GOLDENWICK LTD v. STANDARD CHARTERED BANK (HONG KONG) LTD

BETWEEN

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(Consolidated pursuant to the Order of Master de Souza dated 26 January 2005)

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J U D G M E N T

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A. Introduction

1. This is a conveyancing dispute.

2. In 2004, SCB (the plaintiff) operated a branch office at the Hunghom Commercial Centre, Nos. 37–39 Ma Tau Wai Road, Kowloon (“the Building”).  It wanted to purchase suitable property for operating its bank business.  Having identified various properties including the subject matter of this action, SCB engaged FPD Savills (Hong Kong) Limited (“FPD”) to follow up on the matter.  Mr Christopher Chan Chin Keung, associate director of FPD (“Mr Chan”), then contacted Mr Tong Ping Nam (“Mr Tong”), officer and representative of Goldenwick (the defendant) in about early August 2004.  Negotiations ensued.

3. On 6 August 2004, representatives of SCB and Mr Chan inspected the Property[1] at the presence of Mr Tong (“the 1^st Inspection”).  It is SCB’s case that the representatives who attended the inspection were Mr Stewart O’Hoy, (“Mr O’Hoy”), senior facilities manager, Mr Eddie Chan, senior project manager and Mr Andrew Tsang, senior interior designer.  Goldenwick’s case is that only two representatives of SCB came with Mr Chan.[2]  Later on a day between 21 and 23 August 2004, Mr Samson K.C. Heau (“Mr Heau”), leasing manager, Property Management of SCB and Mr Chan inspected the Property again (“the 2^nd Inspection”).  Mr Tong was not aware of the 2^nd Inspection at the time.

4. Subsequently, SCB and Goldenwick entered into a provisional sale and purchase agreement dated 6 September 2004 (“the Provisional Agreement”) for :

“All those 21 equal undivided 12,841^st parts or shares of and in the Remaining Portion of Section O of Kowloon Marine Inland Lot No.40 (‘the Land’) and of and in the Building, together with the right to the exclusive use occupation and enjoyment of the following parts in the Building—

subject to and with the benefit of a deed of Mutual Covenant registered in the Land Registry by Memorial No.2380654 (‘the DMC’) and Sub-DMC of Mutual Covenant Memorial No.5909240 (‘the Sub-DMC’)”.  (“the Property”)

5. The parties later executed a formal sale and purchase agreement dated 3 November 2004 (“the Agreement”).

6. The price was HK$25,800,000, of which SCB had paid HK$2,580,000 as initial deposits to Goldenwick’s solicitors, T&W, as stakeholders. 

7. Completion was fixed at 16 November 2004.  However, SCB refused to complete on the ground that Goldenwick had failed to satisfactorily answer Requisitions 7 and 12 raised on title.  SCB then rescinded the Agreement on 17 November 2004. 

8. Goldenwick immediately commenced HCA2634/2004, claiming for specific performance, forfeiture of the deposits and damages.  SCB then commenced HCA2645/2004, claiming for repayment of the deposits and damages.  The two actions were subsequently consolidated. 

9. At the trial, Goldenwick no longer pursued the claim for specific performance.  The parties’ claims for damages are relative minor in monetary terms.  What remain substantially, insofar as relief is concerned, are the parties’ claims for the deposits. 

10. The key witness for Goldenwick is Mr Tong.  By consent, the witness statements of two further witnesses, namely, Stanley Hau Kwok Yiu, associate director of Centaline and Christine Leung Kam Lan, Mr Tong’s personal assistant, were admitted.  But their evidence, which is of little significance to the real issues before the court, can be safely ignored. 

11. The witnesses for SCB were Mr Chan and Mr Heau.  It also sought to rely on a witness statement of Mr O’Hoy admitted by the hearsay rules.

B.      MisrepresentationS

12. Central to the parties’ disputes is the question whether Goldenwick had failed to show good title to the Property.  In its pleadings, SCB relied on a further ground for rescinding the Agreement and the Provisional Agreement, namely, misrepresentations by Mr Chan on behalf of Goldenwick made during the 2^nd Inspection of the Property thus :

“In or about August, while they were carrying out an inspection of the Property, [Mr Chan] on behalf of [Goldenwick] orally represented to Mr Heau Ka Chun of [SCB] (‘Mr Heau', who was then the leasing manager, property management) that—
(a)	the escalator situated at the Entrance Hall on the Ground Floor leading to the First Floor of the Building could be demolished by [SCB] after it had purchased the Property and replaced by a landing (I will call this the Escalator Representation);
(b)	the staircase situated at the Entrance Hall on the Ground Floor and the First Floor leading to the Arcade of the Building could be demolished and exclusively used by [SCB] after it had purchased the Property (I will call this the Staircase Representation).”

13. SCB must not only prove the Representations but also the essential element that they had induced them into entering into the Provisional Agreement and the Agreement.

14. The following emerged from the oral testimony of Mr Heau.  During the 2^nd Inspection, Mr Chan told him that both the escalator and the staircase could be demolished after SCB purchased the Property.  The parties later entered into the Provisional Agreement.  About two weeks thereafter, Mr Chan gave a copy of the Sub-DMC to SCB’s solicitors, Deacons.  Deacons then advised Mr Heau to the effect that both the escalator and the staircase had to be used by co-owners as common passageways and that any demolition of the same had to be approved by all co-owners.  He was shocked to learn this.  Deacons then corresponded with the other side to see if the problem could be resolved but of no avail.  SCB nevertheless went ahead and entered into the Agreement later.

15. In my view, given Mr Heau’s evidence, SCB must have discovered the falsity of both Representations by Mr Chan, even if proved, before they entered into the Agreement.  It follows that SCB could not have been induced by them to enter into the Agreement at all.  Having failed to prove inducement, SCB cannot possibly succeed on any claim based on the misrepresentations insofar as the Agreement is concerned.

