BILLION BEST (HONG KONG) LTD. v. AMITY INVESTMENT CO. LTD. AND ANOTHER

HCMP 2263/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2263 OF 1998

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J U D G M E N T

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1. This is a vendor and purchaser summons in which the property concerned is called Forward Mansion, in Tuen Mun, and consists of a residential tower above a ground and first floor designed as commercial retail premises. By an agreement in Chinese dated 5 September 1997, the defendants agreed to sell to the plaintiff the shops comprising about half the ground floor, and the whole of the first floor, of which the 1st defendant was the registered owner, and three shops, being about a quarter of the ground floor, of which the 2nd defendant was the owner. The price agreed for the part owned by the 1st defendant was $70,000,000.00, and that for the 2nd defendant's three shops $150,000,000.00. I have heard no good explanation for the disparity in prices and can only assume that it was a private arrangement for division of the proceeds between the defendants, which, as I shall consider later, were closely associated. They were also associated with the existing tenant of the premises who ran it as a retail store under the name of Tung Kong Chinese Products Emporium Ltd (Tung Kong).

2. A formal agreement for sale and purchase was signed on 19 September 1997 and the date for completion was fixed for 19 March 1998. Sums of $7,000,000.00 and $15,000,000.00 having been paid as deposits, further similar sums were agreed to be paid on or before 19 December 1997, with the balance on completion. In the event, a supplemental agreement was made, first postponing the December payments to January 1998, when a further supplemental agreement was entered into providing for payment of reduced deposits and interest, with the balance outstanding on completion. The total deposits paid then amounted to $10,500,000.00 to the 1st defendant and $22,500,000.00 to the 2nd defendant. Meanwhile, on 16 December 1998, the title deeds were delivered to the plaintiff's solicitors. Clause 7 of the formal sale and purchase agreement, which I shall look at in more detail shortly, limited the time for raising requisitions to 7 days after receipt of the title deeds. A number of requisitions were raised arising out of those, and dealt with to the satisfaction of the parties.

3. Following a visit to, and inspection of, the property by the plaintiff's architect on 6 March 1998, a letter was sent to the defendants' solicitors on 12 March noting that a number of alterations had been observed by him and asking for plans of the building to see if these were authorised. By a letter the next day, the defendants' solicitors gave their view that the time for raising requisitions had long since expired and that title had been accepted by the plaintiff. A further letter of 14 March from the plaintiff's solicitors listed nine alterations and structures which their architect suspected were unauthorised and asked for evidence that they had been approved by the Buildings Department. The defendants' solicitors response was to repeat that the requisitions were out of time and to suggest that they were not made in good faith, being so near to the date of completion. No satisfactory reply having been received by the plaintiff's solicitors by the time of completion, they claimed that the defendants had wrongfully repudiated the agreement, and these proceedings were commenced on 21 May 1998.

The issues

4. There are two principal issues now between the parties: whether clause 7 of the agreement precludes the plaintiff from raising further requisitions as to the unauthorised building works after the time stipulated therein, and from insisting on the defendants making and conveying a good title on completion, and whether the plaintiff, through their knowledge of the existence of the building works or otherwise, is deemed to have accepted the defendants' title. Before looking at these in more detail it is relevant to set out here what the unauthorised building works were, and the extent of the parties' knowledge of them.

The unauthorised building works

5. It has never been in dispute throughout these proceedings that there are a number of alterations to the property which have not been approved by the Buildings Department, and are therefore unlawful under the Buildings Ordinance, and liable to be subject to a notice under that ordinance to reinstate, and possible prosecution of the owner. These alterations are listed in the certificate of the plaintiff's architect, Mr Max Yiu, dated 17 March 1998 and may be summarised as:

(1) A cockloft built inside the ground floor shop area.

(2) Alteration of a protected fire escape staircase.

(3) Alteration of ground floor structural ceiling beams.

(4) A slab covering a void area between the ground and first floor, giving greater floor area on the first floor.

(5) The canopy outside the first floor wall enclosed.

