NG MAN FAI MICHAEL AND ANOTHER v. WORLDPART INDUSTRIAL LTD. AND ANOTHER

HCMP5708/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5708 OF 1998

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J U D G M E N T

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1. This case is a vendor and purchaser summons in respect of a property at G/F and the garden of Block A, Regency Court ("the property"). This is an estate development of 25 small houses consisting of G/F, 1/F, and 2/F. In most cases, each floor is a separate apartment, but some are duplexes. The 1st defendant, Worldpart Industrial Ltd, is the developer of the estate. The 2nd defendant, Mr Yip Wai Choi, is the registered owner of the lot on which the property was built. The plaintiffs, Messrs Ng Man Fai and Ng Man Wai, entered into an agreement to buy the property. The purchase was never completed.

2. The plaintiffs now claim for the return of their deposits, legal costs, estate agent's charges, interest and costs. The defendants counterclaim for declarations, including a declaration that they are entitled to forfeit the deposits, and damages based on the loss of sale and the drop in value of the property. It is agreed that in the event of a finding in favour of the defendants, there will have to be an assessment of damages because at this stage there is no evidence before me of the current market value of the property.

3. The property is built on Section B of Lot No.2067 in D.D.No.76. On 22 January 1994, the 2nd defendant, who is an indigenous villager of the New Territories and the registered owner of the lot, obtained a Building Licence for the same. On 1 April 1997, he signed a Chinese Power of Attorney in favour of the 1st defendant to wholly handle the property including its sale. The 1st defendant employed as its estate agent, the Treasure Palace Property Agency ("Treasure Palace") of Luen Wo Market, Fanling.

4. On 24 April 1997, Mr Ng Man Fai signed an undertaking letter to Treasure Palace for its fee on the purchase by him of the property, and on 10 May, he signed a Chinese "Property Purchase Subscription Letter" between himself and Mr Ng Man Wai as purchaser and the 1st defendant as vendor of the property. This agreement provided for the purchase of the property at a price of $3,431,656.00. The price was to be paid by three instalments. The first instalment was to be paid by 10 May 1997, the second within two months of signing the agreement with the vendor, and the third within three months of the issue of the Certificate of Compliance to the vendor. The balance was to be paid on one month's notice from the vendor.

5. Pursuant to the agreement, the plaintiffs as the purchaser paid $50,000 on 30 April 1997, $293,165.60 on 10 May 1997 and $343,165.60 each on 12 July 1997 and 26 February 1997.

6. The Building Licence was obtained on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories and it contains a condition prohibiting alienation except on terms. This appears at Clause 4, as follows :

"4(a) Except as provided in sub-clauses (b), (c) and (d) hereof, the Licensee (which expression shall, for the purpose of this Condition, include any mortgagee, whether legal or equitable, or an assignee of such mortgagee), having obtained this Licence on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories, shall not assign, partition, mortgage, charge, demise, underlet, part with the possession of or otherwise dispose of the lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, whether directly or indirectly or whether by way of direct or indirect reservation, grant of any right of first refusal, option, power of attorney, building agreement or through a solicitor, agent, contractor, trustee or otherwise howsoever unless -

(i) a period of five years has elapsed from the date of a letter issued by the District Lands Officer confirming that these Conditions have been complied with to his satisfaction, or

(ii) the Licensee has paid to the Government the premium in accordance with Condition 4(d)(ii) hereof.

...

(d) Upon certification by the District Lands Officer that these Conditions have been complied with to his satisfaction the Licensee may, with the prior written consent of the District Lands Officer and on such conditions as may be imposed by him (including the payment of such fee as may be required by him, assign (but not partition), mortgage, charge or part with the possession of the lot (as a whole only and not a part thereof) or the building or part of the building thereon or, subject to sub-clause (e) hereof, any interest therein or enter into any agreement so to do but only to -

(i) a male person at least 18 years of age who has satisfied the District Lands Officer that at the date of the application for such consent he is a person descended through the male line from a person who was in 1898 a resident of an established village in Hong Kong, or

(ii) a person other than a person referred to in sub-clause (d)(i) hereof provided the Licensee shall have first paid to the Government a premium equivalent to the full market value of the lot as at the date of the application to the District Lands Officer for such consent, such value to be determined by the whose decision shall be final and binding upon the Licensee, whereupon, such premium having been paid and such consent having been obtained, sub-clauses (a), (b), (c) and (d) hereof shall be null and void and shall cease to have effect.

