JOIN UNION INVESTMENT LTD v. CHINA TREE INVESTMENT LTD

HCA 1126/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1126 OF 2013

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J U D G M E N T

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INTRODUCTION

1. The defendant was the vendor and the plaintiff was the purchaser of a property (“the Property”) known as Shop B on the Ground Floor of Tak Yan House Stage Eleven (“the Building”) at Nos 61 and 63 Heung Wo Street and Nos 67, 67A and 69 Yuen Tun Circuit, Tsuen Wan, New Territories, Hong Kong, pursuant to a written agreement (“the Formal Agreement”) for the sale and purchase of the Property dated 6 April 2011. 

2. The sale and purchase of the Property fell through because the plaintiff alleged that the defendant:-

(1)  failed to make full and frank disclosure of defects in the title of the Property of which the defendant was aware;

(2)  failed to properly or sufficiently answer requisitions on title;

(3)  failed to show a good title to the Property by the date of completion; and/or

(4)  failed to give or make a good title by the date of completion.

3. The plaintiff’s various complaints relate, essentially, to two matters:-

(1)  certain unauthorised partitions of the ground floor of the Building (“the Partitions”); and

(2)  an unauthorised cockloft in the Property (“the Cockloft”).

4. On behalf of the defendant, it is contended (inter alia) that:-

(1)  the plaintiff was barred from raising any requisitions or objections on title arising from the Partitions or Cockloft by reason of:-

(a)  certain express provisions, referred to in the defendant’s amended defence and counterclaim as “the Illegal Structure Clause” and “the Partition Clause” respectively contained in a preceding provisional agreement (“the Provisional Agreement”) dated 1 March 2011, and/or

(b)“the Supplemental Agreement” thereto,

entered into by the defendant as vendor and one Shiu Lai On Ann (“Madam Shiu”) as purchaser relating to the sale and purchase of the Property;

(2)  the plaintiff was barred from raising any requisitions or objections on title arising from the Partitions or Cockloft because they were not raised within seven working days after receipt of the title deeds from the defendant; and

(3)  in any event, there was no real risk of enforcement action being taken by the Building Authority and/or the Incorporated Owners of the Building and/or other co-owners of the Building.

5. By this action, the plaintiff claims against the defendant for (inter alia):-

(1)  a declaration that it did, by letter dated 15 July 2011, effectively rescind or terminate the Formal Agreement and/or accept the defendant’s repudiation of the Formal Agreement; and

(2)  return of the deposits and part payments paid under the Formal Agreement in the total sum of HK$1,880,000.

6. On the other hand, the defendant counterclaims against the plaintiff for (inter alia):-

(1)  a rectification of the Formal Agreement to incorporate the Illegal Structure Clause into it;

(2)  a declaration that the plaintiff was in repudiatory breach of the Formal Agreement which repudiation was accepted by the defendant; and

(3)  a declaration that the defendant is entitled to forfeit all the deposits and part payments paid by the plaintiff.

7. Pursuant to the court’s directions given on 18 August 2015, the parties have prepared an agreed list of issues, as follows:-

(1)  Whether the defendant owed the implied duties as pleaded by the plaintiff in paragraph 3 of the statement of claim, namely, to:-

(a)  make full and frank disclosure to the plaintiff of any defect in title or incumbrance over title of which the defendant was aware;

(b)satisfactorily answer requisitions raised by the plaintiff and show a good title within a reasonable time and before the date of completion; and

(c)  give or make a good title to the Property on the date of completion?

(2)  Did the defendant fail to make disclosure of the defects in title of which the defendant was aware (without prejudice to submissions on the scope of the duty of disclosure)?

(3)  Was the plaintiff precluded by contract from raising any requisitions or objections on the title of the Property based on the unauthorised Partitions and Cockloft?

(4)  If the plaintiff was not so precluded, did the plaintiff raise the requisitions in respect of the Partitions and Cockloft in compliance with clause 10(a) of the Formal Agreement; if not, was there waiver by the defendant of its right under clause 10(a) of the Formal Agreement?

(5)  If the plaintiff was not barred from raising requisitions on unauthorized structures or alterations of and in the Property, did the defendant fail to properly answer the requisitions raised by the plaintiff concerning such structures, in particular the Partitions and Cockloft, and/or fail to show a good title to the Property by the date of completion?

(6)  Was the defendant unable to give or make a good title by the date of completion?[1]

8. I should mention that although the defendant raised the defence of substantial performance (namely, that even if the Cockloft constituted a blot on the title of the Property, the plaintiff would still get substantially what it contracted to purchase under the Formal Agreement) in its amended defence and counterclaim, this defence was expressly abandoned by Mr Jenkin Suen (on behalf of the defendant) at the trial.  Accordingly, it is not necessary for me to consider the issue of substantial performance in this judgment.  Also, both Ms Queenie Lau (on behalf of the plaintiff) and Mr Suen (on behalf of the defendant) confirmed at the trial that there would be no claim for damages for breach of contract whichever way the court should decide this case.

9. Before I turn to consider the various issues raised by the parties, I shall first set out the relevant background facts, which are largely not in dispute.

BACKGROUND FACTS

10. On 1 March 2011, the defendant and Madam Shiu entered into the Provisional Agreement, in which the defendant was named as the vendor and Shui Lai On Ann 或其指定公司(or her nominated company) was named as the purchaser.

11. The Provisional Agreement was in the standard form of an estate agency called Timberland Strategy Property Consultants with various handwritten additions and amendments.  The Provisional Agreement contained a total of 20 printed clauses.  Clause 20 expressly referred to an annexure (“the Annexure”), which contained 6 further clauses numbered 20 to 26.  The Annexure was signed by the parties.  In addition, the parties signed the Supplemental Agreement on or about 1 March 2011.  It is not in dispute, I understand, that the Provisional Agreement, the Annexure and the Supplemental Agreement ought to be read together as a single agreement.

12. The Provisional Agreement provided, inter alia, as follows:-

(1)  The purchase price of the Property was HK$18,800,000.

(2)  An initial deposit of HK$500,000 was payable upon the signing of the Provisional Agreement.

(3)  A further sum of HK$1,380,000 was payable on or before 15 March 2011.

(4)  A formal agreement for sale and purchase was to be signed on or before 15 March 2011.

(5)  Completion was to take place on or before 15 July 2011 whereupon the balance of the purchase price in the sum of HK$16,920,000 was to be paid.

(6)  Clause 8 (ie, the Illegal Structure Clause) –

「該物業是以現狀售予買方，買方已親察該物業之現時狀況，買方不得因該物業存有任何未經批準之加建、改建或潛建之建築物，而向賣方提出質詢或藉此理由拒絕成交或拖延成交。」

(7)  Clause 24 (ie, the Partition Clause) –

「買方清楚明白此物業現分����成B1及B2兩個租客，買方不得就該分����向賣方提出任何質詢及疑問，亦不會因此為理由拒絕及拖延成交。」

13. The Supplemental Agreement stated as follows –

「買方已清楚明白該物業，FLAT B ON GROUND FLOOR, TAK YAN HOUSE STAGE ELEVEN NOS. 61, 63 HEUNG WO STREET NOS. 67, 69 YUEN TUN CIRCUIT TSUEN WAN N.T. 在 簽署臨時買賣合約時，政府有關部門發出之清拆令ORDER NO.UBF/F03-155/0001/08 BY THE BUILDING AUTHORITY UNDER SECTION 24(1) OF THE BUILDINGS ORDINANCE. 現雙方同意下，賣方CHINA TREE INVESTMENT LTD. 願意付上港幣HK$20,000元，在成交前一切再有政府有關部門發出清拆令，維修令，修葺令，不再負責，買方亦同意一切條件。」

14. There is an English translation of the Illegal Structure Clause, the Partition Clause and the Supplemental Agreement appearing in a document attached to the amended defence and counterclaim –

(1)  The Illegal Structure Clause

“The Property is sold on an ‘as is’ basis to the Purchaser. The Purchaser has inspected the status quo of the Property and shall not at any time hereafter raise any requisitions or refuse completion or defer completion with respect to any unauthorised additions, alterations or unauthorised building structures.”

