GOLDFUL WAY DEVELOPMENT LTD. v. WELLSTABLE DEVELOPMENT LTD.

HCMP 2405/97

HEADNOTES

1. A structure is part of property agreed to be sold if it is a fixture, or (even if it is not a fixture) if, upon consideration of the degree and the objective purpose of its annexation, it is part and parcel of the land (Elitestone Ltd v Morris [1997] 1 WLR 687 applied).

2. A vendor is not a bare or dormant trustee of property he has agreed to sell. His relationship as trustee for the purchaser subsists subject to his paramount right to protect his own interest as vendor of the property (Shaw v Foster (1872) LR 5 HL 321 applied; Sun Great International Ltd v Polly Hui Lai Ying HCA 10742/94 unrep. not followed).

3. The question to be asked when there is a structure which comprises unauthorised building works on the property, which the vendor wishes to demolish prior to completion, is whether the vendor could still be regarded as performing the agreement if he assigns the property without the structure.

4. In a Vendor and Purchaser Summons, it is open to a court to find that good title can be given when a vendor offers substantial performance (Manning v Turner [1957] 1 WLR 91, Pyrke v Waddingham 1 Hare 1, Annie Pang Chor Ying v Lifton Investments Ltd [1993] 2 HKC 57 considered).

5. The test whether there is substantial performance is whether the vendor will be conveying substantially what the purchaser has contracted to get, depending on the nature of the defect, the proportion of the land that is affected, and the purposes for which the parties knew or ought reasonably to have known that it was being sold, and on any other matters which the parties knew or ought reasonably to have known to have affected the decision of the purchaser to enter into the agreement (Shepherd v Croft [1911] 1 Ch 521, 528-9, Flight v Booth 5 Will IV 370, 377, Hamilton v Munro (1951) 51 SR (NSW) 250, 253-4 applied).

HCMP 2405/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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

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

JUDGMENT

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

1. This is a Vendor and Purchaser Summons. The Plaintiff is the purchaser and the Defendant is the vendor of a detached house with grounds ("the Property") in a development at the Redhill Peninsula.

2. Under the Agreement for Sale and Purchase made between the parties on 1 March 1997 ("the Agreement"), completion was originally scheduled for 1 August 1997. An issue as to good title having arisen between the parties, this Originating Summons was issued on 29 July 1997. The parties have agreed to postpone completion date to 5 working days after delivery of this judgment.

THE STRUCTURE IN QUESTION

3. The question of title here arises from the existence of a structure at the back of the house. It was called a "green house" by the Purchaser's Solicitors in their requisition and it appears from the photographs exhibited to be in the nature of an enclosure. I shall adopt that description here. The enclosure occupies part of the paved back yard. Access from the house is from either the kitchen or the servants' quarters. The photographs before the Court show that it is single-storeyed, and is made up of glass panels supported by an aluminium frame, with sliding doors leading to the rest of the back yard.

4. According to a surveyor instructed by the Vendor, it is about 17.40 sq. m., or about 3.93% of the total floor area of the property. Counsel for the Purchaser says that if the car park and the roof are deducted, then according to their calculations the area occupied by the enclosure is about 5.7% of the internal floor area of the property (304 sq.m.).

THE REQUISITION

5. The requisition was in the following terms :

"We are instructed that a green house has been erected on part of the above property. Please therefore let us have the relevant approval of such erection from the Building Authority and the Manager of Redhill Peninsula - Site D."

6. It is accepted by counsel for the Purchaser that no requisition was raised that the erection of the enclosure might be in contravention of the Government Lease.

BUILDING WORKS WERE UNAUTHORIZED

7. The Building Authority has confirmed by a letter dated 13 November 1997 that the "subject green house" falls within the category of "Unauthorized Building Works".

8. The Authority has indicated that it will be dealt with according to its Policy on Enforcement. According to this Policy, unauthorized building works fall within 2 groups - (1) those which pose an obvious hazard to life or property and significant new unauthorized building works, where enforcement will be immediate; and (2) unauthorized building works existing for some time and identified to be not posing an obvious hazard to life or property, on which enforcement action "will" be taken in sequence.

