MAX SMART LTD. v. FIRST SUPER INVESTMENT LTD.

HCMP933/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 933 OF 1998

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J U D G M E N T

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Background

1. This is a Vendor and Purchaser Summons. The property in question is Shop B, Ground Floor, Granville House, Nos.41C and 41D, Granville Road, Tsimshatsui ("the Property"). The Provisional Sale and Purchaser Agreement was dated 19 August 1997. The relevant terms are as follows :-

A. Under Clause 2, the purchase price was HK$55 million.

The initial deposit was $2 million together with further deposits of :-

i) $3.5 million upon signing of the Formal Agreement for Sale and Purchase on or before 9 September 1997;

ii) $2.75 million on 9 October 1997;

iii) $2.75 million on 9 November 1997.

This would make a total of $11 million by way of deposit which would be 20% of the purchase price.

B. Completion date shall be on or before 3 March 1998.

C. Under Clause 11, the said Property was sold to the Purchaser on an "as is" basis.

D. Under Clause 15, the Property was sold subject to tenancies as follows :-

i) For Unit 1, which in fact was also described as Portion A, at the rental of $120,000 expiring on 30 June 1999;

ii) For Unit 2, which was the Portion B, the rental was $73,000 expiring on 15 March 1998;

The Vendor should give Notice of Termination between 15 to 20 October 1997 to terminate the aforesaid tenancies in order to recover possession thereof on expiration on the aforesaid respective tenancies.

2. In other words Shop B was in fact further divided into Portion A and Portion B, each occupied by a tenant.

3. The parties could not agree on the terms of the Formal Sale and Purchase Agreement. However, all further deposits were duly paid totalling $11 million. Both parties agreed that the Provisional Agreement for Sale and Purchase was enforceable. Consequently there would not be any usual clause of limitation to the period of raising requisition as contained in a usual formal agreement.

4. On 3 September 1997, the title deeds were sent to the Purchaser's solicitors. Two main requisitions were raised, one after the other.

The First Requisition relating to "user"

5. The first requisition was raised by a letter dated 6 September 1997 in respect of the permitted user of the Property. The Occupation Permit granted in 1976 was only for the use of the Property as "office". The user in the approved plan for the Property was described as "bank office". The Purchaser's solicitors enquired whether the said Property can now be used for commercial purpose as "shop".

6. Further, there are two different shops, being Portion A and Portion B, on the Property instead of one single office. It was enquired whether the Occupation Permit could permit one single office to be used by two different shops. (In the proceedings before me, the parties accepted that this so-called "number requisition", i.e. 2 instead of 1, is answered or otherwise irrelevant.)

7. The Vendor relied on three various Architect's Certificates. The first one was dated 13 October 1997. It stated that the partition wall, being resting on solid ground did not require the Building Authority's approval under s.41 of the Buildings Ordinance.

8. This Certificate further stated that "the Office user which includes the existing use as a sales office or shop for retail or wholesale purpose for non-domestic use remains unchanged and do not contravene the user stated in the Occupation Permit No.K85/76 which is office or non-domestic use".

9. I agree with Ms Eu for the Purchaser that this statement of the architect did not answer the requisition. The word "office" is different from "shop". In construing the user, the Court looks at the natural meaning of the words. (See Even Growth Investment v. Shing Yip Investment, MP No.2369 of 1996, per Deputy Judge Aiken.) The contention of the Architect is that since office and shop are both for non-domestic use, there would be no change of user. This is an insufficient answer as it did not deal with the obvious change of user and whether the change is material.

10. The next Architect Certificate by another Architect was dated 17 February 1998. Here the Architect's opinion was that the change of user should be considered under the then Buildings Ordinance at the time of the issue of the Occupation Permit, i.e. in 1976, which was prior to the coming into effect of the F.R.C. Code 1989 (Fire Regulations). The Architect was of the opinion that the Building Authority would not have refused to give approval to the plans had the description on the approved plan been "shop" instead of "office", (i.e. in 1976). Thus, it did not constitute a material change in the use of the building.