(2)  The Partition Clause

“The Purchaser clearly and unequivocally acknowledges that the Property is currently let to two tenants, namely, B1 and B2. The Purchaser shall not raise any requisitions or questions thereto or defer or refuse completion.”

(3)  The Supplemental Agreement

“The Purchaser acknowledges and understands that, prior to the date of the Provisional Sale and Purchase Agreement, the Property is subject to a Building Order No.　UBF/F03‑155/0001/08 by the Building Authority under section 24(1) of the Buildings Ordinance. The Parties agree that the Vendor China Tree Investment Ltd. shall pay a sum of HK$20,000 for the said Order, and thereafter and prior to the Completion, the Vendor shall not be liable to any other Removal Order and/or Repair Order issued by any government departments.”

15. The above translation is neither agreed nor certified.  Nevertheless, I do not understand Ms Lau or Mr Suen to be saying that the precise English translation of the Illegal Structure Clause, the Partition Clause and the Supplemental Agreement would have any impact on the proper resolution of the various issues in this case.  In any event, should anything should turn on the wording of those provisions, I consider that the matter should be resolved by reference to the original Chinese text thereof.

16. The Building Order No.UBF/F03-155/0001/08 (“the 2010 Building Order”) mentioned in the Supplemental Agreement was issued by the Building Authority on 26 November 2010 to the defendant’s predecessors in title (Mak Ming Yeung and Mak Yin Ping).  The Building Authority’s complaint was in respect of the following unauthorised building works carried out in or at the Property:-

“door opening formed in the staircase enclosure wall between G/F and 1/F causing a fire hazard”.

17. Under that order, the owners of the Property were required to reinstate those parts of the Building so affected by the said building works in accordance with the plans approved by the Building Authority.

18. The initial deposit of HK$500,000 was paid by Madam Shiu and received by the defendant (through its solicitors, Gallant Y T Ho & Co) on or about 1 March 2011 upon the signing of the Provisional Agreement.

19. By a letter dated 14 March 2011, the plaintiff’s former solicitors, Wong & Co, informed Gallant Y T Ho & Co that they had instructions to act for the purchaser of the Property.  At that time, the purchaser was stated to be “Great Full Investment Limited”.

20. Under cover of a letter also stated 14 March 2011, Gallant Y T Ho & Co sent to Wong & Co a draft formal agreement for the latter’s approval.

21. On or about 15 March 2011, Wong & Co tendered to Gallant Y T Ho & Co a cheque for the amount of HK$1,380,000 being the further sum payable under the Provisional Agreement.  At that time, “Great Full Investment Limited” was still referred to as the purchaser of the Property.  It is not in dispute that Gallant Y T Ho & Co did receive the sum of HK$1,380,000 on behalf of the defendant.

22. On or about 23 March 2011, Gallant Y T Ho & Co sent to Wong & Co title deeds and documents relating to the Property.

23. Also on or about 23 March 2011, Wong & Co returned to Gallant Y T Ho & Co the draft formal agreement with some amendments.  I shall come back to the significance of the amendments later in this judgment.

24. On or about 25 March 2011, Gallant Y T Ho & Co sent to Wong & Co the re-engrossed formal agreement for execution by the plaintiff.

25. By a letter dated 31 March 2011 to Gallant Y T Ho & Co, Wong & Co raised a number of requisitions, including the following  (“the Illegal Structure Requisition”) –

“7. Please take instructions from your client(s) and advise us whether there is/are any unauthorised or illegal structure(s) or alteration(s) of and in the property”.

26. On 1 April 2011, Wong & Co sent to Gallant Y T Ho & Co a nomination signed by Madam Shui, under which the plaintiff (Joint Union Investment Limited) was nominated to take up the assignment of the Property.

27. On 4 April 2011, Wong & Co sent to Gallant Y T Ho & Co the Formal Agreement which had been signed by the plaintiff.

28. The Formal Agreement was signed by the defendant on or about 6 April 2011.

29. The following provisions in the Formal Agreement are of note:-

(1)   Clause 8:

“The Property is sold on an ‘as is’ basis.”

(2)   Clause 10(a):

“Any requisition or objection in respect of title to the Property shall be delivered to the Vendor’s solicitors within seven (7) working days after the date of receipt of the title deeds by the Purchaser’s solicitors and any further requisition or objection arising upon any reply to a former requisition shall be delivered to the Vendor’s solicitors within seven (7) working days after the date of receipt of such reply, otherwise the same shall be considered as waived.”

(3)   Clause 23:

“The parties hereto agree that the additional terms and conditions (if any) set out in the Fifth Schedule hereto (‘the Additional Terms’) shall form part of this Agreement and binding on the parties hereto. In the event of any conflict between any of the Additional Terms with other provisions in this Agreement, the Additional Terms shall prevail.”

(4)  The Fifth Schedule to the Formal Agreement made express reference to the Annexure and the Supplemental Agreement, copies of which were also attached to the Formal Agreement.

30. In a report (“the Report”) relating to the Property addressed to the plaintiff dated 27 June 2011 and signed by Mr Tsang Yin Sang (“Mr Tsang”), registered structural engineer of Lee, Leung & Tsang, it was stated, inter alia, as follows:-

“(1) According to the Occupation Permit … the Ground Floor of the above building is permitted to be 1 shop for non-domestic use. However, we have noticed that the Ground Floor has been actually partitioned into at least 4 Shops, namely, Shop A, B, C and D. The Property (i.e. Shop B) is further sub-divided into Shop B1 and B2. The division of the original Ground Floor into so many smaller shops contravenes the Occupation Permit.

(2)  A substantial cockloft with an area of about 22 square metres has been constructed in the Property as shown on the plan attached hereto and thereon hatched red.  A lavatory is also found inside the cockloft.  The cockloft not only results in the approved gross floor area of the building as a whole being exceeded, it is also structural work creating a massive loading adversely affecting the structural members of the Property as well as the existing building.”

31. In the Report, Mr Tsang expressed the opinion that the building works and alterations in respect of the Cockloft amounted to unauthorised building works and alterations carried out without the approval of the Building Authority, and there was a real risk of the Government taking enforcement action against the owner of the Property including but not limited to requiring demolition and reinstatement of the affected parts of the Property and/or the Building.

32. Under cover of a letter dated 28 June 2011, Kok & Ha (the plaintiff’s current solicitors) sent a copy of the Report to Gallant Y T Ho & Co, and asked the latter to produce satisfactory evidence to show that the Partitions and Cockloft had been consented to or approved by (i) the Building Authority, and (ii) the Incorporated Owners or all other co‑owners of the Building.

33. In that letter, Kok & Ha also referred to an Order No.UBF/F03-155/0016/08 issued by the Building Authority dated 26 April 2011 (“the 2011 Building Order”), which had been registered against the Property in the Land Registry on 9 June 2011.  Kok & Ha stated that they were unable to obtain a copy of the 2011 Building Order from the Land Registry because it was a recently registered document, and asked the defendant to produce it for the plaintiff’s perusal, adding that under the Formal Agreement the defendant was obliged to assign the Property to the plaintiff “free from incumbrances” and to “give a good title to the Property … and show and prove a good title to the Property”.

