GREATEK INVESTMENTS LTD. v. LAM KIT SUM

HCA 8817/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8817 OF 1998

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J U D G M E N T

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1. In terms of an agreement for sale and purchase dated 14 August 1997 (which replaced an earlier provisional agreement) the Defendant agreed to sell to a company called New Crown Ltd a shop premises situated in Kowloon. The purchase price was $14,700,000. This was payable in a series of deposits with the balance payable on or before the completion date. The completion date was set some eight months ahead; namely, on or before 7 May 1998. The agreement specified that time should in all respects be of the essence.

2. On 11 November 1997, New Crown nominated the Plaintiff to accept the assignment of the property from the Defendant. It is not disputed that this was in all respects a valid assignment and that Defendant was given due notice of it.

3. For reasons which remain unclear, Defendant only delivered the title deeds to the Plaintiff's solicitors on 1 May 1998, approximately one week before the date agreed for completion. The agreement specified that any requisitions in respect of title were to be delivered to the Defendant's solicitors within 7 working days of receipt of those title deeds. By letter dated 5 May - within the time allowed - the Plaintiff's solicitors raised a number of requisitions.

4. In particular, two requisitions were raised which the Plaintiff avers were left unanswered or were not satisfactorily answered. According to the Plaintiff, this failure timeously, or at all, to answer the requisitions entitled it to rescind the agreement and to receive back the various deposits paid. Notice of such recission was faxed to the Defendant's solicitors late on the afternoon of 7 May 1998.

5. Defendant, however, did not accept that valid grounds existed to rescind. His solicitors protested that good title had been shown. The difficulties occasioned by late delivery of the title deeds were recognised, however, and Defendant gave notice of an extension of time to enable completion to take place. The Plaintiff did not agree to any such extension. On 11 May 1998, Defendant himself accepted that there would be no completion and his solicitors sent notice formally rescinding the agreement, stating that all deposits paid were now forfeit.

6. Some two weeks later, Plaintiff instituted action, seeking a declaration that it had rightfully rescinded the agreement and was entitled to repayment of its deposits and to damages.

7. It is not disputed that the deposits totalled $2,205,000. In addition, damages - being solicitor's expenses - have been agreed in the sum of $10,631.15. Accordingly, the dispute between the parties turns on the two requisitions to which I have referred. Was there any obligation on the Defendant to answer them and, if so, were they answered satisfactorily?

The first disputed requisition.

8. The shop premises, the subject of the agreement for sale and purchase, was situated on the ground floor of a multi-storey, composite building and was part of that building. The shop premises was described as 'one equal undivided 37th part or share' of the land on which it stood, that land being the Remaining Portions of New Kowloon Inland Lots No. 437 and 1108. A deed of mutual covenant regulated the rights and liabilities of the co-owners of the building and land inter se and a copy of that deed was delivered to the Plaintiff's solicitors as part of the bundle of title deeds.

9. Invariably, deeds of mutual covenant, in regulating the rights and liabilities of co-owners, allocate to each property a number of undivided shares. It does not necessarily follow that each property will be allocated an equal undivided shareholding. For example, in a composite building, commercial properties may be allocated more shares than residential, giving to the owners of those commercial premises a greater liability for payment of rates, repairs and the like. As I understand it, in practice the original property developer often decides on the allocation of such shares, detailing such allocation in a schedule attached to the deed of mutual covenant.

10. On this occasion, however, Plaintiff's solicitors found no such schedule nor any mention of how such shares had been allocated. Accordingly, in their letter of 5 May 1998 Plaintiff's solicitors, in raising thirteen requisitions, raised one which read:

"The Deed of Mutual Covenant M/No. 388467 has made no reference to the allocation of shares of the building. Please comment."

11. Defendant has complained that this requisition was so vague as to be of incapable of an answer. I do not agree. Experienced conveyancing solicitors would well understand, in substance, what was being requested. In any event, Defendant's solicitors did, in fact, make a response and at that time made no complaint that the requisition was ambiguous. The following day, the Defendant's solicitors answered in the following terms:

"Even if the Deed of Mutual Covenant Memorial No. 388367 did not make reference to the allocation of the shares of the building, it will not after the title."

12. This did not satisfy the Plaintiff's solicitors. On 7 May, they responded to the following effect:

"We would refer you to the judgment in Woo Turhan v Taiwan Fuji Trading (HK) Limited [1995] 2 HKC 480. Please provide us the relevant documents showing how the shares of the above building are allocated."