16. As to the Provisional Agreement, even if both Representations were proved, it would not assist SCB.  Under Clause 13 of the Agreement, the Provisional Agreement was superseded by the Agreement.  It follows that any complaint that the Provisional Agreement was entered into because of the Representations is purely academic and should not be entertained. 

17. For the above reasons, SCB’s case on misrepresentations must fail.  I dismiss it accordingly.

18. I now turn to the substantial disputes between the parties and begin with Requisition 7.

C.      Requisition 7

C.1.   The requisition and the issue arising

19. Under Clause 6 of the Agreement, Goldenwick had to show a good title to the Property.

20. By Requisition 7, Deacons sought production of a mortgage memorial no. 4030664 dated 25 February 1989 and a duplicate letter memorial no. 4138927 dated 12 July 1989 (collectively “the Missing Documents”).  The land search showed that the Missing Documents were listed under the section “deeds pending registration” with the remark “registration withheld”.  It is not in dispute that the Land Registry did not have any copy of the Missing Documents.[3]

21. T&W replied that Goldenwick was under no obligation to produce the Missing Documents as they did not affect title.  In fact, they were never produced as Goldenwick simply did not have them and as noted, they could not even be found at the Land Registry. 

22. This issue arose : Were the Missing Documents, which appeared in the land record as deeds pending registration but which registration was withheld, documents affecting the Property? 

C.2.   The prima facie approach

23. Mr Ho, SC, counsel for Goldenwick, submitted that the Missing Documents were not registered against the Property.  That may well be the case because their registration had been withheld.  However, that is not the end of the matter.

24. In my view, when an instrument is properly registrable within the meaning of section 2(1) of the Land Registration Ordinance, Cap. 128, even if it is not formally registered, the mere fact that it appears in the land search record as a document pending registration is prima facie sufficient to introduce a doubt on the good title of the property.

25. I derive this proposition from Wong Kum Chi v. Lee Tit Ying [2003] 1 HKLRD 594.

26. There, the estate of the deceased included a property.  A beneficiary of the estate took possession of the property without the consent of the administratrix.  She successfully obtained judgment for possession.  The beneficiary then appealed, relying on a letter issued by the deceased instructing his solicitors to prepare documents for the transfer of the property to the beneficiary.  The district judge dismissed the appeal, holding that it was an incomplete gift and the letter did not give the beneficiary an interest in the property.  The beneficiary then lodged the letter for registration with the Land Registry as an instrument of transfer against the property.  Although the Registry withheld registration, a land search revealed that the letter was listed as a deed pending registration.  The administratrix sought a declaration that the letter was not registrable, which was allowed by Deputy Judge A Cheung (as he then was).  Referring to the letter, the Judge said at paragraph 5 at pp. 596I-597A :

“5.   I totally agree with Mr Tracy, Counsel for the plaintiff, that [the letter] quite unjustifiably introduces a doubt on the good title of the administratrix to the subject property, even though the so-called instrument of transfer has not been formally registered by the Land Registry.  The mere fact that it appears in the land search record as a document pending registration is, in my judgment, sufficient to introduce a doubt on the title of the administratrix.”

I agree with the Judge entirely.

27. Mr Ho, SC, counsel for Goldenwick, submitted that Wong Kum Chi is distinguishable by taking two points.  He first argued that there was nothing in the report saying that there was any remark that the registration of the letter was withheld.  But, as pointed out by the Judge, the Land Registry did withhold registration of the letter.  He next argued that there is nothing in the report to suggest that an examination of the land search record would reveal that the letter no longer affected the property[4].  But this argument ignored the subsequent finding by the Judge at paragraph 15 at p. 598F-H that the letter in fact did not affect the title of the property.  I reject Mr Ho’s submission. 

28. But it should be emphasised that the matter is only prima facie and can be displaced upon a closer examination.  In Wong Bik Ching v. Yu Hon Chung [1997] 4 HKC 38, Recorder Chan, SC said at p. 45E-G :

“I am of the view that prima facie when an instrument was registered against the property and it was not apparent from the land search that the document had ceased to affect the property, the document ought to be treated as part of the title deeds which the vendor should make available to the purchaser.”

This approach was approved by the Court of Final Appeal in Chen & another v. Lord Energy Ltd [1999] 1 HKLRD 205, where Li CJ said at p. 221H-I :

“It should be emphasized that on this approach, the matter is only prima facie and it may therefore be displaced on examination.  Provided this approach is understood to apply to registered instruments that are properly registrable under the Land Registration Ordinance (Cap.128), I think it is sound.”

29. In my view, this prima facie approach is equally applicable to instruments that are properly registrable but not formally registered. 

30. On a closer analysis, it can be seen that this was in fact how the Judge in Wong Kum Chi approached the subject letter.  As noted, he first took the view that the letter, though not formally registered, would introduce a doubt on the good title of the property.  At that stage, he must have regarded the position as prima facie.  For he then proceeded to find that the letter did not affect the title and did not give any beneficial interest in the property and exercised the court’s inherent jurisdiction to grant the declaration that the letter was not registrable. 

C.3.   Applying the prima facie approach

31. Applying the prima facie approach to the Missing Documents, I look at land search more closely, which reveals this.  The owner at the material times executed the mortgage dated 25 February 1989 in favour of China Liaoning Construction & Engineering (HK) Ltd (“CLCE”).  The duplicate letter dated 12 July 1989 was issued in favour of Overseas Trust Bank Limited (“OTB”).  The owner executed another mortgage also dated 25 February 1989 in favour of CLCE, which was registered on 8 March 1989.  By an agreement for sale dated 21 March 1991 registered on 9 April 1991, OTB sold the Property to the mortgagor’s successor in title.

32. In such circumstances, I agree with Mr Ho that it is beyond reasonable doubt that :

33. T&W was accordingly correct in maintaining that the Missing Documents did not affect title and Goldenwick needed not produce them.  I find that T&W had satisfactorily answered Requisition 7.