34. As a matter of fact, the contents of the 2010 Building Order and 2011 Building Order are materially the same, save that the former was addressed to the defendant’s predecessors in title while the latter was addressed to the defendant.

35. In a further letter dated 30 June 2011 to Gallant Y T Ho & Co, Kok & Ha stated that they were not asking the defendant to demolish the Cockloft because the Property, minus the Cockloft, would be “substantially different from that existing as at the date of the contract”, and any attempt to remove the Cockloft without the plaintiff’s consent for the sake of curing the title defect would be unacceptable to the plaintiff.  It was further stated that, given the substantial size of the Cockloft and that it was within the Property, the defendant’s duty to give and prove good title must extend to and include the Cockloft as well.  It is, in my view, clear from the tenor and contents of this letter that the plaintiff wished to get out of the transaction for the purchase of the Property.  This having been said, the plaintiff was of course entitled to insist on such rights as it might strictly be entitled to as a matter of law.

36. Under cover of a letter dated 5 July 2011, Wong & Co sent to Kok & Ha (inter alia) the title deeds and documents relating to the Property which Wong & Co previously received from Gallant Y T Ho & Co on or about 23 March 2011.

37. By a letter dated 5 July 2011, Gallant Y T Ho & Co stated, in reply to Kok & Ha’s aforesaid letters dated 28 June 2011 and 30 June 2011, that the plaintiff was barred from raising any requisitions or objections on title arising from the Partitions and Cockloft by reason of clause 23 of, and the Fifth Schedule to, the Formal Agreement, in that the plaintiff had expressly agreed to (1) purchase the Property with 2 existing tenancies and not to raise any requisition or objection in relation to the division of the Property, and (2) purchase the Property subject to the 2010 Building Order and all other orders issued by the Government before completion.  Accordingly (according to Gallant Y T Ho & Co), the defendant was not obliged to produce the documentary evidence requested by Kok & Ha in their said letters.

38. By another letter dated 5 July 2011 to Wong & Co’s (a copy of which was also sent to Kok & Ha), Gallant Y T Ho & Co referred to Wong & Co’s aforesaid letter dated 31 March 2011 and stated, in answer to the Illegal Structure Requisition, as follows –

“We are instructed that our client is not aware of any unauthorised or illegal structure or alteration of and in the Property.”

Gallant Y T Ho & Co further stated in the same letter that they believed that they had satisfactorily answered all of Wong & Co’s requisitions.

39. There were further letters exchanged between Gallant Y T Ho & Co and Kok & Ha between 6 July 2011 and 15 July 2011.  It is not necessary for the purpose of this judgment to set out or summarise the contents of those letters, save to point out that the differences between the parties were not resolved.

40. Eventually, by a letter dated 15 July 2011 to Gallant Y T Ho & Co, Kok & Ha on behalf of the plaintiff stated that the defendant had failed to prove and give a good title to the Property or to deal with requisitions satisfactorily with candour or at all, and that the plaintiff had no alternative but to accept the defendant’s repudiation.  Kok & Ha also demanded the defendant to refund all the deposits paid by the plaintiff.

41. On the other hand, Gallant Y T Ho & Co, by a letter to Kok & Ha dated 16 August 2011, stated that as the plaintiff had failed to pay the balance of the purchase price of the Property in the sum of HK$16,920,000 on the completion date of 15 July 2011 and thus committed a breach of the Formal Agreement, the defendant thereby exercised the rights under clause 16 of the Formal Agreement and forfeited all the deposits paid by the plaintiff.

KNOWLEDGE OF THE UNAUTHORISED PARTITIONS AND COCKLOFT

42. Both the defendant and the plaintiff say that they did not have knowledge of the unauthorised Cockloft, and the defendant further says that it did not have knowledge of the other shops on the Ground Floor of the Building, at the time of the signing of the Provisional Agreement or Formal Agreement.

(i)   The evidence of the plaintiff’s representative

43. Madam Shiu, who signed the Provisional Agreement on behalf of the plaintiff, gave evidence at the trial.  In her witness statement, which she confirmed and adopted as her evidence in chief, Madam Shiu said that she only viewed the Property “from the outside casually without actually going inside” before making up her mind to purchase the Property.  In her cross examination, Madam Chan said that prior to signing the Provisional Agreement:-

(1)  She had been told by an estate agent that there was a building order affecting the Property which related to an opening or a door, and that the building order was a simple matter to deal with. 

(2)  She did not know that the 2010 Building Order related to a cockloft in the Property.

(3)  She was not aware of any cockloft in the Property, or that there was a lavatory inside the cockloft.

(4)  Although she was aware that the 2010 Building Order related to a door, she did not think further as to where the door would lead to.

44. Madam Shiu also said that she did not know of the existence of the Cockloft prior to the signing of the Formal Agreement.

(ii)  The evidence of the defendant’s representatives

45. The defendant’s two directors and shareholders (Mr Lai Kwong Kuen Nelson and Madam Chan Po Shan) both gave evidence at the trial.

46. Mr Lai said in his cross examination that he did not know of the existence of the Cockloft until he gave evidence in court on 10 December 2015 and therefore did not disclose its existence to the plaintiff.  He further said that he did not know that the Ground floor of the Building had been divided into 4 shops until the plaintiff produced the expert report from Mr Tsang, which would be on or about 28 June 2011.

47. In his re-examination and in answer to some questions from the court, Mr Lai said that:-

(1)  at the time of the purchase of the Property[2], he had looked at it just from the outside;

(2)  he was aware of the 2010 Building Order (issued on 26 November 2010) prior to the defendant’s completion of the purchase on 23 December 2010;

(3)  he did not know of the existence of the Cockloft at the time of the signing of the signing of the Provisional Agreement on 1 March 2011, but was aware at that time that the 2010 Building Order related to a door;

(4)  he also did not know about the Cockloft at the time of the signing of the Formal Agreement but he seemed to have received a building order[3] at that time;

(5)  after he had received Kok & Ha’s letter dated 28 June 2011 which had enclosed with it some photographs showing the Cockloft, he went to the Property and looked at the door from the staircase but did not go to the Cockloft; and

(6)  he did not know of the existence of the other shops (A, C and D) at the time of the signing of the Provisional Agreement.

48. Madam Chan said in her evidence that prior to the defendant’s completion of the purchase of the Property on 23 December 2010:-

(1)  She was aware of the 2010 Building Order.

(2)  After her solicitor had told her about the 2010 Building Order, she went to the Property to have a look.  However, she only looked at the door from outside and never went inside the Cockloft.

49. Madam Chan also said that she was not aware of the existence of the Cockloft prior to the singing of the Provisional Agreement or Formal Agreement.  Neither was she aware of the existence of the other shops (A, C and D) prior to the signing of those agreements.

(iii)  Court’s findings

50. I accept Madam Shiu’s evidence that she was not aware of the existence of the Cockloft at the time of the signing of the Provisional Agreement or Formal Agreement.

51. I have, however, considerable reservations on Mr Lai and Madam Chan’s evidence that they were unaware of the existence of the Cockloft at the time of the signing of the Provisional Agreement.  While I am prepared to accept Mr Ng’s evidence that he had just looked at the Property from the outside prior to the purchase of the Property in the name of his wife in September 2010, on the evidence of Mr Lai and Madam Chan, they were both aware of the 2010 Building Order prior to the defendant’s completion of the purchase of the Property on 23 December 2010.  The 2010 Building Order identified an unauthorised door opening formed in the staircase enclosure wall between the ground floor and first floor of the Building.  Madam Chan in fact went to the Property to have a look after she had been told about the 2010 Building Order by her solicitor.  Although she claimed that she only looked at the door from the outside and did not go inside the Cockloft, it must have been obvious to her that the door would lead to some premises.  It is not in dispute that, as a matter of fact, the door provided the only means of access to the Cockloft. The defendant had been the owner of the Property since 23 December 2010 and Mr Lai and Madam Chan were at all material times the defendant’s only directors and shareholders.  In the ordinary course of events, they could easily make arrangements with the tenants to inspect the Property at any reasonable time.  The Cockloft was of substantial size, about 22 square metres in area.  Also, Mr Lai and/or Madam Chan were concerned enough about the 2010 Building Order that they specifically procured the Supplemental Agreement to be entered into between the defendant and Madam Shiu so that the purchaser would not be permitted to refuse to complete, or delay the completion of, the purchase of the Property by reason of the existence of the 2010 Building Order.  Lastly, Mr Lai’s evidence that he only came to learn of the existence of the Cockloft when he gave evidence in court on 10 December 2015 is just incredible.