13. The headnote of Woo Turhan, a decision of Leong J (as he then was) reads as follows:

"The defendant vendor was obliged to show how the shares came to be allocated to the office and where the DMC [deed of mutual covenant] was ineffective, this must be shown by way of other documents. In the circumstances, the requisitions raised were not satisfactorily answered and the defendant had not shown a good title. Lee Tak Chun v East Weal International Ltd & Anor [1994] 1 HKC 722 and Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67 applied. Goodtex and Co Ltd & Lung Kwong Emporium Co Ltd [1993] 1 HKC 645 distinguished (at 487I, 489E-F)."

14. In light of that authority, I believe that the Plaintiff's requisition was now clear enough. As the deed of mutual covenant did not appear to show how many shares were allocated to the shop, the Defendant's solicitors were obliged to reveal the position through other documents.

15. As indicated in the headnote, Leong J applied an earlier authority of the Court of First Instance, Lee Tak Chun & East Weal International Ltd and Global Luck Property Ltd, a decision of Jerome Chan J, in which the judge explained the importance of knowing the allotment of shares by saying the following:

"The contention by the vendor's solicitors that the issue raise by the first purchaser's solicitors relating to the allotment of 20 undivided shares to the unit is irrelevant is arguably unsustainable. Many of the rights and liabilities of an owner of a unit vis-à-vis other co-owners depend solely on the exact proportion in the undivided shares of the land his unit was legally and validly allotted. Thus, it is singularly important for the exact proportion of the undivided shares of each unit to be proved by a vendor. The importance lies not in whether the vendor is capable of assigning a particular number of undivided shares to the purchaser, though that is of course not unimportant either. The importance lies in the definition of the exact extent of rights and liabilities that run with the unit."

16. I am satisfied that these two judgments correctly reflect the law. Defendant's solicitors, however, were clearly not persuaded by them. By way of riposte, on the same date (7 May 1998), they responded to the following effect:

"We would like to refer you to the judgment in Goldjet International Investment Ltd v. Ling Ki Wai (1997) MP No. 4160/96 that the lack of a schedule in the deed of mutual covenant did not cast doubt upon the clear and unchallenged assignment of the unit in question."

17. That reply ended the exchange. Later that same afternoon, the Plaintiff purported to rescind the agreement.

18. What then of Goldjet International Investment, the authority referred to by the Defendant's solicitors? It appears to me that Defendant's solicitors did not fully grasp the point in issue. The judge in Goldjet (Deputy Judge Woolley) did not dispute that the two authorities to which I have made reference were correct in law. He did no more than distinguish the case then before him on the facts. In this regard the headnote (1) is self-explanatory:

"The initial requisition was not justified in the light of the evidence of title supplied by the defendants. What the vendor needed to prove was the proportion of the shares for the unit he was selling bearing to the whole, so that the purchaser had no illusions as to the extent of his rights and liabilities. The assignments of the subject flat had always recited that one of the 108 shares in the land and building were allotted in respect of it. There was no suggestion that there was any defect in the assignments (including the first), or any recent subdivision which could affect that title as established by the first assignments." [my emphasis]

19. In the body of the judgment, the Deputy Judge set out his reasoning in clear terms:

"In Woo Turhan v Taiwan Fuji Trading the defective execution of the Deed of Mutual covenant and the assignment made it necessary to show how the shares allotted to the property in question came to be allotted.

That is not the case here. The assignment of 8 April 1976 clearly conveys to the purchaser 'one equal undivided one hundred and eighth part or share ...' and there is no suggestion that the first assignments conveyed any lesser or greater share. There is no suggestion that there is any defect in the assignments, or any recent subdivision which could affect that title as established by the 1976 assignment.

The Plaintiff's solicitors then, by their letter of 29 January, asked to see the assignments of all the other 107 shares in the building 'so as to enable us to get a more complete view on the title of the subject premises'.

Mr Cheung, on behalf of the plaintiff, claims that the judgment of Jerome Chan J in Lee Tak Chun (supra) supports such a request, where, as 731I he says:

Many of the rights and liabilities of an owner of a unit vis-à-vis other co-owners depend solely on the exact proportion in the undivided shares of the land his unit was legally and validly allotted. Thus, it is singularly important for the exact proportion of the undivided shares of each unit to be proved by a vendor.

