JUMBO KING LTD. v. FAITHFUL PROPERTIES LTD. AND OTHERS

CACV 180/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 180 OF 1998

(On appeal from HCMP 160/1998)

----------------------

----------------------

J U D G M E N T

----------------------

Godfrey, J.A. :

Introduction

1. This is an appeal from an order of Mr. Kenneth Kwok, S.C. (sitting as a Recorder of the Court of First Instance of the High Court) made on 9 July 1998, whereby he resolved a dispute between vendors and their purchaser in favour of the purchaser. The vendors now appeal, contending that the judge was wrong to have held, as he did, that the purchaser had been entitled to call off the contract on the ground that the vendors were unable to show title to certain parts of the property agreed to be sold. The purchaser contends that the judge was right; but it claims that, even if he was wrong, it was entitled to call off the contract on two other grounds, as to which the judge had rejected its contentions. Further identification of what are, therefore, the three issues which arise on this appeal must await a rehearsal of the facts of the case, to which I now turn.

The facts

2. The case concerns a building at 5-15 Hankow Road, Kowloon, now known as Hankow Centre, but which, when completed in or about 1968, was then called J. Hotung House. The building is described in the Third Schedule to a Deed of Mutual Covenant dated 1 May 1968 ("the DMC") as consisting of two self-contained parts, one part comprising the basement, ground, first, second, third and fourth floors and the piping service floor, and the other part comprising the fifth to sixteenth floors inclusive and the main roof. The floors first above-mentioned, together with the entrances, lobbies, corridors, staircases, landings, lavatories, lifts and lift motor rooms leading to and serving those floors (the commercial portion of the building), are therein called "the non-domestic floors". The other floors, together with the entrances, etc. serving those floors, are called "the domestic floors".

3. The first sale of a unit in this building was a sale by one Joseph Edward Hotung ("the developer") to one Cheng Ah Loong ("the first purchaser"). The first purchaser took Flat A5 on the sixth floor together with portion no. 11 of the main roof. More accurately, he took "one equal undivided seven hundred and twentieth part or share of and in" the land on which the building had been erected "together with the full right to the exclusive use occupation and enjoyment" of that flat and that portion of the main roof.

4. The assignment by the developer to the first purchaser was dated 1 May 1968 (the same date as that of the DMC to which I have already referred). The parties to the DMC were the developer and the first purchaser. Clause 1 of the DMC reads as follows :-

"1. Each of the parties hereto for himself and his executors administrators and assigns hereby grant unto each of the other parties hereto their or his respective executors administrators and assigns the full right and privilege to the exclusive use occupation and enjoyment and the rents and profits of the part of the said building and the said premises set out in the Second Column of the First Schedule hereto opposite to the respective names of the grantees as set out in the First Column of the said First Schedule TO THE INTENT that each of the parties hereto shall be entitled to the exclusive use occupation and enjoyment and the rents and profits of the part of the said building and the said premises so set out opposite to his name as aforesaid."

5. The First Schedule to the DMC, referred to in Clause 1, reads as follows:-

"THE FIRST SCHEDULE ABOVE REFERRED TO

____________________________________________________________
NAMES, ADDRESSES AND DESCRIPTIONS OF THE PARTIES HERETO AND THE SHARE OR SHARES HELD BY EACH PARTY		PART OR PARTS OF THE BUILDING ALLOTED
____________________________________________________________
CHENG AH LOONG (鄭亞龍) of No. 18 Ashley Road, 1st floor, Kowloon in the said Colony of Hong Kong Merchant (1/720th share)		FLAT "A5" on the SIXTH FLOOR and MAIN ROOF PORTION NO. 11 (1/720th share)
JOSEPH EDWARD HOTUNG of FLOOR		SHOP SPACES on the GROUND FLOOR
D'Aguilar Place, 6th floor, D'Aguilar Street Victoria in the said Colony of Hong Kong Merchant (719/720th shares)		SHOP SPACES on the FIRST FLOOR OFFICES on the SECOND FLOOR OFFICES on the THIRD FLOOROFFICES on the FOURTH FLOOR FLAT ROOF on the TENTH FLOOR LEVEL (482/720th shares)
		FLATS "A1", "A2", "A3", "A4", "A5" and "A6" on the FIFTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH, FOURTEENTH and FIFTEENTH FLOORS inclusive (60/720th shares) FLATS "A1", "A2", "A3", "A4", and "A6" on the SIXTH FLOOR (5/720th shares) FLATS "A1", "A4", "A5", and "A6" on the SIXTEENTH FLOOR (4/720th shares) FLATS "B1", "B2", "B3", "B4", "B5", "B6", "B7" and "B8" on the FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH, FOURTEENTH, FIFTEENTH and SIXTEENTH FLOORS inclusive (96/720th shares) FLATS "C1", "C2", "C3", "C4", "C5" and "C6" on the FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH, FOURTEENTH, FIFTEENTH and SIXTEENTH FLOORS inclusive (72/720th shares) MAIN ROOF PORTIONS NO. 1 to NO. 238 inclusive except the said NO. 11 above mentioned BASEMENT, PIPING SERVICE FLOOR and FLAT ROOFS on the MAIN ROOF"

6. On 29 August 1981, the developer wrote a letter to the Land Officer, Land Office, Hong Kong in the following terms :-

"Dear Sirs,

482/720th equal undivided shares of
and in Kowloon Inland Lot No. 8219
and the Extension thereto

I, Joseph Edward Hotung, am the owner of all those 482 equal undivided 720th part or shares of and in all those pieces or parcels of ground situate lying and being at Kowloon Hong Kong and registered in the Land Office as Kowloon Inland Lot No. 8219 and the Extension thereto and of and in the messuages erections and buildings thereon now known as J. Hotung House at 5-15 Hankow Road, Tsimshatsui, Kowloon, Hong Kong together with the exclusive right to the use occupation and enjoyment of all those the whole of the basement, ground, first, second, third and fourth floors and the piping service floor of the said J. Hotung House.

