HILL TOP HOLDINGS LTD v. WAN KWOK FU

DCCJ 2839/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2839 OF 2006

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JUDGMENT

1.  In March 2006, Hill Top (the Plaintiff) agreed to buy Wan (the Defendant)’s property in the Western District of Hong Kong.  The parties entered into a provisional sale and purchase agreement.  The deal fell through, as they could not resolve their differences during the requisition stage.  Both parties allege wrongful repudiation by the other.  Hill Top now claims for return of deposit.  Wan claims to have forfeited it.

BACKGROUND

2.  The property is inside one of those buildings over 30 years old in the district.  It has an interior area of 357 square feet.  Through a glass door, one could gain access to the outside flat roofs.  The flat roofs amount to about 110 (20x4 plus 7x4) square feet.  2 canopies with supporting frames had been erected on and above the flat roofs, effectively transforming them into covered balconies of the property.

3.  Two representatives of Hill Top, one of them being Skeeles, accompanied by one Clara Li and the estate agent, Chiu, viewed the property.  On the following day, Hill Top and Wan entered into the provisional agreement.

4.  In the agreement, the property was described as Flat D on the 1^st Floor of the building.  The price was HK$1,350,000.  Upon signing of the agreement, Hill Top paid an initial deposit of HK$75,000.  A further deposit of HK$75,000 should be paid by Hill Top upon signing of the formal agreement on or before 6 April.  Completion should take place on or before 8 May when the balance of the purchase price had to be settled.  The property was to be sold free from encumbrances (clause 3) and on an “as is” basis” (clause 11).

5.  The initial deposit was paid as agreed.  On the scheduled deadline for signing the formal agreement, Hill Top tendered a cheque for the amount of the further deposit HK$75,000.  However the formal agreement was never signed and the cheque was never presented.

6.  Hill Top became aware of a notice from the Building Authority back in September 2005 to the owner or occupant of the property.  This caused Hill Top concern.  First, the Authority has classified the structures on and over the flat roofs of the property as unauthorised building works and requested for their removal.  Secondly, the notice referred to the property as “Flat D on the 1^st Floor but also known as Flat D on the 3^rd Floor”.

7.  The title deeds and documents in respect of the property were supplied to Hill Top’s solicitors on 25 April.  They raised formal requisitions by letter dated 26 April.  The present dispute surrounds only the following requisitions:

“	……
	2.	Occupation Permit No.H71/66
		The Property our client is buying being Flat D on the 1st Floor of Ko Shing Building is for domestic use.  However, according to the above Occupation Permit, the 1st Floor comprises 3 shops for non-domestic use.  Please clarify.  Enclosed please find copy of the said Occupation Permit for your easy reference.
		……
	4.	Unauthorised Building Works
		We note the Building Authority had issued a letter of 29th December 2005 to the existing Vendor, Wan Kwok Fu – your client requesting him to remove the unauthorised building works (being structure on and over the flat roof of the Property) existing on the Property (“the said Order”) and that the said letter has never been disclosed to our client prior to the signing of the Provisional Agreement for Sale and Purchase dated 24th March, 2006.
		Please urgent advise us as to how your client is going to cure the defect on title to the Property caused by the said Order and to deliver the Property to our client on an “as is” basis.
		……”

8.  I shall refer to the above requisitions as “the OP requisition” and “the UBW requisition” respectively.

ISSUES

9.  In the present case (where there was only the provisional agreement), Wan had an implied contractual duty to show good title and to answer reasonable requisition satisfactorily before completion: see Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67.

10.  The key issues are as follows:

(1)	In relation to the floor numbering and permitted use, whether the OP requisition was properly raised and, if yes, whether it has been satisfactorily answered.
(2)	In relation to the unauthorised building works:
	(a)	whether Hill Top had notice of the unauthorised building works at the time of the agreement;
	(b)	whether Hill Top was entitled to raise the UBW requisition; and if yes, whether the UBW requisition has been satisfactorily answered.

