SUMMIT INVESTMENT LTD. v. SHIA NING ENTERPRISE LTD.

HCMP1532/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1532 OF 1998

--------------------

--------------------

------------------------------------

REASONS FOR JUDGMENT

------------------------------------

Introduction

1. The Plaintiff was the purchaser intending to purchase an office unit in a multi-storey building from the Defendant. Requisitions on title were raised by the Plaintiff's solicitors. Not satisfied with the answers given, the Plaintiff terminated the sale and purchase agreement and brought this action against the Defendant.

2. At the beginning of the hearing on 23 February 1999, the parties agreed that the Plaintiff's claim should be dismissed with no order as to costs of the action. The Defendant, nevertheless, indicated that it wished to proceed with its Counterclaim but limited only to the relief of a declaration that a good title had been shown and that the requisitions in question had been satisfactorily answered. The Plaintiff neither supported nor opposed such Counterclaim and Mr Ho did not advance any argument at the hearing.

3. After hearing submissions from Mr Chan, I granted the declaration order sought by the Defendant and indicated that my reasons for doing so would be handed down later. These are the reasons.

The Two Requisitions and the Answers

4. Similar to most of the multi-storey buildings in Hong Kong, by a "Deed of Partition and Mutual Covenant and Grant" dated 16 September 1980 ("the DMC"), the building was divided into equal undivided parts or shares. There are a total of 2,001 shares. The basement accounted for 170 shares, the shops on the Ground Floor 376 shares, the Cockloft 40 shares, the 94 car parking spaces 94 shares, the office units on the 5th to 14th Floors 600 shares, Portions A and B on the 15th Floor 60 shares each, the office units on the 16th to 26th Floors 660 shares and the roof, upper roof and external walls one share. Each of the 16th to 26th Floors therefore accounted for 60 shares. By a Deed Poll dated 7 March 1989, the Defendant's predecessor in title divided the 20th Floor into Portions A and B and allocated 30 shares to each.

5. The part of the Occupation Permit dated 24 August 1981 regarding this building stated inter alia :-

"5th to 26th Floors (inclusive) : One office per floor for non-domestic use."

6. The two requisitions on title relevant to this action were set out (as Requisitions Nos.3 and 4) in a letter dated 9 October 1997 from the Plaintiff's solicitors. They were :-

"3. In the Occupation Permit No.H107/81, only one office per floor for non-domestic use is allowed in the above building. However, in the Deed of Partition And Mutual Covenant and Grant Memorial No.2175451, six offices were partitioned on the 5th floor [sic] to the 26th Floor. The 20th Floor was subsequently partitioned to Portion A and Portion B. Please let us know whether there is any Approved Alteration Plan(s) which allow the change of user of one office to six offices and from six offices to two offices, if so, please let us have the documentary proof thereof" ("Requisition No.3");

"4. In the Deed of Partition and Mutual Covenant and Grant Memorial No.2175451, each unit on the 20th Floor were [sic] allocated certain number of undivided shares. Such share [sic] were later re-allocated by the Deed Poll Memorial No.4009443. Such re-allocation is inconsistent with the said Deed of Partition and Mutual Covenant And Grant. Please clarify." ("Requisition No.4").

7. Further to Requisition No.3, through a letter from the Plaintiff's own architect dated 19 November 1997, the Plaintiff expanded its requisition to allege that there was a discrepancy in the number of office units between the Occupation Permit and the actual units on the 20th Floor.

8. The answers given by the Defendant's solicitors can be summarized as follows :-

(a) in relation to Requisition No.3

The Defendant obtained a certificate from an architect (a course agreed to by the Plaintiff's solicitors in a letter dated 23 October 1997) which stated that the sub-division of the 20th Floor complied with the Buildings Ordinance and did not amount to a breach of the relevant Occupation Permit. Further, the architect opined that the partition walls forming the portions on the 20th Floor were exempted works as defined in s.41(3) of the Buildings Ordinance and therefore did not require approval from the Building Authority.

An architect engaged by the Plaintiff did not dispute the partition walls were exempted works. He opined however that all subsequent alterations should be notified to the Building Authority by way of either Alteration Plans or Application for Material Change of Use. Further, even if only exempted works were involved, submission of the sub-division plan to the Building Authority was necessary to rectify the discrepancy in the number of office units in the Occupation Permit.

At the end, the Defendant's solicitors argued that they had sufficiently answered this requisition but the Plaintiff's solicitors held the opposite view.

(b) in relation to Requisition No.4

In their letter dated 21 October 1997, the Defendant's solicitors argued in essence that the earlier owner of the 60 shares was entitled to sub-divide them into two portions and re-allocated 30 shares for each of the portions by way of the Deed Poll. There was no inconsistency between it and the DMC. The Plaintiff's solicitors responded on 23 October 1997 and contended that the latter document did not reserve a right for the owners of the undivided shares to sub-divide or re-allocate their shares.

9. Having set out briefly the history of the relevant requisitions, I now deal with the arguments advanced by Mr Chan for the Defendant.