Mr Cheung maintains that this means that a vendor must show the number of shares allotted to all units in the building. This cannot be right. I have no doubt that Jerome Chan J meant by the above that the vendor should prove the proportion the shares for the unit he is selling bear to the whole, so that the purchaser has no illusions as to the extent of his rights and liabilities. It can be of academic interest only to a purchaser what is the extent of the rights and liabilities of the owners of each of the other units." [my emphasis]

20. In summary, I am satisfied that Goldjet, upon a correct reading, far from supporting the refusal of the Defendant's solicitors, was clear authority to the effect that they had an obligation to show what undivided shares were allocated to the shop premises and if the deed of mutual covenant was defective in this regard then it must be shown through other documents.

21. Support for this is also to be found in Hong Kong Conveyancing Law and Practice by Judith Sihombing and Michael Wilkinson, Vol 1, paras VI [273.5] and [273.6], more particularly at VI 113 and VI 121:

"(ii) A vendor who agrees to sell a unit in a multi-sotrey building must, by way of proof of title, establish the precise number of undivided shares he is assigning. The purpose of this requirement is so that the purchaser will be fully aware of the extent of his rights and obligations qua the other co-owners: Lee Tak Chun v East Weal International Ltd [1994] 1 HKC 722; Woo Turhan v Taiwan Fuji Trading (HK) Ltd [1995] 2 HKC 481. This will usually be done by showing the division of undivided shares in the deed of mutual covenant or, where there has been a further division of shares, by producing the sub-deed of mutual covenant. It may be done, however, by other means.

(iii) Where there is no allocation of shares in the deed of mutual covenant, the vendor may establish by other means the precise number of shares allocated to his unit. This might be done, for example, by producing a document lodged in the Land Registry identifying the number of shares allocated to the particular unit within the building: Marking Ltd v Cheerifat Investment Ltd (1995) MP No 2727/95 (in this case a schedule of share apportionment)."

22. The Defendant has argued that, in fact, the deed of mutual covenant was not defective in this regard. The argument has been made that, upon careful reading, the second schedule to the deed reveals the answer. What must be remembered, however, is that at the material time both parties were ignorant of this. Plaintiff's solicitors had not found it nor had the solicitors for the Defendant. The requisition was not, therefore, seeking an answer to something which was patently self-explanatory. In such circumstances I am satisfied that the burden lay on the Defendant to show good title. In this regard, see Active Keen Industries Limited v. Fok Chi Keong [1994] 1 HKLR 396, a decision of the Court of Appeal, the headnote of which reads (1):

"Even though the agreement is wholly silent on the question of objections and requisitions as to title, there is an obligation on the vendor to show a good title. This objection arises by necessary implication from the contract itself.

23. And below that (5):

"This is a rare case where a vendor has in fact good title and yet fails to show a good title. The Judge made too much of the letter of 13th August 1992 from the Building Authority produced by the vendor's solicitors at the last moment to deal with a different requisition. It came far too late. The Judge was correct when he concluded that there was no real risk of enforcement action by the Building Authority which could affect the title to the flat but was wrong to hold that the requisition, properly raised, had been satisfactorily answered." [my emphasis]

24. In conclusion, I am satisfied that Defendant had an obligation to satisfactorily answer the first disputed requisition in order to show good title. He failed in that obligation.

The second disputed requisition.

25. Included in the various deeds and documents sent to the Plaintiff's solicitors were six earlier assignments. In all of these assignments the shop premises being sold was said to be subject to the exceptions, reservations, easements and other appurtenant rights set out in a deed of assignment registered in the Land Registry by Memorial No. 392952. In addition, in five of the assignments delivered to the Plaintiff's solicitors the shop premises was identified by reference to a plan annexed to the assignment registered under Memorial No.392952. For example, a deed of assignment dated 22 March 1991 (Memorial number 4748334) reads:

"... TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT the GROUND FLOOR of the said NO.96 YEN CHOW STREET which is shown on the Plan "B" annexed to an Assignment registered in the Land Office by Memorial No.392952 ("the said Assignment") and thereon coloured Pink."

26. Regrettably, however, the assignment containing the various exceptions and reservations and a plan of the property being sold was not included in the bundle of title deeds and other documents delivered to the Plaintiff's solicitors. It appears, as Plaintiff's counsel described it, to have "gone missing".

