NATION GROUP DEVELOPMENT LTD. v. NEW PACIFIC PROPERTIES LTD.

HCMP471/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.471 OF 1998

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J U D G M E N T

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The Action

1. This is the Plaintiff's action, commenced by way of Originating Summons issued on 5th February 1999 pursuant to the provisions of section 12 of the Conveyancing and Property Ordinance, Cap.219. In this application, the Plaintiff seeks various relief against the Defendant, in particular certain declarations and the reimbursement of a forfeited deposit of HK$10 million, and the Defendant in turn resists the Plaintiff's claim and itself asserts a counterclaim for damages arising from the non-completion by the Plaintiff of the sale of the property the subject of a Sale and Purchase Agreement entered into between the parties on 30th September 1997.

The Background Facts

2. The facts are in relatively short compass and are set out in the affirmation leading the application. For present purposes, a short outline will suffice.

3. By a Sale and Purchase Agreement dated 30th September 1997, the Plaintiff agreed to purchase two ground floor shops, namely Shops 12 and 13, the whole of the 1st Floor and its canopy and flat roof of one Cheong Wah Building, Tsuen Wan. The price was $65 million. Deposits of $10 million were paid, and completion was to be on or before 9th January 1998.

4. Requisitions were raised by the Plaintiff's Solicitors, Messrs Kok & Ha, and a series of answers were given by the Defendant's Solicitors, Messrs Charles Chiu & Co.

5. The transaction was not in fact completed on 9th January 1998, with the consequence that by a solicitor's letter dated 10th January 1998, the Defendant rescinded the Agreement and forfeited the deposit monies. This in turn was followed by a letter of the same date from the Plaintiff's to the Defendant's Solicitors, wherein the Plaintiff accepted the Defendant's repudiation of the Agreement. Shortly thereafter, the Plaintiff commenced the present proceedings.

The Issues for Decision

6. The relief claimed in the Originating Summons reflects the two principal issues for decision in this case, namely :

(1) whether the requisitions in question had been sufficiently answered; and

(2) whether good title had been shown or given by the date and time of completion.

Clearly these matters are interrelated.

The Requisitions

7. The requisitions the subject of argument in this case originated in two letters from Messrs Kok & Ha, the Plaintiff purchaser's solicitors, dated respectively 11th December 1997 and 12th December 1997. These letters deal primarily with questions arising with regard to the 1st Floor canopy and the staircase, and I deal with them in reverse order.

(i) The Staircase

8. The letter of 12th December refers to "a staircase within Shop 12 leading from the ground floor level to the 1st Floor of the building" and requests confirmation that "the staircase together with the opening in the 1st Floor slab are authorized works and alteration", and further requests the written approval of the Building Authority and the co-owners of the building "relating to the said works and alteration".

9. I do not think that there is anything in this point. As Mr Edward Chan S.C. for the Defendant vendor has pointed out, the existence of this staircase is clearly provided for in the Third Schedule to the Sale and Purchase Agreement entered into between these parties, viz. :-

"THE THIRD SCHEDULE ABOVE REFERRED TO

1. Notwithstanding anything hereinbefore contained to the contrary,

...

(ii) In respect of Property (2), the Purchaser acknowledge the existence of a staircase in Shop 12 leading up internally to the First Floor. The Purchaser specifically agree not to raise any requisition in respect of the Staircase and any matter incidental thereto or arising therefrom." (emphasis added)

In my view this provides the answer to the Plaintiff's arguments, and I am unwilling to accede to the Plaintiff's suggestion that the Schedule refers only to the staircase itself and not to the hole in the floor slab through which it passes. In my judgment the wording "not to raise any requisition" plainly refers to requisition on title, and it is not open to the purchaser to complain that the title offered was not good because of a certain aspect with regard to which the purchaser faced a specific contractual bar against objection. Mr Chan S.C. made the point that it is trite law that the vendor's obligation as to title is dependent upon the terms of the agreement reached with the purchaser, and he scored a neat forensic point in suggesting that if the Plaintiff's argument with regard to the staircase is right, then this runs counter to the advice given by Godfrey JA in Spark Rich (China) Limited v. Valrose Limited, CACV No.249 of 1998, wherein the learned judge observed (at page 11 O-T) :-