THE FLOOR NUMBERING AND PERMITTED USE

11.  It was argued on behalf of Wan that the OP requisition was not properly raised.  It was said to be imprecise: see Chan Chik Sum v Great Pearl Industries Ltd [1997] 1 HKC 27 at 33D; Century Crown Ltd v Ho Wing Chun & Anor, HCMP 2147/98, 20 March 2000, at page 30.  Indeed, what Hill Top’s concern or objection in relation to the title of the property was and in what aspect of the title needed clarification as a result of the description in the occupation permit were not set out precisely in the OP requisition.

12.  Prior to the formal requisition, Hill Top’s solicitors had by letter asked Wan’s solicitors for clarification of the floor numbering, in view of the Authority’s reference to it in the notice to Wan in 2005.  Hill Top’s solicitors first referred to the occupation permit in the formal requisition.  The concern became that of the use of the property permitted by the occupation permit.

13.  There was no issue of any alteration done to the floors.  Hill Top’s solicitors certainly made no such suggestion.  Miss Leung for Wan submitted that even if the property were on the 1^st Floor as described in the occupation permit and therefore the domestic use described in the agreement were not permitted by the occupation permit, it would not have created a title problem in the circumstances: see Summit Investments Ltd v Shia Ning Enterprises Ltd [1999] 2 HKLRD 798 at 802J-803J; 805I (refusing to follow Worldful Investments Ltd v Young King Asia Ltd [1995-96] CPR 665).  I agree.

14.  In any event, Wan’s solicitors asked for the return of the title deeds for preparing the answer.  The documents were returned on 3 May.  On 4 May, Wan’s solicitors gave the following answer:

“	……
	We refer to Requisition 2 raised in your letter dated 26th April 2006 and would point out that the third floor referred to in the Occupation Permit in respect of or covering the captioned premises should be the first floor described in all the title deeds and documents in relation to the said premises.
	The reason is that the captioned building is a ten-storey building and the description of the ground to second floors referred to in the said Occupation Permit was written as the “ground floor” in the said title deeds.  As a result, the description of the 3rd to 9th floors referred to in the said Occupation Permit was written as “1st to 7th floors” in the said title deeds and documents.
	……”

15.  On 6 May, Hill Top’s solicitors asked Wan’s solicitors for evidence in support of their above answer.  The reply came on 8 May, the completion date.  Wan’s solicitors explained:

“	……
	We set out hereunder particulars of the units comprised in the Occupation Permit in respect of or covering the captioned premises:-
	Ground Floor: 2 shops for non-domestic use
		1st Floor: 3 shops for non-domestic use
		2nd Floor: 1 office for non-domestic use
		3rd to 9th Floors (inclusive): 4 tenements each floor for domestic use
	We would also summarise the units comprised in the First Schedule to Deed of Mutual Covenant Memorial No. 537366 as follows:-
		Ground Floor – Shops A, B, C, D and E
		1st to 7th Floors – Flats A, B, C and D on each floor
	It is common sense that non-domestic units on the ground floor would normally be described as “shops” and domestic units would normally be described as “flats”.
	According to the said First Schedule, it is clear that non-domestic units were described as “shops” and domestic units were described as “flats”.
	It is clearly written in the said Occupation Permit that the total number of domestic units on the 3rd to 9th floors is twenty eight which is identical to that described in the said Deed of Mutual Covenant.
	It is a basis rule of construction that an instrument must be read as a whole in order to ascertain its true meaning.  In the present matter, the said Deed of Mutual Covenant should be read as a whole and by reference to the said Occupation Permit.
	Further, upon inspection of the property in question, it is clear that the same is a ten-storey building and the ground first and second floors referred to in the said Occupation Permit were built on street level.  As a result, there is a strong inference that the said ground, first and second floors were described in the title deeds and documents in relation to the said premises as “ the ground floors” and the 3rd floors referred to in the said Occupation Permit were described in the said title deeds as 1st to 7th floors.
	In the circumstances, both documents should be a good and sufficient evidence to prove our contention as contained in our answer set out in our letter dated the 4th May 2006.
	Furthermore, the words “(also known as “Flat D, 3/F”)” were written in the caption of the letter dated the 29th December 2005 from the Building Authority and such fact should also be a good and sufficient evidence to support our said contention.
	……”

