CITY CHAIN PROPERTIES LTD. v. SPEEDY PORT LTD.

HCA 2221/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2221 OF 1998

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J U D G M E N T

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1. The plaintiff as vendor claims against the defendant as purchaser of shop premises in Chungking Mansion, Tsimshatsui, Kowloon for, inter alia, a declaration that it is entitled to forfeit deposits paid by the defendant and for damages for the defendant's breach of contract in failing to complete the sale of the premises on the date of completion. The defendant denies that it has been in breach of contract and alleges that the plaintiff has instead been in breach of contract and counterclaims for the repayment of monies paid to the plaintiff.

The witnesses

2. The plaintiff called as witnesses Mr. Anthony Chu Kai Wah ("Chu"), a director of the plaintiff, Ms. Porey Ip, a solicitor who acted for the plaintiff at all material times, and Mr. Richard Gareth Williams a valuer and surveyor from Vigers Hong Kong Limited. The defendant called as witnesses Mr. Raymond Tang Yiu Man ("Raymond Tang"), a director of the defendant, Ms. Chan King Yee, a solicitor, and Ms. Fanny Wong Yuet Ha, a conveyancing clerk, both of whom acted for the defendant after the defendant agreed to purchase the premises from the plaintiff.

Undisputed facts

3. On the evidence the following facts were undisputed. The plaintiff is and was at all material times the registered owner of the property known as Shop 5 on the ground floor of Chungking Mansion, Nos. 36-44 Nathan Rd., Tsimshatsui, Kowloon ("Shop 5"). The plaintiff is part of the Stelux Group of Companies and its business activities include retail and property development. Shop 5 was at all material times used as a retail shop for selling watches by City Chain Company Limited, one of the plaintiff's associated companies.

4. The defendant was incorporated on 6 June 1997 and it was acquired as a shell company solely for the purpose of acquiring Shop 5. Raymond Tang and his father Mr. Tang Shing Bor were the 2 directors. Mr. Tang Shing Bor was an experienced and well-known investor of real properties and was nicknamed the "king of shop premises" because of his extensive investments in shop premises. Raymond Tang and his father are and were also directors of Mighty Success Realty Ltd., a BVI company through which he and his father invested in commercial premises in Hong Kong, Kowloon and the New Territories. The defendant was one of the affiliated companies of Mighty Success Realty Limited and Mr. Tang Shing Bor was the ultimate owner of Mighty Success Realty Ltd.

5. In mid 1997 Raymond Tang and his father decided to start acquiring commercial units in Chungking Mansion with a view to converting the whole of the basement and the whole of the 1st to 3rd floors into an indoor mall for the retail of high class consumer products. This scheme necessitated acquiring an interest in the whole of the basement and the whole of the 1st to 3rd floors of Chungking Mansion as well as purchasing some of the shop units on the ground floor so that these shop units on the ground floor could be used to provide the necessary facilities to the indoor mall such as entrances and exits.

6. Shop 5 was a shop unit facing Nathan Road and was at one end of Chungking Mansion. There was a pedestrian crossing in front of the entrance to Shop 5. Shop 1 was also facing Nathan Road and was at the other end. Shop 5 was located at a point where there was no material structural part at the top of the shop so that a lift might be constructed at Shop 5 to lead visitors to the basement and the upper floors of the intended mall. As Shop 5 faced the Nathan Road front with a pedestrian crossing there it could conveniently be used to serve as the main entrance for the intended mall envisaged by Raymond Tang and his father.

7. The decision to purchase Shops 1, 5 and 12 of Chungking Mansion was part of the scheme of Raymond Tang and his father for the intended mall. Raymond Tang and his father also had the idea of listing the defendant's holding company on the Stock Exchange of Hong Kong. It was under these circumstances that they were interested in purchasing, inter alia, Shop 5.

8. About a week before 15 August 1997 Mr. Joseph Ng ("Ng") of Everbright Property Consultants Ltd. approached Chu, the property and retail director of the plaintiff. He told Chu that he had a client interested in purchasing Shop 5 and asked him to offer a price. Chu enquired who the purchaser was and was told that it was Mr. Tang Shing Bor. He was also told that Mr. Tang Shing Bor had already acquired some units in Chungking Mansion including the basement and that Mr. Tang Shing Bor believed that if he purchased Shop 5 as well that would be conducive to the future development of the basement. As his client was also concerned with the rental yield of the property Ng also enquired whether a sale and lease back of Shop 5 would be acceptable, i.e. a sale subject to an existing tenancy. It was proposed by Ng that the monthly rent could be about $500,000 per month with the tenancy running to about the end of 1999. At that rental the purchase price of Shop 5 could be set at around $120,000,000. As Chu needed to take instructions from the plaintiff he did not make any immediate offer to Ng.

9. The matter was then discussed internally within the plaintiff and the offer was considered to be reasonable. Chu then had another telephone conversation with Ng at which time he on behalf of the plaintiff offered to sell Shop 5 to Ng's client at $120,000,000 on condition that Shop 5 would be leased back to City Chain Company Limited at the monthly rent of $500,000 so that it could continue on with its retail business of selling watches there. Ng then took instructions from Raymond Tang and in a telephone conversation with Chu, Ng confirmed that his client had accepted the plaintiff's offer. There was thus an oral agreement for the sale and purchase of Shop 5. These negotiations took just a couple of days.

10. After having reached an oral agreement Ng prepared a provisional agreement for sale and purchase ("the provisional agreement") using a standard form. This document is dated 15 August 1997 and described the property as:

"Shop 5, Ground Floor, Chungking Mansion, 36-44 Nathan Road, Tsimshatsui."

11. Neither Raymond Tang nor his father were involved in the preparation of the provisional agreement. Raymond Tang authorized the secretary of Everbright Property Consultants Ltd. to sign the provisional agreement on behalf of the defendant. A sum of $3,000,000 was paid by the defendant to the plaintiff as the initial deposit under the provisional agreement. It was agreed that upon signing the formal sale and purchase agreement on or before 1 September 1997 a further deposit in the sum of $9,000,000 would be paid. The balance of the purchase price would be paid upon completion on or before 5 January 1998. It was also agreed by cl. 16 of the provisional agreement that the property was sold with existing tenancy with a monthly rental of $500,000 exclusive of rates and management fees, that the tenant was City Chain Company Limited and that the term of the tenancy was from 5 August 1997 to 4 January 2000.

