Ip Fong Keng v. Fong Yu Shing and Another

HCMP 843/2017

[2019] HKCFI 1677

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 843 OF 2017

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Before: Deputy High Court Judge Dawes SC in Court

Dates of Hearing: 26 and 27 September 2018

Date of Judgment: 3 July 2019

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JUDGMENT

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A. INTRODUCTION

1.This is a vendor and purchaser summons under section 12 of the Conveyancing and Property Ordinance (Cap 219).  The plaintiff seeks, inter alia, declarations that the defendant’s solicitors did not answer the relevant requisitions sufficiently, that the defendant failed to give and show good title and that the defendant repudiated the agreement for sale and purchase. The plaintiff also seeks the return of the deposits paid and damages.

B.   BACKGROUND

2.By a provision agreement dated 5 January 2017 (“PSPA”), the plaintiff agreed to buy and the defendant agreed to sell the property known as ALL THOSE 2 equal undivided 31^stparts or shares of and in ALL THAT piece or parcel of ground registered in the Land Registry as THE REMAINING PORTION OF KOWLOON INLAND LOT NO 2804and of and in the messuages erections and buildings erected there known as No 77 Ki Lung Street TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT the THIRD FLOOR of the Building (“the Property”).

3.The formal sale and purchase agreement was entered into on 18 January 2017 (“Agreement”). An initial deposit of HK$100,000 and a further deposit of HK$275,000 were paid on the same date.

4.Under the Agreement, the purchase price for the Property was HK$3,750,000 and the completion date was 28 February 2017 at 5:00 pm.  The following clauses are relevant:

Clause 12:

“ … If the Purchaser shall make and insist on any objection or requisition either as to title or any matter appearing on the title deeds or otherwise which the Vendor shall be unable or (on the ground of difficulty delay or expenses or on any other reasonable ground) unwilling to remove or comply with, or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or the Purchaser’s solicitors not less than 5 working days’ notice in writing to annul the sale‌…”

Clause 34(a):

“ Save & except for Superseding Notice No. UMB/MB121201-010/0005 under S. 30B(3) of the Building Ordinance by Memorial No. 15090101180022 and Superseding Notice No. UMW/MB121201-010/0021 under S. 30C(3) of the Building Ordinance by Memorial No. 15090101180049 respectively registered at the Land Registry against the property, the Vendor hereby warrants and declares that the Vendor has not received any notice or order from any Government or other competent authority or the Manager or the Management Committee of the building or estate of which the Property forms part requiring the Vendor as one of the co-owners of building to effect repair to any common part of the building or estate. If it should be discovered that any such notice or order exists or shall be issued or served on or before completion, the cost for such repair shall be borne by the Vendor.”

5.The plaintiff was all along represented by Messrs N K Tsang & Co (“NKTC”) and the defendant was represented by Messrs Joyce Chan & Co (“JCC”) at the material times.

6.The plaintiff’s solicitors started raising requisitions on 17 January 2017. The relevant issues are contained in the correspondence since then and the relevant ones are as follows:

(1)  By a letter dated 17 January 2017 from NKTC to JCC, the defendant was asked to confirm, inter alia, “whether there are any outstanding claims or litigation pending against the owners or incorporated owners of the building”.

(2)  By a letter dated 3 February 2017 to JCC, NKTC enclosed a copy of a letter from the Buildings Department (“BD”) of the same date (“BD’s Letter”). BD’s Letter was written in response to a letter from NKTC dated 6 January 2017.  In BD’s Letter, it is said that according to its record, there were five notices/directions in respect of the Property.  They are:

(a) An outstanding Mandatory Building Inspection Notice no UMB/MB121201-010/0005 issued to the co-owners of the common area of the building.

(b) An outstanding Mandatory Window Inspection Notice no UMW/MB121201-010/0021 issued against the co-owners of the common area of the building.

(c) An outstanding order no C/M2/007269/11/K issued to the co-owners of the building under section 24 of the Buildings Ordinance (“BO” and “Section 24 Order” respectively).

(d) An outstanding Fire Safety Direction issued to the owner of the premises under the Fire Safety (Buildings) Ordinance (Cap 572).

(e) An outstanding Fire Safety Direction issued for the common areas of the building under the Fire Safety (Buildings) Ordinance (Cap 572).  (The directions under (d) and (e) shall be referred to as the “Fire Safety Directions”.)

In the letter from NKTC, they asked for copies of Notice(s) / Order(s) and/or Direction(s) as mentioned in the said letter before completion.

(3)  JCC replied on 6 February 2017 in response to the first letter of 3 February 2017 where it was simply said that the requisition is not a valid requisition on title and that it should be directed to the Incorporated Owners or relevant authority.

(4)  JCC subsequently replied on 15 February 2017 in response to the letter of 3 February 2017.  In respect of items (a) and (b) referred to in BD’s Letter, they referred to clause no 2 of the Annexure to the Agreement and suggested that the plaintiff shall be responsible for the cost in relation to the compliance with the two notices.  In respect of items (c), (d) and (e), they suggested that the plaintiff shall be responsible for the costs (if any) for compliance with the Section 24 Order and Fire Safety Directions. The basis of this suggestion was not explained.

(5)  By a letter dated 16 February 2017 from NKTC, they took issue with items (c), (d) and (e) and said that according to the Agreement, there is no proviso for the plaintiff to be responsible for the Section 24 Notice and the Fire Safety Directions.

(6)  NKTC then reminded JCC on 21 February 2017 that the requisitions contained in the 16 February 2017 letter are outstanding and reserved the right to ask for an extension of time for completion.

(7)  JCC replied on 21 February 2017: 

(a) Significantly, notice to annul the sale under clause 12 of the Agreement was given (“Notice”).  It was said that:

“ We are instructed to give notice to your client, through your firm, which we hereby do, to annul the sale of the Property to your client upon the expiry of 5 working days’ notice according to clause 12 of the Agreement for Sale and Purchase dated 18 January 2017 in respect of the following outstanding requisitions on the ground(s) stated below unless all such outstanding requisitions on the title to the Property shall be withdrawn by your client before the expiration of this 5 working days’ notice in clause 12 of the Agreement for Sale and Purchase.”