9. So it appears that whichever category the enclosure falls into, enforcement action will at some stage be taken against it, unless of course it is demolished. (No notice requiring demolition has however been served by the Building Authority up to the date of hearing).

10. The question is whether this would lead to the Vendor being unable to complete the sale for want of good title (cf. Giant River v Asie Marketing Ltd. [1990] 1 HKLR 297).

ISSUES

11. The Vendor's case is that there is, or would be, no defect in title because:-

(1) the enclosure is not part of the Property agreed to be sold; or

(2) (even if it is part of the Property agreed to be sold), the Vendor can demolish the enclosure prior to completion, and still be in a position to complete by substantially performing the Agreement.

(1) ENCLOSURE IS PART OF PROPERTY AGREED TO BE SOLD

12. Mr Edward Chan SC, Counsel for the Vendor, submits that the enclosure has not been included in the description of the Property agreed to be sold. Further he submits that the Agreement should be construed in such a way that only lawful structures should be included.

13. I do not agree that the Agreement should be read in such a restrictive way. The issue whether the enclosure is part of the property agreed to be sold should be determined by seeing whether it is a fixture, and/or part and parcel of the land or of the house which is itself part of the land.

14. Traditionally, the issue whether a structure forms part of the land was determined according to whether it was a chattel or whether it was a fixture.

15. In Elitestone Ltd v Morris [1997] 1 WLR 687, the House of Lords avoided this traditional two-fold distinction between chattels and fixtures, and adopted the following three-fold classification.

16. An object which is brought onto land may be classified under one of three broad heads. It may be (a) a chattel; (b) a fixture; or (c) part and parcel of the land itself. Objects in categories (b) and (c) are treated as being part of the land.

17. In that case, the structure was a bungalow which was not "affixed" to the land, as it rested by its own weight on concrete pillars, without any attachment. Thus, it did not fall within category (b). Nevertheless, the House of Lords held that when one took into account the degree and the object of annexation to the land, it was part and parcel of the land, i.e. it fell within category (c).

18. It held that the importance of the degree of annexation varied from object to object, and in the case of a large object, annexation to the land could be found as a matter of common sense. A structure could be firmly annexed to the land simply by force of gravitation.

19. Just as important, and possibly more important in some cases, is the object or purpose of annexation. This is not assessed by the subjective intent of the person who brought or built the structure there. As Lord Cockburn said in his famous statement: "No man can make his property real or personal by merely thinking it so" (Dixon v Fisher (1843) 5 D 775, quoted in Elitestone, 698) .

20. The intent is to be assessed objectively, taking into account any number of relevant matters. One relevant matter to be taken into account is the fact that the structure cannot be removed except by destruction (Elitestone, 693). Such a structure must have been intended to be part of the land. This was contrasted with the demountable and movable green house in Deen v Andrews [1986] 1 EGLR 262.

21. In the present case, in my view, the enclosure fell within both categories (b) and (c). It is a fixture:- Photograph 5 annexed to the report of the Vendor's surveyors shows that the soffit of the roof of the enclosure was secured to the external walls of the house.

22. In this connection, Mr Chan SC, Counsel for the Vendor, submits that the enclosure was not a fixture because, he says, the parties had identified the fixtures at the Third Schedule to the Agreement, and the enclosure was not included in that Schedule. I cannot accept that contention.

23. I construe Cl. 25 of the Agreement as specifying certain furniture and fixtures, identified in the Third Schedule, which the parties have agreed would be dealt with in a certain way. In particular, Cl. 25(3) provides that failure by the Vendor to deliver those furniture and fixtures would not entitle the Purchaser to rescind the Agreement (a clause obviously designed to avoid the result in Annie Pang Chor Ying v Lifton Investments Ltd. [1993] 2 HKC 57).

24. So as I see it, the enclosure is a fixture and there has been no agreement by the parties to say it is not.

25. Apart from being a fixture, the enclosure can also be properly regarded as part and parcel of the land when one considers the degree and purpose of the annexation. Unlike the green house in Deen v Andrews, it is clearly not possible to demount this enclosure and move it for re-assembly and to be enjoyed in a new location. For one thing, one side of this enclosure comprises of glass panes which start only halfway up the garden wall on one side of the house. As such it can only be enjoyed in situ and its design is "made to measure" for the use and enjoyment of that particular place.