34. I next turn to Requisition 12.

D.      Requisition 12

35. A meaningful discussion of Requisition 12 entails a fuller history of how the Property was dealt with so that the issues arising can be put in context.

D.1.   How the Property was dealt with

36. The Building is a commercial building, consisting of a basement, G/F to 3/F., and 2 towers of offices as from 4/F to 13/F.  According to the occupation permit issued on 9 December 1982, it was initially envisaged that the 2/F would be used as a restaurant. 

37. Under the DMC (dated 19 February 1983), the Entrance Hall, Unit 42, the 1/F Portions together with the entire 2/F constituted the “Restaurant” : Clause 1.  A total of 970 of the 12,841 equal undivided shares were allotted to the Restaurant excluding Unit 42, which was separately allotted 21 shares : the First Schedule. 

38. By a first assignment also dated 19 February 1983, the developer assigned to the assignee 1,043 equal undivided shares of and in the Land and the Building together with the exclusive possession of :

39. In March 1993, the Property was assigned to Pacific Systems Development Limited (“PSD”).  PSD was also the owner of the 970 undivided shares with exclusive possession to the 2/F immediately before the execution of the Sub-DMC (dated 15 December 1993).

40. Thus as at 15 December 1993, PSD was the owner of the 21 shares referable to Unit 42 and 970 shares referable to the “Restaurant” as defined in the DMC (excluding Unit 42) with exclusive possession of the entire “Restaurant”. 

41. The purpose of the Sub-DMC was to convert the 2/F into a shopping arcade, which was in turn divided into separate units, each allotted with separate shares.  The 970 equal undivided shares referable to the “Restaurant” were allotted thus : 344 shares to various units of the shopping arcade; 279 shares to the “Reserved Areas” and 347 shares to the “Food Court” : Recitals (1) to (3) and the First Schedule.  No shares had been expressly allotted to the Entrance Hall or the 1/F Portions. 

42. By mortgage dated 26 June 1997 (“the 1997 Mortgage”), PSD mortgaged the 21 shares referable to Unit 42 together with exclusive possession thereof in favour of SIIC Finance Company Limited (“SIIC”) to secure credit facilities for the borrower.  The property mortgaged did not include the Entrance Hall or the 1/F Portions. 

43. PSD and the borrower defaulted under the 1997 Mortgage, which resulted in a judgment dated 20 November 1998 against both of them.  In consideration of SIIC refraining from enforcing the judgment, PSD furnished further security by purportedly mortgaging the 1/F Portions and the Entrance Hall under a mortgage dated 11 February 1999 (“the 1999 Mortgage”) in favour of SIIC.  However, no equal undivided share in the Land and the Building was mortgaged or charged at the same time.  In other words, PSD purported to charge the 1/F Portions and the Entrance Hall under the 1999 Mortgage without any undivided shares in the Land and the Building, although at the same time it still retained 256 undivided shares in the Land and the Building.

44. PSD again defaulted under the 1999 Mortgage.  SIIC then exercised its power of sale under the 1997 and 1999 Mortgages by an assignment dated 9 September 2002 (“the 2002 Assignment”), assigned the Property to Onelink Investment Limited (“OIL”), Goldenwick’s immediate predecessor in title.  Goldenwick then acquired the Property by assignment dated 31 March 2004 and had since let or licensed it to various parties.

D.2.   The Requisition and the issues arising

45. Requisition 12 read :

“12.	Portion forming an Entrance Hall on the Ground Floor including the Staircase, Landing & Lift Shaft leading to 2nd Floor and Portions forming the Staircase, Landing & Lift Shaft on 1st Floor leading to 2nd Floor
	There is doubt as to whether your client has the good title to the above premises and the exclusive right to sue the above premises and whether the said premises is assignable to our client in view of the following matters.  Please clarify.
	a.	No undivided shares were allocated to the said premises under [the Sub-DMC].
	b.	Parts of the said premises appear to from parts of the ‘common Services and Facilities’ as defined in [the Sub-DMC].
	c.	The common right to use the said premises was granted to the co owners of the Arcade (as defined in [the Sub-DMC]) under clause D-8 of [the Sub-DMC].
	d.	The said premises without attaching with any undivided shares were charged under [the 1999] Mortgage to SIIC which subsequently exercised its power of sale to sell the same to your client’s predecessor.  There is doubt wheter such transactions relating to the said premises had validly or effectively assigned the legal and exclusive right and interest relating to the said premises.”

46. On the question relating to undivided shares, T&W said that at the time of the 1999 Mortgage, PSD still owned at least 265 undivided shares under the Reserved Area of the 2/F.  The right to occupy the Entrance Hall and the 1/F Portions was attached to those shares.  And SIIC had 21 undivided shares (referable to Unit 42) for the right to occupy the Entrance Hall and the 1/F Portions to be attached with.  Alternatively, even if PSD or SIIC did not have specific share, the right to occupy the Entrance Hall and the 1/F Portions could still be assigned in accordance with Jumbo King Ltd v. Faithful Properties Ltd [1999] 4 HKC 707. 

47. On the question relating to the common parts and common right of way, T&W said that the sale of the Property is subject to the Sub-DMC.

48. The above questions gave rise to what the parties described as “the Undivided Share Issue” and “the Common Parts/Right of Way Issue”.  I will discuss them in turn.

E.      The Undivided Shares Issue

E.1.   The issue

49. As noted, SIIC exercised the power of sale under the 1997 and 1999 Mortgages when it executed the 2002 Assignment to purportedly assign to OIL the 21 undivided shares together with exclusive possession of Unit 42, the Entrance Hall and the 1/F Portions.  The issue arose is whether under the 2002 Assignment, by which SIIC exercised the power of sale under the 1997 and 1999 Mortgages, OIL had acquired good title to the Property.