52. In my view, it defies common sense for Mr Lai and Madam Chan to suggest that they were not aware of the existence of the Cockloft at the time of the signing of the Provisional Agreement.

53. In all the circumstances, I find as a fact that the defendant (through Mr Lai and Madam Chan) was aware of the existence of the Cockloft at the time of the signing of the Provisional Agreement.  I also find, on the balance of probabilities, that the defendant (through Mr Lai and Madam Chan) knew that the Cockloft was an unauthorised or illegal structure, having regard to the terms of the 2010 Building Order which required the reinstatement of the parts of the Building as affected by the door opening in accordance with the plans approved by the Building Authority.  In any event, that the Cockloft was an unauthorised or illegal structure was something which the defendant could easily have discovered prior to the making of the Provisional Agreement.

54. On the other hand, I am prepared to accept that Mr Lai and Madam Chan did not have knowledge of the unauthorised Partitions at the time of the signing of the Provisional Agreement or Formal Agreement.

ISSUE (1): IMPLED TERMS

55. Of the 3 implied terms pleaded by the plaintiff in paragraph 3 of the Statement of Claim, the second and third ones, to the effect that a vendor is generally obliged to:-

(a)   satisfactorily answer requisitions raised by the purchaser and show a good title within a reasonable time and before the date of completion; and

(b)  give or make a good title to the property on the date of completion,

should not be controversial.

56. Ms Lau argues that a vendor of land is also under a general implied obligation to “make full and frank disclosure to the [purchaser] of any defect in title or incumbrance over title which the [vendor] was aware” (ie, the first implied term contended for).  On the other hand, Mr Suen argues that, in relation to this duty of disclosure, only “actual knowledge” of the defect or incumbrance on the part of the vendor is relevant.  Both submissions assume that the vendor is under a general, stand alone, duty to make disclosure of defects in title.  It does not seem to me that this is the right way of looking at the vendor’s duty in the context of a sale and purchase of land in Hong Kong.

57. In support of her argument, Ms Lau refers to the following passages in the decision of Poon J (as he then was) in Goldenwick Ltd v Standard Chartered Bank (Hong Kong) Ltd [2008] 3 HKLRD 266:-

“90 A contract for sale of land is not a contract of the utmost good faith in which there is an absolute duty upon each party to make full disclosure to the other of all material facts of which he has full knowledge. However, a vendor of land has a duty to disclose to a prospective purchaser any latent defects in title. These are incumbrances and other adverse matters of title which the purchaser could not discover for himself by inspecting the property with reasonable care; discovery is reasonably possible, and defects patent, only where there is some visible indication on the property of the existence of third party rights : see Farrand on Contract and Conveyance, 4^th edn, at p. 63.

91. In Faruqi v. English Real Estates Ltd [1979] 1 WLR 963, Walton J had this to say about the duty of disclosure at p. 967C-D :

‘It has for a long time been the view of equity that if there is a defect in the title and the vendor knows that there is a defect … then it is the duty of the vendor to disclose the same fully and frankly in the particulars or in the conditions, or at rate in some place where the purchaser’s attention will be drawn to it.’

And the test of adequate disclosure is whether an ordinary purchaser would understand what the difficulty is when reading the particulars or conditions : at pp. 967D-977E.”

58. It should be noted, however, that the discussion by Poon J regarding the duty of a vendor to disclose to the purchaser any latent defects in title was in the context of a vendor seeking to rely on a contractual provision limiting the title to be proved or given (see paragraph 79(2) of Poon J’s judgement in Goldenwick). In that case, the contract provided that the property was sold subject to and with the benefit of (inter alia) a sub-deed of mutual covenant.  It transpired that part of the property contracted to be sold was within the definition of “common services and facilities” in the sub-deed of mutual covenant, while another part of the property was subject to a common right of way in favour of other co-owners under that deed.  The question that Poon J had to decide was whether the vendor could rely on the provision in the contract that the property was sold subject to and with the benefit of the sub-deed of mutual covenant as an answer to the purchaser’s requisitions or objections on title that parts of the property contracted to be sold were common services and facilities or subject to a common right of way in favour of other co-owners.  The learned judge answered that question in the negative.

59. The same comment applies to the Faruqi case (referred to by Poon J in his judgment), where the contract provided, by a special condition, that the property was sold “subject to entries on the registers of title”.  The vendor was unable to produce a deed referred to in the charges register containing various restrictive covenants affecting the property, and sought to rely on the said special condition to excuse its failure to produce the deed. Walton J refused to enforce the contract by an order of specific performance on the ground that the vendor was under an obligation to make a full and frank disclosure of any known defects in title if it wished to rely on the special condition.

60. In the context of a simple contract for the sale and purchase of land in Hong Kong, the vendor’s duty, in general, is to prove and give a good title.  It is not a defence for the vendor to say that he did not have knowledge of any defects in title at the time of the making of the contract.  The issue of knowledge becomes relevant, however, when the vendor seeks to rely on a contractual provision limiting the title to be proved or given.  In such a case, the proper inquiry is whether, upon the true construction of the limitation provision, it is intended to apply to the relevant defect in title notwithstanding the vendor’s knowledge of it at the time of the making of the contract: see the judgment of Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd & Others (1999) 2 HKCFAR 279 at 299:-

“On the question of the cocklofts I agree with Litton P.J. that clauses 18(e) and 19 preclude the purchaser from basing any objection to title on this ground. Miss Eu submitted that there was a rule of equity which prevented a vendor, as a matter of law, from relying on such clauses in a case in which he knows or ought to know of a defect in title. I think that is putting the matter far too broadly. Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like. What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser. As is stated in Farrand, Contract and Conveyance (4^th ed.) at p. 93, such conditions are ‘subject to the overpowering principle that the vendor must not mislead the purchaser in any way; this means that a sufficient indication of the risk must be given before the contract is made.’ This may be said to leave it unclear whether the ‘overpowering principle’ is an aid to construction of the contract or something which operates outside the contract. It probably does not matter, although for my part I think it is better regarded as a matter of construction. Thus it is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew. No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do. On the other hand, the position is different if the vendor did not actually know of the defect but had the means of knowledge, or if the matter was technically a defect in title but something which a purchaser might reasonably be prepared to accept. Prima facie it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v. Partridge [1966] 2 Q.B. 155. In the present case, however, the language of clause 18 (e) was entirely apt to cover the cocklofts. No one who had read that clause and saw the cocklofts could have failed to appreciate that he was being asked to bear the risk that they were unauthorised structures. The language seems to me perfectly clear. And therefore, in the absence of any evidence that the vendor actually knew that they were unauthorised, the purchaser was in my opinion bound by the clause.”

61. There is no general rule that only “actual knowledge” of the relevant defect in title on the part of the vendor is relevant to this inquiry.  Whether the vendor will be debarred from relying on a contractual provision limiting the title to be proved or given by reason of actual, or some lesser degree of, knowledge of the defect in title would depend on the true construction of the contractual provision in question.

