PAUL CHEN AND ANOTHER v. LORD ENERGY LTD.

FACV No. 11 of 1998

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 11 OF 1998 (CIVIL)

(ON APPEAL FROM CACV No. 194 OF 1997)

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J U D G M E N T

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Chief Justice Li:

1. The question in this appeal is whether specific performance of a contract for the purchase of a flat and carpark should have been decreed in favour of the respondent ("the purchaser") against the appellants (collectively "the vendor"). The purchaser succeeded in the courts below. The vendor's case is that the decree should not have been granted since it had lawfully terminated the contract on the ground that the purchaser failed to complete. The purchaser's case is that the vendor was not entitled to terminate since it was the vendor who was in breach. It had failed to show good title, having failed to answer satisfactorily two requisitions. The crucial issue is whether the vendor had provided satisfactory answers and thereby shown good title.

The Agreement

2. On 1 August 1991, the parties concluded a provisional agreement for the sale and purchase of a flat and a carpark, namely Flat D, 24th Floor, Block 25, Baguio Villa, 550 Victoria Road, Hong Kong ("the flat") and the covered carpark No. 157 on the Second Lower Ground Floor ("the carpark") for the price of $2.5 million ("the agreement"). A deposit of $50,000 was paid. The agreement provided for the payment of a further deposit of $200,000 upon the signing of a formal agreement on or before 10 August 1991. But no formal agreement was signed and no further deposit was paid. Nothing turns on this. The agreement provided for the payment of the balance of the price on or before 15 September 1991, which the parties accept, was the completion date.

The Conditions of Exchange

3. The flat and carpark were part of a residential development known as Baguio Villa on Inland Lot No. 8334 ("the lot"). It is common ground that title in this case commenced with Conditions of Exchange No. 10485 governing the lot ("the Conditions of Exchange"). They were executed between the Government and the developer in July 1973 and included the conditions for the development of Baguio Villa. The blocks in which the flat and carpark are situated were completed in 1979.

4. Special Conditions 16 and 17 obliged the developer to provide and to maintain carparking spaces in the development. They provided:

"(16)(a) Space shall be provided within the lot to the satisfaction of the said Director [of Public Works] for the parking of motor vehicles at the rate of not less than one and one half cars per flat in the building or buildings erected or to be erected on the lot. The space so provided shall not be used other than for the purpose of parking private motor vehicles belonging to the residents of the building or buildings erected or to be erected on the lot.

(b) Car ports under the building or buildings at or above ground level will be permitted and any storey designed and used solely for this purpose will not be regarded as a storey for the purpose of calculating coverage limitations.

(17) A lay-out plan indicating the parking spaces or car ports to be provided within the lot in accordance with Special Condition No. (16) and approved by the Building Authority, or a copy of such plan certified by an authorized architect, shall be registered by the grantee by memorial in the Land Office. No transaction affecting the lot or any part thereof or any building or part of any building erected or to be erected thereon shall be entered into prior to such registration. The parking spaces or car ports indicated on the said approved plan shall not be used for any purpose other than the purpose set out in Special Condition No. (16). The grantee shall maintain the parking spaces or car ports in accordance with the said approved plan and shall not alter the layout except with the prior written consent of the said Director."

General Condition 8 gave the Government a right of re-entry in the event of breach of condition. General Condition 10(a) provided that when the conditions have been complied with to the satisfaction of the Director of Public Works and the Registrar-General (Land Officer), the developer shall be entitled to a Crown Lease of the lot.

The relevant correspondence

5. On 2 September 1991, the vendor's solicitors sent to the purchaser's solicitors the title deeds.

6. On the next day, the purchaser's solicitors wrote raising two requisitions. First, they asked for Letter Memorial No. 1599984 or a certified copy thereof ("the first requisition"). Secondly, noting that the Conditions of Exchange were issued after 1970, they asked for a certified copy of the certificate of compliance to prove that the developer was entitled to a grant of the Crown Lease pursuant to section 14(3) of the Conveyancing and Property Ordinance, Cap. 219 ("the second requisition").