(b) In respect of the requisitions, they said:

“ [w]e are instructed that your client has agreed to bear the cost (if any) for compliance with these relevant Order and Fire Safety Directions mentioned in the letter dated 3 February 2017 from the [BD] … On a without prejudice basis, our client has not received any notice for payment of any contribution for the costs in compliance with the said Order and Directions.

Despite our previous answer to your requisition, you have insisted on your requisitions which our client is (on the ground of difficulty, delay and/or expense) unwilling to remove or comply with.”

(8)  NKTC replied on 22 February 2017 taking issue with the defendant’s right to annul the sale and referring to clause 34(a) of the Agreement which provides that save and except the Mandatory Building Inspection Notice and Mandatory Window Inspection Notice (ie as stated in paragraph 6(2)(a) and (b) above), the defendant warranted that they have not received any notice or order from the Government or other competent authority and that if such notices/orders should be discoveredbefore completion, the costs should be borne by the defendant.  

(9)  JCC responded on the same date reiterating their stance stated previously but indicating: “Without prejudice to our previous reply, we are instructed that so far, our client has not receivedany notice to make any contribution for the costs in compliance with the relevant Order and Fire Safety Directions nor any information about the details of the relevant repair works.  As such, you have insisted on the above requisitions which our client is (on the ground of difficulty, delay and/or expense)unwilling to remove or comply with.”

(10)  By a letter dated 23 February 2017, NKTC:

(a) stated that under the Agreement, the defendant sold the Property free from all incumbrances;

(b) proposed a reasonable sum to be held by defendant’s solicitors upon completion being security money in settlement of the repair costs of the Section 24 Notice and Fire Safety Directions;

(c) asserted that it was JCC’s duty (as vendor’s solicitors) to make enquiries with BD concerning the present status of the said notice/directions;

(d) referred to the fact that the BD indicated that the Fire Safety Directions has been issued to the defendant and they ought to have knowledge and aware of the same before the signing of the PSPA; and

(e) reserved the plaintiff’s right under clause 14 of the Agreement to claim for loss and damages by reason of the defendant’s default.

(11)  On 24 February 2017, NKTC wrote again putting on record that the defendant has still failed to show and prove good titleor to answer the requisitions satisfactorily.  They urge JCC to respond urgently given that completion under the Agreement was due to take place on 28 February 2017.

(12)  By a letter dated 25 February 2017, JCC rejected the plaintiff’s proposal of retaining a sum as security money for settlement of the potential repair costs.  In respect of the requisitions in question, it is said:

“ Requisitions (c), (d) and (e) in your letter dated 3 February 2017

We reiterate that you have insisted on the above requisitions which our clients are (on the ground of difficulty, delay and/or expenses) unwilling to remove or comply with.  Our clients shall annul the sale of the Property to your client upon expiry of the said Notice unless all such outstanding requisitions on the title of the Property shall be withdrawn by your client before the expiration of our said Notice.”

(13)  NKTC letter replied by a letter dated 27 February 2017 putting on record that the requisitions have not been answered.  

(14)  JCC’s replied more substantively on 28 February 2017: 

(a) They asserted that the Section 24 Notice and the Fire Safety Directions do not form part of the title deeds of the Property and were not registered against the Property.  They were therefore not obliged to provide copies to NKTC for proof of title. 

(b) In respect of the Section 24 Notice, it is said that they have made enquiries with the BD and was told that it related to an unauthorised structure on the yard on the Ground Floor of the Building.  NTKC was asked to make enquiries with the case officer directly.

(c) As to the Fire Safety Directions, it is said that they do not constitute any building notice or order under clause 34 of the Agreement nor any encumbrances on title to the Property.  They were therefore not obliged to comply or to pay any repair cost in respect of the same.

(d) Finally, it is also said that without prejudice to the pointsadvanced, they were prepared to offer HK$6,000 to the plaintiff as full and final settlement of the defendant’s obligations and liabilities arising from or in connection with the Section 24 Notice and Fire Safety Directions. 

(15)  NKTC responded on the same day pointing out that the Section 24 Notice and the Fire Safety Directions do form part of the encumbrances and that the defendant was obliged to produce the documents.  Further, the yard in question form part of the common parts of the Building and as one of the co-owners, the defendant shall have liabilities under the DMC to share contribution costs of such repair.  As to the Fire Safety Directions, there were liabilities on the defendant’s part as owner of the Property (in the case of item (d)) or as one of the co-owners (for item (e)).

(16)  On the same day, JCC reiterated that their client shall annul thesale upon the expiry of the Notice unless the requisitions were withdrawn. NKTC then wrote and accepted the defendant’s repudiation on the plaintiff’s behalf and demanded the return of the deposits paid.

(17)  On 1 March 2017, JCC wrote and claimed that the sale was annulled at the expiration of the Notice.  They offered to return the deposits paid and suggested that a cancellation agreement be entered into.  They also demanded the return of title deeds and documents in respect of the Property.

C.   ISSUES BEFORE THE COURT

7.In light of the correspondence, the issues before the Court are:

(1)   whether the relevant requisitions were validly raised;

(2)   if so, whether they have been answered satisfactorily;

(3)   whether the defendant was entitled to annul the sale by relying on clause 12 of the Agreement;

(4)   whether the defendant has repudiated the Agreement; and

(5)   what are the appropriate order(s) / relief.

D.   POSITIONS OF THE PARTIES

8.Before me, Ms Poon for the plaintiff argued that the requisition in question was validly raised as the Section 24 Order and the Fire Safety Directions constituted encumbrances and could be a blot on the title or create possibility of litigation if not discharged.  The requisition has not been answered satisfactorily as the defendant had failed to provide copies of the documents, advised the plaintiff on their status or the works involved or whether they had been complied with.  The offer to pay HK$6,000 was inadequate as it is wholly arbitrary and no basis for calculation was even offered.