ISSUE (2): DID THE DEFENDANT FAIL TO MAKE DISCLOSURE OF DEFECTS IN TITLE OF WHICH IT WAS AWARE

62. For the reasons mentioned above, the proper question is not whether the defendant failed to make disclosure of defects in title of which it was aware, but whether the defendant is entitled to rely on the relevant contractual provisions limiting the title to be proved or given notwithstanding its knowledge of such defects in title.  This raises an issue of construction of the contract, and will be considered below under Issue (3).

ISSUE (3): WAS THE PLAINTIFF PRECLUDED BY CONTRACT FROM RAISING ANY REQUISITIONS OR OBJECTIONS ON TITLE BASED ON THE UNAUTHORISED OR ILLEGAL PARTITIONS AND COCKLOFT

63. The first question which arises for consideration is whether the Illegal Structure Clause relied upon by the defendant forms part of the Formal Agreement.

(i)   No proper basis for incorporation of the Illegal Structure Clause into the Formal Agreement as a matter of construction

64. On behalf of the defendant, Mr Suen submits that the Illegal Structure Clause is incorporated into the Formal Agreement as a matter of construction of the Formal Agreement.  He refers to the well known judgments of Lord Hoffmann in Jumbo King Limited v Faithful Properties Limited (1999) 2 HKCFAR 279 and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 relating to the principles for construction of contracts, as well as the judgment of Ma CJ in Fully Profit (Asia) Limited v Secretary for Justice (2013) 16 HKCFAR 351 regarding the importance of adopting a contextual approach in the interpretation of contracts.

65. Mr Suen’s argument, as I understand it, is as follows:-

(1)  By virtue of, inter alia, the Illegal Structure Clause and Partition Clause in the Provisional Agreement and the Supplemental Agreement, the parties agreed to shift the risk of any defect in title arising from unauthorised structures or partitions to the plaintiff (purchaser), such that the defendant would not be liable or responsible for any order or enforcement action which might be issued or taken by the Government or Building Authority prior to completion, and the plaintiff could not complain about such matters.

(2)  In the absence of any change of circumstances, it would be “against common sense”, or “utterly bizarre” or “unbelievable” to suggest that, when the Formal Agreement came to be signed, the parties suddenly agreed to shift the risk of any defect in title arising from unauthorised structures or partitions back from the plaintiff to the defendant.

(3)  The plaintiff was not entitled to insist on a completely different or indeed opposite term in the Formal Agreement requiring the defendant to show and give an unencumbered title, and the defendant was under no obligation to accept such different or opposite term.

(4)  The defendant’s argument is reinforced by the fact that the plaintiff did not provide any consideration or benefits to the defendant for shifting the risk of defect in title back to the defendant.

66. In my view, the argument that that the Illegal Structure Clause is incorporated into the Formal Agreement as a matter of construction of the Formal Agreement is simply unsustainable.

67. The Illegal Structure Clause in the Provisional Agreement consists of three main parts:-

(1)  the Property is sold on an ‘as is’ basis to the purchaser;

(2)  the purchaser has inspected the Property in its existing state; and

(3)  the purchaser is not permitted at any time thereafter to raise any requisitions, or refuse to complete or defer completion on the ground of any unauthorised additions, alterations or building structures to or in the Property.

68. On the other hand, Clause 8 of the Formal Agreement contains only the first part of the Illegal Structure Clause.  The second and third parts of the Illegal Structure Clause have been omitted from the Formal Agreement. It has not been suggested by Mr Suen, and it cannot reasonably be suggested, that the second and third parts of the Illegal Structure Clause do not have any meaning or effect. 

69. In the context of sale and purchase of real properties in Hong Kong, although a provisional sale and purchase agreement is generally binding on the parties, once a formal agreement is drawn up and signed it supersedes the provisional agreement: see Man Sun Finance (International) Corporation v Lee Ming Ching Stephen [1993] 1 HKC 113, at 117 per Litton JA (as he then was) and 125 per Godfrey J (as he then was); Wise Think Global Ltd v Finance Worldwide Ltd (2013) 16 HKCFAR 799, at paragraph 31 per Litton NPJ.

70. In the present case, the parties were represented by their own solicitors in relation to the preparation and execution of the Formal Agreement.  It was a matter entirely for them, acting with the benefit of legal advice, to decide what provisions in the Provisional Agreement to retain in, or omit from, the Formal Agreement.  As a matter of fact, they expressly agreed to incorporate into the Formal Agreement the provisions in the Annexure and the Supplemental Agreement.  In such circumstances, I fail to see how the second and third parts of the Illegal Structure Clause, which have been omitted from the Formal Agreement, can be brought back into it by any process of construction.

71. In respect of the argument that the plaintiff did not provide any consideration or benefits to the defendant for shifting the risk of defect in title back to the defendant, it seems to me that the making of the Formal Agreement, which contained many additional terms conferring new rights or imposing new obligations on the plaintiff and defendant respectively, would be sufficient consideration as a matter of law.

72. At the trial, there was some debate as to whether it is permissible, as a matter of principle, for the court to take into account what the parties have expressly agreed to “delete” from an earlier draft of the contract for the purpose of construction of the final contract.  Whatever may be the true legal position, I have not find it necessary to rely on such extrinsic evidence in coming to the conclusion that the Illegal Structure Clause is not incorporated into the Formal Agreement as a matter of construction of that agreement.

(ii)  No proper basis for rectification of the Formal Agreement

73. Mr Suen next argues that the Formal Agreement should be rectified to bring the Illegal Structure Clause back into it, and relies on the following statement of principle by Gibson LJ (with whom Jonathan Parker LJ agreed) in the decision of the English Court of Appeal in Swainland Buildings Ltd v Freehold Properties Ltd [2002] 2 EGLR 71:-

“32. Before I turn to the rival contentions advanced before us, let me state the conditions that must be satisfied if the court is to order rectification in a case where it is alleged, as it is here, that there has been a mistake common to the parties.

33. The party seeking rectification must show that:

(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2) there was an outward expression of accord;

(3) the intention continued at the time of the execution of the instrument sought to be rectified;

(4)  by mistake the instrument did not reflect that common intention.”

74. In his final submissions, Mr Suen also relied on “unilateral” mistake in support of the defendant’s case on rectification.

75. The evidence at the trial, however, makes the defendant’s case on rectification untenable.

76. Although pre-contract negotiations are generally not admissible for the purpose of construction of the contract, they are admissible for the purpose of a claim for rectification of the contract: see Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, at paragraph 42 per Lord Hoffmann, quoted by Lam VP in Channel Green Ltd v Hugh Grand Ltd [2015] 1 HKLRD, at paragraph 35.

77. In the present case, after the parties had signed the Provisional Agreement, they had no further direct dealings with each other prior to the execution of the Formal Agreement.  Instead, the negotiation of the terms, and the arrangement leading to the execution, of the Formal Agreement were dealt with by their respective solicitors on their behalf.

78. In the initial draft formal agreement prepared by Gallant Y T Ho & Co on behalf of the defendant which was sent on 14 March 2011 to Wong & Co (then acting for the plaintiff) for their approval, clause 8 (“the Draft Clause 8”) thereof was in these terms:

“The Property is sold on an ‘as is’ basis. The Purchaser has inspected the Property and shall be deemed to be satisfied with and accepts the existing physical state, condition and finishes of the Property and shall take the Property as it stands. 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 fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the building of which the Property forms part (‘the Building’);

(b) the permitted user of the Property;

(c) the fitness of the Property for development or the redevelopment potential of the Property or the Building; and

(d) the construction of the Property is in accordance with the approved building plans of the Building.”

