LUCKY DRAGON CORPORATION LTD v. SPEEDY VANTAGE LTD

CACV 79/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 79 OF 2009

(ON APPEAL FROM HCMP NO. 778 OF 2008)

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BETWEEN

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was the defendant’s appeal from an order dated 23 March 2009 of Chu J. The matter before the judge was a vendor and purchaser summons relating to the sale and purchase of a property known as Ground Floor, 4 Elgin Street (“the property”). The judge held, inter alia, that the defendant had not shown good title to the property and ordered the defendant (the vendor) to return the deposit paid to the plaintiff (the purchaser). At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The main issue below was whether the defendant was able to show a good title to the property notwithstanding certain unauthorised building works to the property.

4.  The provisional sale and purchase agreement dated 18 January 2008 provided for the sale and purchase of the property at the price of $13 million, the payment of an initial deposit of $500,000 upon the signing of the provisional agreement, $800,000 upon the signing of the formal agreement on 4 February 2008 (“the agreement”) and the balance on completion scheduled for 3 April 2008. About two weeks prior to the provisional agreement, a director of the plaintiff, a Mr Ng, had visited the property.

5.  Under the agreement, the defendant was to give a good title to the property and to show and prove such title. Clause 12 then provided for the delivery of any requisition or objection to title to the defendant’s solicitors within seven working days after the date of the receipt of the title deeds by the plaintiff’s solicitors and any failure to deliver the requisition or objection would be deemed to be a waiver of the rights to raise any requisition or objection on title.

6.  Amongst the title deeds delivered to the plaintiff’s solicitors on 31 January 2008 were the occupation permit, the deed of mutual covenant, the first assignment of the property with an assignment plan attached to it and a control card.

7.  Following the receipt of those documents, the plaintiff’s solicitors raised three requisitions none of which was directed at unauthorised building works. There followed correspondence arising from the requisitions. The last letter in this series from the plaintiff’s solicitors was dated 27 February 2008. In response, by letter of 29 February 2008, the defendant’s solicitors enclosed “Drawing No.1/6” of the approved building plans (“the plan”) which contained the floor plans of the lower ground floor, the upper ground floor, and cockloft for the 2 tenement houses to be erected at nos. 2 & 4, Elgin Street & no. 47 Peel Street. About four weeks later, the plaintiff’s solicitor sent a draft assignment to the defendant’s solicitors. Pausing here, it is relevant to note that the approved building plans comprised six drawings but only one of the six (i.e. the plan) was provided to the plaintiff on 29 February 2008.

8.  Several days prior to the completion date stipulated in the agreement, Mr Ng found two notices dated 18 and 25 March 2008 attached to the gate of the property. These had been issued by ISS EastPoint Property Management Ltd, an agent of the Building Authority stating that ISS EastPoint had been appointed by the Building Authority to inspect the property in relation to a complaint received and accordingly wished to have access for that purpose. Mr Ng immediately advised the estate agent and the plaintiff’s solicitors.

9.  On inspection on 31 March 2008, ISS EastPoint found unauthorised building works on the property. It is common ground that under the approved building plans, the property formed part of a two-level unit comprising not only the property but also a cockloft above it, that the only access to the cockloft was by an internal staircase situated within the property with a corresponding stairwell of about 33 sq. ft. in the ceiling of the property and, that the floor of the cockloft did not extend to the external wall of the building but to a 1/2 height parapet wall running across the entire width of the cockloft between a pair of pillars such as to create a void of about 75 sq. ft.between the parapet wall and the external wall of the building fronting Elgin Street.

10.  The unauthorised building works comprised (1) the removal of the internal staircase and the slabbing over of the corresponding stairwell with concrete/cement; and (2) the extension of the floor of the cockloft over the void to the external wall of the building facing Elgin Street with concrete/cement such that the property and the cockloft became separate floors. The extended floor thus formed part of the ceiling of the property.

11.  Following the inspection, correspondence ensued between the solicitors. The plaintiff’s solicitors requested that completion be postponed for a month to enable the matter to be resolved. The defendant, however, was only prepared to postpone completion for a few days, to 8 April 2008.

12.  The plaintiff commissioned Savills to prepare a report while, in June 2008, the defendant engaged its own architect. Meanwhile, the plaintiff’s solicitors raised a requisition concerning the unauthorised building works on 31 March 2008 (“the requisition”) and, on 2 April 2008, they wrote to the Buildings Department seeking confirmation as to (a) whether any unauthorised alterations existed in the property; and (b) whether any building orders would be made.

