and common sense (with an emphasis on the last phrase). It is argued that there must be a "reasonable decent probability" of enforcement action (relying on the test adopted in the first instance judgment in Koh Chong-ho).

Whether there is a Real Risk of Enforcement Action

19. The Defendant argued that there is no real risk of enforcement action being taken against the Penthouse although it (or part of it) is an unauthorized structure. If there is any such risk, it is only a fanciful risk. The Defendant argued that the test to be adopted in deciding on the question of whether there is a real risk is to assess the following factors:-

(a) how long has the structure been in existence;

(b) how large is the structure;

(c) did, or might, the Buildings Department know of the existence of the structure, and if so, for how long;

(d) is the structure dangerous;

(e) where is the structure located;

(f) whether there is also a breach of the Government lease.

The Defendant also accepted the policy and practice of the Buildings Department in respect of unauthorized structures to be relevant but contended that it is one of the factors to be looked at.

20. The Defendant argued that applying these factors to the facts of the present case, there can at most be a fanciful risk of enforcement action being taken against the Penthouse because:-

(a) the alterations have existed for more than 40 years;

(b) the extent of the unauthorized alterations is relatively moderate;

(c) it is safe;

(d) it is on private property and does not affect the public;

(e) there is no breach of the Government lease;

(t) there was no Government query concerning it in the past;

(g) the Buildings Department noted modifications to the roof structure in 1956;

(h) the representatives of the Buildings Department inspected the suit property in 1995;

(i) Mather opined that it falls within the "Low Priority" category.

21. As far as I am aware, this is the first case where there is direct and unchallenged evidence on the precise policy and practice of the Building Department in respect of unauthorized structures. In the light of the evidence in this case, the answer to the question as to whether there is a real risk of enforcement action depends on at least the following:-

(a) whether the risk of enforcement action is to be judged at present or at some future time, and if in future, when;

(b) taking into the "1988 policy" of the Buildings Department:-

(1) whether the Buildings Department has a real intention of carrying out this policy, or, as the Defendant contended, the policy is nothing more than a "public relations" exercise;

(2) (even if there is a real intention of carrying out this policy and if the risk of enforcement is to be judged during the remainder of the leasehold) whether the Buildings Department would be in a position to carry out enforcement action against the Penthouse during the currency of the leasehold interest of the suit property.

22. If the question were whether there is a real risk of enforcement action against the Penthouse during the past 40 years, the answer must be no. The answer would have been the same if such risk were to be judged at the time of hearing, or even at the time of this Judgment. It is however to be remembered that a good title must be one which can be forced upon an unwilling purchaser in an action for specific performance. The risk that a purchaser will have to face is a risk present during the whole tenure of the interest he purchased. For this reason, I consider that whether or not there is a real risk of enforcement action must be judged by looking at whether there is such a risk during the whole tenure of the interest to be purchased. In the present case, it was the remainder of the leasehold: 75 years commencing from 8 June, 1953 and renewable for a further term of 75 years (see p, 1 of the Cullen Report). Hence, the original term would expire by 8 June, 2028 and the renewed term would expire by 8 June, 2103. The original term would expire in about 30 years' time whereas the renewed term would expire in about 105 years' time.

23. Having reached the conclusion that the question of real risk of enforcement action is not to be judged by looking at it at present, but during the currency of the leasehold, whether there is a real risk of enforcement action in the present case is almost a foregone decision as a matter of logic, According to the evidence, enforcement action "will be taken in sequence" although it "may be deferred". To put it in another way, enforcement action will be taken albeit at some time in future.

24. The various factors which the Defendant argued ought to be looked at before deciding on the question of risk of enforcement action are essentially what I will call "circumstantial factors" or "circumstantial evidence". For example, if a structure has existed for a long time, is a conspicuous one, has been known to the Buildings Department since its coming into existence, and no query or action has been taken, the most probable inference (in the absence of explanation) would be that there is little risk of enforcement action in future.

25. There is, however, direct and unchallenged evidence relating to the policy and practice of the Buildings Department regarding enforcement. This has provided an explanation as to why no enforcement action was taken up to now, despite all these "circumstantial factors" (save as to why there was no enforcement action from 1956, the date of the noted modification, to 1975 or, for that matter, to 1988).