(1) Requisition No.3

10. Mr Chan argued that two points were raised by the Plaintiff's solicitors under this requisition. The first is a risk of enforcement by the Building Authority. This risk was created by the possibility that the partitioning might have involved unapproved building work. The other relates to the discrepancy between the Occupation Permit and the division of the 20th Floor into two portions.

11. Mr Chan submitted that the first of the two points was satisfactorily answered because the Defendant's architect had already certified that only exempted works were undertaken. This, he said, had not been challenged by the Plaintiff.

12. The title problem created by any unapproved building work was the possibility of a charge being created by the Building Authority. Under s.24 of the Buildings Ordinance, Cap.123, the Building Authority may by order in writing require the demolition of any unauthorized work and to remedy any such work. If the work is not demolished or remedied, the Building Authority may do so and the costs for carrying out such work may be recovered from the persons who have been served with the order : s.24(3) and (4) of Cap.123. Under s.33 of Cap.123, the Building Authority may certify the costs recoverable and a memorial of the certificate may be registered in the Land Registry against the title of the affected property. Such registration will constitute a first charge on the said property.

13. Mr Chan argued that no order or certificate will or can be issued by the Building Authority in the present case because the Defendant had established that the works involved were only exempted works under s.41(3) of Cap.123. Since the works were exempted works, s.24 of Cap.123 is not applicable and no order can or will be made by the Building Authority thereunder. Consequently, s.33 of Cap.123 is not applicable either.

14. As regards the "discrepancy" resulting from the division of the floor into two portions, Mr Chan argued that no title problem can be created even if such division amounted to a "discrepancy" with the Occupation Permit. His argument can be summarized as follows :-

(a) s.21 of Cap.123 provides that no new building shall be occupied unless the Building Authority has issued an occupation permit;

(b) under s.25(1), one month's notice in the specified form shall be given to the Building Authority of any intended material change in the use of a building;

(c) the use of a building is statutorily deemed by s.25(4) of Cap.123 to be "materially changed" if (1) the carrying out of building works for the erection of a building would have contravened Cap.123, or (2) where the Building Authority could have refused to give approval to plans of such building works under s.16(1)(g);

(d) under s.2, "building" includes the whole or part of any domestic or public building;

(e) under s.40(2) of Cap.123, any person who fails to give any notice required under s.25(1) is guilty of an offence and is liable on conviction to a fine of $10,000 and imprisonment for six months;

(f) even if the discrepancy in the number of office units constitutes a breach of s.25 of Cap.123, no title problem is thereby created because under s.40(2) of Cap.123 the power of the Building Authority is only limited to the prosecution of the person who contravened s.25. Mr Chan submitted that in the present case this person is clearly not the Defendant but its predecessor in title. Further, the only penalty under s.25 is a liability for a fine or imprisonment.

15. Mr Chan drew my attention to some observations made by the late Jerome Chan J. relating to this point. In Worldful Investments Ltd. v. Young King Asia Ltd. [1995-96] CPR 665, the learned Judge said :-

"It is not disputed that part of the property sought to be sold by the plaintiff to the defendant (a shop) ... was described by the Occupation Permit ... to be a garage for ten motor vehicles for non-domestic use. It is, therefore, not in dispute that the user, as described in the agreement for sale and purchase of the property, was not permitted by the Occupation Permit. ... It is then for the plaintiff to explain and establish why, notwithstanding such a blot on the title, there was a sufficient answer to the objections raised in respect thereof, and a declaration that good title has been shown because the admitted unauthorized user of the premises in question would entitle the government to take enforcement action against the said premises ...." (at p.667C to F)

Mr Chan argued that this observation was made without reference to the provisions of Cap.123. He submitted that, as summarized above, it was not supported by the statutory provisions and therefore invited me not to follow the said observation.

(2) Requisition No.4

16. Mr Chan submitted that there is no provision in the DMC (or any other document) which prohibits or limits a co-owner's right to deal with his own equal undivided shares freely (including the right to sub-divide and re-allocate them). That being the case, the co-owner can do so because in law the owner of a property can deal with it in whatever manner he desires.

17. Mr Chan fairly drew my attention to observations made in the case of Finworld Development Ltd. v. Siriban Ltd., HCMP 3307/1992 where the learned Judge said :-

"... the administrator and Madam Wong together were one co-owner of the land as a whole. By virtue of the DMC, they had an unrestricted right to dispose of their 2/50th interest in the land. They did not however have an unrestricted right to sub-divide their interest. Although no authority was advanced for the proposition, I am satisfied that in the context of multi-storey ownership governed by a Deed of Mutual Covenant, all co-owners are entitled to signify their agreement or otherwise to the sub-division of his interest by one of the individual co-owners. It seems to me that the co-owners collectively have a legitimate interest in knowing if one of them intends to sub-divide his share or interest, and how the specified area to which exclusive jurisdiction attaches by virtue of that interest will itself be divided." (at p.11)

18. He invited me not to follow these observations. First, he argued that on basic principle, an owner of a property is free to dispose of the whole or part as he desires. It is repugnant to the concept of ownership of property to say that the owner is somehow restricted in his power to dispose of part of his property if he so wishes. A Deed of Mutual Covenant is primarily intended to regulate the management of a building and is not intended to govern or interfere with the disposal powers of co-owners unless such is specifically provided for. Further, Mr Chan submitted the said observation differed on this point from the conclusion reached in two other cases.