7. The Letter referred to in the first requisition was a letter dated 20 October 1978 from the authorised architect attaching carpark layout plans relating to Blocks 25, 26 and 27 of Baguio Villa and registered in the Land Office on 25 October 1978 ("the letter attaching the carpark layout plans"). The letter stated that the attached plans were presented for registration pursuant to Special Condition 17.

8. The second requisition asked for a certificate of compliance referred to in section 14(3) of the Conveyancing and Property Ordinance ("the Ordinance"). Under section 14(3)(a), where under an agreement for a Crown Lease entered into on or after 1 January 1970, a person has a right to a Crown Lease upon compliance with any conditions precedent, (and the Conditions of Exchange here is such an agreement):

"he shall be deemed, for the purposes of this section, to have complied with those conditions

(a) upon the issue by the Crown of a certificate that those conditions have been complied with and the registration of that certificate in the Land Registry under the Land Registration Ordinance (Cap. 128)."

Sections 14(3)(b) and (c) provide for two alternatives for the purpose of the deeming provision. Section 14(3)(b) provides for the endorsement by the Crown of a note to the effect that those conditions have been complied with and the registration of a copy of that endorsement in the Land Registry. Section 14(3)(c) provides for the entry on the register in the Land Registry of a note to that effect.

9. The replies to the requisitions contained in the vendor's solicitors' letter dated 9 September 1991 were in the following terms:

"1. Our client is not prepared to supply you with certified copy of Letter Memorial No 1599984 as the same does not affect title to the above property.

2. There is no Certificate of compliance issued up to date hereof."

10. By an exchange of letters on 11 September 1991, the purchaser's solicitors maintained that the requisitions have not been answered and stated that they must be resolved before completion, whilst the vendor's solicitors maintained that they have been satisfactorily answered and insisted on completion on 15 September 1991.

11. On 12 September 1991, the purchaser's solicitors wrote:

" We are still looking forward to your client's satisfactory answers to other outstanding requisitions and in particular written document proving that the conditions under the Conditions of Exchange No. 10485 have been complied with to the satisfaction of the Director of Public Works and the Registrar General (Land Officer)."

12. The vendor's solicitors responded on the same day. They maintained that the requisitions were invalid and did not raise any doubts on title. They insisted on completion on 15 September 1991 which was a Sunday.

13. The purchaser did not complete on that day. On 16 September 1991, the vendor terminated the agreement and forfeited the deposit on the ground of the purchaser's failure to complete.

14. On the next day, 17 September 1991, the purchaser issued a writ claiming specific performance of the agreement. By maintaining this claim, the purchaser was prepared to accept the vendor's title.

The vendor's obligation

15. In a contract for the sale of land, the obligation is of course on the vendor to show good title. Counsel for the vendor accepted that under the agreement, the title which the vendor contracted to convey was a legal estate. The vendor therefore was obliged to show good title to a legal estate.

The first requisition

16. By the first requisition, the purchaser's solicitors requested a certified copy of the letter attaching the carpark layout plans which were registered pursuant to Special Condition 17. A land search would reveal its registration and the purchaser's solicitors must have conducted the search since the requisition identified it by reference to the Memorial number of its registration. Obtaining a certified copy was a straightforward matter involving minimal expense. It could have been done by the solicitors for either party. However, the vendor's solicitors maintained that the document did not affect title and the purchaser's solicitors insisted on its production. The position of both parties over such a simple matter could be said to be unmeritorious.

17. The legal position was that the obligation was squarely upon the vendor to show good title. Where a document needs to be produced by the vendor as proof of title, it is no answer for him to say to the purchaser that he could easily obtain it himself.

18. In my view, the letter attaching the carpark layout plans was a document which the vendor needed to produce (by way of certified copy) to prove title. Special Condition 16 required carparking spaces to be provided. Apart from requiring the approval and registration of the carpark layout plan, Special Condition 17 obliged the developer, and hence its successors in title, to maintain the carpark spaces in accordance with the approved plan and not alter the layout except with the prior consent of the Director. To show good title to the carpark sold, the vendor had to prove by producing the document that it is a carparking space corresponding with the approved plan. If it did not, the carpark sold would be a carparking space provided in breach of the Conditions of Exchange and Government would be entitled to take action in respect of such breach in which event its use and enjoyment would be affected.