... "

7. On 25 November 1997, the District Lands Officer issued to the 2nd defendant a Certificate of Compliance certifying that :

"... all the positive obligations imposed on the Licensee of the above lot under the General and Special Conditions of Building Licence No.74/93 had been complied with to my satisfaction.

This certification is given without prejudice to all or any rights of the Government whether under the said Conditions or otherwise in respect of any breach or failure to observe any of the said conditions which may exist on the date hereof or which may hereafter occur."

On 25 March 1998, the District Lands Officer issued to the 2nd defendant a Demand Note for the sum of $1,048,400.00, being the premium payable under Licence Condition No.4(d). The Demand Note went on to say :

"Upon settlement of the Demand Note :

(1) My consent for you to assign the lot pursuant to Licence Condition No.4(d) shall be deemed to have been given; and

(2) Licence Conditions Nos.4(a), (b), (c) and (d) shall no longer apply."

Payment was required on or before 21 April 1998. There was a further paragraph stating that :

"Please note that this letter is without prejudice to all or any rights of the Government whether under the captioned Conditions of Building Licence or otherwise in respect of any breach or failure to observe any term or condition which may exist on the date hereof or which may hereafter occur."

8. The premium was paid on 30 March 1998. On 17 April, Messrs Leung Kin & Co. ("LK") wrote to the plaintiffs to say that they acted for the 1st defendant and advising them to instruct a solicitor to act for them. Completion was required on or before 1 May 1998. There was a paragraph reserving their client's right to forfeit the deposit and/or claim damages in the event of failure to complete within the time limit.

9. On 18 April, the plaintiffs wrote to the 1st defendant a letter to the effect that a land search revealed that the owner of the property was the 2nd defendant, and asking for documentary proof of the owner's title for the purpose of obtaining a mortgage, including the Power of Attorney, within three days. There followed a series of letters between the parties' solicitors, all contentious in tone though conveyancing is regarded as non-contentious business.

10. On 22 April, Messrs Yip and Partners ("YP") wrote to LK on behalf of the plaintiffs asking for the title deeds as soon as possible in view of the threat of forfeiture and a claim for damages in the event of failure to complete in time. On 24 April, they wrote again referring to a telephone suggestion by LK that completion be delayed, claiming that LK had themselves imposed a condition that time be of the essence by their earlier letter, refusing to extend time and stating that if the vendor failed to complete by 1 May 1998, it would be deemed to rescind the sale and purchase agreement.

11. LK replied on 28 April sending a draft sale and purchase agreement naming the 2nd defendant as the vendor, and a bundle of title deeds and documents including the letters from the District Lands Officer mentioned above.

12. YP wrote to LK on 2 May complaining that the title deeds were delivered less than two days before the completion date, in breach of the implied condition that time was of the essence and reserving their clients' right to terminate the transaction. They said that there was no stipulation in the original agreement for the signing of a formal sale and purchase agreement. They asked why the 2nd defendant was named as the vendor, and they raised a requisition as to the 1st defendant's title to sell.

13. LK replied on the same date to the effect that requisitions should have been raised before the date of completion and reserving the right to terminate for failure to complete, but suggesting a postponement of the completion date to 6 May. They advised that the 1st defendant was the lawful attorney of the 2nd defendant.

14. They also enclosed a copy of the judgment in the case of Civil Appeal No.49 of 1997 : "... relating to the validity of the sale and purchase of small house before the removal of non-alienation clause of the relevant building licence." No requisition had been raised about this. The case is now reported as Li Pui Wan v. Wong Mei Yin [1998] 1 HKLRD 84.

