BIG MOST LTD v. CHAU WA HUNG

HCMP 2597/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2597 OF 2011

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JUDGMENT

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1.  This is a vendor and purchaser summons. The plaintiff as purchaser seeks a declaration that the defendant had failed to prove or give a good title to the property known as No 181B Boundary Street, Kowloon (“the Property”) agreed to be sold and purchased. It also seeks for the return of the sum of $668,000 being the deposit paid by the plaintiff to the defendant under the agreement and the conveyancing legal costs in the sum of $22,000.

Background         

2.  The plaintiff as purchaser and the defendant as vendor signed the sale and purchase agreement dated 9 September 2011 (“the Agreement”).

3.  The price for the sale of the Property was $6,680,000 with the scheduled completion date on 28 October 2011.  Pursuant to the terms of the Agreement, the plaintiff paid the sum of $668,000 being the deposit for the sale of the Property.

4.  The completion for the sale and purchase of the Property did not take place.  The plaintiff contended that the defendant had failed to prove or give a good title to the Property and demanded the defendant to return the deposit to the plaintiff.

5.  On the other hand, the defendant denied the plaintiff’s allegation and contended that the plaintiff had repudiated the Agreement by failing to complete on 28 October 2011.  The defendant subsequently sold the Property to another purchaser on 16 December 2011 at a price of $6,000,000.  The defendant therefore counterclaims against the plaintiff for the following losses:

(i)  the sum of $680,000 being the difference in the prices of both transactions;

(ii) the sum of $15,860 being the total legal costs and disbursements;

(iii) the sum of $120,000 being commission paid to the estate agent in respect of the sale of the Property to the subsequent purchaser; and

(iv) the sum of $96,547.76 being the extra interest charged by the financial institutions for the mortgage loans in respect of the period between the scheduled sale of the Property to the plaintiff and the subsequent sale.

6.  The plaintiff’s complaints about the proving and giving of title are three-fold:

(i)  the defendant had failed to give a good title to the Property by refusing or failing to deliver the original of a second mortgage (and its discharge or release) against the Property in 2010;

(ii) the defendant had failed to prove a good title to the Property by failing to deliver a copy of the existing second mortgage against the Property to the plaintiff despite the request by the plaintiff; and

(iii) the defendant had failed to prove a good title to the Property by failing to alleviate the plaintiff’s concern over the exact location of the garage, in particular the fact that there existed a right of way over one of the five designed car-parking spaces of the garage rendering it unusable.

7.  I will deal with each of these allegations in turn.

The 2010 second mortgage

8.  The land search record of the Property shows that the Property was subject to an “All Monies” second mortgage dated 20 August 2010 in favour of United Asia Finance Limited (“the 2010 Second Mortgage”).  The land search record also shows a document called “Receipt on Discharge of a Charge” dated 28 December 2010 registered against the Property (“the 2010 Discharge”).  This appeared to be related to the purported discharge of the 2010 Second Mortgage, although it could not be certain because the defendant had never produced a copy of the 2010 Second Mortgage or the 2010 Discharge throughout the transaction.

9.  Under clause 7(a) of the Agreement, the defendant has to give good title to the Property in accordance with s 13A of the Conveyancing and Property Ordinance, Cap 219 (“the CPO”).

10.  It is trite law that there are two distinct steps in the giving of a good title.  The first is to show a good title, and the second is to give a good title by producing the title deeds.  In Hong Kong, these two steps are taken by the vendor’s solicitor in sending the title deeds and documents to the purchaser’s solicitors for perusal of title.  To facilitate the proving of title, certified true copies of the title documents may be delivered to the purchaser’s solicitor for perusal of title (see: s 13(2) of the CPO), but this does not absolve the vendor from his duty to deliver all the original title deeds to the purchaser on completion (unless there is adequate evidence showing their loss or destruction), failing which the purchaser is entitled to refuse to complete (see: Yiu Ping Fong v Lam Lai Hing [1999] 1 HKLRD 793 at pp 797I-798F, per Yuen J (as she then was); Smart Max Enterprise Ltd v Speedy Way Ltd [2011] 3 HKLRD 675 at §37, per Yuen JA; De Monsa Investments Ltd v Whole Win Management Fund Ltd [2011] 4 HKLRD 478 at §§60-61, per Tang VP).