16.  Mr Leung for Hill Top submitted that Wan should have obtained a better answer with more evidential value from the relevant authority.  Yet one also needs to make sense out of construing the documents.  It is apparent from the documents that the DMC was entered into 3 months after the occupation permit was issued in 1966.  There was no issue of any alteration to the number of storeys of the building during this period.  Merely reading the floor numbering under the DMC to mean the same floor numbering under the occupation permit would lead to an odd result – the 8^th and the 9^th Floors described in the occupation permit would be unaccounted for in the DMC as if they did not exist at the time of the DMC.

17.  Mr Leung for Hill Top also submitted that the answer made no reference to the fact that the building was built on a slope and is located on 2 streets, an explanation now given by Wan and Chiu.  Yet the fact was always known.  The property’s address always consists of 2 street references.  The representatives of Hill Top have also viewed the property.  The floor where the property is stands physically on top of 3 storeys including the Ground Floor.  This is obvious from the photographs of the building.

18.  The explanation with reference to the consistent number of tenements for domestic use and shops in the occupation permit and the DMC is also correct.  In this regard, Hill Top’s solicitors queried that the one office tenement for non-domestic use described in the occupation permit was not accounted for in the DMC.  However, that office tenement was described to be on the 2^nd Floor in the occupation permit.  Whether this was the 2^nd Floor according to the occupation permit or the DMC, the discrepancy and any possible resultant legal consequence would in any event have nothing to do with the property.

19.  If Hill Top was still concerned about some sort of enforcement action, it should be noted that it was in the first place the Authority which identified the property as Flat D on the 3^rd Floor in the very notice to Wan complaining about the unauthorised structures.

20.  In my judgment, the answer on 8 May was not mere assertion but a satisfactory explanation of the floor numbering in the occupation permit and the title deeds in the circumstances.

THE UNAUTHORISED BUILDING WORKS

21.  According to the Authority’s notice to Wan, the unauthorised building works were “on and over the flat roof of the premises”.  The approved building plan was not available for comparison.  Referring to the photographs, both parties seem to understand the structures to mean the canopies and their supporting frames erected on the flat roofs.  During submission, Miss Leung for Wan conceded that they were fixtures.

22.  On 26 April, Wan’s solicitors wrote to Hill Top’s solicitors as follows:

“	……
	We are instructed that your client is fully aware of the existence of the canopy at the flat roof of the Property at the time your client entered into the Provisional Agreement on 24th March 2006 and agreed to purchase the property with the existence of the said canopy.
	However as it is now come to our client’s attention that a letter was issued by the Buildings Department on 29th December 2005 requesting the said canopy be removed, our client has no objection to remove the said canopy at his own expenses if it is so requested by your client.  To the contrary if your client would like the canopy be remained, your client shall be required to purchase the property with the said canopy subject to the said letter or any Building Order which may be issued against the Property without abatement of purchase price.
	……”

23.  On 28 April 2006, Hill Top’s solicitors replied as follows:

“	……
	Our client instructed us that when our client’s representative inspected the Property, it was aware that there was a canopy at the flat roof of it.  Our client considered that the Property on the condition as it was (having a flat roof with the canopy) was the Property that it looked for and hence willing to pay the agreed purchase price for it and entered into the Provisional Agreement for Sale and Purchase which was dated 24th March, 2006 (the “Provisional Agreement”).
	As it has now been revealed that a building order (“the said Order”) has been issued against your client for the removal of the said canopy on the flat roof, it certainly constitutes a defect on the title to the Property and that your client shall not be able to sell the Property to our client free from encumbrance in accordance with Clause 3 of the Provisional Agreement if the said Order is not complied with.
	On the other hand, if the said Order is being complied with, i.e. the said canopy is removed, the Property will not be sold on an “as is” basis as required to be when completion takes place according to Clause 11 of the Provisional Agreement.  In fact, your client had purposefully not disclosed the fact of having received the said Order before our client entered into the Provisional Agreement so that our client expressly reserves its rights and remedies hereunder.
	……”

