LEE WAI KWAN v. CHAN TAK YAN ERIC AND ANOTHER

HCMP 4863/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4863 OF 1999

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J U D G M E N T

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1. By Originating Summons the Plaintiff (Purchaser) claims against Defendant (Vendor) for reliefs in respect of an abortive sale and purchase of property. The Plaintiff claims a Declaration that the Defendant failed to answer requisitions on title satisfactorily; a Declaration that the Plaintiff lawfully rescinded the Agreement for Sale and Purchase (ASP); an Order that the Defendant repay the deposit paid by the Plaintiff and an Order for repayment of disbursements pursuant to purchase, damages, interest and costs.

2. The Defendant counter-claimed for Declarations that it was entitled to rescind the ASP and retain the 10% deposit and claimed damages.

Facts

3. There was no dispute about the facts. The Plaintiff agreed to buy a residential flat from Defendant for $2,080,000.00 and the parties signed an agreement for sale and purchase (ASP), dated 10-5-99, with settlement to be on or before 5p.m. on 6-7-99. The Plaintiff paid a total deposit of $208,000.00.

4. The ASP contained the usual clauses. The property was to be sold free of encumbrances (Clause 1); the vendor had to show and give a good title (Clause 18) and time was to be of the essence. At the time the agreement was signed it was obvious to the Plaintiff that the property was heavily encumbered and clauses 37, 38 and 40 took account of that.

5. Six Memorials related to Charging Orders Nisi and Absolute against the property and, by Clause 37, the Defendant agreed and undertook to take all steps to discharge the orders, on or before completion.

6. The property was subject to a Loan agreement and First and Second charges. The Defendant undertook, in Clause 38, to discharge and release those charges, on or before completion.

7. Clause 40 stated that the deposit money was to be held by the Defendant's solicitors as stake-holders and was not to be released to the Defendant until (a) Plaintiff's solicitors had confirmed and accepted that good title had been given and (b) that the balance of purchase money payable on completion should be sufficient to redeem, release and discharge the orders and charges against the title.

8. Between the date the ASP was signed and settlement, a further 2 Charging Orders Absolute were registered against the title, in respect of orders nisi that were on the title when the ASP was entered into. Thus by 11.5.99 4 Charging Orders Absolute were registered against the title, apparently for credit card debts. The unpaid amounts did not appear on the land search record.

9. The Defendant sent title deeds to Plaintiff on 25-5-99 and the Plaintiff raised requisitions by letter of 2-6-99. Items 3 and 5 are the requisitions which are relevant. Item 3 requested documentary proof that the Orders had been discharged on or before completion and Item 5 requested certified copies of the 3 charges and the 3 Orders. Subsequently the Defendant's solicitors sent copies, not certified copies, of some but not all of the orders.

10. The Plaintiff made another, similar request on 28-6-99, this time adding a request for the certified copy of the order latest filed, as well as a certified copy of the discharge.

11. On the same date the Defendant's solicitor replied that the certified copies would be sent on completion, when the same had been released by the chargees.

12. The day before settlement the Defendant's solicitors suggested by letter that the balance of purchase should be sent subject to the Defendant's undertaking to discharge the existing orders and charges. Original, or certified copies, would then be sent when the same were received from the chargees' solicitors. Copies of various letters from the chargees' solicitors were enclosed advising the amounts payable to discharge the orders.

13. On the same date the Plaintiff's solicitors repeated their requisitions and said that the Defendant's undertaking was unacceptable. Plaintiff's solicitors pointed out that certified copies of orders and the relevant letters from the chargees should be provided sufficiently far in advance of settlement.

14. On 6-7-99 the Plaintiff reminded Defendant of its obligations under Clause 38. The Defendant's solicitors suggested that Plaintiff complete on (a) production evidence of payment of the outstanding sums under the charging orders before completion, with an undertaking to provide the release or discharge within a reasonable time after completion and (b) using the balance of the proceeds of sale to repay the first and second charges. It was not stated clearly whether undertakings were to be given by Defendants or their solicitors, but as reference was made to "the Law Society Circular", one presumes that it referred to the solicitors.