I am now desirous of selling the shops and the office units on the ground, first, second, third and fourth floors of the said building and for the purposes of such sale, the said 482/720th equal undivided parts or shares have been sub-divided into 482,000/720,000th equal undivided parts or shares and have been allocated to the various shops and office units the particulars of which are set out in the schedule annexed hereto.

I shall be obliged if you would kindly amend your record accordingly."

7. The Schedule to this letter sets out, as the letter states, the allocation of the (sub-divided) equal undivided parts or shares to the shop and office units in the building. No such shares were allocated to the basement floor or piping service floor, both expressed to be "designated as part of the Common Areas of the Commercial Portion".

8. On 1 September 1981, the developer (as "the First Owner") assigned to Shanghai Commercial Bank 7,399 equal undivided 720,000th parts or shares in the land on which the building was erected, and by a Sub-Deed of Covenant made on the same day between the same parties each of them granted to the other :-

"1. ..... the full right and privilege to the exclusive use occupation and enjoyment and the rents and profits of the part of the Commercial Portion set out in the Second Column of the Second Schedule hereto opposite to the respective names of the grantees as set out in the First Column of the said Second Schedule TO THE INTENT that each of the parties hereto shall be entitled to the exclusive use occupation and enjoyment and the rents and profits of the part of the Commercial Portion so set out opposite to his name as aforesaid."

9. By Clause 4(ii) of the Sub-Deed of Covenant it was provided as follows :-

"4(ii) Those portions of the Commercial Portion shown and coloured yellow on the floor plans hereto annexed being part of the premises to which the First Owner is entitled to the exclusive use occupation and enjoyment or any part or parts thereof may in future from time to time be designated by the First Owner to be common parts for the common use of all owners or the common use only of the owners entitled to the exclusive use occupation and enjoyment of the shop or office units on any one particular floor and such designation shall have effect accordingly until so designated the First Owner shall be entitled to assign the exclusive use occupation and enjoyment of any such spaces with any shop or office unit in the Commercial Portion."

10. None of the undivided shares were allocated to the flat roofs on the tenth floor or the flat roofs on the main roof. But the Second Schedule to the Sub-Deed of Covenant provides as follows :-

THE SECOND SCHEDULE ABOVE REFERRED TO

Names, address and descriptions of the parties hereto and the share or shares held by each Party	Part or Parts of the said premises allotted
1. JOSEPH EDWARD HOTUNG of 35, Deep Water Bay Road Hong Kong.	(a) All shops and units on the ground floor of the Commercial Portion save and except the shops on the ground floor specified hereunder; (b) the entirety of the first, second, third and fourth floors of the Commercial Portion including all shops and office units therein; (c) the flat roofs on the tenth floor and the flat roofs on the main roof of J. Hotung House; (d) all passages, landings, stairways and lavatories on the ground, first, second, third and fourth floors of the Commercial Portion save and except as may be designated common areas by the Sub-deed of Covenant or in accordance with the provisions herein contained.
2. SHANGHAI COMMERCIAL BANK LIMITED whose registered office is situate at 12 Queen's Road Central, Hong Kong.	All those shops Nos. G4 and G5A on the ground floor.

11. In the Schedule to the letter dated 29 August 1981 to which I have referred, and in the First Schedule to the Sub-Deed of Covenant, 5,112 of the sub-divided shares were allocated to shop G4 on the ground floor of the building, and 2,287 of those shares were allocated to shop G5A, a total of 7,399 such shares. The developer thus retained 474,661 of such shares. The complete allocation was as follows :-

"Basement Floor designated as part of the Common Areas of the Commercial Portion		Shares Nil
Ground Floor
G-1 G-2 G-3 G-4 G-5A G-5 G-6 G-7 G-8 G-9/9A G-10 G-11 G-12 G-13 G-14 G-15 G-16 G-17 G-18/19 & 19A G-20 G-21 G-22 G-23 G-24 G-25 G-26 G-27		4009 2786 2599 5112 2287 2503 4231 5450 4411 5095 5821 2691 5576 3168 2977 4189 2362 3191 15330 3895 7755 3623 3169 7728 2343 3451 2916
First Floor		145371
Second Floor
201-2 203 203A 203B 204 205 206-7 208 209 210, 211 & 213 212 214 215-6 217 218-220 221 222 223 223A 224 225 226 227 228-9 230		4561 752 945 638 2446 2544 6167 2599 2762 7198 3942 1534 4196 3023 6158 1575 4014 1285 1254 1806 2718 2718 1771 4161 1887
Third Floor
301 302 303 304 305 306-307 308 308A 309 310 311 311A 312-313 314 315 316 317 318 319 319A 320 320A 321 322 323 324 324A 324B 325 326 327 328 329-330 331		2567 1424 3030 1506 2318 5536 2506 1489 961 1252 2364 1226 5180 1776 2185 2167 2013 4173 1161 2276 1070 1159 926 2346 1299 1622 2120 1094 2765 1159 1855 1738 4205 2185
Fourth Floor
401-2 403-4 404A, 424 405 406 407-8, 414-5, 417-421 & 432 409 410 411 412 413 416 422 423 425-427 428-430 431		4065 4657 3360 1122 3705 21268 2574 3307 1741 3321 1766 1801 3740 3821 5699 5925 782

Piping Service Floor (designated as part of the Common Areas of the Commercial Portion

Commercial Portion

Basement Floor Ground Floor First Floor Second Floor Third Floor Fourth Floor Piping Service Floor		Nil 118,668 145,371 72,654 72,653 72,654 Nil
		_______
Overall Total :		482,000"

12. It will be observed that while shares are allocated to specific units on the ground, second, third and fourth floors, there is no allocation of any such shares to any specific unit on the first floor.