24.  The formal answer by Wan’s solicitors to the UBW requisition was contained in their letter on 4 May.  They referred to the previous correspondence and their offer to remove the structures.  They explained:

“	……
	It is also clear that the removal or demolition of the said canopy would not (i) reduce the usable floor area of the said premises (ii) affect the value thereof or (iii) change or affect the internal area of the same so that our client is still in a position to convey substantially what had been contracted for.
	We would point out that the “as is basis” clause referred to in the Provisional Agreement for Sale and Purchase entered into between our respective clients were used for the protection of our client and would not be asserted by your client to restrain our client from demolishing the said canopy not could your client use it to insist that the said canopy should be sold to your client together with the rest of the said premises.”

25.  Hill Top’s solicitors rejected Wan’s offer to remove the structures.  In their letter dated 6 May, they explained that the “as is” clause in the agreement was to put to protect Hill Top to the effect that the property must be delivered as flat cum flat roof with the canopy.  They explained:

“

……

Obviously, even though the area of the flat itself (i.e. the Property without flat roof) will not be changed or affected if the canopy of the flat roof is removed, the usage of the Property as a whole (i.e. flat cum flat roof with canopy) must be different, at least as our client’s intended usage of the Property is concerned.  Further, we would stress that the usable floor area (in terms of covered space) of the Property must be substantially affected if the canopy has to be removed.  As such, we are of the view that your client shall not be able to convey the Property to our client substantially the thing that our client intends to purchase if the canopy (which are unauthorised building works) has to be demolished or removed……”

Whether Hill Top was aware of the Authority’s notice

26.  Hill Top and Wan concluded the deal through the estate agent without meeting each other.  The conversation between Chiu and Hill Top’s representatives was conducted with the assistance of Li as the interpreter.  Chiu said in court that she did mention that the canopies were added without approval and might have to be removed.  Skeeles said he was not aware of their legal consequence or any real need to remove them.  He was vague as to whether he had mentioned the idea of replacing the canopies with new retractable ones.

27.  Wan said in court that he informed Chiu’s boss of the existence of the Authority’s notice when he gave instruction to market the property.  However, according to his statement, he did not recall having received the notice until his solicitors specifically asked him about this when the parties were negotiating the terms of the formal agreement.  He explained that he had not paid attention to the content of the notice previously nor had he realised the need to provide it to the estate agent.  Chiu also confirmed in court that she never heard her boss mention the existence of the Authority’s notice.

28.  I do not believe Wan had informed the estate agent of the Authority’s notice.  I find that Hill Top was not informed of the existence of such notice at the time of the agreement.

Whether the UBW requisition was satisfactorily answered

29.  Merely because Hill Top had been told that the canopy structures were added without authorisation did not give rise to waiver of right or relieve Wan of his obligation to show and to give good title of the property: see Giant River Ltd v Asie Marketing Ltd [1990] 1 HKLR 297.

30.  It was argued on behalf of Wan that the Authority’s notice was not an order.  This is true.  It was argued that by the notice, the BD merely suggested, but did not require, Wan to remove the unauthorised structures.  Therefore there was no risk of enforcement by the Authority.  I disagree.

31.  Miss Leung for Wan referred to Lim Seow Keng & Anor v Wealth Ascent Limited, HCA 1010/2005, 10 November 2005.  The court there found (at paras. 47 to 52) that there was no evidence of any step ever taken by the authority (not even a letter) despite the fact that similar unauthorised structures had existed in virtually every property within the same development for over 10 years.  Miss Leung also relied on Polyset Ltd v Panhandat Ltd [2002] 1 HKLRD 319.  The final court construed whether the letter from the Authority constituted a notice requiring removal of the unauthorised structures in the context of the sale and purchase agreement in that case (at 362C-364I, per Litton NPJ).  The court concluded that it did not.