"... it is perhaps worth adding that in the light of this judgment a prudent vendor should always consider, before attempting to sell his property, whether his title to the property may be affected by some unauthorised building work. If so, he should refrain from entering into any contract for the sale of the property which does not contain (1) a full disclosure of the problem; and (2) an agreement on the part of the purchaser not to raise any requisition or take any objection to the title based upon the unauthorised work. Cases in which a purchaser of property may safely be advised that he can be sure he can safely disregard unauthorised building work are likely to be rare." (emphasis added)

(ii) The Canopy

10. This forms the subject matter of the first letter of requisition of 11th December 1997, paragraph 4 of which reads as follows :-

"4. It is noted that there are various substantial unauthorized structures attached to the flat roof and canopy of the 1/F. Copies of photos of such unauthorized structures are enclosed. The existence of these unauthorized structures not only affects the structural safety of the flat roof and canopy but actually amounts to breach of the Buildings Ordinance, the Government Lease and the Deed of Mutual Covenant and therefore brings along serious risks of litigation in particular possible enforcement actions from the Buildings Department as well as from the Government on ground of breach of Government Lease. Please produce evidence that your client has obtained Government approval of such unauthorized structures and written consent from all the co-owners of the building."

That was the requisition which has attracted the bulk of the argument in this case.

11. This letter was accompanied by some eleven colour photographs depicting from various angles the situation as described, and was not only responded to by the Defendant's Solicitors, but the matters raised were also the subject of written comment by Mr Kenneth C.Y. Kan, Authorized Person, retained on behalf of the Plaintiff purchaser, and by Mr Chui Chung Lai, Authorised Person, retained on behalf of the Defendant vendor. The relevant correspondence and argument in this regard continued between the respective solicitors up to the day prior to the date of intended completion, and this Court has had the advantage of perusing this written material together with further photographs (including a useful composite photo showing the panorama of the building frontage) in addition to a Ground Floor plan and also a Section drawn from street level upwards of Shops 12 and 13 including the 1st Floor, its Canopy and the flat roof of the property.

12. Whilst a number of arguments have been raised under this head, let me say at this stage that in my view the determinative issue in this case (and that which has attracted the bulk of the argument) focuses upon the canopy and the illegal structures attached thereto, and whether this Court concludes that the Plaintiff purchaser would have been at risk of litigation by, inter alia, the Building Authority pursuant to the provisions of section 24 of the Buildings Ordinance, Cap.123, which for ease of reference I set out hereunder :-

"24. Order for demolition, removal, or alteration of building, building works or street works

(1) Where any building has been erected, or where any building works or street works have been or are being carried out in contravention of any of the provisions of this Ordinance the Building Authority may by order in writing require -

(a) the demolition of the building, building works, or street works; or

(b) (Repealed)

(c) such alteration of the building, building works or street works as may be necessary to cause the same to comply with the provisions of this Ordinance, or otherwise to put an end to the contraventions thereof,

and in every case specify the time within which the demolition, alteration or work required by such order shall be commenced and the time within which the same shall be completed.

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

(a) the building has been erected, on the owner thereof;

(b) the building works, other than a building, have been completed, on the owner thereof;

(c) the street works have been completed, on the frontagers; or

(d) the building works or street works have not been completed, on the person for whom such works are being carried out or his agent.

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

(4) The cost of works carried out under subsection (3) may be recovered from the persons upon whom orders had been served under subsection (2); and where such an order had been served on frontagers the Building Authority shall apportion such cost -

(a) in the case of private streets, according to the frontages of the premises owned by such frontagers; or

(b) in the case of access roads, equally.

(5) (Repealed) "

13. The factual position, as the Ground Floor Plan makes clear, is that the 1st Floor canopy extends around the building, and that illegal structures in the form of cocklofts are hung down from the canopy (or built up to connect with the canopy soffit, which thereby forms their ceilings) around some two-thirds of the building, namely from Shop 14 to Shop 6A. As the photographs also indicate, air-conditioning units are also bolted into the canopy soffit. It is against this factual matrix, therefore, that leading Counsel on both sides have based their arguments.

14. Mr Griffiths S.C., for the Plaintiff, concentrates upon the unauthorised structures attached to the underside of the canopy, and takes as his central proposition that if (as he says is the situation in the present case) there is a real risk of Government enforcement action against such authorised structures, his client was entitled to withdraw from the contract. The relevant test, he submitted (and as to which there is no difference between leading Counsel) was recently considered by the Court of Appeal in Spark Rich, op.cit., wherein Godfrey JA expressed the matter thus :-

"What is the test?

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 J.A., at p.194).