15. By the settlement date the Plaintiff's solicitors could assess, from documents and correspondence, that the sum required to repay the charges on the title ($2,184,090-00) was considerably more than the purchase price ($2,080,000.00). The nature of the charges registered against the title indicated, prima facie at least, that the Defendants were in a very poor financial position .

16. The Plaintiff and her solicitors were clearly nervous about going further with the purchase. The Plaintiff had not tendered any Assignment to Defendant's solicitors by 6.7.99 and was still requesting certified copies of charges and evidence to show that they had been discharged before or on completion.

17. The Plaintiff had never made any request for a formal settlement and, in the absence of any request for such, the Defendant's solicitors, unsurprisingly, assumed that settlement would take place in terms of Law Society Circular 82-91, whereby solicitors on settlement obtain title deeds and formal documents of assignment and/or release against formal undertakings to forward relevant formal documentation within set times.

18. Settlement did not take place on the 6.7.99. The Plaintiff did not tender the balance of the purchase price, or make any enquiries about split cheques, or canvass with the Defendant's solicitors what undertakings they, as purchasers, required on settlement. When they did not receive, forthwith, any certified copies of discharges, the Plaintiff's solicitors claimed, by letter, that the Defendant had failed to prove good title, rescinded the ASP and demanded the return of the deposit. The basis for their doing so was that the Defendant by failing to provide evidence of discharge of the orders, had failed to give good title.

19. In reply, on 8.7.99, the Defendant's solicitors said that title was not defective and that the Plaintiff was not entitled to rescind. They took the view that they were entitled to rescind the ASP because of the Plaintiff's wrongful repudiation and they forfeited the deposit.

20. There was no dispute by the Defendant that the purchaser had the right to rescind if the vendor failed to answer requisitions on title satisfactorily (Lo Hung Bui v. Lo Shea Chung & Anr [1997] HKLRD 721). The Defendant accepted that the vendor's obligation was to show good title and answer requisitions satisfactorily, within a reasonable time, so as to allow the purchaser to satisfy his queries on the matters raised, get his money ready and complete on the day agreed (Active Keen Industries Ltd v Fok Chi Keong [1994] 1 HKLR 396 ).

21. The Defendant submitted however that the Plaintiff had been premature in rescinding the ASP and had assumed wrongly that the encumbrances on the title would not be, or could not be, discharged. The Defendant pointed out that it had accepted, throughout the correspondence, its obligation to discharge the encumbrances on completion, but were not obliged to do so prior to completion, as Plaintiff appeared to suggest in correspondence.

22. It was submitted on behalf of the Defendant, that, as with most transactions, the parties must have contemplated that the vendor would require some, or all of the purchase price to discharge outstanding mortgages and charges. If appropriate undertakings were given there could have been no risk that the Plaintiff would have had to take the property encumbered with the charges.

23. The Defendant pointed out that the encumbrances were not defects in the title, but matters of conveyance, because they were defects removable as of right by the vendor. As a matter of course the vendor must do whatever acts were required to remove the defects and thus it was not necessary that the purchaser address any requisition to that point. (Emmet on Title 19th Ed. Chapter 5 Rel. 37 5.0001E - Matters of Conveyance) Emmet refers to a mortgage as being the commonest example of this type of defect. By analogy a Charging Order would fall into the same category.

24. It appears that the Plaintiff's solicitors expected discharges of the charges to be available prior to settlement, despite the ASP stating that they should be given on, or before, completion. This was an unrealistic view, given that usually the vendor relies on the payment of the balance of purchase money to discharge all charges.

25. The Plaintiff's solicitors could have protected their client's position by insisting on paying split cheques directly to the chargees' solicitors and requiring undertakings from Defendant's solicitors, in accordance with the Law Society Circular, to provide them with formal documents of discharge within a reasonable time.