12. At the material time there were a total of 7 wall stalls set up and operating as businesses along and protruding from the external wall of the ground floor of Chungking Mansion ("the wall stalls"). The wall stalls were not on the front of the building facing Nathan Road but on the side as shown in the photographs and the ground floor plan attached to the surveyor's report. There was one wall stall along the external wall of Shop 5, two wall stalls along the external wall of Shop 6 and the other wall stalls were along the external wall of Shop 1. It is clear that the operators of the wall stalls were carrying on business there and that none of them was in the business of selling watches.

13. The land registry search in respect of Shop 5 shows that the property is described as follows:

"SHOP 5 ON G/F & WALL STALLS ON THE EXTERIOR OF BUILDING EXCLUDING THE NATHAN ROAD FRONTAGE CHUNGKING MANSION NOS. 36-44 NATHAN ROAD, KLN.''

According to the search, the property is described in the land registry not only as Shop 5 but it includes the wall stalls.

14. Under the provisional agreement the wall stalls were not mentioned. Only Shop 5 was. During the negotiations that Ng had with Chu only Shop 5 was mentioned. The wall stalls were never mentioned. Raymond Tang and his father were not involved in the negotiations with the plaintiff as the negotiations were conducted between Ng and Chu.

15. After the provisional agreement was entered into Raymond Tang handed an original copy of the same to Messrs. Johnson Stokes & Master ("JSM") for them to deal with the matter on the defendant's behalf. He gave them instructions to deal with all matters consequential upon the entering into of the provisional agreement including drawing up a formal sale and purchase agreement and preparing for completion of the sale and purchase.

16. On the plaintiff's side, Chu instructed Ms. Porey Ip a solicitor with Messrs. Woo Kwan Lee and Lo ("WKLL") to handle the matter on the plaintiff's behalf. She was also the solicitor who handled the purchase on behalf of the plaintiff when it purchased the property in 1994 when she was a solicitor with another firm. However, at the time that she was acting for the plaintiff in 1997 she did not recall the details of the plaintiff's purchase in 1994. In his fax to her dated 15 August 1997 Chu described the property as Shop 5 without any reference to the wall stalls. Instructions were given to her to prepare the formal agreement for sale and purchase and the relevant tenancy agreement with City Chain Company Limited in accordance with cl. 16 of the provisional agreement as at that time there was no written tenancy agreement between the plaintiff and the tenant.

17. After receiving the fax from Chu, Ms Porey Ip asked her secretary to conduct a land search in respect of Shop 5. After receiving the land registry search record she noted that the description of the property included the wall stalls with Shop 5. As the wall stalls were not mentioned in the provisional agreement she telephoned Chu and informed him that the property's relevant address in the land registry record was Shop 5 as well as the wall stalls. She told him that the wall stalls were not described in the provisional agreement at all. Chu instructed her that the tenancy agreement and the formal sale and purchase agreement should follow the land search record and should also include the wall stalls.

18. Ms. Porey Ip then prepared a tenancy agreement in accordance with Chu's instructions and on 25 August 1997 the plaintiff and City Chain Company Limited executed a tenancy agreement which was backdated to 5 August 1997. The wall stalls were included in the description of the property under the tenancy agreement.

19. Ms. Porey Ip also received a copy of Ng's letter to JSM of 25 August 1997 asking JSM to contact her for the preparation of the formal sale and purchase agreement. By that letter Ng described the property as Shop 5 without any reference to the wall stalls.

20. Ms. Fanny Wong Yuet Ha, a conveyancing clerk with JSM, was instructed to open a new file in respect of the purchase of three properties by the defendant one of which was Shop 5. After opening a new file she arranged for a land search against Shop 5 and noted that the description in the search included the wall stalls. On 26 August 1997 after receiving Ng's fax of 25 August 1997 she arranged to be sent a standard letter to WKLL requesting the formal sale and purchase agreement and the title deeds for their approval on behalf of the defendant. The letter from JSM to WKLL dated 26 August 1997 described the property as including the wall stalls which followed the description of the property in the land search record.

21. On 26 August 1997 WKLL sent to JSM a draft formal sale and purchase agreement as well as a copy of the tenancy agreement between the plaintiff and City Chain Company Limited. By letter dated 30 August 1997 JSM made some amendments to the formal agreement and returned the same to WKLL. On 1 September 1997 JSM paid WKKL the further deposit of $9,000,000 to be held by them as stakeholders pending signing of the formal agreement. On 4 September 1997 the formal agreement for sale and purchase ("the formal agreement") was signed. The property was described in the formal agreement as :

"ALL THAT SHOP 5 on the GROUND FLOOR of CHUNGKING MANSION, Nos. 36-44 Nathan Road, Kowloon, Hong Kong ("the Building") erected on THE REMAINING PORTION OF KOWLOON INLAND LOT NO. 6817 AND TOGETHER with the right to use ALL THAT the wall stalls on the exterior of the Building excluding the Nathan Road frontage of the Building".

The wall stalls were included in the description of the property in the formal agreement.

22. By letter dated 5 September 1997 WKLL sent to JSM the title deeds and documents as set out in the schedule to the letter.

23. Ms Chan King Yee was at that time a conveyancing solicitor with JSM. She approved the formal sale and purchase agreement on behalf of the defendant and she also approved the title of the property namely, Shop 5 and the wall stalls.

24. By letter dated 15 September 1997 addressed to WKLL, JSM raised a number of requisitions. None of those requisitions are relevant to the matters before me. WKLL took the view that the requisitions were raised out of time which was disputed by JSM. In any event WKLL answered the requisitions on a without prejudice basis but nothing turns on the requisitions raised and answered by WKLL by their letter dated 12 November 1997.