19. Sir John Swaine SC, who addressed us for the vendor on the first requisition, argued that if this were the purchaser's concern, then the requisition should have so stated specifically. In that event, he accepts the vendor would have to produce the letter attaching the carpark layout plans. I do not accept this argument. It ignores the point that it was the vendor who had the duty of showing good title.

20. I therefore consider that the judge and the Court of Appeal were right in holding that the first requisition had not been satisfactorily answered.

21. In coming to her view, the judge (Le Pichon J) relied on the following statement of Mr Recorder Edward Chan QC in Wong Bik Ching v Yu Hon Chung and another 1996 MP No. 2969 (15 May 1997):

"I am of the view that prima facie when an instrument was registered against the property and it was not apparent from the land search that the document had ceased to affect the property, the document ought to be treated as part of the title deeds which the vendor should make available to the purchaser."

22. It should be emphasised that on this approach, the matter is only prima facie and it may therefore be displaced on examination. Provided this approach is understood to apply to registered instruments that are properly registrable under the Land Registration Ordinance, I think it is sound. I agree with Godfrey JA in the Court of Appeal (with whom Mortimer VP and Rogers JA agreed) when he referred to documents that are properly registrable and said:

"Occupation Permits, Certificates of Compliance and other instruments of that sort which demonstrate that the vendor is entitled to a legal estate in the premises and that his title is not defeasible are instruments by which the premises 'may be affected' (see section 2(1) of the Land Registration Ordinance, Cap. 128). They are properly registrable at the Land Office and ought to be produced to the purchaser when he asks for their production."

The second requisition

23. In reply to the second requisition, the vendor's solicitors stated on 9 September 1991 that there is no certificate of compliance. On 12 September 1991, the purchaser's solicitors requested written document proving that the conditions under the Conditions of Exchange had been complied with.

24. Arguments were addressed before us as to how a reasonable conveyancer would have understood that letter of 12 September 1991 in the context of the earlier correspondence. Mr J J E Swaine, who addressed us for the vendor on this requisition, pointed out that this letter referred to "outstanding requisitions" and argued that it merely repeated the earlier requisition asking for a certified copy of the certificate of compliance. That had been answered and therefore, Mr Swaine argued, no further answer was necessary. Ms Audrey Eu SC, for the purchaser, argued that this was a follow-up requisition which required an answer. She submitted that having regard to the earlier answer that there is no certificate of compliance, a reasonable conveyancer would have read the 12 September 1991 letter as seeking other documentary proof of compliance. This is how Godfrey JA understood it, although the judge regarded it as calling for an explanation as to why there is no certificate of compliance.

25. In my view, the issue of the second requisition can be dealt with on a simpler basis. Assuming for the moment that the vendor's argument that the 12 September 1991 letter did not call for an answer is correct, the position as at the completion date was that the vendor had, in breach of the agreement, failed to show good title to a legal estate, the title contracted for under the agreement. The vendor had answered that there was no certificate of compliance and had not sought to prove by other means that the conditions in the Conditions of Exchange had been complied with. It follows that the title he had shown to the flat and carpark was only an equitable estate. This was not the legal title required under the agreement, as was accepted by counsel for the vendor.

26. Further, as to the 12 September letter, a reasonable conveyancer would in my view have regarded it as raising a follow-up requisition which called for an answer. The earlier letter asked for a copy of a certificate of compliance envisaged by section 14(3)(a). But sections 14(3)(b) and (c) provide for two alternatives for the purpose of the deeming provision and as Ms Eu pointed out, compliance could be proved by other means. That being so, the 12 September letter was a request for documentary proof of compliance (other than a certificate of compliance). The vendor was not entitled to ignore it and should have answered it.

The resulting position

27. It follows from my conclusions above that by the completion date, the vendor, in breach of contract, had failed to show good title. As the guilty party in breach, it was not entitled to performance from the purchaser on the completion date on 15 September and to terminate the contract on 16 September. The vendor's purported termination on that day was unlawful. The contract remained in existence. By commencing the action for its specific performance on 17 September, the purchaser accepted the vendor's title "as is" without any further answers. In my view, this was a position the purchaser was entitled to take.