26. They could have pointed out the apparent shortfall in funds needed to discharge the orders and required the Defendant's solicitors to satisfy them as to how that would be met, so as to ensure that all the charges were paid off on completion. They did not send an Assignment in anticipation of settlement. On settlement they should have tendered, but did not, the balance of the purchase price, or make any suggestions as to how settlement should be effected. Although they were justified in being cautious about the Defendant's financial position, they did not know (and did not enquire when they discovered the shortfall) what additional funds, if any, the Defendant could have called on to effect settlement.

27. All in all the Plaintiff's solicitors acted prematurely in rescinding the agreement. Although they claim that the Defendant had not satisfactorily answered their requisitions as to title, what they really complained of were matters of conveyance. If, on the date for completion, they had tendered the balance of the purchase price and if thereafter the Defendant had failed to release with immediate effect the charges and orders against the title, the Plaintiff would have been entitled to rescind immediately.

28. The obligation of the purchaser to pay and that of the vendor to complete by giving an executed assignment were simultaneous obligations unless it was expressly stated that there would be a departure from the usual rule (Chong Kai Tai Ringo & Another and Lee Gee Kee & Anor [1997] HKLRD 461).

29. It was therefore incumbent on the Defendant's solicitors to arrange for repayment of all the charges on completion, and where it was not practicable for formal documents of release to be handed over immediately, to give the appropriate undertakings to obtain and supply the same.

30. It appears from the evidence that on the day of settlement the Defendant's solicitors had not been put in funds by their client to enable them to pay off all the outstanding charges. It was not until the 7-7-99 that the Defendant paid in $35,000.00, to cover part of the expected shortfall of around $50,000.00. The 2nd Defendant in her 2nd affirmation said she had the balance of $20,00.00 in cash, although she gave no reason why she had not made the money available to her solicitors by the time for completion. However, as this was not known to the Plaintiff's solicitors until some time after the abortive settlement, it is not a matter that the Plaintiff was able to rely on as a reason for rescinding the ASP on the 6.7.99.

31. On the morning of the 6.7.99 the Plaintiff's solicitor was demanding proof of due discharge or release of the various orders, which as settlement was not due until 5 p.m. seemed rather premature. Its previous insistence on certified copies of the various charges and orders was not reasonable given that those documents were held by the chargees' solicitors. The Defendant had supplied copy letters from the chargees' solicitors setting out the amounts to be paid by the Defendant to release the charges. It must have been clear to the Plaintiff's solicitors from those letters, which calculated the amounts due up to 7.7.99, that the Defendant was well aware of its obligation to clear the charges from the title.

32. From reading the solicitors' correspondence it appears that neither solicitor applied his mind to reviewing and resolving the practical difficulties that might arise on settlement. The Plaintiff's solicitor did nothing but demand, prematurely, certified copies of documents that the Defendant did not need to produce until settlement. The Defendant's solicitor, rather too late, realised the practical difficulties in settling a transaction where the purchase price was less than the charges on the property and only on the morning of 6-7-99 suggested to the Plaintiff's solicitors a plan for dealing with the releases. By that time the Plaintiff's solicitor, who had not to that point made any specific stipulation as to what they required on settlement, decide to bail out of the transaction.

33. While it is easy to feel sympathy for the Plaintiff's position, the solicitors were not justified in so doing, particularly when they had not made any attempt to fulfil their obligation to tender the balance of the purchase price and had not adopted any realistic stance in respect of discussing how settlement could be sensibly effected.

34. In all the circumstances I am of the view that the Plaintiff's application for relief must fail, as the Plaintiff has not established that the Defendant failed to answer requisitions on title and further the Plaintiff did not give the Defendant any realistic chance of settling the transaction in terms of the agreement.

35. The Plaintiffs summons is dismissed.

36. The Defendants' counterclaim is allowed. It is declared that the Defendants were entitled to rescind the ASP and forfeit the deposit.

37. Damages claimed by the Defendants are to be determined and assessed by a Master.

38. There will be an order nisi for costs of the action in favour of the Defendants.

39. Costs of the damages assessed to be determined by the Master.