13. The contract with which we are now concerned was made on 14 October 1997. By this date, Faithful Properties Ltd ("the first vendor") had become entitled to 6,734 of the sub-divided shares; Target Power Ltd ("the second vendor") had become entitled to 9,861 of such shares; and Good Nation Development Ltd ("the third vendor") had become entitled to 10,916 of such shares.

14. The first vendor contracted to sell to the purchaser its 6,734 sub-divided shares, together with the right to the exclusive use, occupation and enjoyment of units 95 and 96 on the ground floor of the building. It will be recalled that there had been allocated to unit 95 2,503 such shares and to unit 96 4,231 such shares (a total of 6,734 shares).

15. The second vendor contracted to sell to the purchaser its 9,861 sub-divided shares, together with the right to the exclusive use, occupation and enjoyment of units 97 and 98 on the ground floor of the building, and also of (1) two utility rooms, both on the third floor of the building and known as units U3A and 302A; (2) the flat roofs on the tenth floor of the building; and (3) the flat roofs on the main roof of the building. It will be recalled that there had been allocated to unit 97 5,450 undivided shares and to unit 98 4,411 such shares (a total of 9,861 shares). No such shares had been allocated to either of the utility rooms to which I have referred; nor to the flat roofs on the tenth floor; nor to the flat roofs on the main roof of the building.

16. The third vendor contracted to sell to the purchaser its 10,916 sub-divided shares, together with the right to the exclusive use, occupation and enjoyment of units 99, 99A and 910 on the ground floor of the building, and also of two utility rooms, one on the ground floor (known as unit 213A and one on the fourth floor (known as unit 413A). It will be recalled that there had been allocated to units 99/9A 5,095 sub-divided shares and to unit 910 5,821 such shares (a total of 10,916 shares). No such shares had been allocated to either of the two utility rooms to which I have referred.

17. The purchase price for the property which the vendors (collectively called "the vendor") agreed to sell to the purchaser was expressed to be HK$257,500,000, and the completion was agreed to take place on or before 26 January 1998.

18. The agreement contained the following relevant provisions :-

"10. 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 ten (10) working days after the receipt of the title deeds 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) and the Purchaser shall be deemed for all intents and purposes to have accepted the title of the Property and if the Purchaser shall make and insist on any objection or requisition in respect of the title or otherwise which the relevant Vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his Solicitors not less than five (5) days notice in writing to annul the sale in which case, unless the objection or requisition shall have been in the meantime withdrawn, the sale shall at the expiration of the notice be anulled the Purchaser being in that event entitled to a return of the deposits and all other monies paid to the Vendor hereunder forthwith but without interest, costs or compensation and the Purchaser shall return to the Vendor all title deeds, documents and any other papers furnished to the Purchaser or his solicitors by or on behalf of the Vendor in connection with the sale and purchase hereunder.

.....

18(e) The Vendor does not warrant or represent that each and every fixture, fitting, erection and structure (if any) on the Property or any part thereof is erected in all respects in compliance with the Building Ordinance and/or its subsidiary legislation and/or any other legislation or regulation. The Vendor shall be under no liability whatsoever if it is discovered at any time (whether before or after Completion) that at the date hereof or before Completion, there is any fixture, fitting, erection or structure in or to any part of the Property which is in contravention of the Building Ordinance and/or its subsidiary legislation and/or other legislation or regulation, the Vendor shall not be held responsible for the demolition, alteration, removal, reinstatement, reinforcement and/or any other works relating to such illegal fixture, fitting, erection or structure or for any costs or expenses of or incidental thereto whether or not such works are required by the Building Authority or other authority or body or otherwise. The Purchaser shall not be entitled to raise any requisition or objection or to rescind this Agreement or to annul the sale or to claim any compensation or damages from the Vendor by reason of or in connection with any such contravention.

.....

19. Notwithstanding anything to the contrary herein, the Purchaser shall be deemed to have duly inspected the Property prior to the signing of this Agreement and the Purchaser expressly declares that he is fully aware that he is purchasing the Property in its present state and user thereof and shall not make any objection as to title or otherwise or raise any requisition thereto or in connection therewith. The Property is and will be sold on an 'as is' basis. Without prejudice to the generality of the foregoing no warranty is given by the Vendor on any of the following matters, namely :-

(a) The physical state and condition, quality or fitness of the fixtures fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the Building;

(b) The physical state and condition of the Property and the Building;

(c) The permitted user of the Property; and

(d) The redevelopment potential of the Property."

19. On 22 October 1997, the vendor's solicitors sent to the purchaser's solicitors the title deeds and documents, in accordance with the usual practice. On 3 November 1997, the purchaser's solicitors raised (among others) the following requisition :-

"It appears that no undivided shares were allotted to Units U3A, 302A, 213A, 413A, Flat Roof on 10th Floor and Flat Roof on the Main Roof of the building. Kindly show how these properties can be validly assigned to our client."

20. Before that requisition had been answered, the purchaser's solicitors called off the contract. Their letter, dated 14 November 1997, reads as follows :-

"It is discovered by our client that the cocklofts in the said properties are unauthorized structures. Under the existing Sale and Purchase Agreement dated 14th October, 1997, your clients are obliged to show good title to the said properties. The existence of the these unauthorized structures renders your clients' title defective. Firstly, these unauthorized cocklofts are liable to be demolished by the Buildings Authority. As a consequence thereof, the size of the property which your clients have agreed to sell to our client will be substantially reduced and your clients will in effect compel our client to accept property substantially different from that agreed in the Agreement. This is of course unacceptable by our client who will be substantially prejudiced by the difference. Furthermore, these unauthorized structures may also give rise to enforcement action by the Government (including the exercise of the Government's right of re-entry) under the relevant Government Leases. It is also noted that the Deed of Mutual Covenant of Hankow Centre expressly prohibits structural alteration to any part of the building. These unauthorized structures may also give rise to action by the co-owners of the building and/or the manager thereof.