11.  I agree with Mr Chang, counsel for the plaintiff, that the handing of the original title deeds is an important part of the vendor’s obligation in a sale of land.  The purchaser is not asking for such original title deeds for verification or information as to title.  The purchaser is entitled as a matter of proprietary right to possession of the original title deeds, which is the best evidence of ownership.  It is also important for him to get possession of the original title deeds so that he can be sure that the property is not subject to an equitable mortgage by deposit of the title deeds (see: Yiu Ping Fong, supra, at p 798G-I; and De Monsa Investments Ltd, supra, at §82).

12.  Indeed, clause 8 of the Agreement expressly requires the defendant to deliver to the plaintiff such of the title deeds and documents for the purpose of giving title to the Property.

13.  Further, s 13A(1) of the CPO requires the defendant to deliver to the plaintiff, for the purpose of giving title, the originals of both:

(i)  the Government or Crown Lease; and

(ii) any document that relates exclusively to the land and is required to be produced by the defendant as proof of title to that land under s 13(1)(a) and (c) of the CPO.

14.  S 13(1)(c) of the CPO is not relevant here.  S 13(1)(a) of the CPO requires the defendant to produce proof of title extending from the intermediate root of title up to the date of completion of sale.  This obliges the defendant to prove the whole chain of title, by proving each transfer of title and the creation, transfer and extinguishment of any interest in the property, from the date of the intermediate root up to the date of the subject sale (see: Sihombing & Wilkinson, Hong Kong Conveyancing, Division VI, §§[38]- [40] at p 11F).

15.  It is clear that the 2010 Second Mortgage (and its discharge, be it the 2010 Discharge or not) is required to be produced as proof of title, since such mortgage (and its subsequent discharge, if any) clearly had the effect of creating an interest (and later discharging the same) over the Property.  In Sihombing & Wilkinson, Hong Kong Conveyancing, Division VI, §[48] at p 11RB, the learned authors said the following:

“Where the property had been mortgaged or charged during the period of the chain of title, the vendor should produce the mortgage or charge and evidence, in an appropriate case, of its proper reassignment or discharge.”

In Chan Siu Han v Tong Yuk Lan & Anor, unreported, DCCJ 3432/2008 (decision on 17 January 2011) at §§34-37, Deputy Judge R Yu also observed that a previous mortgage over the suit property and its release or discharge are clearly proof of title required to be produced by the vendor, and the two must be read together to prove that the property can be conveyed free from encumbrance.

16.  There is no dispute that the defendant throughout the transaction had failed or refused to supply the original 2010 Second Mortgage or the 2010 Discharge to the plaintiff.  In the correspondence between the respective solicitors of the parties, the defendant claimed that the plaintiff was not entitled to the same based on the following four reasons.

17.  Firstly, the defendant argued that the plaintiff’s requisition in respect of the 2010 Second Mortgage and the 2010 Discharge was made out of time.  Clause 11(a) of the Agreement provides that any requisition or objection on title or other matter arising out of the Agreement shall be delivered to the vendor’s solicitors within 7 working days after the date of receipt of the title deeds or documents 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, and time shall be of the essence in this respect.  The defendant’s solicitors supplied the title deeds to the plaintiff’s former solicitors on 10 September 2011, and the plaintiff’s subsequent solicitors only raised the requisition relating to the 2010 Second Mortgage on 14 October 2011, the defendant therefore took the stance that the requisition was made too late.

18.  However, I agree with Mr Chang that such argument is wholly misconceived because the defendant had confused his duty to show a good title (which includes the duty to answer the plaintiff’s requisitions satisfactorily) and the entirely independent obligation to give a good title (which ends by delivery of the original title deeds to the plaintiff).  A vendor’s duty to give a good title is irrespective of requisitions, and it cannot depend on whether a requisition was raised within time or was raised late or not at all.  Either the vendor is in a position to give a good title on completion or he is not, and requisitions cannot alter the nature of such obligation (see: Profit World Trading Ltd v Ho So Yung [2011] 2 HKLRD 773 at §§21-23, per Le Pichon JA).