E.2.   The proper focus of enquiry

50. Since the 2002 Assignment was a mortgagee sale, a proper construction of Section 53(1) of the Conveyancing & Property Ordinance, Cap. 219 (“CPO”) is in order.

51. Section 53(1) provides :

“Where a mortgagee … sells under an express or statutory power of sale, the assignment shall operate –

(a)   to assign to the purchase the mortgagor’s estate in that land, subject to any other mortgage having priority to the mortgage under which the sale is made;

…”

52. The mortgagee who wishes to invoke section 53 must be a mortgagee of land.  For the expression “mortgage” means “a security over land for securing money or money’s worth.  And “land” includes any estate, right, interest or easement in or over land; the whole or part of an undivided share in land and any estate, right interest or easement in or over the whole or part of an undivided share in land.  See section 2 of CPO.  Accordingly, it is only when the mortgage concerns “land” as defined in section 2 that the mortgagee can invoke section 53.  For other mortgages, section 53 is of no avail.

53. Thus the proper focus of enquiry for applying section 53 is this : is the 1999 Mortgage a mortgage of land as defined in CPO?

54. In his submission on the applicability of section 53, Mr Ho submitted that the focus of enquiry is not whether the 1999 Mortgage was valid as a mortgage of any legal estate but whether OIL obtained a good title to the undivided shares together with exclusive possession of Unit 42, the Entrance Hall and the 1/F Portions.  But as I have demonstrated above, on a proper construction of section 53, the mortgage must be a mortgage of land as defined in CPO.  The question whether a good title to the Property could be passed under the 2002 Assignment cannot be properly addressed without determining the status of the 1999 Mortgage.

E.3.   Status of the 1999 Mortgage

55. So I will now proceed to examine the status of the 1999 Mortgage.

56. It is well settled that a mere right to exclusive possession of part only of a multi-storey building, unaccompanied by any undivided share, cannot subsist as a legal estate in land and building binding on the co-owners.  The right to exclusive possession (as an interest in land) can be created only as an incident to the ownership of an undivided share in the land : see Lai Wing Ho v. Chan Siu Fong [1993] 1 HKLRD 319, per Godfrey J (as he then was) at pp. 323-324.  That exclusive right cannot be assigned on its own, but it has to be assigned together with a part interest in the legal estate : Jumbo King v. Faithful Properties Ltd & Others [1993] HKLRD 231, per Rogers JA (as he then was) at pp. 245I-246I.  A purported assignment of the right to exclusive possession alone is at best a licence binding on the assignor personally and on his personal representatives and might be assignable by the grantee.  But it will not be enforceable against the other co-owners or against anybody else : Lai Wing Ho, per Godfrey J at p. 324; followed inModern Sino Limited v. Art Fair Co Ltd [1999] 3 HKLRD 847, per Yuen J (as she then was) at p. 854A-G. 

57. It follows from the above principles that a mortgage of a right to exclusive possession, unaccompanied by any undivided share, as is the 1999 Mortgage, is not a mortgage of a legal estate or an interest in land as defined in CPO.  It is at best a mortgage of a chose in action.

58. Mr Ho disagreed.  He submitted that the 1997 and 1999 Mortgages should be considered as one transaction creating a charge over PSD’s legal estate the 21 undivided shares together with exclusive possession of Unit 41, the Entrance Hall and the 1/F Portions.  I am unable to accept this submission.  PSD executed the 1997 Mortgage to secure the general credit facilities of the borrower.  The security was the 21 shares with exclusive possession of Unit 42 only.  When default subsequently occurred, judgment was entered against the borrower and PSD.  Then PSD executed the 1999 Mortgage purportedly using the Entrance Hall and the 1/F Portions (unaccompanied by any shares) as security for payment of the judgment debt.  In my view, the two Mortgages, which provided different forms of security for PSD’s different obligations at different times, cannot possibly be treated as one single transaction or charge.  The 1999 Mortgage must be considered on its own. 

59. Mr Ho next sought to rely on the fact that at the time of the 1999 Mortgage, PSD still retained 256 undivided shares and SIIC had security interest over 21 undivided shares by virtue of the 1997 Mortgage.  This position was loosely referred to as “co-ownership” in the course of submissions.  Mr Ho took two points.

60. Mr Ho first referred to the following dictum of Lord Hoffmann in Jumbo King Ltd v. Faithful Properties Ltd [1999] 4 HKC 707 at p. 729D-F :

“Miss Eu said that conveyancing chaos would ensue if owners of shares could at whim assign rights of occupation with any shares they chose, or even assign them without any shares at all to people who happened to own shares already.  I do not think that this is likely to happen for the practical reason that the owner’s liabilities are invariably related both to the shares he has and the particular part he is entitled to occupy and it would usually be extremely unwise for him to deal with the one differently from the other.  But it seems to me that no such practical problems arises in this case and there is in my view no conceptual reason why the obvious intention of the parties should be frustrated.”

He then contended that the above dictum shows that there can be valid assignment of legal estate of property without any shares assigned to person who happens to own shares already.  It means that the 1999 Mortgage could still be a valid charge of the Entrance Hall and the 1/F Portions although no undivided shares were attached to them because at the time SIIC had already had a charge over Unit 42 of where there were undivided shares under the 1997 Mortgage. 

61. I disagree.  Mr Ho has not cited any authority to support his proposition.  If Mr Ho’s submissions were correct, Lord Hoffmann would have laid down a proposition that contradicts the well-established principles on unity of possession (summarized in paragraph 56 above) right after the Court of Final Appeal had approved them.  That is simply inconceivable.  In my view, Lord Hoffmann was just addressing senior counsel’s submissions and rejected them for practical reasons.  He had not laid down such a proposition as contended by Mr Ho.