11. In my view, this approach is incorrect. Whether or not there is a material change should not be judged as at the date of the occupation permit even assuming the change had already been made there and then but at the present. The Architect's rationale was that if there were a description of "shop" instead of "office" on the plan, the plan would have been approved and the occupation permit would have stated "shop" instead. Be that as it may, there was no such change and as I have decided hereinbefore that "office" is different from "shop", there would have to be an application for change. Only until then the Building Authority would decide whether it would allow the change as at the time of the application. It would not consider whether, if the application was made in 1976, it would have approved the application. The Vendor must show and pass a good title as of the present. (This point of whether there is any material change would tie with the other point concerning the presence of a cockloft which will be discussed in the second requisition later.)

12. Further, the same Architect gave a further Certificate dated 27 February 1998. In this third Certificate, it was stated that s.25(3) of the Buildings Ordinance, Cap.123 does not apply. This provision was in respect of change in use of buildings. It provided that :-

"(3) The use of a building shall be deemed to be materially changed -

(a) where the carrying out of building works for the erection of a building intended for such use would have contravened the provisions of this Ordinance; or

(b) where the Building Authority could have refused to give approval to plans of such building works under section 16(1)(g). (Replaced 44 of 1959 s.11)"

There was, however, no consideration of s.25(3)(b) or s.16(1)(g) which provided that :-

"(1) The Building Authority may refuse to give his approval of any plans of building works where -

......

(g) the carrying out of the building works shown thereon would result in a building differing in height, design, type or intended use from buildings in the immediate neighbourhood or previously existing on the same site;"

This would give the Building Authority the power to refuse approval by reason of the user. The Vendor's Architect, in spite of inspection of the Property, had not adverted to the presence of a cockloft altogether. Mr Warren Chan, for the Vendor, submitted that the Architect was not there and then asked about the cockloft. However, the presence of the cockloft would affect the question of whether there was a material change in the user of the Property. This will be considered in the second requisition.

The Second Requisition relating to Unauthorized Structure

13. This requisition was first raised by a letter of the Purchaser's solicitors dated 19 February 1998. It was contended that the Purchaser was informed by the Estate Agent that there was a cockloft erected in the Property.

14. Mr Chan, for the Vendor, contended that there was no admissible evidence as to when the Purchaser knew of the existence of the cockloft. There was evidence put forward by the Purchaser that there was no inspection of the Property for the purchase of this $55 million Property. It was further put forward by the Vendor that the Vendor might not know the existence of the cockloft itself when the Property was first purchased by the Vendor in July 1997 which sale was only completed in October 1997. In other words, in between time, the Property was sold on to the present new Purchaser.

15. Ms Eu, on the other hand, submitted that the Vendor had failed to comply with its duty to disclose blots of title which it knew or ought to have known according to the case of Wah Ying Properties Ltd. v. Sound Cash Ltd. [1994] 1 HKC 786.

16. In my view, this case would not be decided on whether the Vendor knew of the existence of the cockloft and when the Purchaser became aware of the existence of the cockloft. As I have said, the Formal Sale and Purchase Agreement was not signed and therefore there was no time limit as to the raising of requisition. Mr Chan's emphasis on the sharp practice of the Purchaser of raising this requisition only 10 days before the completion date would only receive some sympathy from this Court but no further. The case should be decided on an objective basis and that is whether the cockloft, as an unauthorized structure, would enable the Purchaser to raise the requisition, and whether the requisition has been answered albeit it was raised only 10 days before the completion date unless the Vendor could show that the Purchaser had been aware of the cockloft and was guilty of undue delay in raising this requisition and thus should be considered by the Court that it had waived the same. There is simply no evidence to this effect here.

17. It is clear the cockloft is an unauthorized structure. However, the Vendor's solicitors did not affirm that it was so and only offered to demolish the cockloft. I accept the Purchaser's submission that this offer is not sufficient to prove or pass good title in the Property. The agreement is to sell the Property on an "as is" basis under Clause 11. The Vendor cannot force the Purchaser to accept a variation of the Property agreed to be sold. The cockloft covered nearly the whole area of the shop space except the part to accommodate the staircase for access. Thus, the floor area is doubled by the existence of the cockloft. This situation is different from the case of Homyip Investment v. Chu Kang Ming Trade Development Co. Ltd. [1995] 2 HKC 458. There the Court was concerned with an internal staircase. It was decided that it could not be said that the removal of the additional staircase had the effect of substantially depriving the purchaser of the whole benefit which it was intended and it should obtain from the agreement.