13.  Completion did not take place on 8 April 2008. The plaintiff exercised its right to rescind the agreement by reason of the defendant’s failure to give good title to the property and sought a refund of the deposit. On 9 April 2008, the defendant exercised its right to rescind and forfeited the deposit of $1.3 million. The plaintiff then took out the vendor and purchaser summons which came before the judge. As noted above, the judge found in favour of the plaintiff. She held that the defendant had failed to give a good title to the property.

14.  On 10 April 2008, a few days after the postponed completion date, the Buildings Department replied, stating that ISS EastPoint found unauthorised building, namely:

“a.  Removal of the approved staircase connecting G/F and Cockloft and the stairwell slabbed over; and

b.  Ceiling void facing Elgin Street slabbed over.”

The letter went on to state that:

“It is our assessment that the unauthorised building works as listed above do not warrant Prioritised Enforcement Action in the light of the current enforcement policy.  Nevertheless, advisory letters will be issued to the owners of the premises concerned.”

This appeal

15.  Mr Lee who appeared for the defendant contended that the requisition raised on 31 March 2008 was out of time and, in any event, the risk of enforcement is fanciful.

16.  As a preliminary matter, Mr Lee advanced the suggestion that the present physical condition of the property and cockloft probably existed at the time the occupation permit was issued although he accepted that there was no firm evidence of it. The occupation permit was issued on the 27 January 1966. By the time the DMC came to be executed some five months later, on 7 June 1966, the building (comprising nos. 2 and 4 Elgin Street and no. 47 Peel Street) had been divided into 19 equal undivided shares.

17.  Dealing with this matter first, it is apparent from the first schedule to the DMC that one equal undivided share was allocated to each of the upper ground floor, the cockloft (front portion) and the cockloft (rear portion) at no. 4 Elgin Street. An assignment of the front cockloft was made on 2 December 1966, followed by assignments of the rear cockloft andthe ground floor on 1 March 1967 and 22 April 1967 respectively.

18.  Mr Lee submitted that at the very latest, by the time of the DMC, the unauthorised building works must have been completed and that it was probable that that was already the case at the time of the inspection which led to the issuance of the occupation permit on 27 January 1966. Ms Wong SC who appeared for the plaintiff drew attention to the fact that the plan supplied to the plaintiff on 29 February 2008 bears a stamp stating that it was approved on 27 January 1966. The plan contained the floor plans of the upper ground floor and the cockloft which showed them as forming a single unit.

19.  Such evidence as is before the court does not support the inference Mr Lee invites the court to make. Given that the plan was approved on the same day as the issuance of the occupation permit, it is unlikely in the extreme that as at the date of the occupation permit, the unauthorised building works had already been carried out.

Whether the plaintiff was entitled to raise the requisition

20.  It is common ground that a purchaser is entitled to raise requisitions out of time if they go to the root of title and the defect in the defendant’s title could not have been discovered had the purchaser used due diligence.

Root of title

21.  For present purposes, the issue is whether the slabbing over of the void goes to the root of title. As regards the rest of the unauthorised building works, namely, the removal of the internal staircase and the slabbing over of the stairwell, the judge found (and there is no appeal) that the plaintiff should have discovered those works had it used due diligence.

22.  Mr Lee’s argument was that even if reinstatement were required, the defect could be said to be of a peripheral nature. It was said that a decorative false ceiling of a nonstructural nature could be installed over that part of the property that falls within the void and so preserve and maintain the privacy and quiet enjoyment of the property. Mr Lee sought to derive assistance from the judgment of Nazareth VP in Mexon Holdings Ltd v Silver Bay International Ltd [1999] 3 HKC 756, 762 where enforcement of the requirements of the Building Regulations could be resolved in two ways, one of which involved expenditure only and which Nazareth VP did not consider went to the root of title.

23.  But unlike Mexon, any reinstatement order could not be resolved simply by carrying out work within the property itself. A necessary corollary of Mr Lee’s argument would be the removal of part of the floor area of the front cockloft which is in separate ownership and which would significantly reduce the usable floor area of the front cockloft. Comparing the plan and the assignment plan attached to the first assignment of the front cockloft, it may amount to some 20% or more. More importantly, as Ms Wong submitted, the effect of enforcement action would be forced co-habitation between the owners of the property and the front cockloft when sole and exclusive possession of the property was the subject matter of the agreement.