62. Further, Mr Ho’s proposition is directly contradicted by Modern Sino, on which Mr Chow, SC, counsel for SCB, placed heavy reliance.  There, every house in a development was allotted 3 undivided shares.  No shares were allotted to the car parks.  A had 3 shares with exclusive possession of the house in question.  B had 3 shares with exclusive possession of another house and the car parks in question.  A assigned his shares and exclusive possession of the house to C.  Later, B purported to assign the right to exclusive possession of the car parks to C without assigning any shares.  C then purported to assign his shares and exclusive possession to the house and the car parks to the defendant vendor.  The plaintiff purchaser raised requisition on title claiming that the defendant had no title in the car parks to convey.  Yuen J applied the concept of unity of possession and held that the purported assignment by B to C in relation to the car parks was at best a license and not an interest in the land that C could assign to the defendant; and that accordingly, the defendant had no right to exclusive possession of the car parks which it could convey to the plaintiff.

63. Thus according to Modern Sino, even when the vendor and the purchaser were co-owners of the land, the purported assignment by the vendor of a part without at the same time any undivided share is not a valid assignment.  In my view, the same proposition is equally applicable by analogy to the present case.  Thus although PSD and SIIC at the time of the 1999 Mortgage had proprietary interest in the Land and the Building, the 1999 Mortgage was not effective in creating any legal estate in the Entrance Hall and the 1/F Portions.

64. The second point that Mr Ho took on the so-called “co-ownership” of PSD and SIIC is this.  As an alternative, the 1999 Mortgage would have operated as an agreement (a covenant) between 2 co-owners to re-arrange their respective rights of possession.  Given that such an agreement was intended to run with the land, and that it was an agreement (covenant) between existing co-owners made in right of their ownership over the land, such agreement (covenant) will operate to bind not only the immediate parties to that agreement but also their successors and assigns, and any persons deriving title from and under them.

65. In support, Mr Ho relied on Chao King Lin v. Diamond-Harbour Holdings Corporation [1999] 4 HKC 643.  There, the purchaser bought flat A and carport X from the vendor but the sale did not complete as a question of title arose.  The vendor’s predecessor in title bought flat B and carport X in 1968 and flat A and carport Y in 1971.  Later in 1971, she assigned flat B and carport Y to a purchaser.  In 1984, she assigned flat A and carport X to another purchaser.  After a series of transactions, the vendor became the owner of flat A and carport X.  The question of title concerned carport X.  The purchaser argued that carport X could not be carved out from flat B and then disposed of together with flat A.  Cheung J (as he then was) rejected his argument.  He first held that the deed of mutual covenants did not specify the percentage of shares allotted to the individual flats and carports and also did not pair the flats with the carports.  It did not prohibit the predecessor in title from assigning carport X with flat A.  Cheung J explained the legal basis in which the predecessor assigned carport Y in 1971 at p. 648B-D thus :

“I think the legal basis in which Cheung assigned [carport Y] in 1971 was by way of subdivision of her shares in the two flats and carports.  Although there was no written document regarding the subdivision, in reality that was what happened.”

From this passage, Mr Ho derived the proposition that an owner could sub-divide his shares or attach units possessed by him to whatever undivided shares owned by him. 

66. That proposition may well be correct.  But it does not assist Goldenwick for the simple reason that PSD had not sub-divided any shares or attached the Entrance Hall and the 1/F Portions to whatever undivided shares they owned when they executed the 1999 Mortgage.  Indeed, no share was even referred to in the 1999 Mortgage at all.  I cannot accept the submission that the 1999 Mortgage had the effect of sub-division as contended.

67. To complete the discussion on Mr Ho’s submissions on the so-called “co-ownership” point, I need to deal with his contention that Modern Sino is wrongly decided.  His attack is based on two points.  He first relied on the proposition that he sought to derive from Lord Hoffman’s dictum[5].  But as I have observed, that proposition is unfounded.  Mr Ho then relied on Chao King Lin and submitted that Yuen J had overlooked the fact the dealing with the carport in question was between two co-owners who both already held shares in the land.  I am unable to accept this submission.  There were ways open to the co-owners in Modern Sino to deal with the carport.  And they chose to dispose of it by a purported but ineffective assignment.  They did not opt for sub-division.  The question of sub-division simply did not arise before Yuen J.  In my view, Yuen J’s reasoning and judgment cannot be flawed.

68. All the submissions of Mr Ho arising from the so-called “co-ownership” point fail.

69. Finally, on the status of the 1999 Mortgage, Mr Ho submitted that even if it was a mortgage of chose in action, it still took effect in equity as equitable interest : Fisher & Lightwood’s Law of Mortgage, 11^th edn, paragraph 7.1.  That may well be the case.  But it does not alter the primary fact – the equitable or security interest created is not a legal estate or an interest in land.  It remains the case that the 1999 Mortgage is not a mortgage of land as defined in CPO.

E.4.   Section 53 does not apply

70. Given the status of the 1999 Mortgage, section 53 of CPO, contrary to Mr Ho’s submissions, does not apply.  SIIC could not have effectively assigned the legal estate in the Entrance Hall and the 1/F Portions to OIL by the 2002 Assignment.  OIL’s title to the Property was defective.  So is Goldenwick’s.

71. Mr Ho sought to rely on the Court of Final judgment in Jumbo King and submitted that the 2002 Assignment was valid and effective in passing to OIL the right to possession of the Property including the Entrance Hall and the 1/F Portions.  His reliance is however misplaced.

72. In Jumbo King, the vendor agreed to sell to the purchaser various units and parts in a multi-storeyed building including two flat roofs and four utility rooms to which no undivided shares were allotted.  At issue was whether the fact that the utility rooms and the flat roofs had not been allotted shares prevented the right to exclusive use of those properties from being assigned when the vendor was at the same time assigning other units which had been allotted undivided shares.  The Court of Final Appeal held in favour of the vendor. 

73. The situation in this case is different.  As I have pointed out above, SIIC, unlike the vendor in Jumbo King, did not have any proprietary right to exclusive possession to the Entrance Hall and the 1/F Portions by virtue of the 1999 Mortgage.  When they executed the 2002 Assignment, SIIC could not have effectively assigned to OIL the exclusive possession to the Entrance Hall and the 1/F Portions as an incidence of ownership to the 21 undivided shares. 