All the rights mentioned above are neither fanciful nor remote particularly so due to the substantial size of the cocklofts in question.

Furthermore, up to the moment hereof, you have still failed and/or refused to assure us as to how Units U3A, 302A, 213A, 413A, Flat Roof on 10/F. and Flat Roofs on the Main Roof of the building can be validly assigned to our client as no undivided shares of and in the building and the land are allotted or attached to them. Our client should not be compelled to accept just the exclusive right to use these Units and Flat Roofs but without the corresponding undivided shares. Nor are your clients legitimately entitled to assign just the exclusive right but without the corresponding undivided shares.

Moreover, The Deed of Mutual Covenant of the building Memorial No. 624356 has not even mentioned about the abovesaid Units at all. Indeed, under the said Deed, Joseph Edward Hotung was granted exclusive right to, inter alia, offices on the 2nd Floor and offices on the Fourth Floor. Utility rooms are obviously not offices but are more appropriately regarded as common area or common facilities for the relevant floors or building. It follows that these Units should since become and remain to be part of the common area of the building. As such, it is extremely doubtful whether your clients have exclusive right and possession to these Units capable of being assigned away. Even if (which is denied) these Units are regarded as Reserved Area, it is extremely doubtful whether your clients (as opposed may be to Mr. Joseph Hotung) shall have the legitimate right to assign them away.

It is therefore considered that the present defects in title are not one that can be remedied before completion. In particular, as for the unauthorized cocklofts, even if they are reinstated, your clients are not entitled to compel ours to accept property substantially different from that agreed to be sold under the existing Agreement. Obviously, our client will be seriously prejudiced by the difference.

Hence, in view of such title defects and/or your clients' fundamental breach and/or repudiation which defects and/or breach and/or repudiation is unlikely (if not impossible) to be remedied before Completion, our client is not required to wait until completion in order to exercise its right of rescission. Notice is hereby given to you that our client hereby exercises its right of rescission and requires your clients to refund the deposit to our client forthwith."

(There had been no previous mention of the cocklofts, or of the contention that the utility rooms were "common areas".)

21. On 18 November 1997, the vendor's solicitors replied as follows :-

"We refer to your letter dated 14th November, 1997 and are most surprised by the allegations therein.

As you have rightly admitted, our clients are only required to prove good title to the properties before completion. It is certainly premature to say that the matters raised by you in the said letter constitute any defect in title or if they do constitute any defect in title (which is denied) that they cannot be remedied before completion.

Furthermore, the time for raising requisitions has expired and our clients are not, in any event, obliged to deal with any matters raised out of time. We would also remind you of the provisions of Clause 19(e) of the Agreement for Sale and Purchase dated 14th October, 1997 ('the said Agreement') dealing with unauthorised structures.

As your client has failed to pay the further deposit of HK$25,750,000.00 on 15th November, 1997 in accordance with the terms of the said Agreement, our clients hereby exercise their rights under the said Agreement to terminate the said Agreement and the deposit of HK$25,750,000.00 already paid to our clients has been forfeited.

In the meantime, all our clients' rights and remedies in the matter including but not limited to recovering from your client further damages are hereby expressly reserved."

The proceedings below

22. On 13 January 1998, the purchaser instituted proceedings against the vendors, under s.12 of the Conveyancing and Property Ordinance, Cap. 219 for resolution of their differences over the matter.

23. On 9 July 1998, at the conclusion of a hearing lasting 3 days, the judge held, in substance, that the vendors had failed to show that they could assign to the purchaser the exclusive right to the use occupation and enjoyment of the four utility rooms, the flat roof on the tenth floor and the flat roofs in the main roof, since none of the sub-divided shares had been allocated to these parts of the commercial portion of the building. But he held that the purchaser's objection to the title on the ground that the utility rooms were common areas had been raised out of time; and that the purchaser had not been entitled to use its (alleged) discovery of the unauthorised nature of the cocklofts as an excuse to call off the contract without first raising a requisition or objection in relation thereto and giving the vendors an opportunity to answer it.

The issues on appeal

24. The points in issue on this appeal, now identified, may conveniently be called the "undivided shares" point, the "common areas" point; and the "cocklofts" point. I shall deal with them in that order.

The "undivided shares" point

25. Hong Kong land law is based on English land law; but, in relation to multi-storey buildings in multi-occupation, Hong Kong has developed a method of regulating the rights and duties of a multiplicity of owners among themselves. This involves each owner becoming what is called in English land law a "tenant in common" of the land on which the building is erected; each "tenant in common" is treated as having a quantified but undivided share in the land, and as being entitled, as an incident of his ownership of that undivided share, to the exclusive use of his unit in the building. A right to such exclusive use (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 HKLR 319.

26. But the vendors here do own interests in undivided shares in the land on which the building is erected, by virtue of the division and sub-division created in 1968 (as to the whole building) and in 1981 (as to the commercial portion) respectively, and of the assignments under which they acquired those interests.

27. They do not seek to show a title to the exclusive use of the utility rooms, etc., divorced from their interests in their undivided shares. They seek to show that the right to such exclusive use is one which the developer was entitled to and did grant as an incident to the grant of those interests.