9.The defendant was also not entitled to annul the sale by relying on clause 12.  No attempt was made to communicate to the plaintiff the inability or unwillingness to remove or comply with the requisition.  The mere claim that the plaintiff should investigate himself or that he should be responsible for the costs of the compliance of the Section 24 Order and Fire Safety Directions was not in itself an intimation of inability or unwillingness to remove or comply with the requisition in question.  What the defendant ought to have done was to produce copies of the documents in question, to make enquiries with the BA as to their status and to offer a reasonable sum to be held by JCC as stakeholder upon completion being security for compliance with the Section 24 Order and the Fire Safety Directions.

10.On the other hand, Mr Cheung for the defendant contended, inter alia, that:

(1)  The defendants had no knowledge and had not received the Section 24 Order or the Fire Safety Directions.  They were also not registered against the Property. 

(2)  The requisitions were in any event sufficiently answered.He referred to the 28 February 2017 letter from JCC suggesting that the Section 24 Order is related to an unauthorised structure on the yard on the Ground Floor of the Building.  He submitted that since the order was made in 2011 and no enforcement actions have been taken and that it was not registered, there is plainly no real risk of enforcement.  There is therefore justification for the defendants to suggest that costs of compliance should be borne by the plaintiff.

(3)  As to the Fire Safety Directions, he submitted that it did not constitute any encumbrance on the Property.  

(4)  In any event, he relied heavily on clause 12 of the Agreement and that the Notice was valid.  He submitted that there are two limbs to clause 12, ie (i) if the Purchaser shall make an insist on an objection; and (ii) if the title of the Vendor shall be defective.

E.   WERE THE REQUISITIONS VALID AND WERE THEY ANSWERED?

11.It is trite that that the defendant must show good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an encumbrance:  Gigabillion Asia Pacific Ltd v Sino Dynamic International Ltd[2015] 2 HKLRD 100, 104; Spark Rich (China) Ltd v Valrose Ltd(CACV 249/1998, 9 March 1999) §§20–22.  However, as Litton PJ stated in Mexon Holdings Ltd v Silver Bay International Ltd(2000) 3 HKCFAR 109, 117:

“ 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.”

E1.   Requisition dated 3 February 2017 in relation to Section 24 Order

12.In my view, the requisition concerning the Section 24 Order was clearly valid and no satisfactory answers were given.

13.Once an order is made against an owner under section 24(1) of the BO, the BA has the power to demolish or alter the illegal structure under section 24(3), recover the costs from the owner under section 24(4), and register a memorial of a certificate against the title of the property under section 33(9), upon which the costs shall constitute a first charge upon the property.  Thus, it is proper for the plaintiff to raise requisition on this potential blot on title.

14.Where the Section 24 Order is made against the co-owners in relation to the common parts (as in this case), the apportioned costs of demolition or alteration may be charged against the titles of all the individual co-owners under section 33(9), thus potentially rendering those titles defective: see Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, 409.  Of the three other cases cited by the plaintiff, To Yung Sing Herman v Szeto Chak Mei [2018] 3 HKLRD 370 is most relevant, because it concerns common parts, whereas in the other two cases [1] the orders under the BO were made only against the sale property.

15.In any event, where the order is made against common parts,the co-owners would have to make contributions to fund demolition or alteration works carried out by the IO.  Where liability to make contributions is of such magnitude that it would exceed anything that a reasonable purchaser would have in contemplation when agreeing to purchase the property, it would constitute a title defect, quite apart from the possibility of a charge under section 33(9) of the BO: see All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630, §§15 – 17, applying Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268.  Contributions for compliance with a Section 24 Order cannot be characterised as ordinary running expenses or expenses for mere renewal of the property, so are likely to be beyond the reasonable purchaser’s contemplation.  Thus, they are a potential blot on title and the valid subject of a requisition.

16.I do not consider it makes any difference that the Section 24 Order was not registered, because registration of the order itself is not a precondition for registration of a charge under section 33(9): To Yung Sing Herman (supra) at §100.  Thus, the order would still be a potential blot on title.

E2.   Requisition dated 3 February 2017 in relation to Fire Safety Directions

17.On the contrary, I agree with the defendant that the requisition in relation to the Fire Safety Directions was not properly raised.  The defendant referred to E-Global Ltd v Trenda Ltd[2013] 5 HKC 192 wherethe Court found that the fire safety directions in that case did not constitute a title defect.

18.Admittedly, E-Globalis distinguishable in several respects. First, it concerned another statute—the Fire Safety (Commercial Premises)Ordinance (Cap 502), rather than the Fire Safety (Buildings) Ordinance (Cap 572) as in the present case.  Second, much of the reasoning was fact- specific and based on common sense—for example, the Court noted that the directions were not urgent; did not impact on the existing safety of the building; had not been registered in the 3 – 4 years since they had been issued; and were generally of an entirely different nature to the works required of an order under the BO: §§12, 26 – 27.  In contrast, there is not enough information about the Fire Safety Directions in evidence in the present case—eg when they were issued, whether there has been any follow-up etc—to determine how similar the facts are.  Third, the Court did not specifically consider whether the requisitions in that case were validly raised, but only that they had been properly answered (by the stakeholding and undertaking offer).

19.Nevertheless, I consider the key point to be that the Fire Services Department has no statutory power (whether under Cap 502 or Cap 572) to (i) register fire safety directions against a property; (ii) carry out the work required in directions by themselves; (iii) recover the costs from the owner; and/or (iv) register a first charge against the property to secure payment of those costs: see To Yung Sing Herman, §103.  This is the primary distinguishing factor between the Fire Safety Directions and the Section 24 Order.  Without such power to charge, I cannot see how the Fire Safety Directions can be potential blots on title.  Nor do I consider that required contributions of co-owners to the cost of fire safety works in common parts are likely to exceed the contemplation of the reasonable purchaser.

20.None of the cases cited by the plaintiff demonstrate otherwise. Although there was a brief mention of installation of fire sprinklers in breach of fire service regulations in Tsang Kwok Hung Frederick v Ching Lai Tuen(CACV 48/2009, 30 September 2009), the requisitions in that casewere primarily about other illegal works and there was no specific analysisof the sprinklers issue.  In any event, no fire safety directions were at issue in that case.