E.5.   Possible adverse claim by co-owners

74. Finally, Mr Ho submitted that no adverse claim could be possibly raised against the title of Goldenwick.  PSD and SIIC might well be estopped from asserting any adverse interest.  However, as rightly pointed out by Mr Chow, when PSD had disposed of all their undivided shares in the Land and the Building, their right to exclusive possession of the Entrance Hall and the 1/F Portions would become extinguished and revert to all the co-owners : Incorporated Owners of Cheong Wang & Cheong Wai Mansion v. Government of the HKSAR [2001] 1 HKLRD 483 at p. 486G-488B.  It is open to the co-owners to assert their right to possession of the Entrance Hall and the 1/F Portions. 

E.6.   T&W’s answers

75. What remain are the answers provided by T&W on the Undivided Share Issue at the time.  In my view, those answers demonstrated a misunderstanding of the applicable principles.  They are not satisfactory answers to the objection at all.

E.7.   Objection not sufficiently answered

76. For the above reasons, I find that Goldenwick had not satisfactorily answered Requisition 12 insofar as the Undivided Share Issue is concerned.

F.      The Common Parts/Right of Way Issue

77. I then come to the Common Parts/Right of Way issue.

78. As noted, the Property as defined in the Provisional Agreement contained the express proviso that the Property is sold subject to the Sub-DMC.  Under the Agreement, the description of the Property referred to sole and exclusive right and privilege to hold use occupy and enjoy Unit 42, the Entrance Hall and the 1/F Portions.  At the same time, Clause 2 of the Agreement, drafted in line with the Provisional Agreement, provided that the Property is sold subject to and with the benefit of the Sub-DMC. 

79. Two questions arose :

(1)     Whether parts of the Entrance Hall and the 1/F Portions, namely the staircase, escalators and lift are “Common Services and Facilities” within the meaning of the Sub-DMC and whether the Entrance Hall is subject to a common right of way in favour of all the co-owners of the shopping arcade (“Question 1”);

(2)     If yes, whether it is sufficient for Goldenwick to merely provide in the Provisional Agreement and the Agreement that the Property is sold subject to and with the benefit of the Sub-DMC (“Question 2”).

F.1.   Question (1) – Common parts/right of way

80. Under the Sub-DMC :

Parts of the Entrance Hall and the 1/F Portions, namely, the staircases, escalators and lift are plainly “Common Services and Facilities” within the meaning of the Sub-DMC.

81. Further, Clause D-8(a) of the Sub-DMC provided :

“[PSD] hereby expressly reserves to itself and its successors and assigns (other than the Assignee) all its estate right title benefit and interest over the Entrance Hall.  [PSD] hereby grants to the Assignee and other co-owner(s) for the time being of the Arcade the right exercisable in common with [PSD] or other person claiming through under or in trust for [PSD] and the other co-owner(s) of the Premises to use for the purpose of access to and egress from their units in the Arcade such of the passages in the Entrance Area and the appurtenances thereto.  Provided Always that [PSD] can at its absolute discretion restrict such right to only part of the Entrance Area and designate which part of the Entrance Area to be the passages.  Save as aforesaid, the Purchaser has no estate right title or interest over the Entrance Area.”

The Entrance Hall is accordingly subject to a common right of way in favour of the co-owners of the Arcade.

82. In his opening submissions, Mr Ho emphasised that under Clause C-2 of the Sub-DMC, the Common Services and Facilities in Clause B-5 are to be used in accordance with and subject to the provisions of the Sub-DMC.  He then referred to Clause D-8 and contended that the PSD, as the assignor, and its successors including Goldenwick, has the legal title to the Entrance Hall.

83. Mr Chow submitted that the “Common Services and Facilities” as defined in Clause B-5 do not extend to the whole of the Entrance Hall on the G/F, but to only “the staircase leading from the Entrance Area at the Ground Floor to the Arcade” and “the escalator and lift at the Entrance Area connecting [it] with the Arcade”.  The general reservation by PSD over the Entrance Area does not detract from the right of the co-owners to use the escalators and staircase as “Common Services and Facilities” under Clauses C-2 and D-6(b).  Clause D-8(b) then grants a further or additional right of way to the Assignee and other co-owners over such of the passages in the Entrance Area for the purpose of access to and egress from their units in the Arcade.  This right is additional to their right under Clauses C-2 and D-6(b) in respect of the escalator and staircase.  Although Clause D-8(b) expressly states that the Assignee or other co-owners of the Arcade has no estate right or easement whatsoever over Unit 42, they plainly have some rights in the nature of a quasi-easement, in or over the Entrance Area.

84. I agree with Mr Chow entirely. 

85. I accordingly find that under the Sub-DMC, the escalators and staircase in the 1/F Portions are “Common Services and Facilities” and the Entrance Hall is subject to a common right of way in favour of the co-owners of the Arcade.

86. Deacons took the view that it amounted to a defect in title.  Hence Requisition 12 on this point.  T&W’s reply was very simple : look at Clause 2 of the Agreement — the sale of the Property is subject to the Sub-DMC.  There can be no doubt that but for the reference to the Sub-DMC in the description of the Property, Goldenwick would not have been able to make or give good title to the Property.  The question is : is the proviso that the Property is sold subject to and with the benefit of the Sub-DMC sufficient?  This brings me to Question (2).

F.2.   Question (2) – Duty of disclosure

87. Mr Ho submitted SCB is not entitled to renege on the provision that the Property is sold subject to the Sub-DMC.  SCB at all material times had the benefit of legal advice from Deacons.  They must know what the phrase “subject to and will the benefit” meant.  But there is a marked absence of evidence on such advice from Deacons.  Since SCB had freely agreed to the provision and it could not turn around to complain that it did not know what it meant and implied. 