27. Accordingly, among the requisitions raised by Plaintiff's solicitors in their letter of 5 May 1998 was one which asked for sight of this missing assignment. The reason for the request was expressed in the following terms:

"Assignment with plan M/No.392952 - the property is stated to be subject to and with the benefit of such exceptions, reservations, easements and other appurtenant rights as more particularly described in the said Assignment in all the Assignments you sent to us."

28. In their reply of the following day, Defendant's solicitors said that 'as your requisition was far beyond 15 years' their client was under no obligation to deal with it.

29. Under their letter of 7 May 1998, Plaintiff's solicitors persisted in their request:

"As Assignment M/No.392952 falls within the documents mentioned in Section 13(1)(b) of the Conveyancing and Property Ordinance Cap.219. Please provide us with certified copy of the same."

30. Defendant's solicitors replied to the following effect, refusing still to deal with the missing assignment:

"We would like to draw your attention to Section 13(1)(a)(ii) of the Conveyancing and Property Ordinance Cap.219, it reads (inter alia): "... extending not less than 15 years before the contract of sale of that commencing with an assignment, a mortgage by assignment or a legal charge, each dealing with the whole estate and interest in that land." Accordingly, the title should commence from the Government Lease and Mortgage Memorial No.2072220 instead of Assignment Memorial No.392952. Therefore, we are not prepared to deal with any requisition in respect of Assignment Memorial No.392952."

31. In my opinion, of fundamental importance was the fact that neither the agreement for sale and purchase nor any of the title deeds and documents submitted by Defendant's solicitors gave any detail of the exceptions, reservations and the like contained in the missing assignment. Nor was there any indication that such exceptions, reservations and the like no longer applied. In short, the Plaintiff was being asked to have assigned to it a property which may well be subject to encumbrances. But Plaintiff remained ignorant of the true position because Defendant's solicitors refused to confirm or deny whether any encumbrances existed and, if so, whether they had ceased or expired.

32. But what of the statute to which both parties made reference? The relevant portion of section 13 of the Conveyancing and Property Ordinance, Cap 219, reads:

"(1) Unless the contrary intention is expressed, a purchaser of land shall be entitled to require from the vendor, as proof of title to that land, only production of the Government lease relating to the land sold and -

(a) proof of title to that land -

(i) where the grant of the Government lease was less than 15 years before the contract of sale of that land, extending for the period since that grant; or

(ii) in any other case, extending not less than 15 years before the contract of sale of that land commencing with an assignment, a mortgage by assignment or a legal charge, each dealing with the whole estate and interest in that land;

(b) production of any document referred to in the assignment, mortgage or charge mentioned in paragraph (a) creating or disposing of an interest, power or obligation, which is not shown to have ceased or expired and subject to which any part of that land is disposed of; ..."

33. In my judgment, on an ordinary reading of section 13(1)(b), the Defendant was obliged to produce any document referred to in the title deeds which identified what could well be an existing obligation; that is, an obligation to which the purchaser could well be subject. The vendor is deemed to know the conditions of his own title. He is in addition obliged to show good title. However, no attempt was made to explain to the Plaintiff's solicitors why sub-section (b) did not apply. In the circumstances, the Plaintiff's solicitors were left in a situation in which the missing assignment could well have created current obligations and encumbrances but nevertheless the Defendant's solicitors refused to deliver up the missing assignment or render details of its contents.

34. On that basis alone, without reference to the question of the plan, I am satisfied that the requisition was a proper one and should have been answered.

Conclusion

35. For the reasons given, I am satisfied that Defendant wrongfully repudiated the agreement for sale and purchase in failing satisfactorily, or at all, to answer the two requisitions raised by the Plaintiff. The Plaintiff, being entitled to rescind when it did, is entitled to judgment as claimed; namely -

(1) to a declaration that the Plaintiff has rightfully rescinded the Sale and Purchase Agreement and that the deposits in the sum of $2,205,000 paid by the Plaintiff to the Defendant have been wrongfully forfeited by Defendant;

(2) to payment of the said sum of $2,205,000 and interest thereupon;

(3) to damages in the sum of $10,631.15;

(4) to a declaration that the Plaintiff is entitled to a lien on such interest as the Defendant may have in the property being the subject of the Sale and Purchase Agreement;

(5) to interest at judgment rate from the date of issue of the writ to date of judgment and thereafter at judgment rate until payment;

(6) to costs of the action, to be taxed if not agreed.