28. They cannot do this unless the developer himself is to be treated as having been entitled to exclusive use of the utility rooms, etc. The developer cannot be so treated if he has granted the exclusive use of the utility rooms, etc. to others; nor if he has designated the utility rooms, etc. as "common areas" (in which case all the owners of all the undivided shares, or at any rate of the undivided shares in the commercial portion, are entitled to the non-exclusive use of such areas). But the developer can be treated as entitled to the exclusive use of the utility rooms, etc. if the relevant assignments and deeds of mutual covenant are to be read as granting to the developer, himself retaining undivided shares, rights, incident to his ownership of those shares, for the exclusive use of the utility rooms, etc. to the exclusion of the other owners of undivided shares. And if he can be so treated, he can, when disposing of his own undivided shares, confer on the grantee under such a disposition, as an incident to that grant, the exclusive use of the utility rooms, etc. to which he was himself entitled.

29. Now, under Clause 4(ii) of the Sub-Deed of Covenant (see above), it was provided that the developer ("the First Owner") was to be entitled to assign the exclusive use of any space coloured yellow (and not otherwise designated for non-exclusive use) with any shop or office unit in the commercial portion. That is what has happened here. In disposing originally of the units which the vendors here later agreed to sell to the purchaser (as he did in 1992) the developer assigned, as an incident to the grant of the undivided shares allocated to those units, the exclusive use of the utility rooms, etc. (all coloured yellow); and this was something which, in my judgment, he was perfectly entitled to do.

30. I would, therefore, differ from the judge on this point. Had that been the only point, the result would have been that the purchaser would have to be treated as having repudiated the contract, when it called off without waiting for an answer to its requisition. But it is not the only point and I must go on to consider the other two points which I have identified.

The "common areas" point

31. The utility rooms, etc. were never designated as common areas and this is, in my judgment, the short and correct answer to this objection to the title which (as the judge held) was, anyway, raised out of time and which, anyway, the purchaser gave the vendor no chance to answer. As the judge held, the point does not avail the purchaser.

The "cocklofts" point

32. "Unauthorised structures" are all too common in Hong Kong and present a real problem for conveyancers. A vendor whose title is, or may be, open to objection because there is, or may have been, erected on the property of which he is granting exclusive use to his purchaser some unauthorised structure is well advised to protect himself by precluding his purchaser, by contract, from raising any requisition or objection to the title based on an "unauthorised structure" point. Of course, if the vendor's contract is tricky or unfair; if by concealment or non-disclosure, he misleads the purchaser about the matter, it will be held that he has disqualified himself by his conduct from relying on any such provision.

33. In the present case, however, the vendors are in my opinion perfectly entitled to rely on Clause 18(e) of their contract with the purchaser (set out above). If the purchaser had raised, in time, an objection to the title based on the (alleged) unauthorised nature of the cocklofts, the vendors would have been entitled to reply that, by virtue of Clause 18(e), the purchaser was not entitled to take that objection to the title. There is nothing in the case, as it seems to me, which would justify a complaint by the purchaser that the vendors' conduct had been such as to disqualify them from relying on Clause 18(e). It follows that this point, too, does not avail the purchaser.

Conclusion

34. In the result, the purchaser must be held to have wrongfully repudiated the contract. We should allow the vendor's appeal; set aside the judge's order in favour of the purchaser; and make instead such order (including an order as to costs) in favour of the vendors as the parties agree we should make, or, in default of such agreement, as we think fit to make after hearing further argument (on a date and time to be appointed for that purpose through the usual channels).

Rogers, J.A. :

35. I agree that this appeal should be allowed. As set out in the judgment of Godfrey J.A., there are 3 major questions for consideration.

The absence of shares in respect of the utility rooms and the Flat Roof

36. The first question that arises is whether the fact that the Utility Rooms Unit U3A and 302A on the 3rd Floor, Flat Roof on the 10th Floor and Flat Roofs on the Main Floor, the Utility Room Unit 213A on the 2nd Floor and Utility Room Unit 413A on the 4th Floor are not referable to or accompanied by any corresponding undivided parts or shares of and in the Land and the Building prevents the right to the exclusive use thereof being assigned. The Learned Recorder below held that as a matter of law the exclusive right to these units could not be assigned because no undivided shares in the property had been allotted to these parts in either the Deed of Mutual Covenant or the Sub-Deed of Covenant.

37. The crucial part of the Recorder's judgment on this aspect is :

"In my judgment (which I believe is conceded by Mr Chow), the Vendor could not validly assign these units on their own as they had no corresponding share in land and (this is not conceded by Mr Chow) the Vendor's position cannot be improved or remedied or cured or affected by adding :

a. the exclusive right to use occupation and enjoyment of all those units, G7 and G8 on the Ground Floor, together with

b. those shopping units' corresponding 9,861/720,000th shares."

38. Quite simply that point as Godfrey J.A. has pointed out is erroneous. An undivided share is just what it says: it is an undivided share in the legal estate of the whole property. Without a Deed of Mutual Covenant, each co-owner of the property, that is those who hold undivided shares, would be entitled to the full use and enjoyment of the whole property. The Deed of Mutual Covenant governs the rights of the co-owners amongst themselves and regulates, amongst other things, the portions of the property in respect of which each owner would have the exclusive right of enjoyment. That exclusive right of enjoyment cannot be assigned on its own, but it has to be assigned together with a part interest in the legal estate.

39. This point was discussed in Lai Wing-ho and Another v Chan Siu-fong [1993] 1 HKLR 319, one of the cases relied upon by the Respondents. In that case, a co-owner had purported to assign part of the premises (a roof) of which he was entitled to exclusive possession but without any share in the ownership of the land. He then sold the rest of the premises (the flat underneath that roof) with his shares in the ownership of the land. What was at issue in that case was the validity of this second sale (the sale of the flat). Godfrey J.A. held that this second sale was valid as the vendor had transferred the right of exclusive possession of the second part (the flat) as part and parcel of the transaction whereby he had transferred his undivided shares. It was not strictly necessary to consider what were the rights of the "owner" of the first part (the roof). However, the judgment did go on to deal briefly with the position with regard to the roof. It was pointed out that a co-owner could not create or carve out a right of exclusive possession so as to bind the other co-owners and assign it separately. The reason for that is quite simply that the right of exclusive possession of any part of the premises could only arise out of the Deed of Mutual Covenant.