25. There was no reply from JSM to WKKL after receiving their letter of 12 November 1997. Nothing further was raised by JSM. On 19 December 1997 JSM wrote to WKLL confirming that they had no further instructions to act for the defendant and returned all the relevant title deeds and documents to WKLL.

26. On the same day 19 December 1997 Messrs. Chung & Partners ("Chung") wrote to WKLL informing them that they had instructions to act for the defendant in place of JSM and asking for the relevant title deeds and documents. These were sent on 29 December 1997.

27. Hong Kong, like other Asian nations, suffered a severe economic downturn with the Asian financial crisis which started in October 1997. Because of this the price of shares trading in the Stock Exchange and property prices fell substantially.

28. In early December 1997 with the completion date of 5 January 1998 not far away, Ng on behalf of the defendant approached Chu and told him that the defendant proposed to extend the completion date to 12 February 1998 as the defendant faced some liquidity problems and to obtain such extension the defendant was willing to pay a further deposit of 5% of the purchase price. Chu was also told that Mr. Tang Shing Bor was preparing to list a company on the Stock Exchange in January or February and that after that the defendant would have funds to complete the sale. The plaintiff was eager to ensure that the sale could be completed and would not fall through. The plaintiff was therefore prepared to accommodate the defendant and agreed to extend the completion date to 12 February 1998 on condition that a further deposit of 5% of the purchase price would be paid. Under such circumstances the parties, without the assistance of solicitors, entered into a supplemental agreement in Chinese dated 3 December 1997 which was a document prepared by Ng. The property was described as Shop 5 without any mention of the wall stalls. Completion was extended to 12 February 1998 and the defendant paid the plaintiff a further sum of $6,000,000. Under the supplemental agreement it was also agreed that the other terms in the formal agreement would "remain completely unchanged".

29. By letter dated 6 January 1998 addressed to WKLL, Chung raised a number of requisitions. None of these are relevant to the matters before me. By a second letter of the same date to WKLL, Chung wrote stating, inter alia, that the defendant noted that the existing units of part of the wall stalls were operated by parties other than the plaintiff or the tenant. They asked for full particulars as to the status and whether there were any existing tenancies or licenses of the wall stalls and whether there was any claim of interest by third parties or any encumbrances thereto.

30. By letter also dated 6 January 1998 WKKL wrote to Chung pointing out that the time for raising requisition or objection on title had long expired under the formal agreement and that the defendant was deemed to have waived any requisition or objection. Chung wrote back also by letter dated 6 January 1998 alleging that the refusal to reply was unreasonable as the enquiry was on the status of the property and not a requisition on title deeds and alleged that the plaintiff had a duty to demonstrate that there were no third party interest or encumbrance on the property.

31. On 8 January 1998 Chung also wrote to WKLL alleging that the plaintiff could not possibly perform the formal agreement to assign to the plaintiff the right to use the wall stalls for a number of reasons by reference to the Deed of Covenant dated 1 May 1962 and for other reasons. None of the matters raised in that letter were pursued at the trial and are not relevant to the issues before me. By letter dated 8 January 1998 WKLL asked Chung to return all the title deeds and documents.

32. On 9 January 1998 Chung wrote to WKLL enclosing an architect's report and alleging that there was unlawful expansion of Shop 5 from its original state and asking for the comments of WKLL. Chung returned the title deeds to WKLL on 10 January 1998. By letters dated 13 and 22 January 1998 Chung wrote again to WKLL stating that they were still awaiting WKLL's reply to their previous letters. By their letter dated 22 January 1998 Chung also stated that if the problems could not be removed the plaintiff should return all payments made by the defendant forthwith without any delay and they reserved the defendant's rights .

33. By letter dated 24 January 1998 WKLL wrote to Chung maintaining that the time for the defendant to raise requisitions or objection had long expired and that every requisition or objection not so delivered within time shall be deemed to have been waived, time being of the essence. They also reserved the plaintiff's rights under the formal agreement.

34. By letter dated 27 January 1998 WKLL, on a without prejudice basis, indicated that the plaintiff was prepared to remove the structures referred to by Chung and to re-instate the shop front of Shop 5. Chung replied on the same day rejecting that proposal. They also said that they were awaiting the full reply on the wall stalls.

35. By letter dated 3 February 1998 Chung wrote to WKLL alleging, inter alia, that the issue of the wall stalls and the unauthorized expansion of the shop had not been resolved and threatened to take action unless there was an acceptable proposal of settlement.

36. On 5 February 1998 WKLL sent the title deeds and documents again to Chung. By letter dated 9 February 1998 WKLL wrote to Chung reiterating, inter alia, their position that the defendant was already deemed to have waived all requisitions or objections on title under the terms of the formal agreement. On a without prejudice basis, however, they gave their comments on the issues relating to the shop front and the wall stalls. They also made a proposal for the removal of the building elements of which complaint had been made by Chung in respect of the shop front. Chung by letter of the same date rejected their comments and proposal.

37. On the date of completion 12 February 1998 WKLL wrote to Chung and maintained that the plaintiff was able to assign the property as defined in the formal agreement on completion to the defendant free from any encumbrance or third party interest. They also, without prejudice to the plaintiff's position that the defendant was no longer entitled to raise any objection to title, informed Chung that there was a licence agreement entered into on 12 February 1998 between City Chain Company Limited, the tenant and one Chan Chi Pui and stated that as the licence would expire on 4 January 2000 the tenant would be able to yield up the premises and the wall stalls on expiration of the tenancy on 4 January 2000.

38. By letter dated 12 February 1998 Chung maintained that the plaintiff had failed to answer requisitions raised as to:

(a) legal title to the wall stalls;

(b) the existence of third party interest at the wall stalls and;

(c) the presence of unauthorized structures in Shop 5.

They alleged that the plaintiff was in repudiatory breach of the formal agreement which was accepted by the defendant and asked for the return of all sums paid and damages. In his closing submissions Mr. Robert Tang SC, leading Mr. K M Chong for the defendant, abandoned the complaints under (a) and (c) as set out above. The only complaint left was under (b) namely, the existence of third party interest at the wall stalls.