26. In conclusion on this issue, therefore, I hold that by reason of its annexation to the external walls, the enclosure was part and parcel of the house which is part of the land in question. It was therefore within the description of the property agreed to be sold.

(2) SUBSTANTIAL PERFORMANCE NOTWITHSTANDING DEMOLITION

27. The Vendor's next argument is that nevertheless, it can pass good title on completion because it will cause the enclosure to be demolished prior to completion. The parties have agreed that the completion date will be postponed to 5 working days after the delivery of this Judgment. There is uncontradicted evidence that it will take only 2 days to demolish the enclosure.

28. So, the Vendor says, it will be able to give clear title to the Property at completion date. That is because once the enclosure is demolished, there is no question of enforcement action by the Building Authority. As far as the Deed of Mutual Covenant is concerned, there is no evidence (and indeed it has not been submitted by Counsel for the Purchaser) that the Manager would still have any rights against the Property once the enclosure is demolished. No requisition having been raised on any contravention of the Government Lease, no case of re-entry by Government needs to be considered.

No reliance on `as is' clause

29. Although much of the correspondence between the solicitors have dealt with the requirement in Cl. 8 of the Agreement that "the Property is sold on an `as is' basis", Sir John Swaine SC, Counsel for the Purchaser, has made it clear that it is not his case that the Vendor is prohibited by this clause from demolishing the enclosure.

Vendor not bare trustee for purchaser

30. I should add in this connection, that a vendor is not merely a bare or dormant trustee of the property he has agreed to sell. He is a trustee having a personal and substantial interest in the property, with a right to protect that interest. Although the relation of vendor as trustee and purchaser as cestui que trust subsists, it subsists subject to the paramount right of the vendor and trustee to protect his own interest as vendor of the property (Shaw v Foster (1872) LR 5 HL 321, quoted in Ji Shan International Investment Ltd v Resources Main Enterprises Ltd. [1998] 1 HKLRD 800, 807).

31. Thus in my view, the Vendor is at liberty to demolish the enclosure, especially now that the Building Authority has indicated that it involved unauthorized building works; and in so far as that view is at variance with one of the reasons for the judgment in Sun Great International Ltd v Polly Hui Lai Ying HCA10742/94 (unrep.) p.6 G-K , I have with respect to differ from the view of the judge in that case.

32. The issue

The issue is not whether the Vendor has the right to demolish the enclosure. The issue is whether the Vendor could still be regarded as performing the Agreement if it assigns the Property without the enclosure. In this connection, I should add that the parties have agreed that the Court can decide this issue on the materials before it now.

33. The Vendor submits that there would still be substantial performance. There would be no physical diminution in the area of the land conveyed; there would just be a difference in the character of that area - from being a covered area, to being an uncovered area. Put another way, there would be a deficiency of 5.7% of the internal floor area, as calculated by the Purchaser's counsel, but an increase in open area. There is no evidence that the price of the Property had been calculated with reference to the internal floor area including the enclosure. The Vendor has also adduced valuation evidence (which has not been challenged) that the difference in open market value between the Property with the enclosure and without the enclosure is negligible, so there is no need to consider compensation or an abatement of the purchase price.

Good title can be given by substantial performance

34. The first question posed by Counsel for the Purchaser is a general one:- whether good title can be given if the Vendor offers substantial performance. In my view, good title can be given.

35. It is well-established that in considering whether a vendor has shown good (albeit not perfect) title, the test is whether a court would at the instance of the vendor force the title upon an unwilling purchaser in a suit for specific performance (Farrand, Contract and Conveyance 4th ed p.87, Manning v Turner [1957] 1 WLR 91, Pyrke v Waddingham 10 Hare 1).

36. It is equally well established that a court of equity would decree specific performance at the suit of a vendor where he is able to convey substantially (albeit not all of) what he has contracted to sell (Spry, Principles of Equitable Remedies, 5th ed. pp.292-6).