88. I disagree.  As noted, the parties entered into the Provisional Agreement on 6 September 2004.  Mr Heau’s undisputed evidence is that Deacons was given a copy of the Sub-DMC shortly after the signing of the Provisional Agreement.  (T&W sent the title deeds, including a copy Sub-DMC, to Deacons on 5 October 2004.)  Deacons then advised SCB that under the Sub-DMC, the escalator and the staircase could only be removed with consent of all the co-owners.  But as rightly submitted by Mr Chow, given the description of the Property in the Provisional Agreement, it would not have been open to SCB to insist, unilaterally, on any term in the Agreement which had the effect of altering the substance of what had been agreed under the Provisional Agreement : Chu Wing Ning v. Ngan Hing Chung and another, HCA9409/1991, unreported, 6 November 1002, per Ribeiro QC (as he then was) at paragraphs 35-39.  SCB was plainly entitled, which it did, to raise objection arising from it later.  SCB is not estopped from maintaining the point now.

F.2.a. The law

89. Turning to the substance of Question 2, I will begin with the law thus.

90. A contract for sale of land is not a contract of the utmost good faith in which there is an absolute duty upon each party to make full disclosure to the other of all material facts of which he has full knowledge.  However, a vendor of land has a duty to disclose to a prospective purchaser any latent defects in title.  These are incumbrances and other adverse matters of title which the purchaser could not discover for himself by inspecting the property with reasonable care; discovery is reasonably possible, and defects patent, only where there is some visible indication on the property of the existence of third party rights : see Farrand on Contract and Conveyance, 4^th edn, at p. 63. 

91. In Faruqi v. English Real Estates Ltd [1979] 1 WLR 963, Walton J had this to say about the duty of disclosure at p. 967C-D :

“It has for a long time been the view of equity that if there is a defect in the title and the vendor knows that there is a defect … then it is the duty of the vendor to disclose the same fully and frankly in the particulars or in the conditions, or at rate in some place where the purchaser’s attention will be drawn to it.”

And the test of adequate disclosure is whether an ordinary purchaser would understand what the difficulty is when reading the particulars or conditions : at pp. 967D-977E.

92. Mr Ho submitted that reliance on Faruqi was misplaced because in that case, the deed, which the transaction was made subject to, was missing whereas in the present case, the Sub-DMC is a public document.  In my view, although the facts in Faruqi are different, the principle that it laid down, which had since become well established, is equally applicable here.

F.2.b.    Applying the law

93. Applying the principles here, I take into account the following matters. 

94. First, the purported sale of the Property carried with it the right to exclusive possession of all the parts thereof.  No ordinary, reasonable purchaser such as SCB, would expect that exclusive possession to the parts in question was in fact impossible by virtue of the Sub-DMC.

 95. Second, the physical condition of the Property as revealed at the time of the 1^st Inspection and what transpired then did not imply any third party rights.

96. On the G/F, the escalator was concealed by a plastic folding door and further blocked by wooden hoardings fitted with a door and a lock, the key to which was kept by Goldenwick’s appointed property management agent.  According to Mr Chan and Mr O’Hoy, the door to the staircase was generally kept locked.  According to Mr Tong, the door was only locked during the non-opening hours of the Building and the manager of the Building also kept a key.  Mr Tong was implying that if they wished, the owners of the units or their licensees could use the escalator as a passageway.  I find it difficult to accept Mr Tong’s evidence.  It is highly unlikely that given the physical state of the escalator and the availability of other more convenient passageways that the escalator would be used as a passageway at all.  I accept the evidence of Mr Chan and Mr O’Hoy.

97. On the 1/F and 2/F, the escalator landings were completely condoned off or blocked by metal fencing and/or metal grille shutters.

98. On the 1/F, the staircase landing was enclosed by a glass panels fitted with a door generally kept under lock and key, whereas on the 2/F, the staircase landing was condoned off by a metal bar.  Mr Tong said that the door remained open during the opening hours of the Building so that other owners could use the staircase.  Mr Tong’s evidence is inherently improbable because, on his own admission, no lighting was provided to the staircase area at the G/F.  I reject his evidence. 

99. It is Mr Tong’s evidence that SCB’s inspection team should know that the escalator and all the staircases leading from the Entrance Area to the 1/F and then to the 2/F were passageways which could be used by other owners.  This allegation is inconsistent with the physical state of the Property and must be rejected.

100. In my view the physical condition of the escalator and the staircase clearly demonstrated they could not ordinarily have been used by third parties as a means of access to or from the 1/F or 2/F.  Rather, it was consistent with the exercise of ownership by Goldenwick over the Property.

101. The third matter that I take into account is the Representations made by Mr Chan to Mr Heau during the 2^nd Inspection.  Both Mr Heau and Mr Chan said that Mr Chan did represent to Mr Heau that the escalator and the staircase could be demolished.

102. Mr Heau was not shaken on cross-examination on his evidence on this point.  Further, Mr Heau was shocked when he learnt from Deacons that the escalator and the staircases could be demolished only with the consent of all the co-owners.  Plainly, he was shocked because he was laboured under the mistaken belief that they could be demolished, which is consistent with his evidence that Mr Chan had made both the Escalator and Staircase Representations to him.  I accept Mr Heau’s evidence.