(6) An extension to the canopy, also enclosed, built on to a part of the building.

Initially the architect had also pointed out the demolition of a staircase between the ground and first floors, next to the void area, a new staircase and an escalator. However, it was discovered later that these had been authorised, and alteration and addition plans approved by the Buildings Department in 1982, shortly after the building was completed and at about the time that the defendants purchased the property.

6. The cockloft covered some 60% of the total ground floor area and was used by the tenant of the premises, Tung Kong, as further retail space. It was in two parts and accessed as to the first part by the new, approved, staircase from the ground to first floors, via a level area half way up it, and as to the other by the, unauthorised, altered fire escape staircase, which had been realigned, and had a solid wall and fire resistant doors removed for this purpose. The alteration to the ceiling beams was merely to change their shape as they formed the ceiling of the cockloft area. The canopy round most of the building at first floor level had been extended to go right round, and enclosed to provide space for, inter alia, the air conditioning ducts.

Knowledge of the parties

7. Although it was not apparent from the affidavits and witness statements filed in these proceedings, the evidence of Mr Tam Yat Hung on behalf of the defendants makes it clear that in 1982 the 1st defendant and Tung Kong were owned by substantially the same shareholders. The 2nd defendant was owned by two of those shareholders, Mr Chan Tam (or Dam) Wong, and Mr Cheung Chak Hung, and at some later stage, at least by 1996, a company called NT Chinese Emporium Holdings Ltd, a family company of Mr Tam, bought into the 2nd defendant, and Mr Cheung and Mr Chan became shareholders of that company. In effect, as Mr Tam conceded, they were all partners in a commercial enterprise through the guise of limited companies. This is emphasized by the fact that, when the property was purchased by them in 1982, and leased to Tung Kong, there was no written tenancy agreement, the premises being let on a monthly basis, although it was clearly a retail business of considerable size. It was Mr Cheung Chak Hung, later together with his first cousin Mr Cheung Chau Ming, who ran the business of Tung Kong throughout.

8. The occupation permit of the building was issued on 6 July 1982. The application for the alteration works in demolishing and replacing the staircase, and installing an escalator, was submitted in August 1982, and approved in October 1982, and I have no doubt that these were requested for the purpose of using the premises as Tung Kong's emporium. There is no evidence before me as to when the other, unauthorised, alterations were completed, but it must have been during the occupation of the premises by Tung Kong, and, with similar directors, the owners must have known of them, or be deemed to have knowledge through their common directors. The 1st defendant would certainly have had direct knowledge of the authorised structures on their part of the property, as a notice would have been served on them as owners, but as late as this year when witness statements were being prepared, they were proceeding on the basis that these too were unauthorised. The only explanation for this is, in my view, the fact that Mr Cheung Chak Hung was the principal operator of Tung Kong and was left to manage the affairs of the emporium, and the premises, largely by himself. Indeed, it was he who negotiated the sale of the property to the plaintiff on behalf of both defendants, being the one with intimate knowledge of the building. Yet Mr Cheung was neither called to give evidence, nor made any affidavit or statement in relation to these proceedings, the defendants instead electing to put forward Mr Tam, who was not a director of the defendants or Tung Kong in 1982, and has since divided his time between Hong Kong and his business in Australia. This appears to me to be an almost cynical attempt by the defendants to keep from the court the one witness who could give positive evidence about the knowledge of the defendants of these alterations. Following the well-known dictum of Lord Diplock in Herrington v. British Railways Board [1972] AC 877, defendants who adopt such tactics cannot complain "if the Court draws from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold".

9. While Mr Tam may not have known the details of the unauthorised structures, I am satisfied that even he was aware that some existed, and the defendants, through Mr Cheung, were well aware of the nature and extent of all those which have since been revealed, none of which were disclosed by them to the plaintiff at any stage before or after the agreement of 19 September 1997.