40. It follows, therefore, that for anyone to enjoy rights of exclusive possession of part of a property he must be a co-owner, in other words, the owner of undivided shares. On the other hand, provided there is a valid assignment of part of the legal estate there is no reason why the vendor who is selling his right of exclusive enjoyment to some part of the building and assigning part of the legal estate by transferring the undivided share could not assign his exclusive right of enjoyment of some other part of the building which he enjoys by virtue of the Deed of Mutual Covenant.

41. The present case is very far from a situation where an attempt has been made to convey a right of exclusive possession on its own. The purchaser would be a co-owner and entitled to such rights under the Deed of Mutual Covenant and the Sub-Deed of Covenant as had been transferred. Those rights would include the right of exclusive enjoyment of, for the sake of example, Utility Room Unit U3A on the 3rd Floor. It would not matter that neither of the Deeds had assigned undivided shares to that particular area. Once the purchaser became a co-owner, he could still enjoy the right of exclusive possession arising under the Deeds because he was entitled to the property.

42. Whereas it is clear that there might be difficulty if the purchaser wished to transfer the right of exclusive possession of, say, Utility Room Unit U3A on the 3rd Floor on its own and without any of the undivided shares that is not what is being done here.

Utility Rooms - Common Areas

43. The next point taken by the Respondent is that the Vendors did not have the right to exclusive possession of the four Utility Rooms which were contracted to be sold but that these Utility Rooms were part of the common areas under the Deed of Mutual Covenant.

44. On this aspect, the Recorder below agreed with the Respondent but held against it because the objection had been taken too late and the Vendors had not been given an opportunity to answer any requisition in this regard.

45. On first reading, the Respondent's objection would appear to be attractive. The First Schedule of the Deed of Mutual Covenant identifies those areas in respect of which Joseph Edward Hotung, the original vendor, would enjoy exclusive possession. It identifies the shop spaces on the ground floor, shop spaces on the first floor, offices on the second floor, offices on the third floor, offices on the fourth floor. When the plans are considered, it can be seen that on those plans there is a distinction drawn between various parts of those floors. For example, on the third floor plan, the two Utility Rooms are shown in the centre of either end of the building. As a matter of geographical location, as best can be made out from the plan, the Utility Rooms do not appear to be immediately physically adjacent any of the offices but are sandwiched between the areas allotted for the access to the upper floors of the building, namely there appear to be staircases and lift shafts between the Utility Rooms and the nearest offices. The Utility Rooms lead straight on to the corridors.

46. I do not consider that it is correct to regard the Utility Rooms as offices or parts of offices. Thus Clause 1 and the First Schedule of the Deed of Mutual Covenant does not, on the bare wording, give the right of exclusive use of the Utility Room to Joseph Edward Hotung.

47. If, of course, the wording of the First Schedule were that the whole of the floors were to be allotted to the exclusive use of Joseph Edward Hotung, no difficulty would arise.

48. In my view, however, the answer to this objection lies in the proper construction of the Deed of Mutual Covenant.

49. Clause 3 of the Deed provides as follows :-

"3. Each owner shall hold his part of the said building and the said premises subject to and with the benefit of the following rights privileges and obligations namely :-

(a) Full right and liberty to go pass and repass over and along the entrances, staircases, landings, passages and lifts in the said building and the roads and footpaths within the said premises for all purposes connected with the proper use and enjoyment thereof."

50. It is in particular in relation to the words "proper use" that, in my view, attention should be drawn and has possibly been overlooked. Clause 4 of the Deed of Mutual Covenant requires each owner to be bound by and observe the covenants, provisions and restrictions contained and set out in the Deed of Mutual Covenant and in the Third Schedule.

51. Paragraph (a) of the Third Schedule reads as follows :-

"The said building consists of two separate self-contained parts. One part comprising the Basement, Ground, First, Second, Third and Fourth Floors and the Piping Service Floor is for non-domestic use and such floors together with the entrances lobbies corridors staircases landings lavatories lifts and lift motor rooms leading to and serving such floors and the equipment and fittings provided for such floors are hereinafter called 'the non-domestic floors' and the other part comprising the Fifth to Sixteenth Floors inclusive and the Main Roof is for domestic use and such floors together with the entrances etc. are hereinafter called 'the domestic floors'."

52. Hence, even if one were to assume that Cheng Ah Loong, the original purchaser of Flat A5 on the 6th floor and signatory of the Deed of Mutual Covenant, were to have the benefit of, for example, the liberty to pass and repass over all passages in the building, that would be limited to proper use which in the context of the basement to 4th floors would be non-domestic use. Hence, the owner of a flat in the domestic part of the building would have no right of access to any of the non-domestic floors except for legitimate non-domestic use. The basement to 4th Floors consisted entirely of shops and offices and areas which were apparently ancillary thereto, as for example corridors, lifts and other mechanical equipment and Utility Rooms. Since Joseph Edward Hotung had under the Deed of Mutual Covenant the right to the exclusive use occupation and enjoyment of the shops and offices on these floors, the only people who would have access to those shops and offices and the entrances, staircases, landings, passages, lifts and so forth on those floors would be either Mr. Hotung or any person having legitimate business in and, therefore, invitees to those places. Even if a Utility Room is not an office or part of an office, it seems to me that in the context in which it is used in the Deed of Mutual Covenant it is ancillary to the offices, or perhaps more accurately, the non-domestic floors of which the offices are the only relevant part. In effect, therefore, as between the parties to the Deed of Mutual Covenant, Mr. Hotung enjoyed the right to exclusive use and occupation of, amongst other things, the Utility Rooms on the 2nd and 3rd floors.