19.  Secondly, the defendant argued that the 2010 Second Mortgage was shown in the land search to have been discharged by the 2010 Discharge and as such it ceased to be an encumbrance to title.   Again such contention is misconceived.  The land search record does not directly link the 2010 Second Mortgage with the 2010 Discharge.  Even if the 2010 Discharge was executed for the discharge of the 2010 Second Mortgage, without sight of the actual documents, one is simply unable to confirm whether the purported discharge was valid.  Further, the fact that the 2010 Second Mortgage might have been discharged by the 2010 Discharge did not render them any less a proof of title that the defendant was under a duty to produce to the plaintiff.  The mere fact that the underlying debt under a mortgage may have been previously paid off can make no difference in the right of the purchaser to have the title deeds handed over (see: De Monsa Investments Ltd, supra, at §82).  A similar argument was in fact raised and was rightly rejected by Deputy Judge R Yu in Chan Siu Han, supra, at §§34-37.  Indeed, there was a “heavy burden” on the defendant as the vendor to prove title, and the plaintiff was always entitled to “proof of all matters of fact which were part of or affected the title” (see: Jasmin Enterpises Ltd v Chan Yuk Hon [1998] 4 HKC 224, per Sakhrani J at p 226E).  The plaintiff should not have been left to speculate on what an undisclosed document might or might not cover.

20.  Thirdly, the defendant argued that a copy of the 2010 Second Mortgage and the 2010 Discharge is available from the Land Registry, and so there was no duty on the part of the defendant to produce the same.  However, I agree with Mr Chang that such argument completely begs the question.  It was the defendant’s duty to show and prove good title, not the plaintiff.  In any case, it was the defendant’s duty to deliver the originals of the 2010 Second Mortgage and the 2010 Discharge to the plaintiff, not a copy thereof.

21.  Fourthly, the defendant argued that the 2010 Second Mortgage and the 2010 Discharge created no risk and did not constitute an encumbrance on title.   Again this completely begs the question.  It lies ill in the mouth of a vendor to say that the risk is remote, when it is within his power, to remove the risk completely, for example, by properly accounting for the absence of the originals (see: De Monsa Investments Ltd, supra, at §78).

22.  In the hearing, Mr Wong, counsel for the defendant, has raised additional arguments.  Firstly, the Sixth Schedule of the Agreement has expressly stated “the existing mortgages” affecting the Property and it did not include the 2010 Second Mortgage.  Further, the plaintiff acknowledged and admitted in clause 21 of the Agreement that it was fully aware of and had been advised of the existence of the then existing mortgages (which did not include the 2010 Second Mortgage), and so the 2010 Second Mortgage and the 2010 Discharge did not go to the root of the Property.

23.  I cannot accept such argument.  Clause 21 and the Sixth Schedule of the Agreement only stipulate that the defendant would discharge the existing mortgages affecting the Property.  Such clause and schedule cannot be construed to mean that the plaintiff had waived the defendant’s duty to give a good title by producing the originals of the 2010 Second Mortgage and the 2010 Discharge.

24.  Secondly, Mr Wong argues that the defendant’s stance has all along been that the requisition relating to the 2010 Second Mortgage was made out of time and the defendant therefore had no obligation to answer.  It was not the case that the plaintiff had requested the defendant to give a good title at completion by delivery of the originals of the 2010 Second Mortgage and the 2010 Discharge and the defendant refused.

25.  I also see no merit in such argument.  In the letter of the plaintiff’s solicitors dated 14 October 2011, the plaintiff had expressly requested the defendant to produce the originals of the 2010 Second Mortgage and the 2010 Discharge.  The defendant’s solicitors simply refused to deal with such requisition on the ground that it was made out of time.  In the subsequent letters by the plaintiff’s solicitors dated 21 and 26 October 2011, the plaintiff had insisted on the production of the originals of the said two documents, and yet the defendant refused to comply with such request.  If the defendant intended to supply the originals of the two documents at the time of completion, he should have made it clear to the plaintiff in the correspondence.