10. What then of the plaintiff? The defendants' case, at its highest, appears to be that the alterations were so obvious that they must have known about them and been put on enquiry as to whether they were illegal or not. Their case is based on the premise that any person, qualified architect or not, on entering the premises, cannot help but notice the cockloft, and the enclosed canopy, and must assume that they are illegal. Further, it is contended that the plaintiff's representatives visited the property a number of times after the signing of the agreement and had a chance to see such alterations. The evidence as to that from the plaintiff's witnesses, which I accept, is that there were visits to look at the commercial possibilities of the building, and the area, to decide what use to make of it, one such possibility being as a shopping arcade. There is no evidence of any surveyor or architect instructed to examine the structure or any alterations. Indeed, as has been pointed out, throughout this time the premises were still being used as a retail store, and detailed examination would have been difficult. It was only in March 1998, when Tung Kong had ceased operations, that the plaintiff's architect Mr Yiu was able to make a close examination of the building.

11. It can only have been on such an examination that all the alterations would come to light. While an astute property investor, familiar with the ways of Hong Kong commercial property owners, might suspect that a cockloft, which substantially increased the usable floor area and thereby affected the plot ratio, might well not be authorised, there is no other unauthorised structure here which would raise the same doubts. The alterations to the fire escape staircase, while possibly creating a narrower staircase than usual, would hardly raise the suspicions of any but a qualified architect or surveyor. The variation of the ceiling beams was purely cosmetic. The filling in of the void area, such void having been shown on the simplified plans attached to the Chinese agreement, was not clearly apparent, the defendants' own architect, who conceded that, with such a large building, inspection was complicated, having missed it on his examination, and it not being such as to make an assumption of illegality. The enclosure of the canopy could only be seen from outside, a screen wall covering to original windows inside, and to all intents and purposes part of the original structure to a unqualified observer. The extension of the canopy would need also a sharp eye and a close examination of the plans and was another alteration missed by the defendants' architect, Mr Tsang.

12. The plan annexed to the Chinese agreement does not assist the defendants in their allegation of knowledge, being a simple floor plan showing the layout of the building, and not even including the new stairs and the new escalator, or the removal of the original stairs, which were authorised. It was clearly the layout when the building was first constructed and, while it may be apparent from it that changes had been made, it is of no assistance in finding out the extent and nature of them or whether they were approved. Similarly perusal of other plans and land search records would yield little in the way of information as to alterations and approval for them.

13. There was a suggestion that an architect, Mr Tong Kin Hong, had been instructed to prepare plans for the plaintiff in December 1997, and their knowledge must date from then. I accept his evidence that the plans he prepared were of his own volition to try to persuade the plaintiff to use his services, and in any event, were drawn from basic site plans without the need for a close inspection of the property, which he had no authority to carry out.

14. I accordingly come to the conclusion that the plaintiff had no knowledge of either the existence or extent of the unauthorised structures prior to their architect reporting to them in March 1998, that being a reasonable time for such an inspection taking place, after the tenant had vacated and a detailed examination could be done. At the most they may have had suspicions as to the cockloft, but the evidence does not support any such suspicions as to the rest. On the other hand, the defendants had full and complete knowledge of all the alterations which had been carried out during the tenancy of Tung Kong, at the very least through Mr Cheung Chak Hung, their common director.

Effect of Clause 7

15. The relevant part of clause 7 of the agreement reads as follows:

"Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's Solicitors within 7 working days after the date of receipt of the respective title deeds of the 1st Premises and the 2nd Premises by the Purchaser's Solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence of the agreement)."

16. It is the submission of Mr Chong for the defendants that this clause is sufficiently wide to preclude the purchasers from raising out of time requisitions as to unauthorised structures, and in effect waiving their right to do so. Mr Tong, for the plaintiff, contends that this would have the effect of shifting the risk of a defective title, through the presence of illegal structures, to the plaintiff and that this cannot be the intended construction of the agreement, where any defects in title would at that stage only be those apparent from the title deeds themselves. It is not in dispute that there is an obligation on the vendor under the agreement to show and make a good title, neither can it be denied that the presence of substantial unauthorised building structures, and the risk of action by the Building Authority, will prevent a vendor from giving a good title on completion. The question now is: can the vendor insist on the purchaser taking that defective title on the basis of having waived a right to raise requisitions?