24.  Moreover, a false ceiling already appears to exist and it cannot be suggested that enforcement action would only involve the removal of that section of the false ceiling and its replacement by the installation of a new one. Nor could the relevant works be carried out exclusively within the property itself since they would involve the removal of part of the actual ceiling of the property presently concealed by the false ceiling. In my view, on the facts, I have no doubt that enforcement action would go to the root of title.

Due diligence

25.  Mr Lee submitted that had the plaintiff exercised due diligence, it would have become aware of the parapet wall on the cockloft and consequently the void, at the latest, after it had been provided with the plan at the end of February 2008. While the plan disclosed the existence of a staircase situated within the property, I agree with Ms Wong that the existence of a parapet wall and the void cannot readily be discerned from the plan. First, it is relevant to note that the covering letter enclosing the approved plan was couched in these terms:

“2.  We repeat that there has been no doubt to the identity of the captioned property …we …enclosed (sic) herewith certified copy of the building plan of the building which the captioned property forms part, details of the captioned property are properly and clearly identified …”

It is evident from the covering letter that the subject matter being addressed by the parties was the proper identification of the property and nothing more.  It would not have been reasonable to expect the plaintiff’s solicitors to have studied parts of the plan unrelated to the subject matter of the requisitions.

26.  Second, it is only Drawing No. 5/6 (which is an elevation plan showing, inter alia, Section ‘C’–‘C’) that shows clearly the half height parapet wall in the cockloft and the void spanning the area between the parapet wall and the wall of the building fronting Elgin Street. That drawing had not been provided to the plaintiff prior to the completion date.

27.  As regards the defendant’s contention that anyone perusing the plan would have appreciated that the existence of the parapet wall and the void, apart from the fact that it is incorrect, that is hardly consistent with the position taken by the defendant’s own solicitors in contemporaneous correspondence. In the exchange of correspondence following the requisition raised on 31 March 2008, the defendant’s solicitors asserted in their letter of 1 April 2008 that a void could not have existed because of the similarity in size of the ground floor and the cockloft as shown on the plan, respectively 685.1 sq. ft.and 681.5 sq. ft. Even after undertaking an inspection with ISS EastPoint shortly before the rescheduled completion date, the defendant’s solicitors were refusing to admit that there were any unauthorised building works.

28.  In my view, due diligence on the plaintiff’s part would not have revealed the potential defect in the defendant’s title and the plaintiff cannot be criticised for failing to appreciate the existence of the parapet wall and a void from the title deeds and the plan provided by the defendant.

Risk of enforcement

29.  The first matter to consider is the meaning of “enforcement”. That requires a consideration of what the unauthorised building works have breached. Unquestionably, they were in contravention of the Buildings Ordinance, Cap. 123 (“the Ordinance”), whether or not they were also in contravention of the Government lease.

30.  The provisions of section 24 of the Ordinance are relevant. In pertinent part, they read as follows:

“  (1)  Where … any building works … have been … carried out in contravention of any of the provisions of this Ordinance the Building Authority may by order in writingrequire-

…

(c)  such alteration of the … building works … as may be necessary to cause the sameto comply with the provisions of this Ordinance, or otherwise to put an end to the contraventionsthereof,

…

(2)  An order made under subsection (1) shall be served on-

(a)  in the case of … building works … the owner of the land orpremises … on which the building works have been … carried out;

…

(2C)  The Building Authority may, upon the service of an order under subsection (2)(a) … cause the order to be registered in the Land Registry against-

(a)  if the order has been served on the owner of any land or premises in accordance with subsection (2)(a) … the land or premises;

…

(3)  If an order made under subsection (1) is not complied with, the Building Authority may demolish or alter orcause to be demolished or altered such … building works …

(4A)  Where the order has been registered with the Land Registry in accordance with subsection (2C), the cost ofany demolition or alteration under subsection (3) in relation to the … building works … to whichthe order relates shall be recoverable from-

(a)  if the order had been served on the owner of any land or premises in accordance with subsection (2)(a) … the person who, as at the date of completion of the demolition or alteration, is the owner ofthat land or premises;

…”

31.  In summary, the Building Authority could order reinstatement as per the approved plans or permit the slabbing over of the void but requiring the works to be carried out afresh in compliance with the provisions of the Ordinance. Such orders would be served on the defaulting owners, namely, the owners of the property and of the front cockloft. The Building Authority would have power to register a first charge against the interest of a defaulting owner and if the work is not carried out, it may cause such work to be done and where a charge has been registered, recover the cost from the person who at the date of the completion of the demolition or alteration is the owner.