53. When it came to the Sub-Deed of Covenant the Utility Rooms were treated in the same way as the corridors. In Clause 4(ii), it was said that :-

"Those portions of the Commercial Portion shown and coloured yellow on the floor plans hereto annexed being part of the premises to which the First Owner is entitled to the exclusive use occupation and enjoyment or any part or parts thereof may in future from time to time be designated by the First Owner to be common parts for the common use of all owners or the common use only of the owners entitled to the exclusive use occupation and enjoyment of the shop or office units on any one particular floor and such designation shall have effect accordingly until so designated the First Owner shall be entitled to assign the exclusive use occupation and enjoyment of any such spaces with any shop or office unit in the Commercial Portion."

54. In my view Joseph Edward Hotung, the First Owner, was entitled to enter into the Sub-Deed of Covenant in that form. In view of the fact that the First Owner has thus been entitled to the right to exclusive use and enjoyment of the Utility Rooms and there has been a clear chain of title, I consider that the objection on this ground has not been made out.

55. If it had been made out, as the Recorder below held, the objection was taken out of time and without giving the Vendor a chance to answer the same. The objection would therefore fail for that reason also.

The Cocklofts

56. In the Purchaser's solicitors' letter of the 14th November, the question of the cocklofts was raised. It was said that they were unauthorised structures and therefore liable to be demolished by order of the Building Authority. It was also said that there was a possibility of re-entry because of breach of the Government lease. The letter pointed out that even if the cocklofts were removed, there would still be a breach because that would render the size of the floor area of the premises being bought significantly less than that which the purchaser had contracted to buy in its present condition. This was one of the reasons upon which the purchaser sought to exercise its right of rescission there and then.

Clauses 18(e) and 19 of the Sale and Purchase Agreement

57. The Vendors' first answer to this is that they are entitled to rely upon Clause 18(e) which reads as follows :-

"18(e) The Vendor does not warrant or represent that each and every fixture, fitting, erection and structure (if any) on the Property or any part thereof is erected in all respects in compliance with the Building Ordinance and/or its subsidiary legislation and/or any other legislation or regulation. The Vendor shall be under no liability whatsoever if it is discovered at any time (whether before or after Completion) that at the date hereof or before Completion, there is any fixture, fitting, erection or structure in or to any part of the Property which is in contravention of the Building Ordinance and/or its subsidiary legislation and/or other legislation or regulation, the Vendor shall not be held responsible for the demolition, alteration, removal, reinstatement, reinforcement and/or any other works relating to such illegal fixture, fitting, erection or structure or for any costs or expenses of or incidental thereto whether or not such works are required by the Building Authority or other authority or body or otherwise. The Purchaser shall not be entitled to raise any requisition or objection or to rescind this Agreement or to annul the sale or to claim any compensation or damages from the Vendor by reason of or in connection with any such contravention."

By reason of Clause 19 and the Sale and Purchase Agreement, the Purchaser was deemed to have inspected the property prior to signing the Agreement and declared itself to be satisfied with the state of the property.

58. On the face of Clause 18(e), the Plaintiffs would appear to have good grounds for saying that the contract was made upon the basis that whatever erections or structures were on the premises, whether they complied with the Buildings Ordinance or not and whether they were liable to be demolished or removed, the Purchaser was unable to complain about the same and was required to take the property with such erections and structures. In my view, Clause 18(e) would clearly cover cocklofts if they were present on the premises, moreover, given the fact that cocklofts do not appear to be a rarity in Hong Kong buildings, the reader of Clause 18(e) would, in my view, very possibly think in terms of the cocklofts being covered.

59. It is the Plaintiff's case however that the Defendants are not entitled to rely upon Clause 18(e) because of their failure to disclose defects in title of which they knew or should have known. In support of this, they rely upon the rule of equity which precludes a vendor relying on general exclusion clauses unless full and frank disclosure is made. In particular, reference is made to the case of Rignall Developments Ltd. v. Halil [1987] 3 All ER 170. In that case, a property had been improved with the aid of Council funds. Any owner for the time being of the property was likely to be required by the Council to reimburse the amount of those funds if the property were to be sold. The Council had registered its interest on the register of local land charges. The Vendor in that case relied upon the General condition in that case whereby the purchaser was deemed to have made local searches and inquiries and to have knowledge of all matters that would be disclosed thereby and was purchasing subject to those matters. Millett, J. (as he then was) held that the Vendor could not rely upon that Clause in those circumstances because the solicitor's conveyancing file contained a copy of the entries on the register of the local land charges. The fact that the solicitor may, or may not, have read that or have been conscious of that at the relevant time did not matter. The solicitor was deemed to have knowledge of what was in the conveyancing file and the knowledge of the Vendor's solicitor was to be treated as that of the Vendor. Millett, J. referred to, what he described as the well-established rule of equity that :-

"..... if there is a defect in title or incumbrance of which the vendor is aware, the vendor cannot rely on conditions such as those in the present case unless full and frank disclosure is made of its existence."

60. The Judge then went on to refer to the leading authority of Nottingham Patent Brick and Tile Co. v. Butler (1885) 15 QBD 261 and he cited the following passage from p.271 :-

"The 4th condition provides that the property is sold subject to any matter or thing affecting the same, whether disclosed at the time of the sale or not. Such a condition, however, does not relieve the vendor from the necessity of disclosing any incumbrance or liability of which he is aware, but simply protects him if it should afterwards turn out that the property is subject to some burden or right in favour of a third person of which he is unaware ... It would be nothing short of a direct encouragement to fraud if a vendor were at liberty by a condition of this kind to sell to a purchaser as an absolute and unburdened freehold a property which he knew to be subject to liabilities which would materially reduce its market value ... In honesty and in law alike he was bound to give the purchaser full and fair information what it was that he had for sale, and was inviting him to buy, and having failed to do so, he cannot insist upon the bargain procured by the suppression of material facts affecting the nature of the subject of sale. I entirely acquit the defendant of anything like intentional misconduct, but in the preparation of the particulars of sale he unfortunately relied upon his solicitor, who, as I cannot help believing, was under the mistaken impression that he could better the position of the vendor by abstaining from making himself acquainted with the contents of the earlier deeds in his possession, and open to his perusal."