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.

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." (emphasis added)

15. Mr Griffiths S.C. accepts that there were no structures on top of the canopy, emphasising that the causes of concern were the cocklofts, air-conditioning units, advertising signs and lightboxes attached to the underside, which appeared to pose safety risks and thus made enforcement action the more likely. Nor was the absence of any government order in this regard of any comfort to his client as purchaser; the blight on the title was the risk that there may be such, or some other form of enforcement.

16. He further pointed out that the canopy was part of the property agreed to be sold, as per the Second Schedule to the Agreement, and that the grant was of the entire canopy "to hold use occupy and enjoy", and not just its top surface, and that the canopy as such did not fall within the definition of 'common parts' in Clause 4(p) of the Deed of Mutual Covenant. Nor he submitted, did the assignment plan restrict the grant to the topside of the canopy only; as with all plans this was one-dimensional and indicated the horizontal plane and the top of the area to be conveyed.

17. Mr Griffiths maintained that any enforcement action would be against the owner of the structure or of the building (he noted that the definition of 'building' in section 2 of the Ordinance included "any part" of a building), and that the Building Authority may well take the view that the attachments to the canopy are the responsibility of the canopy owner since they are physically attached to his property, in which event enforcement action naturally would be directed at the owner of the canopy; alternatively, it was conceivable that Building Authority action would be directed at (among others) the owner of the property together with the other building owners. Either way, he said, it could not properly be suggested that there was no real risk; and that accordingly the purchaser was entitled to be put beyond doubt as to such risk.

18. On this central issue, Mr Chan S.C. for the Defendant vendor contended that Mr Griffiths' approach was flawed on the particular facts of this case. In the present case, he submitted, what was abundantly plain was that the structures complained of were the cocklofts of some ground floor shops, and that it was inconceivable that the Building Department would serve any order for the removal of such cocklofts, and associated air-conditioning units, on other than the relevant cockloft owners; and in any event it was difficult to see how the owner of the 1st Floor and canopy could give effect to any such order without committing trespass to other persons' property. Furthermore, in this regard, Clause 17(a) of the Agreement assisted. This provided :-

"17. (a) The Vendor hereby further declares that the Vendor has not received and is not aware of there being any notice from any Government or other competent authority or the Manager or Management Committee of the building of which the Property forms part requiring the Vendor (i) as one of the co-owners of the said building to effect repair to any common part of the said building or (ii) as owner of the Property to effect repair or reinstatement to the Property or any part thereof. If it should be discovered that any such notice existed prior to the date hereof or if any such notice referred to in (i) shall be served before the date of completion the cost for such repair shall be borne by the Vendor."

19. It followed from this, submitted Mr Chan, that it was plain and obvious that it was in the parties' contemplation that any enforcement action by the Government served on the owner of the property to be sold, either as co-owner or as the owner of the property, to effect repair or reinstatement did not entitle the purchaser to rescind, and that the only consequence of such notice was that the cost of the repair or reinstatement should be borne by the vendor.

20. In the course of argument, Mr Chan drew to the attention of the Court and laid great emphasis upon the judgment of the Court of Appeal in Active Keen Industries Limited v. Fok Chi Keong [1994] 1 HKLR 396, in which the Court there held, inter alia, that since any remedial work for the required alterations would involve every owner of the 9th Floor of the building in question, it was difficult to see how an order could lawfully be made under section 24(1) of the Buildings Ordinance requiring demolition or alteration, since in practical terms the owner or owners may not be able to comply and that, further, the future possibility that the owner of one of the flats might have to share with the other co-owners the cost arising out of something done to the building did not affect the title to the flat.

21. Whilst it is clear, I think, that the judgment of Litton JA in Active Keen, op.cit., puts to rest that which Mr Chan S.C. termed the 'myth' arising from the decision in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 (CA) to the effect that the mere existence of unauthorised structures renders the title of a property defective, I find it difficult to agree that the decision in Active Keen is conclusive in favour of the vendor in this case. In Active Keen, Litton JA observed (at page 410) :-

"... It is difficult to see how the title of the owner of Flat C could be affected by any thing done by the Building Authority, unless Flat C itself could be the target of an order made under s.24(1). ..."

the point there being that in the learned Judge's view, it was not possible, in the particular circumstances of a 9th Floor which should have contained seven flats but which turned out to contain nine, to hold that Flat C could itself be the target of an order made under section 24(1) of the Buildings Ordinance.