39. By letter dated 13 February 1998 WKLL wrote to Chung stating, inter alia, that the plaintiff accepted the defendant's repudiation of the formal agreement and exercising its right to forfeit the deposits paid thereunder and to claim for damages. On 14 February 1998 the writ was issued on behalf of the plaintiff against the defendant. On the same day the defendant also issued a vendor and purchaser summons in other proceedings.

40. By letter dated 24 February 1998 WKLL wrote to Chung informing them that apart from the relief sought in the writ of summons the plaintiff would also be seeking rectification of the formal agreement by deleting the reference to the right to use the wall stalls because it was never the intention of the parties to include the wall stalls as part of their contractual bargain. On 12 March 1998 the amended writ of summons was filed to include, inter alia, the claim for rectification.

41. There is a counterclaim by the defendant for the return of the sums paid to the plaintiff and for damages although Mr. Robert Tang in his closing submissions did not pursue the claim for damages.

42. The facts set out above have not been challenged and are undisputed facts. Having seen and heard the witnesses, I have no hesitation in accepting Chu, Ms. Porey Ip, Ms. Chan King Yee, and Ms. Fanny Ho as witnesses of truth. I find that they are honest and reliable witnesses and I have no hesitation in accepting their evidence. I also accept the expert evidence of Mr. Richard Gareth Williams which was not challenged. I am unable to accept all of the evidence of Raymond Tang as there are certain unsatisfactory features in his evidence which in my view affected his credibility. There are parts of his evidence which I accept but there are other parts of his evidence which I do not accept. I shall set these out later.

43. Chu gave evidence that when the plaintiff purchased Shop 5 in 1994 he was advised by Ms. Porey Ip who was then a solicitor with Messrs. Robert W. H. Wang & Co. She advised him then that the wall stalls would be included in the assignment but she said that there might be problems as to the title to the wall stalls. Notwithstanding this he was willing to accept the assignment of Shop 5 with the right to use the wall stalls as the plaintiff was only interested in Shop 5 and not in the wall stalls. Shop 5 was then being used by City Chain Company Limited for the retail business of selling watches. It was his evidence that the wall stalls were not mentioned in the negotiations with the vendor in 1994. Chu also said that throughout the years the plaintiff had no interest in the wall stalls and never collected any rent or licence fees from any of the occupants. Over time the plaintiff had simply forgotten about the wall stalls. I believe him and accept his evidence. The evidence before me also shows that it was the Incorporated Owners of Chungking Mansion that collected rent or fees from the occupiers of the wall stalls. This supports Chu's evidence that the plaintiff never collected any rent or licence fees from the occupiers of the wall stalls.

44. Chu also said that after Ms. Porey Ip had been instructed to act for the plaintiff in the sale to the defendant in 1997 and when she told him that she had conducted a land search which showed the property's relevant address as Shop 5 as well as the wall stalls, he did not at that time recall what the wall stalls were. She told him that the wall stalls were not described in the provisional agreement. He thought that since the wall stalls were included in the land registry record he believed and assumed that the plaintiff was obliged to sell the wall stalls as well in addition to Shop 5 under the provisional agreement notwithstanding that they were not mentioned there. He did not at that time disclose his belief and assumption to Ms. Porey Ip but simply confirmed to her that the tenancy agreement and the formal agreement should follow the land search record and should also include the wall stalls. I believe Chu and accept his evidence .

The Issues

45. Mr. Robert Tang SC submitted that the plaintiff was in breach of its contractual obligations under the formal agreement to show good title to Shop 5 and the wall stalls before completion and also to give good title on completion.

46. Although there is a claim by the plaintiff for rectification of the formal agreement to delete the inclusion of the walls stalls therein as being part of the property sold or alternative relief on the basis that the wall stalls were included in formal agreement by reason of mistake, Mr. Warren Chan SC leading Mr. Wong Yan Lung invited the court in his final submissions to deal with the matter first on the basis that the wall stalls were included together with Shop 5. It was his submission that the court would find that even assuming that the wall stalls were properly included in the formal agreement it was the defendant and not the plaintiff who was in breach of the formal agreement and judgment should be given in favour of the plaintiff. He submitted that if the court came to that view then it would not be necessary to determine the other issues in the case. It seems to me that the course proposed by Mr. Chan was an eminently sensible one and should be adopted.

47. That being so, I accept that the issues before me which have been conveniently listed and summarised by counsel for the plaintiff are as follows:

1. Issue on breach of contract:

Whether the plaintiff as vendor was in breach of cls. 27 and 16 of the formal agreement.

2. Issue on acceptance of title:

Whether the defendant as purchaser has accepted and/or is deemed to have accepted title and precluded from raising objection to title on the ground of third party interest in the wall stalls (by virtue of waiver and/or cl. 6(a) of the formal agreement).

3. Issue on want of consideration:

Whether the agreement to convey the right to use the wall stalls in the formal agreement is unenforceable for want of consideration.

4. Issue on substantial performance:

Whether there has been substantial performance of the formal sale and purchase agreement.

5. Issue on mistake and rectification or rescission:

i) Whether the wall stalls were included in the sale;

ii) Whether the formal agreement ought to be rectified, or rescinded pro tanto on the ground of (a) mutual mistake, or alternatively, (b) unilateral mistake on the part of the defendant as vendor.

Issues 1-4 are to be considered on the assumption that the wall stalls are included in the description of the property to be sold and on the assumption that there is to be no rectification or rescission pro tanto.

Issue 1: Issue on breach of contract

48. Cl. 27 of the formal agreement provided as follows:

"The Vendor hereby declares and confirms that no third party (whether related or otherwise ) has any right or interest whatsoever, whether legal or equitable, in the Property. .................................................
...................................................................................................................................................

In the event of any valid third party claim to the Property, whether legal or equitable which shall remain unresolved, on or before completion the Vendor shall then forthwith return all the deposit and all monies paid hereunder or under any other agreement made between the parties and without prejudice to the Purchaser's right to claim against the Vendor for all losses and damages sustained by the Purchaser by reason of the Vendor's failure and or inability to complete the sale in accordance with the terms hereof and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor for execution. This clause shall survive completion".