32.  Where there has been a breach of the provisions of the Ordinance, only the interest of the defaulting owner is amenable to the remedies of the Building Authority: it would not affect all tenants in common of the Government lease unless the breach relates to the common parts. See Active Keen Industries Ltd v Fok Chi-Keong [1994] 1 HKLR 396. Further, under section 12 of the Land (Miscellaneous Provisions) Ordinance, the Government has power to demolish illegal structures on leased land but it seems that a breach of the provisions of the Ordinance alone would not give rise to any right of forfeiture.

33.  At the hearing, it appeared to be the common position of counsel that the only remedy open to Government would be re-entry and forfeiture of the lease in respect of the entire piece of land. The basis appeared to be the decision of the Court of Final Appeal in Jumbo Gold Investment Ltd v Yuen Cheong Leung [2000] 1 HKLRD 763, 769J. But that case concerned a breach of a building covenant (imposing a height restriction) in a Crown lease. In the present case, the Government lease was not even in evidence.

34.  The requisition related to unauthorised building works and, in that context, the issue relates to the remedies open to the Building Authority. It matters not whether the unauthorised building works also involve a breach of the lease conditions. It is thus sufficient to consider the remedies open to the Building Authority only given that it is clear that the provisions of the Ordinance have been breached. As explained above, its remedies would include the imposition of a charge against the property.

35.  The question therefore is whether the effect of the breach will result in action by the Building Authority. Is there a real possibility or real risk of the Building Authority exercising its powers and ultimately imposing a charge against the land?

36.  As Godfrey JA observed in Spark Rich (China) Ltd v Valrose Ltd [2006] 2 HKC 589 at 598A, whether a risk is real or not is a question of degree. I cannot improve on the exposition of the test given by Godfrey JA in that case:

“20.  It is impossible to formulate any test as what is a real risk and what is a risk which is not real.  So this is of little help.  It is more helpful to state that if, in an ‘unauthorised structure’ case, the court concludes that, beyond reasonable doubt, the purchaser will not be at risk of any successful action against him by the Building Authority, it should declare in favour of a good title shown: cp MEPC Ltd v Christian-Edwards [1981] AC 205, per Lord Russell of Killowen at p 220 (followed here in Kan Wing Yau v Hong Kong Housing Society [1988] 2 HKLR 187: see per Clough JA, at p 194).

21.  Now, the burden of showing a good title falls on the shoulders of the vendor.  He must, therefore, in an ‘unauthorised structure’ case, satisfy the purchaser (or, failing him, the court) that the risk of such action is one which a purchaser can safely be advised to disregard.

22.  So the test may be usefully framed as follows: If the purchaser asks his solicitor: ‘Can I be sure that I can safely disregard the risk?’ then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor’s title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority was unlikely.”

37.  I have earlier set out (see § 14 above) the Building Authority’s response to the question whether any building orders would be made. The letter did not state that no enforcement action would be taken in respect of the unauthorised building works. Rather, it indicated that “advisory” letters would be issued to the owners of the premises concerned. Clearly, the terms of the “advisory” letter would have shed light on the Building Authority’s intentions. While no such letter is in evidence, had the defendant not received any communication by the time of the hearing below, one would have expected evidence of that fact to have been placed before the judge.

38.  Further, the letter referred to the “current enforcement policy” as the reason for the unauthorised building works not warranting prioritised enforcement action. But that policy is capable of change. Moreover, while the extension of the floor of the cockloft over the void appears to have occurred over 40 years ago, it is fair to say that the Building Authority does not appear to have been aware of such works until the inspection carried out by its agent on 31 March 2008. The structural integrity of the extended floor over the void which forms the real ceiling to that part of the property can hardly be dismissed as a matter of no moment given that the user of the property is a shop.

39.  Mr Lee placed heavy reliance on the judgment of Litton NPJ in Jumbo Gold at 770B-D. But as earlier noted, the issue there was different. It concerned the remedies open to the Government for breach of a building covenant resulting in re-entry and forfeiture rather than remedies open to the Building Authority for breach of the provisions of the Ordinance.

40.  Applying the test adumbrated by Godfrey JA which is the applicable test in the present case, I am of the view that no prudent and experienced solicitor could properly exclude the possibility of some action being taken at some future time by the Building Authority.

Order

41.  I would dismiss the appeal. I would also propose that there be an order nisi of costs in favour of the plaintiff.

Hon Sakhrani J:

42.  I agree.

Hon Rogers VP:

43.  There will accordingly be an order in terms of paragraph 41.