26.  Hence, I find in favour of the plaintiff on the first complaint.

The 2011 second mortgage

27.  The land search record shows that the Property was subject to an “All Monies” second mortgage dated 26 January 2011 in favour of United Asia Finance Limited (“the 2011 Second Mortgage”), which was subsisting at the material time of the transaction between the plaintiff and the defendant and had to be discharged by the defendant at the time of the intended completion.

28.  The plaintiff asked for a copy of extract of the 2011 Second Mortgage from the defendant.  Although the request was for a copy of extract, it is clear from the correspondence that the defendant knew that the plaintiff was requesting for a certified copy of the said document.  The defendant replied that the 2011 Second Mortgage was retained by another law firm to prepare for the necessary discharge or release, and undertook to deliver the 2011 Second Mortgage and its discharge to the plaintiff after completion.

29.  However, such undertaking is insufficient for the defendant to discharge his duty to show a good title.  In Cheng Chun Chun v Chow Chung Tao, unreported, HCA 12016/1999 (decision on 14 May 2000), P Cheung J (as he then was) held that the vendor must provide a certified copy of a mortgage affecting the title even where the vendor has promised to discharge that mortgage prior to completion, and this forms part of the vendor’s duty to show a good title.  The purpose is to enable the purchaser to check, well before completion, whether, for example, early redemption of the mortgage is permitted, and whether the release or discharge covers all the conditions of the mortgage.  The vendor therefore has the duty to show the title documents which include the mortgage.  The duty is not discharged if the mortgage is merely given to the purchaser after completion.

30.  Mr Wong argues that the plaintiff had waived such requisition.  According to him, the title documents were delivered to the plaintiff’s former solicitors on 10 September 2011.  The plaintiff’s solicitors only requested the defendant to provide a copy of extract of the 2011 Second Mortgage on 14 October 2011 which was out of time.  By the letter dated 20 October 2011, the defendant’s solicitors replied, inter alia, that the 2011 Second Mortgage was retained by another solicitors’ firm for preparing the discharge or release upon completion, and they undertook to let the plaintiff to have both documents after completion.

31.  Further, Mr Wong submits that the plaintiff’s solicitors did not follow up on the reply of the defendant’s solicitors in the subsequent correspondence.  Clause 11(b) of the Agreement provides that any further requisition or objection raising upon any reply to a former requisition shall be delivered to the vendor’s solicitors within 7 working days from the date of receipt of such reply, otherwise the same shall be considered as waived and the purchaser shall be deemed to have accepted the vendor’s title.  As the plaintiff’s solicitors did not raise further requisition or objection after the reply from the defendant’s solicitors, it amounted to a waiver on the part of the plaintiff.

32.  There is some force in such argument.  However, the 2011 Second Mortgage and its discharge are certainly documents going to the root of the Agreement as they would affect whether the plaintiff can obtain the Property free from encumbrance.  In such circumstances, the plaintiff was entitled to insist on the production of the certified copy of the 2011 Second Mortgage prior to completion.  Hence, I also find in favour of the plaintiff on the second complaint.

Right of way in respect of the car-parking space

33.  I now turn to the third complaint.  In the plan annexed to the First Assignment dated 10 January 1958 (“the First Assignment”), Section C of Kowloon Inland Lot No 2568 (on which the garage was built) appeared to comprise of the parts highlighted in pink and green.  The First Assignment stated that the lot was assigned “subject to a free and full liberty and uninterrupted right of way” over the green part of the plan.

34.  When the plan of the First Assignment is mapped against the building plan approved by the Building Department dated 16 March 1957 (“the Building Plan”), one can immediately see that one of the five designated car-parking spaces in the Building Plan falls within the green part.  Hence, there is a doubt as to whether the car-parking space is subject to a right of way created over it.

35.  The plaintiff’s solicitors thus raised requisition to the defendant’s solicitors as to why one of the five car-parking spaces fell within the green part of the plan of the First Assignment, and requested the defendant to clarify the location and boundary of the Property to be conveyed. The plaintiff also raised requisition as to the due compliance of Condition (c) of the Modification Letter dated 9 February 1957 (“the Modification Letter”) which requires that not less than five car-parking spaces be provided.