79. However, when the draft formal agreement was returned by Wong & Co to Gallant Y T Ho & Co on 23 March 2011, apart from the first sentence of the Draft Clause 8 (ie, “The Property is sold on an ‘as is’ basis”), the rest of that clause was crossed out.  That amendment was accepted by Gallant Y T Ho & Co on behalf of the defendant, as evidenced by the final form of the Formal Agreement executed by the parties.

80. Madam Chan, a director and the principal witness of the defendant who signed the Formal Agreement on its behalf, said in her evidence that before she signed the Formal Agreement, it had been shown to her and the contents thereof had been explained to her by the defendant’s solicitors.  Significantly, Madam Chan also said that she in fact noticed that clause 8 of the Formal Agreement contained only the first part of clause 8 of the Provisional Agreement (ie, the Illegal Structure Clause) and she told her solicitor (Mr Wong) that something had been missed out.  Madam Chan said that before she signed the Formal Agreement, she had told her solicitors that the whole of clause 8 of the Provisional Agreement should be reproduced in the Formal Agreement. However, as a matter of fact, she signed the Formal Agreement which plainly contained only the first part of clause 8 of the Provisional Agreement.

81. Although Madam Chan sought to retract part of her aforesaid evidence in re-examination, I am unable to accept her retraction of the above evidence which I consider to be clear in substance and effect.

82. Accordingly, if the matter is to be looked at objectively, it is clear that the parties agreed that only the first part of the Illegal Structure Clause was to be retained in the final form of the Formal Agreement, and the omission of the rest of the Illegal Structure Clause was not because of any mistake in failing to express or reflect the common intention of the parties in the Formal Agreement.  Even if one should also have regard to the evidence of what transpired between Madam Chan and the defendant’s solicitors, it cannot be said the Formal Agreement mistakenly failed to record the common intention of the parties.  Madam Chan was fully aware of the fact that only the first part of the Illegal Structure Clause appeared in the Formal Agreement that she was asked to sign and the rest of the Illegal Structure Clause had been omitted.  Although she raised that matter with the defendant’s solicitor, she signed the Formal Agreement in the form that was presented to her.  It is obvious that she did not insist on the whole of the Illegal Structure Clause being reproduced in the Formal Agreement.  There was not, therefore, any relevant mistake which could support a claim for rectification of the Formal Agreement.

(iii)  Plaintiff not precluded by Clause 8 of the Formal Agreement, the Partition Clause and the Supplemental Agreement from raising any requisitions or objections on the title of the Property based on the unauthorised Partitions (of Ground Floor into 4 shops) and Cockloft

83. Clause 8 of the Formal Agreement, which provides that the Property is sold on an ‘as is’ basis, relates only to the physical condition of the property; it does not preclude the plaintiff from raising requisitions or objections arising from illegal structures or other matters as to title: see All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630, at paragraphs 32 to 33 per Le Pichon JA (with whom Rogers VP agreed), followed by Sakhrani J in Poon Mee Kuen v Chan Hor Tong, HCMP 1431/2004 (18 January 2005), at paragraphs 41 to 42.

84. The Partition Clause refers to the division of Property into B1 and B2 and the letting thereof to two tenants, and provides that the plaintiff is not entitled to raise any requisitions, or refuse to complete or delay completion, by reason of such matters.  I consider the Partition Clause to be sufficient to preclude the plaintiff from raising any requisitions or objections on title based on the partitioning of the Property into two shops.  However, the Partition Clause does not refer to the partitioning of the Ground Floor of the Building into four shops (A, B, C and D).  It cannot, in my view, preclude the plaintiff from raising requisitions or objections on title arising from such partitioning.  Further, the Partition Clause has no relevance in so far as the Cockloft is concerned.

85. The Supplemental Agreement expressly refers to the 2010 Building Order, and provides that the parties agree that the defendant, subject to the payment of the sum of HK$20,000 to the plaintiff, would not be responsible for any other removal order or repair order which might be issued by any government departments prior to completion.  The Supplemental Agreement makes no mention of any cockloft.  Even if one were to refer to the 2010 Building Order itself, it only mentions “the door opening formed in the staircase enclosure wall between G/F and 1/F”, but does not mention any cockloft.  Since a vendor is generally under a duty to convey a good title to the purchaser, if he wishes to rely on a contractual stipulation to limit or qualify the title to be conveyed, the language must clearly do so.  As stated by Lord Hoffmann in Jumbo King Ltd at 299:-

“Prima facie it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v. Partridge [1966] 2 Q.B. 155.”

86. In my view, the language of the Supplemental Agreement is insufficiently clear to preclude the plaintiff from raising requisitions or objections on title in relation to the unauthorised Cockloft which the defendant was aware of or could easily have discovered.  Further, the Supplemental Agreement has plainly no relevance in so far as the partitioning of the Ground Floor of the Building into four shops is concerned.

ISSUE (4): DID THE PLAINTIFF RAISE ANY REQUISITIONS IN REPSECT OF THE PARTITIONS AND COCKLOFT IN COMPLIANCE WITH CLAUSE 10(a) OF THE FORMAL AGREEMENT; IF NOT, WAS THERE WAIVER BY THE DEFENANT OF ITS RIGHT UNDER CLAUSE 10(a) OF THE FORMAL AGREEMENT

(i)   Whether requisitions properly raised and in compliance with clause 10(a) of Formal Agreement

87. Clause 10(a) of the Formal Agreement provides that the plaintiff shall raise any requisition or objection in respect of title to the Property within seven (7) working days after the date of receipt of the title deeds by its solicitors, otherwise the same shall be considered as waived.

88. As earlier mentioned, the title deeds and documents relating to the Property were sent by Gallant Y T Ho & Co to Wong & Co on or about 23 March 2011.  The Illegal Structure Requisition, which was raised by Wong & Co’s letter dated 31 March 2011, was within time.  However, that requisition, which required the defendant to state “whether there is/are any unauthorised or illegal structure(s) or alteration(s) of and in the property”, is not a proper requisition.  A virtually identical requisition was considered by Deputy High Court Judge Yeung, SC in Continental Zone Limited v More Glory International Limited, HCMP 446/2012 (18 April 2013).  In that case the requisition was in these terms: “Please take instructions from your client and advise us whether there is/are any unauthorized or illegal structure(s) or alteration(s) of and in the Property”.  The learned deputy judge held that the requisition was not a proper one.  His reasons for coming to that conclusion can be found in paragraph 28 of his judgment:-

“I refer to the wording of Requisition 16. It made no reference to any plan, approved or otherwise. It was not supported by any expert report. It in fact did not even refer to any particular structure. In effect, it simply requested the Defendant to make a confession as to the existence of any illegal structure. In my view, it lacked the specificity and precision to qualify as a proper requisition. The Defendant was not obliged to answer it.”

89. On the other hand, the plaintiff’s further requisitions raised on 28 June 2011 and 30 June 2011 were clearly out of time.  Nevertheless, Ms Lau argues that the plaintiff was entitled to raise or rely on those requisitions on the grounds that:

(1)  the defendant waived the time limit by purporting to answer the requisitions, and/or

(2)  the requisitions go to the root of title and the defects could not have been discovered even if the plaintiff had exercised due diligence.

90. At the trial, Mr Suen took a pleading objection to the plaintiff’s reliance on ground (2) above.  I do not propose to deal with the pleading point since I have come to a clear conclusion, for reasons appearing below, that this ground is not well founded.

