CAPITAL FAMOUS LTD v. MTR CORPORATION LTD

HCMP 413/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 413 OF 2007

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REASONS FOR JUDGMENT

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1.  By Originating Summons the plaintiff sought declarations that the defendant was in repudiatory breach of four Agreements for sale and purchase of properties, that the defendant failed to answer requisitions, and that the plaintiff had lawfully terminated the agreements, as well as for the usual consequential orders as to the return of deposits, damages and liens.  On 13 August 2007 I dismissed the Originating Summons.  I now give reasons.

2.  The defendant is the owner of a development known as Metro Town in Tseung Kwan O.  It is located on Tseung Kwan O Town Lot No. 73 which was granted to the defendant under an Agreement and Conditions of Grant dated 11 February 2003.  By Special Condition 9 of the Grant the defendant was subject to a building covenant requiring completion and fitness for occupation of the buildings in two stages.  Site A was to be completed by 31 March 2008, and Site B by 31 March 2009, or the expiration of 60 months from the “Due Date” whichever is the later.

3.  On 27 September 2005 the parties entered into four agreements for sale and purchase between the defendant as vendor and the plaintiff as purchaser of four flats there.  The flats were respectively Flats G and H on the 21^st floor and Flats G and H on the 22^nd floor of Tower 5, which is erected on Site A.  The subject matters of the agreements are undivided shares in the entirety of Lot No. 73, with exclusive possession of the respective flats.

4.  The flats were sold under the Consent Scheme.  At the time of execution of the Agreements, Messrs Kao, Lee and Yip (“KLY”) acted for both parties in the sale and purchase of the 21^st floor flats, and Messrs Wilkinson and Grist (“WG”) acted for both parties in the sale and purchase of the 22^nd floor flats. 

5.  By Clause 4(1)(c) of the Agreements, the vendor was required to complete the building, defined in Clause 1(b) as Towers 1 to 5 in Phase I of Metro Town in compliance with the Government Grant.  Phase I is of course the buildings on Site A.  By Clause 4(7), the issue of a Certificate of Compliance or consent to assign by the Director of Lands was to be conclusive evidence that the building had been completed.  By Clause 5(1) of the Agreements, the vendor was to notify the purchaser in writing that he was in a position validly to assign the properties within one month of the issue of the Certificate of Compliance or the consent of the Director of Lands to assign, whichever happened first.  By Clause 5(2), completion was to take place within 14 days after such notification.  By Clause 12(2) of the Agreements, the purchaser was to have no grounds for objection if the vendor’s interest in the properties was an equitable interest and not a legal estate.

6.  The Director of Lands issued the Consent to Assign in respect of Phase I of Metro Town on 20 November 2006.  An Occupation Permit was granted and duly registered for each of the properties.  On 11 December 2006, WG, on behalf of the defendant, notified the plaintiff of the issue of the Occupation Permit and Consent to Assign and called on the plaintiff to complete the purchases of the 22^nd floor flats on or before 27 December 2006, and on 15 December KLY similarly called on the plaintiff to complete the purchases of the 21^st floor flats on or before 2 January 2007.  The plaintiff did not complete the purchases.  On 4 January 2007, WG wrote to the plaintiff giving it a further 21 days to complete in respect of the 22^nd floor flats, and on 11 January KLY similarly gave a further 21 days to complete in respect of the 21^st floor flats.

7.  The plaintiff then instructed Messrs Y T Szeto & Co., solicitors (“YTS”) to act for it.  On 11 January 2007, YTS wrote to both KLY and WG raising requisitions, in the same terms, in respect of the 21^st and 22^nd floor flats.  The requisitions were:

(a)	Whether the Certificate of Compliance in relation to the Lot had been issued; if yes, the defendant was asked to produce a certified copy of it and if no, the defendant was asked to make disclosure as to whether it had applied for such Certificate;
(b)	If the Defendant had applied for a Certificate but it had not been issued, the defendant was asked to make disclosure of all documents since its application and up to 11 January 2007; and
(c)	Alternatively, if the defendant had not applied, it was asked to make disclosure of all the positive obligations under the Grant with which it considered that it had not complied.

8.  KLY replied to the effect that Metro Town was developed under the Consent Scheme and given that Phase II was still under development, the defendant had not yet obtained the Certificate of Compliance.  They pointed to the Consent to Assign and said that the defendant was in a position validly to assign the 21^st floor properties, and therefore the requisitions were sufficiently answered.  WG replied in similar terms in respect of the 22^nd floor flats.

9.  YTS would have none of it.  On 22 January, they wrote to KLY saying that the requisitions were not sufficiently answered, that the defendant had not yet complied with all the positive obligations under the Grant, and that there was a real risk of re-entry and/or enforcement action by Government.  On the same day they wrote to WG in the same terms.  Later, YTS wrote to both firms to the effect that the plaintiff’s concern was whether the Government would re-enter or commence enforcement action against individual purchasers in the event that the defendant failed to comply with all the positive obligations under the Grant.

10.  Later still, YTS relied on a letter dated 31 January 2007 from the Lands Department indicating that Government reserved the right to take enforcement action should any breach of condition of Grant exist then or be detected thereafter, as showing a real risk of enforcement action.