15. On 5 May, LK wrote to YP enclosing further deeds and documents including the letter of authorization from the 1st defendant to the 2nd defendant and suggesting completion on 13 May. On the same day, they sent the certified copies of various documents.

16. YP replied on 6 May reserving their clients' right of rescission for LK's failure to prove good title or deliver all the title deeds by 1 May. They also raised the requisition as to title on the basis that the Power of Attorney by the 2nd to the 1st defendant and the agreement of sale had violated Clause 4(a) of the Building Licence.

17. LK wrote back on the same day to the effect that the judgment in Li Pui Wan dealt with the requisitions in relation to the Building Licence, recording that no requisitions had been raised before 1 May and reserving the right to forfeit and claim damages if the sale was not completed by 13 May.

18. There followed a long letter from YP arguing about the effect of the Li Pui Wan's decision and maintaining that the title was defective in that the Government could re-enter because the sale agreement was in breach of the condition in the Building Licence. Questions about the time of delivery of title were also raised. In addition, it was stated that forfeiture in default of completion on 13 May was not acceptable.

19. LK replied on 8 May with further argument, claiming that the plaintiffs knew of the position relating to the non-payment of premium at the time of the agreement, and so could not raise any requisition relating to breach of condition. There was a suggestion that completion take place on 20 May. YP responded on 12 May denying knowledge of the position relating to the premium at the time of the agreement, reiterating the requisition as to title and asking for other certified copies. LK reiterated their stance and provided the requested certified copies on 15 May.

20. Further correspondence followed, and then on 21 May, LK wrote postponing the completion to 4 June. There was further fruitless correspondence, back and forth, up to that date when LK purported to postpone completion to 5 June. In the event, completion did not take place.

21. All went silent until 17 September 1998 when YP wrote to LK notifying them that their clients exercised their right to rescind the transaction because the vendor had not proved good title on all the completion dates proposed and up-to-date, and demanding repayment of the deposits.

22. There is evidence from Mr Ng Man Fai for the plaintiffs and from Mr So Siu Hong, Danny for the defendants. In addition, there is before me a statement of Miss May Tang, who was the estate agent concerned. There is no real dispute of fact in this case.

23. The major issue is whether the defendants proved good title to the property.

24. The plaintiffs say that the effect of Clause 4 of the Building Licence is that the property cannot be sold to one who is not himself an indigenous villager without the consent of the District Lands Officer and the payment of the premium. No agreement for sale can be made before that consent is obtained and the premium paid. The agreement was made in May 1997; the District Lands Officer's consent only became effective on payment of the premium on 30 March 1998. The agreement was made in contravention of the condition and therefore the Government is entitled to re-enter. The vendors never satisfactorily answered the requisition and the purchasers were entitled to rescind the agreement. In the second place they did not, by the various dates of completion up to and including 5 June 1998, deliver in time all the required title deeds.

25. The defendants' stance is that the title is good, once the premium is paid and that the Government would re-enter is mere conjecture. The deeds and documents were delivered in reasonable time.

26. It is unfortunate that though YP suggested, on 7 May, that LK approached the District Lands Officer for written consent, and on 12 May they expressed that they had instructions to refer the matter to the District Lands Officer, neither firm saw fit to take this practical course of action. So there is no evidence as to whether in fact the Government would ever have exercised its rights under the Building Licence.

27. The defendants rely on the case of Jumbo Gold Investment Ltd v. Yuen Cheong Leung and Another [2000] 1 HKLRD 763. In that case, the property concerned was a five-storey building built on a lot which was subject to a restrictive covenant under the Crown Lease which specified a height restriction of 35 feet. An occupation permit had been issued in 1955 even though the block exceeded the height limit. The purchasers raised requisitions as to the covenant, and the vendors replied :

(a) they had nothing in writing to show that the Government had consented to the excess height beyond the occupation permit, and official letters concerning the fulfilment of the building covenant in the Crown Lease by the lessee;

(b) it was likely that the Director of Public Works had, informally by correspondence, granted a modification of the restriction in approving the building plans pursuant to legislation in force at the time; and

(c) as the Government had not taken enforcement action in 40 years, the risk of such action was remote. The purchasers sought declarations that the requisitions had not been sufficiently answered and that the vendors had not shown good title.