17. I have been referred to a number of cases where similar clauses have been under consideration, and I hope I may be forgiven if I do not deal with them all here, many of them being decided on the particular facts in each case. I start from the proposition that it would be unconscionable for a vendor to rely on such a clause to make a purchaser accept a title with a defect of which the vendor was aware, but of which the purchaser was ignorant, at the time requisitions had to be raised, and the courts would be reluctant to construe the clause to give this effect. This was clearly stated by Lord Hoffmann in Jumbo King Ltd v. Faithful Properties Ltd & ors [1999] 4 HKC 707 where he says, at page 729:

"Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like. What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser. As is stated in Farrand, Contract and Conveyance (4th ed.) at p. 93, such conditions are "subject to the overpowering principle that the vendor must not mislead the purchaser in any way; this means that a sufficient indication of the risk must be given before the contract is made." This may be said to leave it unclear whether the "overpowering principle" is an aid to construction of the contract or something which operates outside the contract. It probably does not matter, although for my part I think it is better regarded as a matter of construction. Thus it is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew. No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do."

18. In this case it is significant that, in the draft of the formal agreement, the vendors had sought to include a clause limiting their obligations as regards unauthorised structures, and effectively shifting the risk to the plaintiff, and this had been deliberately deleted. I agree with Mr Tong that, although this cannot be used as an aid to construe the agreement, their attempt to limit their obligations had not been permitted, and they should not now be allowed to use clause 7 to a similar effect. Mr Chong relies in part on the decision of the Court of Final Appeal in Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 2 HKC 1, but I am of the view that the findings there do not help him. Once the court there had found that the defect was so minor that it did not go to the root of the title, the question of the limit to the purchaser's right to make requisitions became academic and was not pursued, although Litton PJ did remark, at page 9, that:

"....there are undoubtedly cases in the books where a clause restricting inquiries into the vendor's title has been held not to be a bar to relief when the purchaser discovered from other sources that the proffered title was worthless."

19. I agree with Mr Chong to the extent that clause 7 could be wide enough to cover requisitions not just arising out of the title deeds, but I do not find any of the cases to which he has referred me to be authority for the proposition that it can do so here, where there is a severe defect within the knowledge of the vendors, but not known to the purchaser. There would in such a case have to be clear language including acceptance by the purchaser of the risks, and providing that the title itself is deemed to be accepted. There is no evidence here that the purchaser knew of the defects, either at the time of the agreement or within the time limited for requisitions, merely a suggestion that they might or ought to have been put on enquiry as to at least one structural alteration.

20. But Mr Chong takes the matter one step further, and says that such unauthorised structures should be discoverable to the plaintiff upon their using due diligence. In support of this proposition he relies on Hillier Development Ltd v. Tread East Ltd [1993] 1 HKC 285, where Penlington JA says, at page 293, after referring to a number of cases:

"I am satisfied that those authorities only go to the proposition that where a [purchaser], having used due diligence, is unaware of some defect in the vendor's title, the time limit imposed in the agreement does not run against him."

21. What amounts to due diligence in the context of a commercial property transaction in Hong Kong? I have to say immediately that I am constantly surprised, in the many cases of this type I have seen, how rarely purchasers of any property in Hong Kong arrange for a structural survey of the property either before or at the time of their agreement to purchase. In other countries it is done almost as a matter of course, if only to ensure that the property being purchased is structurally sound, but here it seems to be the exception rather than the rule. But because it is the exception and not normal procedure here, I find it difficult to say that a purchaser has not used due diligence, as he is merely following the usual procedure. In any event, on the facts here, I am not satisfied that all the structural alterations would necessarily have been discovered, without a full disclosure by the vendors of the extent of the changes they had made over the years, and of those which had been made without approval. The two architects who have given evidence in this case both missed some of the alterations after a close examination of the building. I have already referred to those which the defendants' architect did not find, but he did discover another illegal staircase in the centre of the building which had gone entirely unnoticed by the plaintiff's.