The first part of the clause contains a declaration and confirmation. The second part set out above makes it plain that there has to be a "valid third party claim" which remains unresolved on or before completion before an obligation is imposed on the vendor to return the monies paid. It is also to be noted that the clause survives completion.

49. Mr. Robert Tang submitted, correctly in my view, that the obligation under the formal agreement on the part of the plaintiff was to show title and to give good title as shown on completion. He submitted that there were third party interests over the wall stalls as the wall stalls were occupied by third parties. This, it was submitted, was an encumbrance which by the time the plaintiff called off the sale and purchase was still in existence. That being so, it was submitted that the plaintiff was unable to show good title on or before completion and to give good title on completion and the defendant was entitled not to complete.

50. Mr. Warren Chan rightly submitted that it was important to see the pleaded case of the defendant. The defendant is, of course, bound by its pleading. Para. 45 of the amended defence and counterclaim pleaded as follows:

"The said Wall Stalls were occupied by a number of trespassers/occupiers without licences upon Government land on which these Wall Stalls stood who operated business thereat."

51. I would observe that first, the evidence did not support the fact pleaded that the wall stalls were upon Government land. They were on the 2 side lanes or alleys of Chungking Mansion along the exterior wall of the building. There was no evidence that this was Government land. Furthermore, the evidence showed that the Incorporated Owners of Chungking Mansion were collecting rent or fees from the occupiers of the wall stalls. Quite simply, the defendant's pleaded case that the wall stalls were on Government land was not made out. Secondly, it is trite law that trespassers have no interest or rights in the property which they occupy. Even if the occupiers did not occupy Government land, on the defendant's pleaded case they were nevertheless trespassers who occupied the wall stalls without licence. I accept Mr. Chan's submission that a trespasser has no proprietary claim to the property and the mere fact that there were trespassers occupying the wall stalls is of no significance. Nowhere is it pleaded by the defendant that the trespassers had in any way acquired a possessory title to the wall stalls by continuous adverse possession. Being mere trespassers, the occupiers of the wall stalls did not acquire any rights or interest (whether legal or equitable) to the wall stalls. There could not be any valid third party claim by the trespassers and indeed none is alleged by the defendant in its pleading. It is not even pleaded that anyone has made a claim at all whether valid or otherwise. It is also not pleaded that anyone has obtained a possessory title to the wall stalls by reason of continuous adverse possession. In my judgment there was, therefore, on the defendant's pleaded case no encumbrance on the property. In the circumstances, I am unable to see how it can be said that the plaintiff was in breach of cl. 27. The defendant has failed to establish this on its pleaded case.

52. Cl. 16 of the formal agreement provided that the vendor should assign the property as beneficial owner. Mr. Robert Tang relied on the implied covenants under s. 35 of the Conveyancing and Property Ordinance, Cap. 219. By s. 35 (1)(b) it is provided that there shall be implied in an assignment to a purchaser for valuable consideration, the covenants, by a person who is expressed to assign as beneficial owner, mentioned in Part II of the First Schedule. Part II of the First Schedule makes it plain that the covenants set out therein are covenants for title to be implied in an assignment of land to a purchaser for valuable consideration by a person which is expressed to assign as beneficial owner. Mr. Robert Tang relied on covenant no. 3 which provides as follows:

"That the vendor now has good right and title to assign the land free from encumbrances save as specified in the assignment and subject to the manner in which the assignment is expressed to be made."

It was submitted that the plaintiff was obliged to assign the land free from encumbrances and the plaintiff was unable to do that on completion.

53. The first point to note is that s. 35 implies the covenants in an assignment. These are not conditions to be implied in the formal agreement. They are, as clearly stated in Part II of the First Schedule to the Ordinance, implied covenants for title. If there is a breach of covenant the defendant may sue for damages for breach of the same but that is not what the defendant is seeking to do in this case. The defendant alleges that the plaintiff has wrongfully repudiated the formal agreement.

54. Secondly, and in any event, even if covenant no. 3 as set out above is implied in the formal agreement, as Mr. Warren Chan has correctly submitted, the case for the defendant as pleaded is that there were trespassers occupying the wall stalls. As I have said trespassers acquire no rights or interest (whether legal or equitable) to the wall stalls and on the defendant's pleaded case there was no encumbrance on the property. In my judgment the defendant has failed to establish that the plaintiff was in breach of its contractual obligation to give a good title free from encumbrances.

55. Mr. Warrren Chan also referred me to Sihombing and Wilkinson's Hong Kong Conveyancing Law and Practice Vol. 1 where it is stated that the duty to give good title does not, however, extend to matters of mere conveyance (para. 161-165). It is also stated there that:

"The existence of a trespasser or licensee on the premises before completion, where the vendor has agreed to give vacant possession, may also be a matter of mere conveyance since the vendor has the right to evict them. The position would be otherwise, however, where the occupants are in occupation by way of a tenancy agreement by virtue of which they enjoy security of tenure. Thus Davies J said in Sharneyford Supplies Ltd. v Edge [1985] 1 All ER 976:

'If the occupants of the farm were trespassers or licensees, it was within the vendor's power to have them removed so as to be able to give vacant possession; so that there was no inability to show a good title. But if the occupants were tenants, for a term of years or yearly, then it was not within the vendor's power to have them removed by the completion date so that there is an inability to show good title.' "

56. The sale to the defendant was subject to a tenancy with City Chain Company Limited which would expire on 4 January 2000. The occupiers of the wall stalls were on the defendant's pleaded case trespassers and it is clear that they acquired no rights and could be removed at any time before the expiry of the tenancy agreement. I am satisfied that the existence of trespassers was a matter of mere conveyance and not a matter of title and the duty to give a good title does not extend to matters of mere conveyance.