37. Accordingly, as a general proposition, good title can be given where a vendor is able to offer substantial performance. To say otherwise would lead to the anomalous situation that whereas in a Vendor and Purchaser Summons, the court would have to find that no good title is given; yet on the same material, the court would decree specific performance if the claim is heard at the same time.

38. I am conscious that specific performance is an equitable remedy and not a contractual right (Annie Pang v Lifton, 61) and that in some cases, the concept of substantial performance might introduce an unwelcome ambiguity into the agreement, because a purchaser would not be in a position to know how much to pay by way of an abated purchase price. But in this case, at least, the Purchaser is not confronted with any such ambiguity or uncertainty - it is obtaining a court's determination on whether there is substantial performance, and since the only unchallenged evidence is that there is no real difference in the value of the Property, no question of abatement arises when completion date arrives.

39. So it may not be safe for a vendor in every case to assert that he has offered substantial performance by demolishing unauthorised building works - every case will have to depend on its own facts. As an example, the vendor in Sun Great v Polly Hui would clearly not be able to say that it had offered substantial performance.

Substantial Performance

40. Is there substantial performance in this case? In my view, the answer is "Yes". The test is whether the Vendor will be conveying substantially what the Purchaser has contracted to get (Rutherford v Acton-Adams [1915] AC 866, P.C.)

41. As stated in Spry, whether a deficiency is essential and prevents substantial performance depends on the nature of the defect and also on the proportion of the whole of the land that is affected by it, and the purposes or uses for which the parties knew that it was being sold, or ought reasonably to have known that it was being sold, and on any other matters which might reasonably have affected the decision of the purchaser to enter into the agreement or which were known by the vendor to have affected the decision (see also Shepherd v Croft [1911] 1 Ch 521, 528-9, Flight v Booth 5 Will IV 370, 377, Hamilton v Munro (1951) 51 SR (NSW) 250, 253-4).

42. It is a matter of fact and degree in each case. Objectively, the deficiency of 5.7% of internal floor area, which will result from the demolition of the enclosure, is in a house of this size, small and immaterial. It is at the back of the house, between the kitchen and the servants' quarters. It was never part of the original design of the house. It is not at all material to the enjoyment of the rest of the Property (unlike say, the frontage lot in Re Arnold XIV Ch D 270).

43. The Purchaser has filed an Affirmation by a director asserting that the "extra area of usage" and the ability to relocate the dining room away from the sitting room were "important factors" in the decision to purchase the Property. This does not account for much, when there was no evidence that the Purchaser was acquiring the Property for that (or any other) director's own use, nor of what other factors there were in the decision to purchase the Property, and the relative degree of importance of each such factor. It is also of some significance that no representative of the Purchaser had ever inspected the Property internally so as to examine the adequacy of the construction of the enclosure. Further, this idea of using it as the dining room (even though it was accessible only through the kitchen or the servants' quarters) was never communicated to the Vendor.

Agreement did not preclude substantial performance

44. The remaining question is whether the parties had by the terms of the Agreement precluded substantial performance. Sir John relied on Cl. 28(b) which gives the Purchaser an option to rescind if a notice is served by inter alios the Building Authority requiring the demolition of any part of the Property. This gives the Purchaser a contractual right to rescind if a notice has been served. No notice has yet been served, so the contractual right has not arisen. It does not follow that the parties intended that the law of substantial performance could not apply. Much clearer language would be necessary.

45. In the same way, although this was not argued before me, the fact that Cl. 25(c) prohibits rescission if the furniture and fixtures in the Third Schedule are not delivered does not mean that rescission is by agreement permitted if some other fixture is not delivered. Clause 25(c) contains an express agreement specifically "to remove doubt". This cannot be elevated into an agreement to preclude the law of substantial performance where it would otherwise apply.

CONCLUSION

46. In conclusion, I find the Vendor would be able to give good title on completion if he demolishes the enclosure. I would therefore dismiss the Originating Summons, with no order as to costs as agreed by the parties.

47. Finally, I would like to thank Counsel for both parties for their assistance.