61. In the Nottingham Patent Brick case, the clause in question related to arrangements which had been entered into with regard to laying pipes along a particular road and the clause then had the general exclusion at the end. The general exclusion was sought to be used by the vendor to cover a restrictive covenant which governed the land in question and prevented the land being used as a brick yard. The Plaintiff's name in that case clearly showed that it was likely to be interested in operating such a premises. In that case, the vendor himself had alerted the purchaser to the possibility of such a restrictive covenant but his solicitor had denied its existence, again, without familiarising himself with the contents of his conveyancing file. The vendor was saddled with knowledge and therefore responsibility, based not upon what he actually knew but based upon the knowledge that his solicitor ought to have had if he had read the conveyancing file properly. The constructive knowledge of the solicitor was thus inputed to the vendor.

62. It is true that in the first sentence of that quotation, Wills, J. referred to the clause simply protecting the vendor in case it should afterwards turn out that there is some burden of which he (the vendor) was unaware but the burden of the proposition both as expounded by Wills, J. and by Millett, J. was that the vendor when relying on a broad exemption clause was required to disclose any incumbrance of which he was aware either actually or constructively.

63. The work Hong Kong Conveyancing Law and Practice, Vol. I by Judith Sihombing and Michael Wilkinson stresses at p.v4, paragraph 17, the doctrine covers defects in title of which the vendor has actual or constructive knowledge. A more recent authority is cited for this same proposition.

64. Whilst this matter has given me some concern, I have come to the conclusion that the Vendors are not entitled to rely upon Clause 18(e) for the following reasons.

65. I bear in mind that the Clause contains more than simply a general exclusion of liability in respect of a broad range of defects but specifically refers to any erection or structure which might be in contravention of the Buildings Ordinance. As I have indicated above, this goes further than being a mere reference to defects in title but draws attention to structures. A cockloft is clearly an erection or structure but although I have had my doubts about it, I have come to the conclusion that the wording of the Clause does not identify the cocklofts with sufficient particularity to take it out of the general exceptions category.

66. I do not consider that the facts in relation to this matter have been fully or sufficiently explored. The judgment below proceeds upon the basis that the cocklofts were illegal and in the face of an absence of evidence to the contrary that was probably the only basis on which the matter could be dealt with. There is no finding by the Recorder below that the Vendors knew or should have known of the defect in title in particular it is unknown when and by whom the cockloft was erected. The most telling point perhaps would be that the Vendors' submissions seek to argue that the Purchaser should have been put on notice to make requisitions by reason of the occupation permit, the Deed of Mutual Covenant, the Sub-Deed of Covenant and the floor plans attached to the assignments. Certainly, the submissions made by the Vendors come dangerously close to suggesting that these documents which, were in the Vendors' possession, would have given the means of knowledge to, or at the very least put on enquiry, any person looking at them that the cocklofts were unauthorised. The Recorder put it:

"There is no suggestion that the non-disclosure is innocent."

67. In normal circumstances, I would consider that that puts the onus the wrong way round, placing it on the Vendor to establish innocence rather than on the Purchaser to establish knowledge, actual or constructive. However, in the circumstances of the submissions being made on the part of the Vendor, I consider that the approach is justified.

68. There must therefore be strong reason to consider that the difficulties with regard to the cocklofts should have been brought to the attention of the purchaser and that the vendor is not therefore entitled to rely on Clause 18(e) which, in the circumstances, is too broad and non-specific to be of avail to the vendor. Whilst I have doubts about the matter particularly because I feel the facts have not been fully explored, I would therefore not disturb the Recorder's finding in this respect.

Lateness in raising the objection

69. By the first of the two Clauses which are numbered 10 in the Sale and Purchase Agreement, the purchaser was required to raise any requisitions within 10 working days after receipt of the title deeds. There is no dispute that the letter of 14th November 1997 came after that time. The purchaser did not rely upon any facts as giving rise to any reason as to why the time limit should be ignored or extended. In my view, the objection on the ground that the cocklofts were illegal structures should have been raised as a requisition. Since the Vendors were not given any opportunity to answer the objection raised, I consider that the Recorder below was correct in holding that the purchaser was not entitled to rely upon this ground to rescind the contract.

Mortimer, V-P :

70. I also agree that this appeal should be allowed. I have had the opportunity of considering both earlier judgments in draft.

71. On the "undivided shares" point, I agree with those judgments.

72. As to the "common areas" point, the utility rooms etc were never designated as common areas but even if they are to be regarded as such, for the reasons given by Rogers JA, the objection to the title on this ground is not made out. In any event, I would also hold that the Recorder was right in deciding that the objection was raised out of time without giving the vendor the opportunity to answer so that the point "does not avail" the purchaser.

73. The "cocklofts point" is more difficult. Again, however, the objection was not raised in time. Had it been raised timeously, in my judgment, clause 18(e) of the Sales and Purchase Agreement is sufficient to protect the purchaser. Like Godfrey JA, I would hold that there was nothing demonstrated in the vendor's conduct such as would prevent them from relying upon this provision.

For these reasons, I would allow the appeal and set aside the judge's order. In the absence of agreement between the parties, the appeal should be re-listed for further argument upon the orders that we should make.