21.On balance, my view is that the Fire Safety Directions do not give rise to a title defect and the requisition thereon was not properly raised.

F.   WERE THE REQUISITIONS ANSWERED SATISFACTORILY?

22.In short, I am of the view that the requisition in relation to the Section 24 Order was not satisfactorily answered.  Further, if I am wrong on whether the requisition in relation to the Fire Safety Directions was validly raised, I consider that it was also not satisfactorily answered.

23.The starting point is that: (i) requisitions must be answered with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed: Active Keen at 407; (ii) to provide a satisfactory answer to a requisition, the vendor must provide proper conveyancing evidence, which is so compelling that the court can concludebeyond reasonable doubt that there is no real risk of a title defect: So Marikov Tse Chun Chung John[2011] 3 HKC 174, §39; (iii) in the context of notices or orders from the BA, it is incumbent upon the vendor to demonstrate either that the notices or orders have been dealt with to the satisfaction of the BA, or that the costs of compliance have been adequately provided for, such that no encumbrance under section 33(9) BO could ever arise: see All Ports at §21; To Yung Sing Herman at §106.

24.In response to the requisitions relating to the Section 24 Order and Fire Safety Directions, the defendant initially replied on 15 February 2017:

“ We are instructed that your client shall be responsible for the cost (if any) for compliance with these relevant Order and Fire Safety Directions. Please take instructions from your client and revert to us.”

25.This was in my view a wholly inadequate answer, for a number of reasons:

(1)  There was no basis for the defendant to assert that the plaintiff should be responsible for the costs of compliance.  In fact, clause 34(a) of the Agreement states, to the contrary, that the defendant shall be responsible for any “notice or order” requiring them as co-owner to effect repair to the common parts.  Such wording certainly includes the Section 24 Order, and in my view also the Fire Safety Directions.[2]  Further, the Agreement contains an entire agreement clause (clause 23), so any prior understanding that the plaintiff would bear the costs of compliance is irrelevant.

(2)  In answering the requisitions, it was not enough for the defendant to make such an assertion without disclosing its basis: Chan Chu Hang v Man Yun Sau [1997] 2 HKC 144 at 148I.

(3)  In any event, the mere assertion that the plaintiff should be responsible for the costs does not answer the substance of the requisitions, which was to request copies of the Section 24 Order and Fire Safety Directions.  There is no indication thatthe defendant made any effort to locate and produce the copies, for example by making enquiries with the IO and/or the BA.  Nor did the defendant undertake or offer a reasonable sum to be stakeheld to settle any costs arising from compliance with the Order and Directions.

26.Subsequently, on 21 February 2017 and again on 22 February2017, the defendant stated that they had not received any notice for payment of any contribution for costs of compliance with the Order and Directions.  However, I do not consider that these can be regarded as answers to the requisitions, because the defendant was also at the same time purporting to annul the sale on the grounds of unwillingness to comply with those very requisitions.  In any event, even if those responses were answers to the requisitions, it was in my view not enough for the defendant to simply state that they had received no notice, without making any positive attempt to locate and obtain copies of the said Order and Directions.

27.On 23 February 2017, the plaintiff proposed that a “reasonable sum” to be stakeheld as security money in settlement of the Orders and Fire Safety Directions.  This will be discussed below.

28.On 28 February 2017 (ie, the completion date), the defendantstated that (i) the Section 24 Order and Fire Safety Directions did not form part of the title deeds; (ii) the Section 24 Order relates to an unauthorised structure on the yard of the G/F, and any further queries should be directedat the BD case officer; and (iii) the Fire Safety Directions do not constitute a“notice or order” under clause 34(a) of the Agreement, nor any encumbrance on title.  However, these responses are wholly inadequate because:

(1)  the Section 24 Order does go to title, as explained above;

(2)  the mere fact that the Section 24 Order relates to an unauthorised structure on the yard (ie common parts) rather than the Property itself does not prevent the Order from constituting a blot on title of the Property, because the Property owner may be required to make contributions to the costs of compliance, and because the Property may be charged for those costs under section 33(9) of the BO;

(3)  it was not sufficient for the defendant to require the plaintiff to make further queries with the BD case officer, because the burden was on the defendant to show good title; and

(4)  the Fire Safety Directions probably do not go to title, but do constitute notices under clause 34(a).

29.Even if the answers in the defendant’s 28 February 2017 letter were adequate, they came too late.  Requisitions must be answered in sufficient time to allow the purchaser reasonable time to consider the answer before completion: Tang Wing Lam David v Chung Chi Keung Frederick[1999] 3 HKC 553, 562.

30.The plaintiff referred to More Alliance Ltd v Shing Samuel(HCMP 1980/2012, 29 April 2013) at §§17 – 20. The case involved requisitions for (inter alia) documentary evidence to prove that a section 24 order had been discharged or released by the BA.  The vendors failed to provide any documentary proof of discharge or release, but eventually insisted that their answers were adequate and that they had been willing to bear the cost of the remedial works all along.  The Court found that the vendors had not answered the requisitions satisfactorily, because they provided no evidence to demonstrate that the BA would refrain from enforcing the order; nor any evidence as to the amount of costs of compliance with the order.

31.Admittedly, there are some differences between More Allianceand the present case.  For example, the order in that case was made against the sale property itself, not the common parts; less time had elapsed between the issuance of the order and the sale; and the order had been registered before the vendors bought the property so they should have known about it.  However, I do not consider these distinctions detract significantly from the overall similarity of the vendors’ actions in both cases. The defendant provided no information as to what the Section 24 Order or Fire Safety Directions entailed and what works were involved; no evidence that the relevant authorities would refrain from enforcement; and no evidence as to costs of such works.  Thus, following the reasoning of More Alliance, the defendant failed to answer the requisitions in question satisfactorily.