18. The situation is more akin to another case of Sun Great International Ltd. v. Hui Lai Ying Polly, HCA 10742 of 1994. Here Waung, J. said at p.6 that :-

" It is a well recognised principle of conveyancing that a vendor is a trustee of the property agreed to be sold and is not at liberty to make changes to the property let alone demolish 25% of the enclosed structure of the property. I do not see how a vendor can demolish an illegal part of the property agreed to be sold and yet be able to force that property on the buyer on completion...."

19. Mr Chan, for the Vendor, submitted that breach of this "as is" clause is only a breach of an agreement leading to the claim of damages if it is not fundamental to the agreement. The Purchaser who has not inspected the Property at the time of purchase or any time thereafter would not be able to say that it is a fundamental term of the agreement.

20. However, quite apart from the fact that the cockloft covers the whole area of the shop which is very material to a user of the shop, the Vendor has an obligation to pass a good title in respect of all structures on "as is" basis. The Vendor cannot force the Purchaser to complete and accept an offer of reasonable compensation at some later stage. In other words, the Vendor's offer to demolish the cockloft is not an answer to the requisition whether it has good title to pass the Property including the unauthorized structure of the cockloft.

21. Further, the presence of the cockloft would have an additional complication to the user or the change thereof. If the shop has no cockloft and there is an application to the Building Authority for the change of user from "office" to "shop", the Building Authority will only make sure that the whole property would comply with all regulations and in particular fire regulations. The present fire regulations require the installation of sprinklers on the shop and the cockloft. The presence of the cockloft would have posed other fire hazards. This would render the application to be refused by the Building Authority unless the cockloft is removed altogether. Thus, the change of user, together with the construction of the cockloft, would render the owner liable to both breaches, i.e. breach of change of user and breach of material alteration to the building.

22. In other words, the presence of the cockloft would render the Building Authority to refuse his approval under s.16(1)(g). Thus the use of the Property as a shop is deemed to be materially changed under s.25(3)(b) of the Buildings Ordinance.

23. Further the Vendor could not pass a good title to a material part of the shop, i.e. the cockloft as it is an authorized structure. The removal of the same cannot solve the problem. The Purchaser is entitled to ensure the Vendor can pass a good title to all parts on the agreed "as is" basis.

One Further Evidential Consideration

24. There is one further consideration in respect of one piece of evidence. Ms Eu, in her submission contended that any demolition of the cockloft or material alteration may well lead to claims from the tenant or a difference to the rental. The Purchaser cannot be compelled to take the risk of litigation.

25. In response to that Mr Chan produced two agreements dated 21 February 1998 signed between the Vendor and the two existing tenants to the effect that the two tenants agreed to have the cockloft removed upon certain amounts of compensation to be paid therefor. Ms Eu objected to the production of these two documents.

26. The Purchaser's case herein is not that the Vendor should have removed the cockloft and it had failed to do so. Instead its case is that the Vendor should pass a good title for the cockloft as well. Thus this theoretical consideration of any risk of litigation with tenants would be irrelevant. Should Ms Eu insist to make this submission, Mr Chan would, in my view, be entitled to put forward these two documents (with an undertaking to file an affidavit producing the same) in order to neutralise such a suggestion since this point has only been raised for the first time. In short I would ignore both Ms Eu's submission and Mr Chan's two further documents.

27. However, Ms Eu's other submission that the Purchaser would have a substantially lesser shop than it had contracted still holds as aforesaid.

Conclusion

28. For the aforesaid reasons, I consider that the Vendor has not answered both requisitions of the Plaintiff satisfactorily. The Purchaser is entitled to rescind the Agreement. Accordingly, the Plaintiff Purchaser is entitled to the declaration to that effect, as in paragraphs 1(a) and (c), 2 and 3 of the Originating Summons. Consequently, the Plaintiff is also entitled to the orders as contained in paragraphs 4 to 7 inclusive of the Originating Summons. They are in respect of refund of the deposit, and reimbursement of stamp duty paid and costs and expenses of investigating the title of the Property, and costs of the proceedings herein, to be taxed if not agreed. There shall also be interest on the refund of the deposit in the sum of $11 million at 8% per annum from the date of the Originating Summons, i.e. 3 March 1998, until judgment.

29. As agreed between the parties when I find for the Plaintiff, the counterclaim of the Defendant shall be dismissed which I hereby order accordingly with costs to the Plaintiff.