57. The evidence of Chu was that after consulting an in house solicitor he decided that the operator of the wall stall outside Shop 5 should be approached to enter into a licence agreement with the tenant. It was the plaintiff's initial understanding that only the wall stall outside Shop 5 was covered by the formal agreement. The operator of that wall stall was approached and the licence agreement dated 12 February 1998 was entered into whereby the tenant granted a licence to the occupier to occupy that wall stall. By this licence agreement Chan Chi Pui, for a licence fee of $1 per month, was granted a licence by the tenant City Chain Company Limited to run the wall stall outside Shop 5 until 4 January 2000 when the tenancy would terminate. A perusal of the licence agreement shows that the rubber chop of the Incorporated Owners of Chungking Mansion was stamped thereon thereby indicating their approval of the same. Chu said that when the plaintiff realized the possibility that the other wall stalls were also included in the formal agreement they intended to obtain licences from the other occupiers about 2 or 3 days before completion but as there was insufficient time to do that before completion they did not do so. I believe Chu and accept his evidence. In any event the sale to the defendant was subject to tenancy and it would only be at the termination of the tenancy on 4 January 2000 that the tenant has to yield up possession to the defendant. There is no reason to think that the tenant would be unable to deliver vacant possession to the defendant at that time.

58. I should mention that Raymond Tang gave evidence that on 6 January 1998 he made enquiries from the persons who were conducting business at the wall stalls and he was told that they had been there operating the wall stalls for decades and that they were neither the sub-tenants nor licensees of the tenant. However, I am unable to attach any weight to this evidence. It is hearsay evidence and he has not identified the person or persons to whom he spoke. It is also not known whether such person or persons are able to speak of this from their own knowledge or whether it is indeed further hearsay. It is also not sufficient to state that they were neither sub-tenants nor licensees of the tenant. The tenant was City Chain Company Limited and it only started occupying Shop 5 in October 1993. What the position was before that is unknown. More importantly, it is the defendant's pleaded case that the occupiers of the wall stalls were trespassers and nowhere has it been pleaded that they had acquired possessory title by reason of continued adverse possession or anything of the sort. I am unable to attach any weight to the said evidence of Raymond Tang.

59. In my judgment the defendant has failed to establish that the plaintiff was unable to assign the property free from encumbrances in breach of the implied covenant relied on under s. 35 of the Ordinance.

60. It was also submitted that the plaintiff was in breach of cl. 26 of the formal agreement. This provided as follows:

"The Vendor covenants with the Purchaser that upon signing of this Agreement by the Vendor, except for the existing mortgage and existing tenancy, the Vendor will not assign, further mortgage, further charge, let, underlet, lease or otherwise dispose of or part with possession or make any arrangement for the sharing of the Property or any part or interest thereof or therein, or cause or permit any encumbrance to be affected of the Property or any part or interest thereof or therein."

It was submitted that the defendant was in breach of this clause by granting to Chan Chi Pui on 12 February 1998 the licence to occupy the wall stall outside Shop 5.

61. I would observe first, that what was contained in cl. 26 was a covenant by the vendor. It was not a condition. Breach of a covenant entitles the innocent party to claim damages but not to refuse to complete the formal agreement. The defendant does not seek damages for breach of this covenant but seeks to justify that it was entitled to refuse to complete. Secondly, in my judgment there was no breach of the covenant in cl. 26 by the vendor, namely the plaintiff. The licence was granted by the tenant not the plaintiff. The sale was subject to tenancy and possession has to be yielded up by the tenant to the defendant only at the expiration of the term of the tenancy on 4 January 2000. In my judgment there was simply no breach of cl. 26 by the plaintiff.

62. I accept Mr. Warren Chan's submission that the defendant has failed to establish that the plaintiff has been in breach of its contractual obligations. Issue 1 is resolved in favour of the plaintiff. I find that the plaintiff has not been in breach of cls. 27 and 16 of the formal agreement. The plaintiff has also not been in breach of cl. 26.

Issue 2: Issue on acceptance of title

63. In view of my findings it is not strictly necessary to deal with Issue 2, but I consider that I should deal with this issue as well namely, whether the defendant as purchaser has accepted and/or is deemed to have accepted title and precluded from raising objection to title on the ground of third party interest in the wall stalls (by virtue of waiver and/or cl. 6(a) of the formal agreement.

64. Cl. 6(a) of the formal agreement provided as follows:

"Any requisition or objection on title shall be delivered to the Vendor's solicitors within seven (7) working days after the date of the receipt of title deeds by the Purchaser's solicitors and any further requisitions on title or objection to the Vendor's reply to any requisitions on title or objection previously raised by the Purchaser shall be raised within 7 working days from the date of receipt of such reply by the Purchaser's solicitors. Every requisitions or objections not so delivered shall be deemed to have been waived of which time shall be of the essence. If the Purchaser shall make and insist on any objection or requisition as to title or any matter appearing on the title deeds which the Vendor shall be unable or (on the ground of difficulty delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than seven (7) working days' notice in writing to annul the sale, in which case unless such requisition or objection is withdrawn answered or removed or complied with by the Vendor in the meantime, this Agreement shall be annulled at the expiration of the said notice and the Purchaser shall forthwith be entitled to a return of all the deposit(s) paid hereunder but without interest (if that return is made within 7 days from the date of demand) costs or compensation and a Cancellation Agreement shall be entered into by the parties hereto at their respective costs."

65. It is important to bear in mind that the purchaser had 7 working days from receipt of title deeds to raise requisitions and objections on title. Any further requisitions on title or objection to the vendor's reply to any requisition on title or objection previously raised by the purchaser shall be raised within 7 working days from receipt of such reply by the purchaser's solicitors. It is also important to bear in mind that every requisitions or objections not so delivered shall be deemed to have been waived of which time shall be of the essence. It was further provided by cl. 15 of the formal agreement that time should in every respect be of the essence of the formal agreement.

66. Whether or not a vendor of property may be able to assign the property free from third party rights or encumbrance is, in my judgment, a matter relating to title. I accept Mr. Warren Chan's submissions on this.