32.The defendant placed some weight on the fact that they had no knowledge of the Section 24 Order or Fire Safety Directions before entering into the PSPA, and that because they did not occupy or reside at the Property, they would not receive such notices.  The defendant may not have knowledge of the Order or Directions before entering into the sale, since they were not registered against the Property.  But even if the defendant had no actual knowledge, the evidence shows that the BD issued the Section 24 Order and Fire Safety Directions to the co-owners of the Building and/or the owner of the Property. As the legal and registered owner of the Property, the defendant should have been aware of the Order and Directions and it should have been incumbent upon the defendant to find out about them.  The mere fact that the defendant did not occupy or reside at the Property cannot be an adequate excuse.

33.Further, as a matter of law, I do not regard the defendant’s lack of actual knowledge as tending to show that he answered the requisitions satisfactorily.  For example, in All Ports, which involved a requisition as to a section 26 order issued against the IO, the vendor claimed that it did not know such order had been issued.  The Court accepted the purchaser’s submission that the vendor’s lack of knowledge was no answer to the requisition: §§20, 24.  Moreover, as explained by Anderson Chow J in Join Union Investment Ltd v China Tree Investment Ltd[2016] 2 HKLRD 901 at §60:

“ In the context of a simple contract for the sale and purchase of land in Hong Kong, the vendor’s duty, in general, is to prove and give a good title. It is not a defence for the vendor to say that he did not have knowledge of any defects in title at the time of the making of the contract.”

G.   OFFER OF PAYMENT

34.As stated above, on 28 February 2017, the defendant offered topay HK$6,000 upon completion in full and final settlement of its obligations in relation to the Order and Directions. I also do not consider this to be a satisfactory answer to the requisitions, because the sum of HK$6,000 is wholly arbitrary and not clearly adequate.

35.The general position is that there is no obligation in law on the purchaser to accept an offer of post-completion payment from the vendor to cover the costs of curing the title defect: Re Heaysman’s and Tweedy’s Contract(1893) 69 LT 89; Chan Fung Lan v Lai Wai Chuen[1997] 1 HKC 1, 10 – 11. This is because the duty is on the vendor to show good title beyond reasonable doubt.

36.I agree with the plaintiff that the decisions of Tsang Kwok Hung Frederickand To Yung Sing Hermanare relevant here.  In Tsang Kwok Hung Frederick, the Court rejected the sufficiency of the vendor’s offer to deduct HK$20,000 from the purchase price and to stakehold HK$50,000 in answer to requisitions about unauthorised works.  The vendor there already went further than the defendant in the present case, in that she obtained quotations for the repairs to demonstrate the adequacy of the deduction and stakeholding offer.  Nevertheless, because the vendor did not supply such quotations to the purchaser until after the completion date, the Court held that there was no satisfactory or conclusive evidence prior to completion as to the cost of the remedial works, so the requisitions were not satisfactorily answered: §26.  A fortiori, the same conclusion should be reached in the present case.  Admittedly, the works in Tsang Kwok Hung Frederick were to be done in the property itself (whereas here the Section 24 Order concerns common parts), but I am of the view that the distinction is immaterial.

37.In To Yung Sing Herman, the vendor had offered to pay an agreed sum or bear all obligations and expenses arising from undischargedmandatory inspection notices: §76.  Yet the Court held that a mere offer topay fell short of what was required to answer the requisitions satisfactorily,because the purchaser was entitled to be assured of adequate provision by the vendors for the costs of the prescribed inspections and repair works.  As at the completion dates, the inspections were yet to be carried out, and without those, it was not known whether any, and if so what, repair works would be required to satisfy the notices: §§108 – 109.

38.Similarly, in the present case, the mere offer to pay HK$6,000 was not sufficient to answer the requisitions.  There was no basis for calculating this amount.  Since the defendant declined to produce copies of the Section 24 Order and Fire Safety Directions, it is not known whether any, and if so what, repair works would be required to satisfy the Order and Directions, let alone the likely costs of those repair works.  In these circumstances, the plaintiff cannot be assured of adequate provision for those costs by the mere offer to pay HK$6,000.

39.There are a number of other cases where the vendor’s offer topay the costs of compliance with outstanding repair orders or other notices was accepted by the Court as being a sufficient answer to the relevant requisitions.  However, I do not consider that they assist the defendant, because in those cases the vendor undertook to pay the apportioned costs of the remedial work, and did not just offer to pay an arbitrary sum the basis for calculation of which was unclear.

40.For example, in Lam Mee Hing v Chiang Shu Yin[1995] 3 HKC 247, which concerned a repair order against slopes, the court held that it was sufficient for the vendor to undertake to be responsible for the apportioned costs of the remedial works, with HK$100,000 to be retained by vendor’s solicitors as stakeholders to fortify the said undertaking.  Unlike the present case, tenders for the remedial works had already been obtainedand it was known that the apportioned costs could not exceed HK$100,000.

41.Another example is Hu Mei Yu Anastasia v King Best Enterprise Ltd(HCA 9317/1998, 10 July 2000) where a building order hadbeen made requiring investigation of the adjoining slopes and the co-ownershad resolved to conduct the necessary repair works.  The vendor undertook to pay for her share of contribution to the costs for complying with the Building Order and a proportion of the costs involved in carrying out the necessary remedial works to the slope.  Adopting the robust attitude from Mexon Holdings, the Court found that such undertaking was sufficient, even if no sum had been set aside on account.  Again unlike the present case, the cost of the renovation work was already known to be approximately HK$14 million.

42.In Luk Ho Chang v Fook Man Finance Co Ltd[2006] 2 HKLRD 489, the IO had resolved to replace the lifts and carry out major repairs to the building.  Although this was an encumbrance on title, the Court (again applying Mexon Holdings) held that a reasonable way to complete title would be deduction from the purchase price and stakeholding of the estimated cost of repairs by the vendor’s solicitors, coupled with an undertaking to return the sum once works were completed.  Again unlike the present case, the estimated cost of repairs was known to be HK$80,000.