103. In his witness statement, Mr Chan said that he told Mr Heau that the staircase could be demolished.  But he amended this when he began his oral testimony and said that he was actually referring to the demolition of the escalator.  Contrary to Mr Ho’s submission, I accept that it was a mistake on his part.  The reason why I came to this conclusion is this.  It is not in dispute that after the 1^st Inspection, Mr Tong gave Mr Chan a quotation and a report for the demolition of the escalator.  I have no doubt that Mr Tong provided those documents to Mr Chan to lead him to believe that the escalator could be removed.  This also supports Mr Chan’s evidence (a) that Mr Tong in fact told him that the escalator could be removed and (b) that Mr Tong was willing to reduce the price from HK$26 million to HK$25.8 million to reflect the costs that SCB had to incur for the demolition of the escalator.  Plainly Mr Tong had by his conduct intended that Mr Chan should tell SCB that the escalator could be removed.  That was exactly what Mr Chan did when he related the same to Mr Heau.  I therefore accept his evidence on the Escalator Representation.  As to the staircase, it is conceded by Mr Chow that Mr Tong did not tell Mr Chan that they could be demolished.  But it is reasonable that Mr Chan came to such conclusion when he considered the physical state of the staircase that he saw on the 1^st Inspection and related the same to Mr Heau later.  So I accept Mr Chan’s evidence on the Staircase Representation as well.

104. In light of the Representations by Mr Chan to Mr Heau, the defects could not have been apparent before the parties entered into the Provisional Agreement.

105. The fourth matter that I consider is Goldenwick’s case that the defects in title were discoverable and had been discovered. 

106. Mr Ho referred to the building plans of the Building and submitted that it could be readily discovered that the lift, staircase and escalator would only have served the purpose of access and egress.  Thus the defects arsing out of their presence must be discernible.  I am unable to agree because this submission entirely ignored the physical condition of the Property, which is entirely consistent with the notion that Goldenwick had exclusive possession to the Property free from any third party rights.

107. Mr Ho next relied on the queries that SCB’s team harboured after the inspection on 6 August 2004, which meant that they were aware of the possible complication with the Property in relation to the staircase and the escalator.  Mr Ho was referring to the email reports by Mr O’Hoy and Mr Eddie Chan to Mr Heau by emails dated 25 and 21 August 2004 respectively.  Mr O’Hoy in his email said Goldenwick’s representative could not identify the area belonged to them.  According to paragraph 16 of Mr O’Hoy’s witness statement, the vendor’s representative (presumably Mr Tong) was not certain if the corridor area on the 2/F between the staircase and the escalator area and the escalator area formed part of the Property but the representative said he would confirm later.  I do not think it is sufficient to raise any doubt on title.  Mr Eddie Chan in his email referred to the escalator from the G/F to 1/F and the internal staircase from G/F to 2/F.  He did not express any doubt. 

108. In any event, I do not think any doubts, if they ever existed, matter in light of my earlier finding that Mr Chan did make the Escalator and Staircase Representations to Mr Heau.  Such doubts did not render the defects reasonably discernible before the parties entered into the Provisional Agreement as contended.

109. Finally, it is Mr Tong’s evidence that he told SCB’s inspection team at the time of the 1^st Inspection and Mr Chan on other subsequent occasions that the passages in the Entrance Area were reserved for use by other owners; that all the staircases including the one in question had to be used by the other co-owners and that the Property must leave a passage for use by other owners as subject to the terms of the Sub-DMC.  This is denied by Mr Chan and Mr O’Hoy.

110. In my view, Mr Tong’s evidence is inherently improbable and contrary to common sense.  Had he mentioned those things to SCB’s officers, it is simply inconceivable that Mr Eddie Chan and Mr O’Hoy would have failed to refer to them in their subsequent email reports to Mr Heau.  Bearing in mind that SCB wanted to buy the Property for operating a branch there and security was no doubt the primary concern, no bank officer in his right mind would have omitted such an important point in his report to his superior.  Had Mr Tong mentioned those things to Mr Chan, I see no reason why Mr Chan would have failed to raise it with Mr Heau.

111. For the above reasons, I reject Goldenwick’s case that the defects in title arising from the common facilities and common right of way are patent.

F.2.c. Proviso not sufficient disclosure

112. In my view, the mere reference to the proviso in the description of the Property that it is sold subject to and with the benefit of the Sub-DMC is a glaringly insufficient disclosure.  T&W’s answer to the objection raised is not enough to meet the objection. 

F.3.   Objection not sufficient answered

113. For the above reasons, I find that Goldenwick had also failed to answer Requisition 12 insofar on the Common Parts/Right of Way Issue. 

G.      conclusion

114. Having failed to answer Requisition 12 in its entirety, Goldenwick had failed to prove good title to the Property.  All of its claims are dismissed.

115. SCB is entitled to a declaration that the Provisional Agreement and the Agreement had been terminated or rescinded.

116. SCB also claims for wasted conveyancing costs in the sum of HK$84,506.  Contrary to Mr Ho’s submissions, this claim is well supported by Deacons’ invoice dated 26 January 2005, Mr Heau’s undisputed evidence that he had initialled on the invoice and passed it on to the relevant department for payment and Deacons’ ledger showing the payment.  This claim is allowed in full.

117. Under Clause 18 of the Agreement, SCB is entitled to return of the deposits and damages by reason of such failure.  But I do not accept that SCB had thereby become a secured creditor for the deposits and the wasted conveyancing expenses.  This claim is disallowed.

118. I will accordingly enter judgment in favour of SCB for :

119. Costs are to follow the event.  There will be an order nisi that SCB shall have the costs of the two actions, including all costs reserved, to be taxed if not agreed. 

[1]    Initially, Mr Tong said in his witness statement that the inspection took place on or about 23 August 2004.  But in his oral testimony, he accepted that it took place on 6 August 2004.

[2]    This difference is minor and does not affect any live issue before me.  I will just leave it aside.

[3]    Under Regulation 15(2) of the Land Registration Regulations, Cap.128, where an instrument is withheld from registration, the Land Register shall, inter alia, enter on a docket the reasons why such instrument has been withheld and keep a copy of the instrument.  However, on the evidence before me, the reason for withholding the registration of the Missing Documents and why the Land Registry did not have any copy of the Missing Documents is not apparent. 

[4]    As will be seen in paragraph 32 below, it is Mr Ho’s submission that the Missing Documents here did not affect the title to the Property.

[5] See paragraph 61 above.