The judge at First Instance held that good title had been shown on the basis there was no real risk of enforcement. The Court of Appeal allowed the purchasers' appeal and the vendors appealed to the Court of Final Appeal, which ultimately allowed the vendors' appeal.

28. In that case, Yeung J at First Instance approached the matter thus :

"In order to show and prove a good title the vendors must establish beyond a reasonable doubt that there is no risk of the Government taking any enforcement action in respect of the covenant on the height restriction. If the vendors cannot so satisfy the Court, the Court will not force title on the purchaser."

The Court of Appeal did not disagree with this approach. The majority held that the question was whether in respect of an established breach of a building covenant, there was a real, as opposed to a fanciful, risk of enforcement action by the authorities. This must be approached with common sense, and the facts assessed in the round. However, there must be an evidential basis for such conclusion; and such evidential basis was not found. There was insufficient evidence to show that the Government had known of or acquiesced in the breach. See Jumbo Gold Investment Ltd v. Yuen Cheong Leung and Another [1999] 3 HKLRD 825.

29. Liu JA, dissenting, took the view that there was sufficient evidence to infer that there was no real risk of enforcement action. His approach generally was this (at p.823E-F) :

"In a vendor and purchaser summons under s.12 of the Conveyancing and Property Ordinance (Cap.219), the court would be considered best guided by the commercial reality as to whether there is any real risk of problems in title. It is not to be troubled by the absence of an absolute risk-free assurance, nor unduly hampered by strict legal proof in matters requisitioned. Conveyancing practice must be geared to uphold bargains. In most cases, unless the obvious commercial reality is shaken by compelling contra-indications, the court would more readily conclude beyond reasonable doubt that risk of Government intervention is remote."

Ultimately the Court of Final Appeal held that Yeung J's conclusion, supported by Liu JA in the Court of Appeal, was correct. It also upheld the practical approach. Litton PJ said at page 770F-G :

"In a case like this where, as Liu JA said 'concrete proof of Government's knowledge and attitude is ... not easy to find', the Court must look at the larger picture."

30. It seems to me that in this case, I must take the same practical approach. The vendors must establish beyond a reasonable doubt that there is no risk of the Government taking any enforcement action in respect of the condition against alienation in the Building Licence. In deciding this, I have to look at the larger picture.

31. In so doing, I am guided by the words of Litton PJ in Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 2 HKC 1, at page 8G-H :

"First principles

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."

Granted that Mexon Holdings was different from the instant case, in that it involved a breach of the Building (Planning) Regulations, which at best would have allowed Government to order the demolition of a wall or the sealing off of part of a unit and which was found not to go to the root of the title, the same first principle must apply here.

32. I have set out above the relevant parts of the Building Licence, Certificate of Compliance and Demand Note. The plaintiffs say that the Government cannot be taken to have accepted any breach by acceptance of the premium because of the paragraphs which say that the certificate and the consent are given without prejudice to Government's rights in respect of any existing or future breach of condition.

33. On the face of it that is so. There is a breach of Condition No.4(a). The Government's remedy is set out in the Licence which specifically states that it

"... may be revoked at any time if the Licensee shall fail to comply with or observe or shall be in breach of any of these Conditions, without prejudice to the rights, remedies and claims of the Government in respect of any antecedent breach, non-performance or non-observance by the Licensee of these Conditions. Any such revocation shall (inter alia) render the said building liable to be demolished by the District Lands Officer, North... "

The "said building" is, of course, the three-apartment house of which the property concerned here is a part.

34. So the Government's remedy is to demolish the whole house. It may - I have not heard any evidence on this - have rights under the Crown Lease but it seems to me that these would also relate to the whole of the lot on which the three-apartment house is built.