32.  In my judgment, the present case is distinguishable from the above authorities.  Unlike Lim Seow Keng, the Authority did issue a notice in the present case requesting the removal of the unauthorised structures.  The notice in this case specified a 30-day time limit within which Wan was expected to remove the structures and to inform the Authority in writing of the removal.  It also specified the consequence of non-compliance. These elements were lacking in the letter in Polyset Ltd (at 360B-I).  I will not say that objectively, the notice in the present case was merely advisory as that in Polyset Ltd.  I am satisfied that it was reasonable for Hill Top to raise the UBW requisition.

33.  After the commencement of this action, the Authority took a further step by issuing a superseding warning notice due to Wan’s non-compliance with the notice in 2005.  It was Hill Top’s enquiry with the Authority which prompted the Authority to inspect the property again and led to the notice.  For my consideration of the situation at the material time, I did not take into account this after event.

34.  Hill Top rejected Wan’s offer to cure the defect by removing the canopy structures, relying on the “as is” clause.  However “as is” provision in the agreement is not a right which could be asserted by the purchaser to restrain the vendor from removing unauthorised structures nor could it be used as the purchaser’s justification for insisting that the unauthorised structures be sold to the vendor with the rest of the property: see Leung Wing Fai v Onlink Investments Ltd [2000] 1 HKLRD 725 at 731E-F.  In the present case, Wan could not be restrained from removing the admittedly unauthorised canopy structures.  The real issue is whether by removing the structures, Wan would still be giving substantially what Hill Top bargained for.  Wan says yes whereas Hill Top says no.

35.  Whether a deficiency (as a result of the reinstatement) was essential and prevented substantial performance depends on (a) the nature of the defect; (b) the proportion of the whole of the land that was affected by it; (c) the purposes or uses for which the parties know that it was being sold, or ought reasonably to have known that it was being sold; and (d) 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.  It is a matter of fact and degree which varies from case to case: see Goldful Way Development Ltd v Wellstable Development Ltd [1999] 1 HKLRD 563 at 570F; H-J. Parties referred to numerous authorities which I consider to be instances of how the test had been applied.

36.  Mr Leung for Hill Top referred to the following cases: Sun Great International Ltd v Hui Lai Ying Polly, HCA 10742/1994, 29 August 1996 involved additions to the upper balcony, a skylight and the courtyard.  Max Smart Ltd v First Super Investment Ltd [1999] 1 HKLRD 519 involved an unauthorised cockloft of substantial dimension.  Grandco (Holdings) Limited v Harbour Wealth Company Limited, HCA 3388/1998, 6 April 2000, involved a large rear garden of a luxurious detached house.  Reinstatement would entail excavation of and effectively sinking of the garden by the height of an average man.  In these cases, the court found that removal of the unauthorised structures and reinstatement would render the vendor unable to convey substantially what the purchaser had bargained for.

37.  Miss Leung for Wan referred to the following cases: In Leung Wing Fai (above), a small void with a concrete parapet, originally built for drying of clothes, had been converted without authorisation into an additional enclosed area by adding a concrete floor slab and windows set on top of the parapet.  The court commented that the area of the additional enclosed area was small and relatively insignificant relative to the property being sold.  In Goldful Way Development Ltd (above), a single-storey green house was erected without authorisation in the backyard connecting the kitchen of a detached house.  The green house covered 3.93% of the total floor area of the property or 5.7% of the internal floor area of the property.  The court considered that the deficiency of enclosed floor area resulted from the demolition of the green house was small and immaterial in a house of this size.  It was not material to the enjoyment of the rest of the property.

38.  Skeeles of Hill Top gave evidence that relative to the internal usable area of the property, the flat roofs under the cover of the canopies became an appealing feature to them.  He described this as a massive benefit.  The use of the flat roofs would create the impression of bringing the outside in and the inside out of the property.  Hill Top would not have decided to buy the property at the price but for this consideration.