26. I do not agree with the suggestion that the "1988 Policy" is nothing much more than a public relations exercise. There is no evidence that the Buildings Department does not intend to deal fully with the issue of unauthorized structures. Indeed, the devices introduced relatively recently by the Department to tackle the problem show the contrary. This was described in Hong Kong Conveyancing Law and Practice:-

"In its press release of 23 November, 19933 ... the Building Authority has said that it intends to notify relevant lending institutions where owners fail to comply with orders to remove unauthorized building works. Lending institutions might be affected if the Building Authority eventually sold the offending property following a notice under s. 24 of the Buildings Ordinance which has been ignored by the owner of the property. Property owners have also been informed that it is the policy of the Authority to prosecute offenders who fail to comply with removal orders. In Law Society Circular No. 185 of 1994, the Buildings Department has informed solicitors that it has increased prosecutions of persons carrying out unauthorized building works and those who fail to comply with removal orders. Since December, 1993, it has also notified banks and lending institutions of failure to comply with removal orders ...."

With the introduction of these devices, the ability of the Buildings Department to curtail the number of unauthorized structures was enhanced. It would be astounding to think that a government department vested with the powers (and duty) to enforcement the law would choose not to do so. As stated earlier, there is no evidence that such is the case with the Buildings Department. There is also no evidence that it has waived the right to enforce the law whether generally or in this case.

27. In the Mather affidavit, it was said that: "the Buildings Department has a vast number of cases to deal with under the Immediate Enforcement category ... ". Mather also referred to the need for the Department to deal with large scale clearance operations. While it may be true that the Department has to deal with these problems, there is no evidence it could not deal with unauthorized structures in the "Low Priority" category within the next 30 years (that is, the currency of the original term of the leasehold in this case) or 105 years (if renewed). Thus, the risk of enforcement action during this period cannot be considered to be unreal.

28. I concluded earlier that the Mather affidavit cannot be relied upon to supplement the answers to the requisition given by the Defendant prior to the scheduled completion date. Even if the Defendant be allowed to do so, I do not consider that it would materially affect the matter. The relevant additional materials in the Mather affidavit are as fol1ows:-

"At paragraph 3.3.2 of my report I explained the criteria which distinguish between the two groups [that is, "High Priority" and "Low Priority" groups]. However, within the Low Priority group there are the following sub-categories:

(a) UBWs constituting only a potentially dangerous situation where there is no immediate danger to life or property;

(b) UBWs which constitute merely a nuisance or inconvenience to the public;

(c) UBWs which may lead to a deterioration of the environment or which may render good building management more difficult;

(d) UBWs not falling under (a) to (c) above which simply constitute a breach of the Buildings Ordinance.

…

Even within the category of "Immediate Enforcement" the Buildings Department also concentrates its efforts on high risk UBWs and large scale clearance operations. As a consequence, enforcement action will be taken only against UBWs which fall within the "Prioritized Enforcement" category if the UBWs are subsequently upgraded to the "Immediate Enforcement" category. Furthermore, the UBWs will only be upgraded to the Immediate Enforcement category if (I) a specific complaint is received by the Buildings Department … and (ii) on inspection of the building by the Buildings Department, the Buildings Department is satisfied that there is an obvious risk to life or property or UBWs are found under construction or newly completed."

In my view, this evidence only adds a gloss to the overall picture described in the Mather Report. Even if the Penthouse falls within the lowest or the sub-categories in the "Low Priority" category, I am still of the view that there is a real risk of enforcement action.

Conclusion

29. No issue is taken as to whether enforcement action constitutes an encumbrance to the Defendant's title. This must be so in view of the conclusions reached in the cases relating to unauthorized structures existing within the property purchased. For the above reasons, I must decide in favour of the Plaintiff's claim and dismiss the Defendant's counterclaim.

Relief

30. It was agreed by counsel for the parries that in such event, it is appropriate for me to grant the relief asked for by the Plaintiff in the Originating Summons.

Costs

31. There is no apparent reason why I should not make a costs order nisi or as to why costs should not follow the event. There will be a costs order nisi that costs of the action are to be borne by the Defendant to be taxed if not agreed.