(ii)  No waiver

91. There was at one time a strict approach taken that any answer to a requisition raised out of time would amount to a waiver of the time limit unless the answer is accompanied by a clear statement that it is without prejudice to the vendor’s right to reject the requisition on the ground of lateness.  This strict approach can be seen in a judgment of the late Jerome Chan J in Ultra Eternal Ltd v Liu Tai Cheong [1997] 1 HKC 258 at 267, as follows:-

“It is advisable that solicitors should avoid answering out-of-time requisition ‘as a matter of courtesy’. Any reply to such invalid requisitions, if not accepted as a properly raised requisition, should only be ‘answered’ subject to very clear statement that such answer was to be wholly without prejudice to the rejection of such requisition on ground of lateness. Such a warning can also be found in Emmet on Title (19^th Ed) para 5080.”

92. The strict approach was not, however, followed by Mr Recorder Ribeiro SC (as he then was) in Big Foundation Development v Wong Shu Kei, HCMP 4536 of 1997 (16 June 1998).  At paragraphs 23 and 27 of his judgment, the learned Recorder stated as follows:-

“The Plaintiff argues that the time limit was in any event waived by AYC's reply mentioned above. The argument is based on the following dictum in Ultra Eternal Ltd v Liu Tai Cheong [1997] 1 HKC 258 (Jerome Chan J) at 266-7 as follows …

In any event, the paragraphs in AYC's reply fell far short of the unequivocality required for a waiver of their client's contractual rights. If, contrary to the construction I have adopted, the second and third paragraphs of AYC's reply do constitute answers to the purported requisition, I would nonetheless respectfully decline to follow the approach suggested obiter in the Ultra Eternal case. I would hold that notwithstanding the giving of such answers, the clear express refusal to entertain the requisition precluded any waiver. In my view, the burden rests on the party alleging that the time limit is waived to show that this has unequivocally been done. The other party does not shoulder the burden of expressly excluding a waiver, whether by having to add express words preserving what is already his right by contract or otherwise. Solicitors should not be placed at risk of waiving their clients’ rights as a result of a response given purely as a matter of courtesy, in the absence of a clear and unequivocal waiver.”

93. In Goldmex Ltd v Edward Wong Finance Co Ltd [2006] 2 HKLRD 795, Deputy Judge A To (as he then was) expressed his preference for the approach of Mr Recorder Ribeiro SC.  At paragraph 22 of his judgment, Deputy Judge A To stated:

“I respectfully prefer the approach of Mr Recorder Ribeiro SC. As a matter of principle, the burden of proving a waiver must be on the party alleging that the time limit has been waived. A waiver is not to be lightly inferred from the mere fact that a vendor answers a requisition made out of time. It is wrong in principle to cast the burden on the party answering the requisition to show that a waiver has been excluded by using any form of expression. A waiver is not to be inferred especially in the face of clear language to the contrary. Furthermore, answering a requisition is also what a willing vendor possessed of robust common sense would do to help to ease the mind of the purchaser if he has a good answer to the requisition. Such practice should be encouraged rather than to be discouraged by any unduly cautious approach.”

94. I too would respectively prefer the approach of Mr Recorder Ribeiro SC in Big Foundation Development as being more consistent with the general principle that waiver of a contractual right by conduct requires proof of some clear and unequivocal act by a party which is consistent, and consistent only, with an intention by that party to waive the right in question.

95. In the present case, although Gallant Y T Ho & Co did not, in their letter dated 5 July 2011 in reply to Kok & Ha’s letters dated 28 June 2011 and 30 June 2011, expressly rely on clause 10(a) of the Formal Agreement to contend that the requisitions or objections were raised out of time, they did contend that the plaintiff was not entitled to raise those requisitions or objections (because of the Partition Clause and the Supplemental Agreement which had been incorporated into the Formal Agreement).  Furthermore, Gallant Y T Ho & Co expressly reserved all the defendant’s rights.  The same reservation appeared in Gallant Y T Ho & Co’s subsequent letters to Kok & Ha relied upon by the plaintiff as establishing waiver on the part of the defendant.

96. For my part, I do not consider Gallant Y T Ho & Co’s letters, read either individually or collectively, to be sufficiently clear or unequivocal to evince, on behalf of the defendant, an intention that it would not rely on, or would relinquish, its rights under clause 10(a) of the Formal Agreement.  It follows that I would reject the plaintiff’s waiver argument.

(iii)  Defects not going to the root of title

97. In respect of the division of the Ground Floor of the Building into 4 shops, although Mr Tsang in the Report stated that the division of the Ground Floor into many smaller shops was in contravention of the occupation permit, he did not say that the works involved amounted to unauthorised building works and alterations carried out without the approval of the Building Authority, or that there was any real risk of enforcement action being taken by the Government/Building Authority.  He only came to mention that in his expert report prepared for the purpose of these proceedings.  There, he made a bare statement that the works which resulted in the division of the original ground floor into the smaller shops were “liable to be objected by the Building Authority and there is a real risk of the Government taking enforcement action against the owner of the Property including but not limited to requiring demolition and reinstatement of the affected parts of the Property and/or of the building”. No example or case was cited where, in similar circumstances, the Government or the Building Authority took enforcement action to require the demolition of the partitioning and reinstatement of the property to its original state.

98. In Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, the occupation permit dated 29 January 1964 stated that there were seven tenements on each of the third to eleventh floors of the building but there were, as a matter of fact, nine self-contained tenements on the ninth floor of that building. In the deed of mutual covenant dated 21 March 1964, it was mentioned that the third to eleventh floors were divided into nine flats per floor.  The property the subject matter of the sale and purchase was one of the flats on the ninth floor of the building.  A requisition was raised on behalf of the purchaser relating to the discrepancy in the number of flats on the ninth floor. Litton JA (with whom the other members of the Court of Appeal agreed) stated, at page 408 lines 14-23, as follows:-

“One thing, however, is certain: whatever the nature of the alterations, any remedial work would have involved every owner of the 9/F. Each owner, under the DMC, has exclusive possession of his particular unit and no demolition removal or alteration by an owner to comply with an order served on him under s24(2) of the Buildings ordinance could have been effected without trespass upon his neighbour. It is difficult to see how, in these circumstances, an order can lawfully be made under the provisions of s24(1), since under subsection (2) it must be served either upon the ‘owner of the building’ - para. (a), meaning all the co-owners of Yuen King Building - or, under para. (aa) ‘the owner thereof’ meaning the owner of the building works. This contemplates that, in practical terms, the owner or owners can comply with the order made under subsection (1). They may not be able to do so in this case.”

99. At page 409 line 44 to page 410 line 18, Litton JA further stated the following:-

“Whatever the unlawful alterations might have been, resulting in the nine flats on each floor of Yuen King Building, the ‘works’ must have passed into the ownership of the individual owners of the flats a very long time ago. 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). This situation is to be contrasted with that in Giant River Ltd. v. Asie Marketing Ltd.(1990)1 HKLR 297. That case did not concern any co-owners of property. It concerned a detached house, No. 66 Black's Link, standing within its own grounds. Three basement floors, a roofed-over inner court and balconies had been constructed by a previous owner without approval by the Building Authority and were liable to be ordered to be demolished under s24. The risk of ‘enforcement action’ was of immediate concern to the owner. No-one else was involved. He was not being asked to tear down someone else’s walls and partitions; ‘enforcement action’, if taken, would have impinged upon his right of occupation of the house. It was a blot on the title to the property to that extent. No such circumstance seems to exist in the present case. The position would have been different if the Building Authority had issued a certificate under section 33(8) and registered a memorial thereof under subsection (9) against Flat C 9/F in relation to work done under s.24(3). A possibility that, sometime in the future, the owner of Flat C 9/F might have to share with the other co-owners the cost arising out of something done to the building does not affect the title to the flat: no more than if, for instance, the lifts should fail and the co-owners had to share the cost of repair or replacement.”