11.  KLY and WG responded to the effect that the Lands Department letter merely reserved the Government’s rights but there was no evidence that the defendant had been or would be in breach of any of the conditions of the Grant.  Again, YTS would have none of it; they said that the defendant had not complied with its duty to show a good title and that the requisitions were not sufficiently answered.

12.  The Originating Summons was issued on 2 March 2007.  On 8 March 2007, Messrs Deacons, who act for the defendant in these proceedings, advised YTS that the defendant had validly accepted the plaintiff’s repudiation by conduct of the Agreements, and purported to forfeit the deposits.

13.  As is so often the case, this matter is best resolved by recourse to first principles rather than by tedious dissection of the complications prayed in aid by senior counsel in support of their clients’ positions.  The vendor has to prove a good title, i.e. that there is no encumbrance attaching to the property at the time of completion.  So the question is, where is the encumbrance?

14.  The plaintiff’s position seems to be that the requirement under the Grant, outstanding at the date of completion, to complete the works on the whole of the Lot, i.e. Phase I and Phase II by given dates, which could give rise to enforcement action by the Government in the event of default by the defendant is itself an encumbrance.

15.  Now the proposition that a large organisation like the defendant, which has set out to develop a housing development and already completed Phase I of it, is going to default on the completion of Phase II is the sort of unlikely proposition which brings to the forefront of the judicial mind, and on occasion to the judicial lips, phrases such as “Get real!”.  That is not going to happen.  If, for any reason, there is delay, the Lands Department is always happy enough to extract a massive premium from a developer for extension of the building period.

16.  There was admittedly no default by the defendant at the time of completion.  There is also no evidence to suggest that default is likely.  Of course a market crash could happen at any time, as Mr Mok SC suggests, but the point about market crashes is that they generally take the market, apart from the very clever or the very lucky, by surprise.  You cannot rely on them happening to suit your purposes.

17.  If it were necessary to apply the test in MEPC Ltd v Christian-Edwards [1981] AC 205, then given that there is no evidence that default is likely, and the inherent probabilities of the situation I would be inclined to conclude beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the encumbrance.  For the application of that test to be necessary, however, one needs some kind of encumbrance to assert in the first place, so unless some encumbrance can be found, there is no need for me to decide whether there is no real risk of assertion of it.

18.  As I have indicated, there was no breach of the Conditions of Grant at the time fixed for completion.  The law does not require the vendor to show that there will be no future breach.  As is noted in Emmet and Farrand on Titleat paragraph 5.076:

“	A purchaser of a leasehold title is concerned to ascertained that the lease (or any superior lease) is not liable for forfeiture for breach of covenant already committed; Becker v Partridge [1966] 2 QB 155.”

19.  Mr Mok SC however says that this is not necessarily final and he points to cases such as Chi Kit Co. Ltd & Anor v Lucky Health International Enterprise Ltd [2000] 3 HKCFAR 268, Lee Siu Man v Chu Chi Wing & Anor [1992] 1 HKC 266 and Luk Ho Chang v Fook Man Finance Co. Ltd [2006] HKLRD 489 as cases where the courts have found that a future or contingent liability may be regarded as a sufficient encumbrance to prevent the vendor from showing a good title.

20.  In my view these cases do not assist the plaintiff.  In all of them, an actual liability existed at the time fixed for completion.  In Chi Kit, it was a judgment against the incorporated owners for a large sum of money, to which the owner of the property would be liable to contribute.  The court held that there was an actual and not merely a contingent liability.  In Luk Ho Chang, there was a resolution of the incorporated owners to carry out repairs to which the owner of the property would be liable to contribute, even if, at that stage, no repairs had even been contracted for; in other words, there was a pre-existing liability at the time fixed for completion, even if the quantum was yet to be established.

21.  Lee Siu Man is perhaps a little more helpful, in that the vendors had acquired the property under a deed of gift, which gave rise to a contingent liability against the property for estate duty, if the donors, who were still alive, should die within three years of the date of the gift.  However, here too there was a pre-existing liability even if it was subject to a contingency.

22.  In the instant case there was no default, therefore there was no liability attaching as an encumbrance to the property at the time fixed for completion.  The existence of the Conditions of Grant could not be regarded as a liability themselves.  They only provide for liability in the event of default and any default could only come in the future.  The defendant was therefore able to give a good title.

23.  When the plaintiff asked whether the Certificate of Compliance had been issued, in my view that was sufficiently answered by the defendant’s reply that it had not.  The plaintiff was bound to take a title, even an equitable title, once the Consent to Assign had been issued, as an alternative to the Certificate of Compliance.  Cf. Liu Chung Fai and Anor v Tin Shui Wai Development Ltd & Anor, HCA 4610 of 2003.

24.  When the plaintiff asked, in the event that the Certificate of Compliance had not been issued, for disclosure of all documents since its application and up to 11 January 2007, that was simply unnecessary.  The same applied to the requisition for disclosure of all the positive obligations under the Grant with which the defendant considered that it had not complied.  Everyone knew that Phase II was not completed, but then it did not have to be for some years to come.

25.  If the plaintiff’s proposition is right it must mean that no buyer under the Consent Scheme can be forced to take a title to a property in a half-finished development, because until the whole thing is finished, there is always the possibility that the developer will not finish it.  That is absurd.  Worse, it is not what the contract provides for.

26.  For these reasons I dismissed the Originating Summons.