35. If the Government sought to exercise its rights under the Building Licence, this would necessarily involve not just the buyer of the ground floor and garden but the buyers of the other two floors who may well have been innocent of "jumping the gun" or of any other breach of condition.

36. In Jumbo Gold Investment Ltd, Bokhary PJ said at page 771B :

"In my view, the evidence in this case did not exclude a reasonable possibility of an unwaived breach of condition which gives the Government a right of re-entry. The question is therefore whether, assuming that the Government has that right, there is any real risk that it would actually take the drastic step of enforcing it to the detriment of innocent owners. I entirely agree with Mr Justice Litton PJ that the correct answer is in the negative. It is simply not in the nature of good government to harm innocent people unnecessarily like that."

37. This was a perfectly ordinary housing development. There have been many such, in the New Territories, where building licences have been granted on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories. The indigenous villagers get together with a developer to build houses on their lots; premiums are paid to the Government for consent to alienate the lots to those who are not indigenous villagers; such persons buy the houses and the indigenous villagers, the developers and the Government all make some money out of the project. Everyone benefits.

38. The defendants have throughout relied on the case of Li Pui Wan which, to be fair, deals rather with the question of illegality of a contract which was made before the premium was paid and permission given than with the question of defect in title. The court in that case found that there was no illegality and took the view that the parties to the agreement did not intend to breach the conditions of grant and that it could only be regarded as technically "jumping the gun". It seems to me that the breach of condition here could likewise only be regarded as technically "jumping the gun". The case does not otherwise assist.

39. In all the circumstances and applying the reasoning in the cases cited above, it seems to me quite fanciful to assume that there is any real risk that Government would take enforcement action against the owner of the property or his successors in title.

40. It follows that once the vendors were in a position to show that the premium had been paid, they were in a position to show and did show a good title. That was when YP received LK's letter of 28 April 1998.

41. I turn to the question of whether the vendors delivered in time all the documents required to prove good title. It does not seem that this was ever in fact an important issue; the real issue all along was the breach of condition. As I have indicated, a bundle of title deeds and documents were sent on 5 May. YP asked for a certified copy of the Power of Attorney dated 1 April 1997 and the Deed of Mutual Covenant. The latter was sent and on 20 May, LK undertook to provide a certified copy of the Power of Attorney on completion. In fact the latter was not sent until 4 June. The letter, which purports to extend the completion up to 5 p.m. on 5 June is chopped as received at 12:55 p.m. on that date.

42. In fact, in spite of all the threats of rescission by the solicitors, and in spite of Mr Ng's evidence that he had decided, some time in early June but before 4 June, not to proceed with the purchase, neither side took any action on 4 June nor 5 June. The vendors did not give notice of forfeiture of the deposits. The purchasers did not purport to rescind the transaction until 17 September. Neither side in fact treated time as being of the essence, whatever they might have said about that.

43. Where there is no express agreement, a vendor's obligation to show a good title by production of title deeds must be done within a reasonable time; Ng Chek Kok v. Kiu Wai Ming [1992] 1 HKLR 5 (CA). The rest of the deeds were all produced well before the final completion date. The purchasers' solicitors had ample time to raise requisitions. A non-certified copy of the Power of Attorney had been produced. All that was needed was the certified copy for the vendors to comply with the requirements of section 13 of the Conveyancing and Property Ordinance. It is difficult to see what more time might have been required for requisitions to be raised on the Power of Attorney once that had been received, especially in the circumstances of this case where completion had been postponed and the purchasers had accepted this.

44. I have no doubt that the vendors fulfilled their obligation to show a good title in a reasonable time. There was nothing to stop the plaintiffs from completing on 5 June.

45. It follows that the plaintiffs' claim for the return of deposits must fail and the defendants' counterclaim must succeed.

46. There will be judgment for the defendants for the reliefs sought in items (1) to (4) of the counterclaim and for damages to be assessed.

47. The plaintiff's claim is dismissed. Costs will be reserved to the hearing of the assessment of damages.