22. I am accordingly far from satisfied that clause 7 assists the defendants for the reasons above.

Acceptance of title

23. From my findings as to the effect of clause 7 it is clear that neither do I subscribe to the proposition that the defendants' title had been contractually accepted by the plaintiff by failing to raise this requisition in time. Mr Chong, however, also submits that the conduct of the plaintiff's solicitors in requesting the title deeds on 12 March 1998 for them to prepare the assignment demonstrates that title had been accepted.

24. I have little sympathy with that submission. There is no evidence that they had any knowledge at that stage of the findings of their architect. The letter to the defendants' solicitors from the plaintiff's new solicitors was dated the same day, and the obvious inference is that that was the day on which they were informed of the architect's findings.

Bona fides of requisition

25. The last proposition on behalf of the defendants is that the plaintiff's requisition was made mala fides and in an effort to extricate themselves from a deal which, in the light of the falling property market, no longer made commercial sense, and for which there was evidence they did not have the resources to pay. As to the latter, Mr Chong points to the supplementary agreements in December 1997 and January 1998 postponing and reducing payments of the further deposits, and failure by the plaintiff to put their solicitor in funds for the balance prior to completion date. I consider it more likely than not that the reason for the supplementary agreements was a problem, which may well have been temporary, with cash flow. The evidence of Mr Tse Chun Kong of the plaintiff that it was merely because it was better to pay 5% rather than 10% I find unconvincing, but finding funds from their own resources at that stage is very different from raising them on completion, when they have the additional security of the property itself to assist them to do so. As to the failure to put their solicitors in funds before completion, this seems to me to be neutral. It is obvious economic sense not to incur interest unnecessarily by borrowing money before it is needed, nor to remove funds from interest bearing accounts. In any event, by the time of completion there had been the discovery of the illegal structures and correspondence between the parties' solicitors, in the light of which the plaintiff could be forgiven for assuming that completion was unlikely to take place. This would be reason enough not to take any steps to make available money for the transaction.

26. The fall in the property market during this period is sufficiently well known to be taken as read, and it can hardly be denied that anyone who was then a party to a contract to purchase an expensive property, worth considerably less than the price to be paid, would welcome an opportunity to be released from their bargain. But one must not confuse eagerness to avoid liability under a contract with a right to do so. If the purchaser has such a right in law, then whatever his motive for relying on that right, rather than proceeding with a bad bargain, is irrelevant. The vendors can either show and make a good title or they cannot. If they cannot, then the purchaser may be relieved of his liability under the contract, whether that is the result he desired or not. This is not a case where there is any evidence that the plaintiff had earlier knowledge but kept this in reserve until it was sure that the defendants could not remedy the situation. It was rather a case of the vendors having knowledge which they kept from the purchaser.

27. Whatever the motives of the plaintiff, I do not consider them relevant, insofar as they do not affect the rights they seek to enforce.

Conclusion

28. For the above reasons, I am of the view that the defendants were unable at the time of completion to give a good title to the property because of the unauthorised building works, and that the requisition as to those works was properly raised, within the terms of the agreement and has not been sufficiently answered. The plaintiff is therefore entitled to a declaration to that effect, and that the defendants have failed to show and give a good title to the property.

29. There will also be an order that the 1st defendant repays to the plaintiff the sum of $10,500,000.00, and the 2nd defendant repays the sum of $22,500,000.00, both sums with interest at 1% above HSBC prime rate from time to time from 19 March 1998 to the date hereof, together with the costs of investigating title of the properties, such sum to be assessed by a Master, if not agreed, and to carry interest at the same rate and for the same period.

30. I further make an order nisi that the defendants pay the costs of the plaintiff of these proceedings, to be taxed. The plaintiff is also entitled to a lien on the properties for the above sums, interest and costs. The defendants' counterclaim will be dismissed.