22. In the instant situation, however, I find it difficult to grasp why the owner of the 1st Floor canopy -- to which the unauthorised structures are physically attached -- cannot be served with a notice under section 24(1), particularly if, as certainly appears possible from the views of the Authorized Person retained by the Plaintiff, there is a structural safety factor : see for example, the letter of Mr Kenneth C.Y. Chan of 3rd January 1999 to the Plaintiff's Solicitors, which includes the following observations :-

"Items (1) [the staircase], (2) [the cockloft structures] and (4) [the ventilation plants and airconditioning units] are alteration and addition works that involve the structure of the building. For such works, prior approval and consent should have been obtained from the Building Authority, without which they are subject to notices being served by the Building Authority for their removal and reinstatement to the as approved condition.

In addition to the above, I am concerned with the structural safety of the 1/F canopy for the additional loading imposed onto it as a result of items (2), (3) and (4) described above. Normally, a canopy is used only for 'protection from rain or sun, not carrying any floor load, either cantilevered or supported by brackets', as defined in the Building (Planning) Regulations 2(1). It would not be designed to carry any live-load or dead load, i.e. no structural allowance is made for it to carry any occupants or to carry any other superimposed loads such as equipment, walls, furniture, plants or whatever. In June 1995 the Buildings Department has also issued amended Practice Note No.173 to Authorized Persons and Registered Structural Engineers regarding the construction of canopy to ensure that such would be constructed with due supervision and used properly, a copy of which is attached. The guidelines issued by the Buildings Department regarding advertising signs have also stressed that no signs should use any canopy structure for support, copy also attached.

From the conditions of the G/F and 1/F canopy of the captioned building as observed on site, I am of the view that the canopy at 1/F level has been used abusively as support for many other structural elements by the tenants/owners of the G/F shops. I not only suspect they are unauthorized works but have reason to believe that, due to the magnitude of the additional works, the canopy structure at 1/F level has been rendered structurally unsafe, unless there is evidence to prove that the canopy structure had been designed for carrying all the additional loads and that all the works under the canopy have been approved and authorized by the Building Authority."

23. Against this background, therefore, and whether or not the owners of the various cocklofts under the canopy would also themselves be served, in my view it is difficult to see how the owner of the offending canopy cannot in some wise be the subject of a section 24 notice. And if this be correct, as I think it is, then it seems to me that Mr Chan's reliance upon the dicta in Active Keen, op.cit., does not suffice for his purposes, given that an order served under section 24(2) would in effect constitute an encumbrance and a blot on the title.

24. It follows, therefore, on the basis of the test which both leading Counsel have considered to be applicable, and which in any event binds this Court, that in my view the Plaintiff's solicitor in these particular circumstances would not have been able to advise his client in this "unauthorised structure case" that he could safely disregard the risk of any successful action against him by the Building Authority. In my judgment, the question "Can I be sure that I can safely disregard the risk?" must in this instance be answered by a singular 'No'. As Godfrey JA put it in Spark Rich, op.cit., the purchaser's solicitors :-

"... might perhaps add that such action would, in his view, be unlikely; he might perhaps add that, in his view, it was more probable than that such action would not be taken; he might perhaps add that the risk was small. But he could not properly exclude the possibility altogether ..."

25. It follows from the foregoing, therefore, that I am against the Defendant upon what I perceive to be the central issue in this case.

26. Nor do I think that Mr Chan's argument in terms of section 17(a), to which I have earlier made reference, contractually precludes the argument in terms of the risk of a section 24(1) enforcement action. This seems to me essentially a matter of construction of that particular clause, and although I understand how the argument is put, I disagree with the submission.

27. Two other matters were raised in the course of argument by Mr Chan which require mention, not least because (as I have been informed by the Defendant) it is anticipated, at least on the Defendant's part, that this case will go further.

28. First, the issue of the canopy soffit. The vendor's position was that the right to the exclusive use of the soffit had not been given to it, and that the reference to the plan coloured pink in the Assignment indicated that the plan was not merely used in aid of identification but was part of the description of the property to be assigned. This plan was two-dimensional, said Mr Chan, showing the level of the 1st Floor, the owner of the 1st Floor did not own the whole concrete slab separating the two floors (and usually he would not have any right to interfere with the owner of the ground floor hanging lights to his ceiling), and that the reference to the flat roof and the canopy should therefore be construed as being a reference mark in terms of the space which may be used exclusively by the assignee rather than a reference to the whole physical structure of the flat roof and the canopy. If, therefore, it had been intended that the entire canopy structure was to be assigned, there was no reason why the plan could not be cross-sectional and coloured pink.