67. It is clear from the evidence of Ms. Chan King Yee, the defendant's then solicitor, which I accept, that she approved the title to the property. She raised a number of requisitions in the letter from JSM to WKLL dated 15 September 1997. Those requisitions were answered by letter from WKLL dated 12 November 1997 albeit on a without prejudice basis as there was a dispute as to the time when the title deeds were delivered. There was no reply from JSM to that letter. No further requisition on title or objection to the reply by WKKL was raised by JSM within 7 days from 12 November 1997 or at any other time. It is relevant to observe that Raymond Tang also gave evidence, which I believe and accept, that he knew of the existence of the wall stalls and the fact that the occupiers were carrying on business there. He already knew of these matters at the time that the provisional agreement was entered into in August 1997. It is also significant that he gave evidence, which I believe and accept, that he was not concerned about the wall stalls. Raymond Tang also gave evidence that the defendant was informed by JSM that there was a title problem with the wall stalls. His understanding was that JSM had advised the defendant that the problem was that there were no independent shares allotted to the wall stalls. Notwithstanding this it is clear from his evidence that he asked his staff to instruct JSM to proceed to completion. Ms. Chan King Yee did not recollect whether she had advised the defendant of any problem regarding undivided shares relating to the wall stalls. It is, however, clear from the evidence of Raymond Tang that notwithstanding what he had learnt from his staff about the advice given by JSM the defendant wanted to proceed to completion. The defendant did not instruct JSM to raise any further requisition within the further 7 days or at all. No requisition was raised by JSM about the occupiers of the wall stalls. Raymond Tang was not concerned about the wall stalls. This is hardly surprising as the plan of Raymond Tang and his father was develop an indoor shopping mall inside Chungking Mansion. The wall stalls formed no part of the plan. I find that although the defendant already knew at the time of the entering into of the provisional agreement in August 1997 of the existence of the wall stalls and of the fact that the occupiers were carrying on business there, the defendant was not concerned about the wall stalls.

68. On 19 December 1997 JSM wrote to WKLL informing them that they had no further instructions in the matter. By that time I am satisfied and I find that JSM had approved and accepted the title not only to Shop 5 but to the wall stalls as well. As no requisition or objection was raised as to the occupiers of the wall stalls within the time required by cl. 6(a) I am also satisfied and I find that the defendant is deemed to have accepted title. The defendant was in my view precluded from raising requisition or objection on title on the ground of third party interest in the wall stalls by instructing Chung to raise the same in January 1998 and in the correspondence that took place after they were instructed. Time being of the essence they were too late to raise those requisitions or objections.

69. As I have said there were certain unsatisfactory features in Raymond Tang's evidence. It was his evidence in chief that it was his practice to conduct pre-completion inspection of the commercial premises purchased by companies controlled by him and his father. It was his evidence that it would be necessary to carry out a pre-completion inspection at a time close to the completion date. The reason for this was to ascertain whether there would have been material change to the condition of the premises since the contract date. This was the reason for his pre-completion inspection of Shop 5 on 6 January 1998. The distinct impression given by his witness statement which was treated as his evidence in chief was that it was only at such inspection on 6 January 1998 that he discovered that there were the 7 wall stalls there. He said in para. 34 of his witness statement that this was the first time that he noticed that there were trespassers occupying the wall stalls. In para. 35 he said as follows:

"At no time had the Plaintiff disclosed that the said premises had encumbrances or that there were trespassers occupying part of the said premises. These latent defects of the Plaintiff had never been disclosed by the Plaintiff or the said estate agent during the course of negotiation. Nor had the Plaintiff done so after the parties had entered into the said Provisional Sale and Purchase Agreement. This latent defects in the Defendant's title was not discovered until on or about 6th January 1998 when I made enquiries with the persons who were apparently conducting business at these wall stalls."

70. Although by cl. 17 of the formal agreement the defendant should prior to the signing of the formal agreement make all necessary inspection of the property, the defendant did not do so. It is also clear from the evidence of Raymond Tang that he had not inspected Shop 5 before entering into the provisional agreement. It appears that no one from the defendant had. That is not surprising as the defendant wanted to purchase the premises as part of a plan for an indoor shopping mall. The condition of the shop was not something which concerned the defendant. The reason given by Raymond Tang for the pre-completion inspection in January 1998 was to ascertain whether there was a material change to the condition of the premises since the contract date. I do not believe him. Since there had been no inspection by the defendant on the contract date it is ridiculous in my view to suggest that a comparison could be made of the condition of the premises from the contract date to the date of the pre-completion inspection. When cross-examined on this Raymond Tang was evasive and was unable to give a satisfactory explanation for the reason for the pre-completion inspection which took place about a month before the extended completion date of 12 February 1998. It became abundantly clear in cross-examination that Raymond Tang had all along known of the existence of the 7 wall stalls. There is no doubt that on his evidence in cross-examination and which I accept he knew of the existence of the wall stalls when he entered into the provisional agreement in August 1997. He knew that the occupiers were carrying on business at the wall stalls and that their business was not the retail business of selling watches as was the case with Shop 5. I am wholly unable to see how it can be said that this was a latent defect. There was nothing latent about the existence of the wall stalls. Notwithstanding the fact that it already knew of the existence of the wall stalls and the fact that the occupiers were carrying on business there, the defendant did not raise any requisitions or objections on title within the time agreed under cl. 6(a). It seems to me, and I so find, that the defendant was simply looking for excuses to walk away from the contractual bargain and the inspection in January 1998 was carried out with that objective in mind. Any such requisition or objection raised in January 1998 is in my judgment deemed to have been waived, time being of the essence. I find that the defendant is deemed to have accepted title and was precluded from raising objection on title on the ground of third party interest in the wall stalls.

71. The agreement prescribing the time limit in cl. 6(a) must be given legal effect. (see Jumbo King Ltd v Faithful Properties Ltd. & others [1999] 2 HKCFAR 279; Mexon Holdings Ltd. v Silver Bay International Ltd. [2000] 2 HKC 1). In entering into the formal agreement the parties were separately represented by solicitors. In my judgment there is no reason why the court should not give effect to the provisions of cl. 6(a). This was a bargain freely made by the parties when they were separately represented by solicitors. As Litton PJ said in Mexon Holdings Ltd. @ 9:

"Seven working days for the purchaser's solicitors to scrutinise the title deeds and documents might have been an extremely short time. But, in entering into the agreement, the parties were separately represented by solicitors. The purchaser could have bargained for a longer time : completion was not to take place until eight months after the contract. In principle, courts give effect to bargains freely made......"