43.In E-Global Ltd(discussed above), the vendor offered HK$50,000 to be stakeheld as costs for compliance with the fire safety directions, which the Court found to be sufficient.  The Court acknowledged that the method by which the HK$50,000 figure was calculated was “somewhat random”, because it was based on the works costing HK$10 million which was “entirely speculative”. However— and this is the crucial distinction from the present case—the vendor alsooffered an unconditional undertaking to pay the excess if HK$50,000 turned out to be inadequate: §§30 – 32.  The Court found that the stakeholding offer was sufficient.

44.None of the four cases above involved an offer to pay a relatively low and arbitrary sum, without any information as to the estimatedcost of remedial works and therefore without any indication of whether theamount would be sufficient.  Further, in those cases the vendor undertook to pay the full extent or close to the full extent of the apportioned costs.  Therefore, I consider the present case to be readily distinguishable from all four cases above.

45.The defendant referred to Kok Chong Ho v Double Value Developments Ltd(HCMP 2857/1990, 19 December 1990) and Jumbo Gold Investment Ltd v Yuen Cheong Leung [2000] 1 HKLRD 763, to argue that there was no real risk of enforcement in relation to the Section 24 Order.  I consider that this conflates the duties to give and show title, because even if the former is satisfied (ie there was in fact no real risk of enforcement), the latter may not be satisfied.  In any event, I consider the two cases to be of no assistance to the defendant.

46.Kok Chong Hoinvolved a requisition in respect of discrepanciesbetween the OP and approved building plans, one of which was that the OP only allowed four flats on 2/F,[3]whereas the plan showed six flats.  The vendors all along insisted that the additional flats were authorised.  The paragraph cited by defendant—§18—states in full:

“ But is there a real risk in the present case? It is perfectly plain on the evidence that these flats have existed for 30 years. The Building Ordinance Office has been apprised (if not before,by the letter of 29th August 1990 from the vendor’s solicitors) of the position and seems quite uninterested in taking any stepsabout it. I have come to the conclusion that there is theoretically the possibility of proceedings for enforcement here, but that the possibility is so remote and so unlikely to eventuate that the vendor is entitled to ask the Court to say that it should be ignored.”

47.The defendant’s submissions only focus on the last sentence (“… there is theoretically the possibility of proceedings…”).  But read in context, it is clear that Kok Chong Hois readily distinguishable from the present case. The unauthorised flats had existed for 30 years in that case, whereas here the Section 24 Order was made in 2011, less than 10 years ago.  I do not see how it can be said in the present case that there is no real risk of enforcement.

48.In any case, although not mentioned in the defendant’s submissions, on appeal the trial judge’s finding that the requisitions had been satisfactorily answered was overturned: [1993] 2 HKLR 423, 431.[4]The vendors had all along asserted that the additional flats were authorised. They wrote to the BA to seek information as to whether any approval had ever been given to alterations or additions after the issuance of the OP.  The BA replied that no such approval had been given, which made clear that there had been no basis for the assertion that the additional flats were authorised: 433 – 434.

49.In the present case, the defendant had not even written to the BA to seek information about the Section 24 Order (or, to the extent relevant, to the FSD regarding the Fire Safety Directions).  Even if the defendant had written to the BA, the BA’s reply would not have given any support to the defendant’s initial contention (on 15 February 2017) that the plaintiff should be responsible for the costs of compliance.  A fortiori from the appellate decision in Kok Chong Ho, it was clear that the defendant did not answer the requisitions satisfactorily.

50.As for Jumbo Gold, that case concerns a wholly different factual scenario, namely a height restriction in the Government Lease.  Further, the Government had taken no enforcement action for 40 years.  I do not see how Jumbo Goldhas any bearing on the present case.

H.   WHETHER THE DEFENDANT WAS ENTITLED TO ANNUL THE SALE AND PURCHASE OF THE PROPERTY UNDER CLAUSE 12 OF THE AGREEMENT

51.Clause 12 of the Agreement states:

“ … If the Purchaser shall make and insist on any objection or requisition either as to title or any matter appearing on the title deeds or otherwise which the Vendor shall be unable or (on theground of difficulty delay or expense or on any other reasonable ground) unwilling to remove or comply with, or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or the Purchaser’s solicitors not less than 5 working days’ notice in writing to annul the sale, in which case unless the objection or requisition in question shall have been in the meantime withdrawn the sale shall at the expiration of the notice be annulled …”

52.Such rescission clauses are generally construed contra proferentem, against the vendor: Morley v Cook(1842) 2 Hare 106, 115.

53.I agree with the defendant that properly construed, clause 12 has two limbs: (i) if the Purchaser shall make and insist on any objection or requisition; or (ii) if the title of the Vendor shall be defective.

54.However, the authorities specifically on the second limb are scant.  Even where the vendor’s rescission clause contains both limbs, the courts generally focus only on the first limb: see for example Sun Wealthy Ltd v Galant Motors Ltd[2006] 2 HKC 239; Mark Alexander Turner v Hung Hok Man(HCA 2387/2004, 13 March 2007); Lee Siu Wai Florence v Priway Investments Ltd[1998] 1 HKC 228.

H1.   First limb

55.Under the first limb, the defendant can only invoke clause 12 if the following four criteria are fulfilled (Duddell v Simpson (1866–67) LR 2 Ch App 102, 109, applied in Queen’s Electronic Manufacturing Co Ltd v Dr Ma Chung Ho Kei [1991] 2 HKC 218, 228):

(1)  the plaintiff raised an objection or requisition;

(2)  the defendant was unable or unwilling on a reasonable ground to remove the objection;

(3)  the defendant communicated the existence of this unwillingness or inability to the plaintiff; and

(4)  the plaintiff insisted upon his objection or requisition notwithstanding the communication.

56.In this case, I agree with the plaintiff that the defendant had not communicated its unwillingness or inability to the plaintiff before it purported to issue the notice under clause 12.

57.In Sun Wealthy Ltd v Galant Motors Ltd[2006] 2 HKC 239, the vendor stated, in reply to a requisition about the architect’s certificate, that they were waiting for a reply from the architects.  A few hours later on the same day, the vendor issued a second letter giving notice to annul under the vendor’s rescission clause.  The Court held that the notice was premature and invalid, on the basis that the vendor’s prior reply that they were waiting for the architects’ reply was not a communication of inability or unwillingness to the purchaser.