36.  The defendant’s solicitors contended that the said requisition was raised out of time and refused to answer.  However, I agree with Mr Chang that the defendant had a duty to answer such requisition.

37.  A requisition can be raised out of time if it goes to the root of the contract or on matters not apparent from title documents provided by the vendor but only come to the knowledge of the purchaser through his own search or inquiry (see: Octorich Ltd v Liu Sin Ming & Anor, unreported, HCMP 977/1992 (decision on of W Wong DHCJ) at p 8).  Here, the requisition raised went to the root of the contract, namely the car-parking spaces in the garage conveyed, and in any case it only came to the plaintiff’s knowledge through its own search and enquiry by comparing the plan of the First Assignment with the Building Plan obtained by the plaintiff. Hence, the defendant was obliged to answer the requisition in a satisfactory manner.

38.  In the correspondence, the defendant’s solicitors contended that the plaintiff’s requisition was unjustified because it had inspected the garage and it was sold on an “as is” basis.  However, a property stated to be sold on “as is” basis refers only to its physical states and condition, and does not extend to illegal structures in the absence of clear wordings to such effect (see: All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630 at p 632B-C).  Here, the subject lot consists of a 5-storey building, and under Condition (c) of the Modification Letter, there should be “no less than” five car-parking spaces in the lot.  If one of the five designed car-parking spaces in the Building Plan is subject to a right of way created immediately above it, there can no longer be five car-parking spaces, meaning a breach of the Modification Letter and, in turn, a possible right of re-entry by the Government.  Under such circumstances, the plaintiff’s concern was a legitimate one and the defendant was obliged to answer the requisition satisfactorily.

39.  In his submission in the hearing, Mr Wong argues that putting the three documents together, namely the First Assignment, the Modification Letter and the Building Plan, it is obvious that the garage falls on the areas coloured pink and green and consists of five parking spaces, and it is also obvious that Condition (c) of the Modification Letter has been complied with.  Further, the complaint in relation to the right of way is unjustified.  The right of way on area marked green was created for the owners or occupiers for the purpose of going to and from any part of other portions of the land.  As the car-parking space thereon does not block the said right of way, there is no interference with such right of way.

40.  I disagree.  The Building Plan expressly stipulates that there should be five car-parking spaces.  If one of the car-parking spaces is subject to a right of way, any owners or occupiers of the building can lodge a legitimate complaint that the relevant area cannot be used as car-parking space because it blocks the right of way.  Up to now, the defendant cannot provide a satisfactory answer as to how to alleviate the concern of the plaintiff in this regard.  In my judgment, the risk associated with breach of the condition in the Modification Letter and the possible re-entry by the Government is a real one which cannot be ignored.  As the said requisition remained unanswered on completion, the plaintiff was entitled to refuse to complete.

Conclusion

41.  There is no issue on the quantum of the claim. Based on my findings in favour of the plaintiff on all the three complaints, I grant judgment in favour of the plaintiff in terms of paragraphs 1 to 4 and 6 of the Originating Summons.  The amount of legal costs and disbursements in paragraph 6 is $22,000.  I also award interest on the judgment sum at 8% per annum, which is the existing judgment rate, from 15 December 2011 (the date of the Originating Summons) to the date hereof and thereafter at judgment rate.

42.  I dismiss the defendant’s counterclaim.  In the case that I am wrong on the issue of liability, there is no dispute that the defendant is entitled to claim for the difference in the prices of the two transactions.  For the legal costs, there is also no issue that the claim is only limited to the sum of $7,360 in respect of the solicitors’ fees for the subject transaction.  I disallow the claim for the commission of the estate agent for the following two reasons.  Firstly, the defendant did not have to pay any commission under the subject sale, and the defendant has not given any reason why he had to pay a substantial amount of 2% commission for the sale to the subsequent purchaser.  Secondly, there is no evidence to prove the actual payment and so there is a doubt as to whether the plaintiff had to make such payment.  Finally, I allow the claim for extra interest in the sum of $96,547.76 in full because these are expenses flowing directly from the non-completion of the subject sale.

43.  I make an order nisi that the costs of the action be to the plaintiff which shall be made absolute 14 days after the date of the handing down of this Judgment.