29. This argument is either right or wrong, and, with respect, I think that it is wrong. It seems to me to be plain as a pikestaff that the intention was to assign the entire canopy structure, and if this be right, then this argument falls away. So in my view, the 'soffit point', if I may so term it, is a non-starter.

30. Second, Mr Chan argued that in so far as the requisition related to the breach of the Government lease and DMC, such requisition was not properly made and was insufficient as a proper requisition, citing in this connection Chan Chik Sum v. Great Pearl Industries Ltd [1997] 1 HKC 27 (at 31B) and Wan Moon Ling Wandy v. Sino Gain Investment Ltd [1997] 2 HKC 592 (at 595E-H). It was necessary, said Mr Chan, for the purchaser to set out the basis for his contention as to breach, and in what way that would cause concern to the purchaser in relation to the title of the property, and in regard to what aspect the vendor's clarification was sought.

31. This point was not relied on in terms of the argument in relation to section 24 of the Buildings Ordinance, and on this narrow issue I am inclined to think that Mr Chan is correct, albeit this conclusion does not affect the ultimate result. There is no doubt that upon a fair reading of the correspondence, the risk of Government enforcement action pursuant to the Ordinance provided the predominant focus. In any event, Mr Chan argues that, even if correctly identified, both points were bad in substance, and once again, had this been the real issue before the Court, I think I would have been minded to agree; in particular on the papers, I think he is correct to assert that there is no indication whatever that the illegal structures objected to were erected or owned by this vendor. To the contrary, the purchaser at no time suggested that that was the case, and the reports produced and relied on by the purchaser appeared to accept that the structures were not erected by the vendor but by the various shop-owners.

Decision on the Issues

32. It follows from the foregoing that, in my judgment, Requisition No.4 made by letter dated 11th September 1997 has not been sufficiently answered, and further that good title had not been shown or given by the date and time of completion.

33. I will now hear Counsel as to the form of the relevant Order, and as to costs.

[Submissions from Counsel]

34. I have now had the benefit of Counsel's observations, and in particular Mr Li has submitted that, in terms of any monetary order, there should be a stay of execution pending appeal. After considering Counsel's submissions, I am minded to order the following relief :-

(1) A declaration in terms of paragraph 1 of the Originating Summons, namely, a declaration that the requisition numbered 4 in the letter dated 11th December 1997 from the Plaintiff's solicitors Messrs Kok & Ha to the Defendant's solicitors Messrs Charles Chiu & Company has not been sufficiently answered by the Defendant;

(2) A declaration in terms of paragraph 3 of the Originating Summons, namely, a declaration that good title to the property comprised in the above-mentioned Sale and Purchase Agreement had not been shown and given at or before 5 pm on 9th January 1998 in accordance with the said Sale and Purchase Agreement;

(3) I order that the Defendant is to pay into Court within 40 days of the date hereof (such monies to remain in Court pending conclusion of the Defendant's appeal) the sum of $10 million, being the amount of the deposit paid by the Plaintiff to the Defendant under the Sale and Purchase Agreement, together with interest thereon at the judgment rate from time to time prevailing for the period from 1st February 1998 to the date of payment in;

(4) I further order that the Defendant do pay to the Plaintiff its costs of investigating the title of the said property, such costs to be assessed by a Master, if not agreed, and that such sum (once agreed or assessed), be paid into Court pending conclusion of the Defendant's appeal;

(5) A declaration that the Plaintiff is entitled to a lien on the said property for the return of the deposit in the sum of $10 million, together with the sum in interest upon such principal sum once such interest be ascertained.

35. As to costs, Mr Li argues that although he has lost the case, subject of course to appeal, nevertheless, in terms of the requisitions his client won on the 'staircase requisition', and that there should be some form of apportionment to reflect that fact. To the contrary, Mr Merry says that it is not normal to split a costs order in this way, and invites the Court to follow the normal rule. I think that in this regard Mr Merry is right, and that, given the way that I have decided this case, the Plaintiff is to have its costs of this action, to be taxed if not agreed.

36. The final matter arising is the Defendant's counterclaim which, in the circumstances, I hereby dismiss. There will be liberty to apply to either side.

37. I wish to thank all Counsel for their assistance.