58.Similarly in Eternal Crown Development Ltd v Great Wide Investment Ltd[2009] 1 HKLRD 492, the purchaser raised a requisition requesting a statutory declaration by three former co-owners of the property,pursuant to section 5(4) of the Powers of Attorney Ordinance (Cap 31).  Prior to giving notice to annul, the vendor informed the purchaser that one of the three co-owners could not be located, but the Court regarded that in itself as not being an intimation of inability or unwillingness to remove or comply with the purchaser’s requisitions.  In any case, the purchaser had indicated its willingness to accept a statutory declaration from only two of the co-owners.  Thus, the vendor could not annul the sale.

59.I consider the present case to be analogous to the above cases,in that the notice to annul was premature:

(1)  Contrary to the defendant’s submissions, the reply on 15 February 2017, indicating that the plaintiff should be responsible for the costs of compliance, was not an intimation or communication of inability or unwillingness to comply with the requisitions.  There was no explicit statement that the defendant was unable to produce copies of the Order and Directions, nor any indication that they had tried and failed to locate those copies.  Further, the defendant did not state that they were unwilling to do so. The requisitions merely required the defendant to produce copies of the Orders and Directions, and did not say anything about requiring the defendant to bear the costs of compliance with those Orders and Directions, so the defendant’s reply that the plaintiff should be responsible for the cost did not necessarily imply that the defendant was unwilling to produce copies of the Orders and Directions.

(2) In the defendant’s next reply on 21 February 2017, they already purported to annul the sale under clause 12.  In the same letter, the defendant stated their unwillingness to comply with the requisitions.  But this communication was too late because it was simultaneous with and not prior to the giving of notice to annul.  There had been no insistence by the plaintiff on the requisitions before the notice to annul.

(3)  The defendant subsequently repeated the contents of the 21 February 2017 letter on 22, 25 and 28 February 2017.  It might be argued that the defendant communicated their unwillingness on 21 February 2017, the plaintiff insisted on the requisitions on the same date, and the defendant gave the notice to annul on 22 February 2017.  However, this argument cannot succeed.  It was the defendant’s case throughout that they gave notice to annul on 21 February 2017, not thereafter.[5]  If that is so, then there was no communication of unwillingnessprior to the giving of notice, and no insistence by the plaintiff.  The notice was premature.

60.The defendant attempts to distinguish Sun Wealthyand EternalCrownfrom the present case on the basis that the annulment notice in those cases “came all of a sudden, as if the vendor was finding whatever excuse available to get away from the sale”.  I do not see how such a distinction can be drawn.  It could equally be said of the present case that the notice of annulment on 21 February 2017 came all of a sudden; certainly the plaintiff did not appear to have any prior expectation of it.

61.In any case, the defendant’s exercise of the rescission clause would be invalid if:

(1)  He was reckless at the date when he entered into the contract (Selkirk v Romar Investments Ltd[1963] 1 WLR 1415, 1423 – 1424);

(2)  At the time when he failed to comply with the purchaser’s requisition or objection, he did not have reasonable grounds for so doing (as stated in the wording of clause 12 itself); or

(3)  He rescinded the contract on grounds which, judged at the time of rescission, were arbitrary or capricious (Selkirk at 1424).

62.I consider that the defendant had no reasonable grounds for failing to comply with the requisitions, and that the rescission was arbitrary or capricious.  The defendant made no effort to produce copies of the Section 24 Order (and Fire Safety Directions if applicable).  They failed to make enquiries with the BA until very late in the day, and then only limited enquiries regarding the subject matter of the Section 24 Order.[6]  Further, the defendant did not offer an undertaking or a reasonable sum to be stakeheld—as opposed to an arbitrary amount of HK$6,000—to settle any costs of remedial works.  In other words, the defendant made no serious attempt to answer the requisitions and the rescission was arbitrary: Selkirk, 1424.

63.I also reject the defendant’s counterarguments on this point.  In my view, it was not enough for the defendant to simply sit on their hands and deny prior knowledge of the Order and Directions.  The burden lay on the defendant as vendors to find out the information necessary to answer the requisitions, for example by making enquiries with the BA in good time.  Moreover, even if it was impossible to conduct all the remedial works in compliance with the Order and Directions before completion, the defendant could still produce copies of the Order and Directions to the plaintiff as requested, and offer an undertaking or reasonable sum to cover the costs of compliance.

H2.   Second limb

64.In my view, the defendant cannot rely on the second limb of clause 12 either.  Although the requirements of Duddell v Simpsondo not apply to the second limb, my view is that the vendor still cannot rely on the second limb if he was reckless at the date of contract, or the exercise of the contractual power of rescission was arbitrary or unreasonable.  While there is no direct authority on the second limb, such restrictions as laid down in Selkirk (1424) need not logically be limited to the first limb but apply with equal force to the second limb.  Further, cases show that such restrictions are to be implied into vendor’s rescission clauses regardless of the precise wording of the clause: Greaves v Wilson (1858) 25 Beav 290.[7]

65.I do not consider this to be reading extraneous restrictions into the second limb or varying the terms of the agreement, as the defendant suggests; but instead interpreting the second limb consistently with the first limb so that clause 12 is coherent as a whole.

66.On the one hand, I agree with the defendant’s submissions that the defendant was not reckless. Mere failure to disclose a defect of title does not suffice to establish recklessness.  There must be an unacceptable indifference to the situation of a purchaser who is allowed to enter into a contract with the expectation of obtaining a title which the vendor has no reasonable anticipation of being able to deliver.  In other words, a vendor who had knowledge of any outstanding title or claim to title, or had reasonto expect that one would appear, would be reckless.  This is to be assessed at the time of contracting: Selkirk, 1422 – 1424.

67.In the present case, the defendant had no knowledge of the Section 24 Order and Fire Safety Directions at the time of contracting, andthey were not registered against the Property.  The defendant had no reason to expect these Orders or Directions to arise, otherwise they would likely have dealt with them expressly in the Agreement, like the two Mandatory Inspection Notices (see clause 34(a) of the Agreement and the Annexure to the PSPA).  I do not consider that the defendant’s actions (or rather inaction) reach the level of recklessness.