28. Counsel for the vendor posed in argument the question: Where a vendor in breach of contract has failed to show good title and therefore could not lawfully terminate the contract, can the innocent purchaser keep the position open indefinitely by keeping the contract alive and yet not accepting the vendor's title ? He suggested that if the purchaser could, such a stalemate situation would be unjust for the vendor whose property would be tied up.

29. This of course was not the position here where the purchaser acted promptly by commencing the action for specific performance, thus accepting the vendor's title.

30. In a situation where the purchaser does not take this position promptly, is the guilty vendor at the innocent purchaser's mercy ? I do not think so. Formal agreements usually contain the standard provision to the effect that the vendor can rescind returning the deposit if the purchaser should insist on any requisition which the vendor is unable or unwilling to comply with. Although the point was not explored in argument, it would appear that in the absence of such an express provision, as in the present case, the vendor has no such right. But the vendor is not without remedy. The vendor can always put the purchaser to his election as to whether or not he wishes to proceed to perform with the title "as is". If the purchaser's response is yes, then the contract would be performed. If his response is no, a court would not allow him thereafter to change his mind and seek specific performance. If specific performance could no longer be obtained, a court would be prepared to free the property by making any appropriate orders.

Order

31. Accordingly, I would dismiss the appeal with costs and would make an order in the following terms which the parties have helpfully agreed should be the form of the order in this event:

"(1) The Appeal herein be dismissed;

(2) The appellants do pay to the respondent its costs to be taxed if not agreed, which payment may be satisfied to the extent of HK$400,000 from the bank guarantee in the same amount heretofore furnished by the appellants;

(3) An inquiry be made before a Master as to any loss sustained by the respondent by reason of the stay ordered by the Court of Appeal by its order dated 7 April 1998 as continued by its order dated 5 May 1998;

(4) The appellants do pay to the respondent any amount found due upon such inquiry, which payment may be satisfied to the extent of HK$750,000 from the bank guarantee in the same amount heretofore furnished by the appellants;

(5) The Order of Le Pichon J dated 8 September 1997 be carried into effect commencing from 21 December 1998 being the date of the Order of the Court of Final Appeal."

Mr Justice Litton, PJ:

32. I agree with the Chief Justice's judgment and the orders proposed and would simply add the following observations:

(1) As to the first requisition, the vendor's solicitors' assertion that it did not "affect the title to the ... property" was not only unhelpful, as Sir John Swaine SC was prepared to concede; it was plainly wrong with regard to the title to the carparking space agreed to be sold.

(2) As regards the second requisition, if the position were that, from the outset, the vendor's solicitors had realized that the developer of Blocks 25, 26 and 27 of Baguio Villa had failed to take steps to convert its equitable interest into a legal estate pursuant to s. 14(3) of the Conveyancing and Property Ordinance, Cap. 219, then this should have been squarely faced: The vendor could never have conveyed to the purchaser more than an equitable interest in relation to the flat and carpark sold. And if the vendor's solicitors were not sure, then the letter of 12 September 1991 from the purchaser's solicitors asking for a written document (other than a certificate of compliance) carried even greater weight. Either way, the assertion that the requisition was "invalid" and did not "raise any doubts on title" was plainly wrong.

33. The vendor purported to terminate the agreement and forfeit the deposit on 16 September 1991. On the very next day the purchaser issued their writ thereby indicating that they were prepared to accept the vendor's title, but the vendor stuck to its position through thick and thin. By our order, finally, completion of the sale will take place: a completion which might well, with the exercise of a little common-sense, have taken place over seven years ago. Such is the price the parties pay for litigation of this nature.

Mr Justice Ching PJ:

34. I agree with the Chief Justice.

Mr Justice Bokhary PJ:

35. Neither side has any merit; and the dispute between them appears to be one which could have been avoided without too much difficulty. Nevertheless here they are, after a long time and a lot of costs, in the highest court in the land. Justice makes no particular call for either side's activities to be crowned with success. But the law dictates that the appellant must fail. As to why that is so, I agree with the reasons given by the Chief Justice in whose judgment I concur.

36. This case provides yet another illustration of the importance of responding to requisitions on title in a constructive manner.

Lord Hoffmann NPJ:

37. I agree with the Chief Justice.

Chief Justice Li:

38. Accordingly, the appeal is dismissed with costs and the Court makes the order I have set out above.