39.  In Leung Wing Fai (at 732A-C), the purchaser also gave evidence that one of his reasons for deciding to buy was that he considered that the enclosed void area was “practical and sensible”.  In Goldful Way Development Ltd (at 570J; 571B-D), the corporate purchaser filed an affirmation by a director saying that the extra area of usage and the ability to make use of the extra area a certain way were important factors in the decision to purchase the property.  However, in both cases (decided by the same learned judge), the court took an objective view of the evidence.  This must be right.

40.  In the present case, the canopy structures were made of corrugated steel plates.  The supporting frames were simple.  The materials and construction could hardly be classified as sophisticated.  Without the canopies, the flat roofs would effectively be open balconies of the property.  Indeed, the flat roofs amount to nearly 30% of the internal area of the property.  But since they were never enclosed to full height by any wall or window, they never became additional internal area of the property.  In other words, the removal of the canopy structures would not lead to any deficiency in the usable internal area of the property.

41.  Part of the flat roofs was used as a sitting area while part was used as a small utility area where a washing machine was placed.  The flat roofs would become uncovered without the canopies.  But I am not convinced that the flat roofs would therefore become unusable as a sitting area, especially in the absence of evidence that the roofs, with just the canopies, could have been used as sitting area in all kinds of weather.  Assuming (as there is no evidence) that it would not be appropriate to place a washing machine on the uncovered flat roofs, there is no evidence that relocating the washing machine to the internal area of the property would be difficult or would result in substantial reduction in the internal usable area.  To begin with, this is by no means a luxurious accommodation.  I am not convinced that removing the canopy structures would materially change the character and use of the flat roofs.

42.  While Skeeles gave evidence of his impression about the property and how it could be used, he confirmed that the property was bought for lease or resale after some basic renovation or decoration.  The property was not acquired for his own use.  I am not inclined to accept his evidence as generally true in the case of whoever might happen to be the actual user of the property.  In the absence of proper and sufficient valuation evidence, I am also not prepared to accept Hill Top’s assertion that the existence of the canopy structures enhances the value of the property so that their removal would affect the value of the property adversely.

43.  Considering all the circumstances, I find that any title problem caused by the unauthorised canopy structures could be cured by their removal prior to completion.  Accordingly, the UBW requisition was satisfactorily answered by Wan’s offer to do that at his own expenses before completion.

44.  Wan was still willing to proceed and gave notice to complete but Hill Top terminated the agreement on the completion date.  I find that Hill Top has wrongfully rescinded the agreement.  This amounted to repudiation which Wan accepted.

REMEDIES

45.  Wan was entitled to forfeit Hill Top’s deposit.  Apart from that, Wan has also pleaded claims for other heads of damages allegedly resulted from the failed deal.  Such claims do not appear to be allowed by clause 7 of the agreement which reads as follows:

“

Should the Purchaser fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance.”

46.  There is no evidence of such alleged damage in any event.

47.  Wan is in possession of Hill Top’s cheque for the further deposit of HK$75,000.  He claims to keep it pending assessment of damages.  It follows from what I held above that no such security could legitimately be held.  However I understand that the cheque has never been presented.  I wonder if the cheque drawn in 2006 would still be good and valid for presentation now.  For what is worth, the cheque should be returned to Hill Top.

48.  The agreement provided that the defaulting party should effectively be responsible for compensating the estate agent for both parties’ commission (clause 10a).  This is not part of the counterclaim.  In any event, Chiu confirmed in court that no claim for commission has been and would be made by the estate agent against either party.

ORDER

49.  In the circumstances, I dismiss the claim and allow the counterclaim.  I also grant the following orders:

(1)	a declaration that Hill Top has wrongfully rescinded the agreement and that Wan was entitled to and has validly forfeited the initial deposit of HK$75,000 paid by Hill Top;
(2)	an order that the registrations of the agreement and the writ herein against the property in the Land Registry be vacated;
(3)	an order that Wan shall deliver up to Hill Top cheque no. 174685 dated 6 April 2006;
(4)	an order nisi that Top Hill shall pay Wan’s costs of this action, including any costs reserved, to be taxed if not agreed, with certificate for counsel; and
(5)	the costs order nisi shall become absolute in the absence of appointment to argue in 14 days.