68.Nevertheless, I do consider that the defendant exercised its right of rescission arbitrarily, for similar reasons set out above.  Thus, the second limb is unlikely to assist the defendant.

69.In any case, in its letters to the plaintiff dated 21, 22, 25 and 28 February 2017, the defendant all along purported to annul the sale on the ground of unwillingness to comply with the requisitions (ie the first limb). It is doubtful that the defendant can now rely on the second limb just to circumvent their failure to meet the communication requirement in the first limb.

I.   REPUDIATION AND LOSS AND DAMAGE

70.It follows from the above that the defendant failed to show good title to the Property and served notice to annul prematurely, in repudiation of the Agreement.  The plaintiff accepted such repudiation by letter on 28 February 2017.

71.The plaintiff is entitled to the return of deposits in the sum of HK$375,000.

I1.   Loss of rental income

72.I consider this head of damage to be recoverable in principle,but not for the full amount of HK$386,387 claimed by the plaintiff.

73.The defendant objects that the claim for loss of rental income for the full unexpired portion of the tenancies is “simply not recognised”, because it is akin to a claim for damages in lieu of specific performance.  That objection is difficult to understand. Upon acceptance of the defendant’s repudiatory breach, the plaintiff may claim damages for loss of bargain, and because the sale was subject to existing tenancies, the loss of bargain includes loss of rental income which the plaintiff would have earnedfrom the Property if the sale had gone through.  Such loss arose naturally from the repudiatory breach or was within the reasonable contemplation of the parties at the time of contracting, so it was not too remote: see also Foremax Development Ltd v To Ngai Earthware Co Ltd(HCA 1568 and 1569/2015, 24 July 2017), §18.

74.Nevertheless, that claim is subject to mitigation.  All four of the existing tenancies had 1 ½ to 2 years to run from the completion date.  If the plaintiff took reasonable steps to mitigate, he could have purchased an alternative property for investment purposes before the full unexpired portion of the tenancies elapsed.  Thus, the defendant should not be liable for the full amount of rent.  Similarly, in So Siu Yung v Chan Tsan Tak (HCMP 1516/2011, 13 February 2012), the Court only awarded 4 months’ loss of rental income, on the basis that it would have taken 4 months for P to buy an alternative property.  Although there was no specific argument on mitigation by the defendant, it was pointed out in Mr Cheung’s Skeletonthat there was “no evidence on any attempt at the purchase of an alternativeproperty” which is presumably a reference to the plaintiff’s failure to mitigate. 

75.Alternatively, the defendant might have argued that they did not assume responsibility for the loss of rental income for the full unexpired portion of the tenancies, but only part of it, in a similar vein to the reasoningin The Achilleas[2008] UKHL 48, §§21, 32.  However, the defendant did not raise any such argument, and I do not think it would be appropriate to decide on this basis.

76.In the circumstances, I hold that the loss of rental income should be restricted to 4 months under the four tenancy agreements.

I2.   Stamp duty

77.The plaintiff is entitled to the costs of stamp duty in the sum of HK$84,375, pursuant to clause 30 of the Agreement.

78.The defendant argues that the plaintiff can apply for a refund of stamp duty under section 29C(5B)(a) of the Stamp Duty Ordinance (Cap 117) (“SDO”), so the plaintiff cannot claim the costs of stamp duty from the defendant.  This argument is misconceived.  Clause 30 expressly provides that the defaulting party shall bear and pay all ad valorem stamp duty payable under the SDO.  The mere fact that the plaintiff has a statutory right to apply for refund of stamp duty cannot detract from the express terms of the agreement between the parties.

79.In Kwok Chung Hon v Lo On Wa[1996] 4 HKC 191, the Court held that stamp duty was not recoverable against the defaulting vendors, on the basis that the stamp duty would have been incurred by the purchaser even if the purchase had proceeded.  However, that case is distinguishable on the basis that there was no express contractual term requiring the defaulting party to pay the stamp duty.

I3.   Other heads of loss

80.There is no dispute that if the plaintiff succeeds, the defendant should indemnify the plaintiff for the estate agent’s commission under clause 30.

81.As for the costs of investigating the title, I do not consider this to be recoverable alongside loss of bargain damages (eg the loss of rental income), in the absence of an express term in the Agreement allowing for such recovery.  This is because such costs would have been incurred by P in any event, even if the purchase had proceeded: see eg Kwok Wai Kong v Luk Ping Hung(HCA 4447/1998, 4 November 1999).

I4.   The plaintiff was not ready, willing and able to complete

82.The defendant also argued that the plaintiff suffered no loss and damage, on the grounds that they were not ready, willing and able to complete the purchase.  The defendant relies on information from the estate agent that the plaintiff’s mortgage might not have been ready at the completion date.  I do not consider there is any substance in this argument,for the reasons given at §45 of the plaintiff’s skeleton argument, ie the evidence before the court plainly suggested otherwise.

J.   CONCLUSION

83.In conclusion, I consider that the plaintiff should succeed in this action.  I declare that:

(1)  The requisitions in the letter from the plaintiff’s solicitors dated 3 February 2017 have not been satisfactorily answered by the defendant.

(2)  The defendant had failed to show or give good title to the Property.

(3)  The Agreement was repudiated by the defendant on 28 February 2017 and was accepted by the plaintiff on the same date.

(4)  The plaintiff is entitled to a lien on the property for the deposits paid.

84.Further, the plaintiff is also entitled to the return of the deposits in the sum of HK$375,000, the stamp duty paid and part of the rental income as discussed above.  The plaintiff is also entitled to a declaration that the defendant indemnify the plaintiff for any claims for commission by the estate agent.

85.I also make an order nisi that the defendant shall pay the plaintiff costs of these proceedings, to be taxed if not agreed on a party and party basis.

Ms Debora Poon, instructed by N K Tsang & Co, for the plaintiff

Mr Anthony P W Cheung, instructed by Au Yeung Lo & Chung, for the defendant