100. Litton VP concluded that there was no real risk of enforcement action being taken by the Building Authority in that case (see paragraph 71 of his judgment).

101. In the present case, the partitioning of the Ground Floor of the Building into 4 shops would affect the owners of all 4 shops.  It may be argued that an order may be issued by the Building Authority to all 4 owners to require demolition of the partitions and reinstatement of the Ground Floor of the Building in accordance with the approved building plans, assuming that some such order can lawfully be made.  It seems clear, however, that such an order cannot be complied with by the owner of Shop B alone.

102. It is relevant, as one can see from the land search of the Property, that the first assignment of the Property (Shop B on the Ground Floor of the Building) was dated 8 May 1973.  In other words, the Property as a separate unit appears to have existed for nearly 38 years by the time that the Provisional Agreement was entered into.  It does not appear that any action has ever been taken by the Government or Building Authority to require demolition of the partitions and reinstatement of the Ground Floor of the Building in accordance with the approved building plans.

103. In all the circumstances, I am of the view that there is no real risk of any enforcement action being taken by the Government or Building Authority in respect of the unauthorised Partitions.  I pause to add that Ms Lau has not in fact been able to pinpoint what action can lawfully be taken by the Government or Building Authority in respect of the unauthorised Partitions.  The risk of action being taken by the incorporated owners or other co-owners of the Building to object to the Partitions seems to me to be even more remote.

104. On the other hand, having regard to the fact that the Building Authority has already taken action in respect of the door to the Cockloft, I consider that there is a real risk of enforcement action being taken by the Building Authority, but not by the incorporated owners or other co-owners of the Building, in respect of the unauthorised Cockloft.

105. The next question is whether this risk of enforcement action by the Building Authority goes to the root of title.

106. What title defect would go to the root of title was also considered by Mr Recorder Ribeiro SC in Big Foundation Development.  At pages 5 to 6 of his judgment, the learned Recorder stated as follows:-

“ It is common ground (in my view, obviously correctly) that not every unauthorized structure goes to the root of title. Whether or not it does so depends on the nature and extent of the unauthorized structure, the risk of enforcement action that it poses and the likely consequences of any such enforcement action, including risk of the property becoming encumbered or subject to re-entry by the Government: see, e.g., Chan Chik-sum v Great Pearl Industries Ltd [1997] 1 HKC 27 at 32; Ji Shan International Investment Ltd v Resources Main Enterprises Ltd & Anr (Unreported, 30^th March 1998), Civ App No 213 of 1997, at p 11.

As Mr Raymond W.S. Chan appearing for the Defendant pointed out, in the authority cited by the Plaintiff, there was ample evidence that extremely extensive unauthorized structures had been built on the property in question, consisting of three lower basements, the inner court and certain balconies, all forming part of the property (Giant River Ltd v Asie Marketing Ltd [1990] 1 HKLR 297 at 300E-F). Plainly, where there is only a minor unauthorized structure which is readily capable of being removed and the property reinstated, the defect does not per se go to the root of title.”

107. In the present case, it is apparent, form the evidence of Mr Lai, Madam Chan and Madam Shiu, that none of them considered the 2010 Building Order, or indeed any unauthorised building works in the Property, to be of any great moment.  Prior to the respective purchases of the Property by the defendant (through Madam Chan) and the plaintiff (through Madam Shiu), none of them took the trouble to go inside the Property to inspect its physical conditions, or ascertain whether there might be any unauthorised building works in the Property.  Even after her attention had been drawn to the 2010 Building Order, Madam Shiu did not carry out any further investigation prior to entering into a binding contract to purchase the Property, and was prepared to accept a modest sum of HK$20,000 from the defendant as sufficient compensation for the costs of complying with the 2010 Building Order.  The existence of unauthorised building works in retail premises, especially in the older districts in Hong Kong, is common place and does not appear to have any significant impact on their market or capital values.  These properties change hands frequently like ordinary commercial commodities, as demonstrated in the present case by the fact that the defendant (through Madam Chan) purchased the Property in September 2010 and sold it to the plaintiff (through Madam Shiu) in March 2011 for a handsome profit.  It is contrary to market reality to treat the existence of an unauthorised cockloft, even of a substantial size like the present one, as constituting a title defect going to the root of title.  The worst that could happen in the present case, it seems to me, would be an order by the Building Authority requiring the Cockloft to be demolished. The practical consequence of such an order, however, would not be any different from that achieved by the 2010 Building Order.  Under that order, those parts of the Building affected by the building works complained of by the Building Authority, namely, the door opening formed in the staircase enclosure wall between the ground floor and first floor of the Building, which provides the only means of access to the Cockloft, have to be reinstated in accordance with the approved building plans.  In either case, the Cockloft could not be used.

108. In all, I am of the view that although the unauthorised Cockloft gives rise to a defect in title of the Property, such defect does not goes to the root of title.

(iv)  Defects could have been discovered if the plaintiff had exercised due diligence

109. Madam Shiu’s attention was drawn to the existence of the 2010 Building Order prior to the making of the Provisional Agreement.  She did not, however, carry out any further investigation at that time to ascertain the nature or extent of the unauthorised building works complained of the Building Authority.  According to Madam Shiu, the plaintiff was prompted to engage Mr Tsang to inspect the Property only because in or about June 2011, a friend of Madam Shiu happened to ask her whether she had ever conducted any professional inspection of the Property in order to ensure that it was free from illegal structures the existence of which would affect the plaintiff’s mortgage loan application and the future sale of the Property.  I have considerable reservation on this evidence of Madam Shiu having regard to her previous experience in the sale and purchase of retail properties in Hong Kong.  In any event, Mr Tsang was able to come up with a report which identified the unauthorised Partitions and Cockloft without any apparent difficulty.  In my view, the unauthorised building works in the Property could easily have been discovered had the plaintiff exercised due diligence prior to the making of the Provisional Agreement.

110. In all, I am of the view that the plaintiff is precluded by Clause 10(a) of the Formal Agreement from raising any requisitions or objections on the title of the Property based on the Partitions or Cockloft.

OTHER ISSUES

111. In view of the conclusions reached above, Issues (5) and (6) do not arise for consideration.

112. However, if I am incorrect in my view that the plaintiff is precluded by clause 10(a) of the Formal Agreement from raising any requisitions or objections in respect of the Partitions or Cockloft, I would find that:-

(1)  the defendant failed to properly answer the requisitions raised by Kok & Ha’s letters dated 28 and 30 June 2011 relating to (a) the partitioning of the Ground Floor of the Building into 4 shops, but not the further sub-division of Shop B into B1 and B2, and (b) the Cockloft, or show a good title to the Property by the date of completion (Issue (5)); and

(2)  the defendant was unable to give or make a good title by the date of completion by reason of the existence of the Cockloft in the Property (Issue (6)).  In this regard, I do not consider the partitioning of the Ground Floor of the Building into 4 shops to constitute a defect in title of the Property, because I do not consider that there is any real risk of enforcement action being taken by the Government/Building Authority or the incorporated owners or other co-owners of the Building.

DISPOSITION

113. For the above reasons:-

(1)  I dismiss the plaintiff’s claim against the defendant;

(2)  I grant a declaration that the defendant is entitled to forfeit the deposits and part payments in the total sum of HK$1,880,000 paid by the plaintiff under the Provisional Agreement and Formal Agreement.

114. I also make an order that the plaintiff shall pay to the defendant 70% of its costs of this action, including the costs incurred in the counterclaim, to be taxed if not agreed.  The reduction is on account of the following two matters:-

(1)  the failed defence of rectification raised by the defendant took up most of the time spent in taking oral evidence at the trial;

(2)  the defendant abandoned the defence of substantial performance only on the first day of the trial.

115. Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.