19. In Sheenip Industries Ltd. v. Champion Billion Development Ltd., HCMP 1390/1995 (4 July 1995), Deputy Judge Yuen (as she then was) said :-

"The Purchaser's argument as developed in Court is that since the DMC did not expressly contain a method of allocation, any subsequent allocation by the developer required the consent of the 1st Owner. If the developer were given a free rein, he might allocate the shares in such a way as to act unfairly upon the 1st Owner ... " (at pp.11-12);

In my judgment, the proprietary rights which the developer enjoyed as the owner of the 107/108th shares cannot be restricted except by clear wording or necessary implication. There being nothing to indicate that there were any constraints upon his rights, he was free to allocate the 107/108th shares in whatever manner he thought appropriate.

He could not of course water down the 1st Owner's share in the land by increasing the total number of shares, but I can see no reason why he should not be free to allocate the shares in whatever manner he thought appropriate ... There might be a difference if the DMC had contained a specific allocation of shares and the developer later chose to re-allocate the shares different [sic] ... " (at p.14)

20. In Hinex Universal Design Consultants Ltd. v. Chan Lai Hing [1998] 1 HKC 317 (31 December 1997), Le Pichon J. said :-

"Counsel for the plaintiff relies on Lee Tak Chun v. East Weal International Ltd. & Anor [1994] 1 HKC 722 for the proposition that it is incumbent on the vendor to produce a document of title showing the allocation of undivided shares. ... At 731C-H the learned Judge made observations to the effect that where there is nothing to show when, how and in what manner the shares were allotted, it would be reasonable to infer that some document existed which had not been disclosed. ... As counsel for the defendant rightly pointed out, the observations relied on by the plaintiff were not made with the benefit of full argument ... Counsel for the plaintiff accepted that subject to any restrictions imposed by the DMC, a developer has an unfettered right to allocate the undivided shares amongst the various units. See (the Sheenip case) where it was held ... that the proprietary rights which the developer enjoyed as owner of undivided shares cannot be restricted except by clear wording or by necessary implication. I agreed with that proposition in Marking Ltd. v. Cheerifat Investments Ltd. (MP2727/95, unreported), and remain of that view. An aspect of the issue to be determined in the present case takes the Sheenip case one step further: whether, subject to any limitations that may be imposed by the DMC or other document, a subsequent owner has a similar right ... (at pp.320-21);

Approaching the question as one of principle, there does not appear to be any valid basis or reason for differentiating between the position of a developer ... and that of a subsequent owner. In my judgment, a subsequent owner has the same unfettered right as the developer in the allocation of undivided shares vested in him subject to any prior prohibition which exists in the DMC or some other document." (at pp.321-22).

Conclusion

21. To conclude, I agree with the above submissions of Mr Chan. Further, although Mr Ho did not advance any oral submissions at the hearing, he put in a written skeleton submissions for the Plaintiff. One point raised therein regarding the sub-division of the 20th Floor is :-

"One consequence is that, vis-à-vis the other co-owners of the Building, owners of Portions A & B would be jointly liable for contributions attributable to the 20th Floor as a whole. Default on the part of the owner of Portion A will provide the basis for enforcement action under DMC against the whole of the 20th Floor, including Portion B. ... In the premises, the title of the Property is plainly adversely affected."

First, this argument has not been raised as part of Requisition No.4 which was limited to an alleged inconsistency between the DMC and the Deed Poll. It is not open to the Plaintiff to raise this argument now. Further, even if the Plaintiff could do so now, I do not find it to be a valid argument. This argument is in short that the owner of each of the two portions are jointly liable for the contribution for reinstatement or repair costs of his own portion as well as those of the other portion. This potential liability by itself is not a title problem. It is no more than a contractual obligation to pay (even though it is to pay more than what other co-owners of other units may be liable to pay). The remedy open to the co-owner of one portion who has to pay more may be to ask for reimbursement from the other owner. A similar argument (but involving different facts) was advanced in the Sheenip case and Deputy Judge Yuen said this in her Judgment :-

"Co-owners with exclusive possession of large areas might be allocated a small number of shares and thus have to pay only a disproportionately small contribution to expenses. However, in the event of say, resumption or redevelopment, the value of their property could be correspondingly less.

I am not able to solve the problem which the latter part of Clause 4 poses. I am driven to conclude that this is an anomalous provision which might suffer from typographical and/or drafting errors. However, I do not see how the problems of calculation assist the Purchaser's argument." (at pp.14-5)

I consider this reasoning to be based on the same logic, that is, when the matter in issue is contractual in nature (such as the liability to pay under a Deed of Mutual Covenant), the concept of fairness or equity only has limited application.

22. Whether to grant a declaration in the Defendant's favour is a matter of discretion. Although the Plaintiff has agreed that its claim should be dismissed, it appears that a real challenge had been made against the Defendant in this action as to whether it had made good title or satisfactorily answered the said two requisitions. For this reason, in exercise of my discretion, I found it appropriate to grant the declaration as sought.