72. I was also reminded of what Litton PJ said in Mexon Holdings Ltd. @ 8:

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain."

In my view in January 1998 the defendant was no longer a willing purchaser intending to see the transaction through to completion in terms of the bargain. Property prices in Hong Kong were still falling due to the Asian financial crisis and the defendant was simply looking for excuses to walk away from its contractual bargain.

73. Stone J. succinctly said at pg. 12 of his judgment in Wong Man Kit Raymond v. Chan Nam Fan [1998] HKCU 629:

"........ I do not accept that a clear and obvious matter which goes to the root of the Vendor's title can, in effect, be clasped to the Purchaser's breast for opportunistic use in any subsequent emergency - and in this context, perhaps, there can be no greater emergency in the eyes of the Hong Kong speculator than the fall of the property market subsequent to purchase. It follows, therefore, that in my judgment a problem going to root of title does not, as Mr. Chain contended, serve in itself to render the provisions of Clause 10(a) otiose. To the contrary. In my view the time limit in Clause 10(a) fails to bite only in those circumstances where the problem with title could not have been discovered within the relevant contractual period for the raising of requisitions."

I agree with Stone J. The time limit in cl. 6(a) of the formal agreement fails to bite only where the problem of title could not have been discovered within the relevant contractual period for the raising of requisitions and that is certainly not the case here as the defendant knew of the existence and the occupation of the wall stalls at the time of the entering of the provisional agreement in August 1997. It was much too late to raise the requisition of third party interest in the wall stalls in January 1998. The defendant has failed to adequately explain why its requisition was raised so late. What Bokhary PJ said in Mexon Holdings Ltd. v Silver Bay International Ltd. [2000] 2 HKC 1 @ 10 is also applicable here:

"It is not adequately explained why its requisition was as late as it was. One cannot rule it out as a real possibility that the purchaser was watching the property market for a time before deciding to raise its requisition."

74. It was also submitted that apart from cl. 6(a) the defendant has by its conduct also waived any objection to title on the ground of third party interest in the wall stalls. It is stated in Farrand's "Contract & Conveyance" 4th Edn. at pg. 130:

"An implied acceptance of title depends on whether it appeared from the purchaser's conduct that he intended to waive any objections. This is a question of fact only to be determined in the light of the whole of the circumstances of the case. The quality of conduct to be looked for involves the performance by the purchaser of acts which a prudent purchaser would not normally perform until a good title has been shown, ie. not until completion would be bound to take place (see Haydon v Bell (1838) 1 Beav 337; Hyde v Warden (1877) 3 Ex D 72). In addition, the inference from the acts should not be nullified by a continued insistence on the part of the purchaser on any objections (see Burroughs v Oakley (1819) 3 Swanst 159.

Conduct implying acceptance of the title may take many forms (eg, payment of the purchase price) ............"

The above passage was approved by the Court of Appeal in Hillier Development Ltd. v. Tread East Ltd. [1993] 1 HKC 285 at 291.

75. I was also referred to Jones & Goodhart's "Specific Performance" 2nd Edn. where it is stated at pg. 254:

"A purchaser may be precluded from objecting to a defect if he had actual or constructive notice of it at the date of the contract or if he expressly or by his conduct waives any right to object."

76. In this case the defendant knew of the existence wall stalls and the fact that the occupants were carrying on business there. It was not concerned about the wall stalls. It entered into the provisional agreement and the formal agreement with that knowledge. The defendant was advised that there was a title problem to the wall stalls as there were no independent shares allotted to the wall stalls. But the defendant was also not concerned with this as it wanted to proceed to completion. No requisitions were raised about the occupation of the wall stalls within the time required by cl. 6(a). On 3rd December 1997, the defendant entered into the supplemental agreement with the plaintiff and paid a further 5% of the purchase price to obtain an extension of the completion date. At the time of the supplemental agreement the defendant still wanted to proceed to completion. The title to the property including the wall stalls was in fact accepted by the solicitor for the defendant. On those facts which I find I am satisfied that apart from the provisions of cl. 6(a) the defendant has by its conduct also waived any objection to title on the ground of third party interest in the wall stalls.

77. It was also submitted by Mr. Robert Tang that notwithstanding cl. 6(a) the vendor was obliged to give good title as shown on completion and this the plaintiff was unable to do because of third party interest in the wall stalls. I am unable to accept Mr. Tang's submission. First, the defendant's pleaded case was that there were trespassers who occupied the wall stalls. As I have said, trespassers acquire no rights in the property and I have already found that there was no encumbrance on the wall stalls. Secondly, in any event, I have also found that the defendant was precluded from raising objection on title on the ground of third party interest in the wall stalls. The obligation on the plaintiff on completion was to give a good title as shown. I agree with Mr. Warren Chan that the title as shown means the title with the third party interest in the wall stalls. As the defendant had in fact accepted title and is also deemed to have accepted title, it is inconceivable that the defendant can on completion turn around and refuse to complete on the ground that the plaintiff was unable to assign the property free from encumbrance because of the third party interest in the wall stalls. In my judgment at the time of completion the defendant could not refuse to complete for this reason.

Conclusion

78. Issue 2 is resolved in favour of the plaintiff. The remaining issues do not arise in the light of my findings and I do not propose to deal with them.

79. I am satisfied that the defendant was in breach of contract by failing to pay the balance of the purchase price on completion and that the defendant thereby repudiated the contract. Having accepted the defendant's repudiation, the plaintiff was in my judgment entitled to forfeit the deposits paid and to claim damages under cl. 7(a) of the formal agreement. I give judgment to the plaintiff for the declaration as claimed in para. (b) of the prayer for relief in the re-re-amended statement of claim and for damages for breach of the formal agreement such damages to be assessed by a Master. The defendant's counterclaim is dismissed. I also make an order nisi for costs of the action and the counterclaim including the costs reserved on 10 January 2001 to be costs to the plaintiff such costs to be taxed if not agreed and to be paid by the defendant.

80. Finally, I would like to express my gratitude to counsel for their helpful and able assistance rendered to me at the trial.