Ng King Wai Terence and Another v. Qing Yuan Enterprises Ltd.

HCMP000748/1998

High Court Miscellaneous Proceedings No. 748 of 1998

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HEADNOTE

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Property law - Contract - Conveyancing - Good Title - Incumbrances - Requisitions and Objections to Title - Illegal Structures

The Defendant and the Plaintiffs signed a provisional agreement for the sale and purchase of a flat unit in a multi-storey building. Deeds and documents comprising title were delivered one week later. On 12th December 1997, estate agent informed the purchasers that the property had illegal structure. On 16th December 1997, the day for exchange of contract, solicitors for the vendor wrote to solicitors for the purchasers that the property had illegal work carried out without consent or approval of the Building Authority and requested the purchasers to sign a declaration relieving the vendor from responsibilities for illegal structures. The purchasers demanded exchange of contracts but refused to sign the declaration. Solicitors for the vendor duly effected exchange of contracts by return. The contract provided for conveyance free from mortgages, charges and incumbrances. The contract stipulated that requisitions and objections to title must be raised within 7 days after delivery of title deeds. The purchasers remained silent until early January 1998 to request survey by their nominated architect. The vendor contended that the purchasers were time-barred from challenging title. Architect confirmed that the kitchen in the property was an illegal extension affecting the structure of the building and that the Building Authority may take enforcement action requiring restoration to original state. On 16th February 1998, the contractual completion date, the purchasers refused to complete on the ground that the vendor's title was bad because the government may re-enter for breach of the government lease, that there had been no full and frank disclosure of the illegal structure which went to the root of title and that the vendor had failed to answer requisitions and objections to title satisfactorily and sufficiently.

Held: (1) The vendor under the contract has two distinct duties, one to deliver goods title, the other to convey property free from incumbrances. (2) There is likewise the two distinct duties under common law. (3) Since the purchasers have not produced the Conditions of Re-grant by the government, no inference should be drawn that the illegal extension would entitle the government to re-enter. (4) Distinction should be drawn between matters that render title doubtful and those that constitute incumbrance on property. (5) A vendor who contracts to convey free from incumbrances is bound to clear all incumbrances without necessity for the purchaser to raise requisitions or objections. (6) The contractual time bar for raising requisitions or objections to title does not apply to questioned incumbrances. (7) The risk of enforcement action by the Building Authority for illegal structures does not affect the vendor's title but constitutes an incumbrance. Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297, Kok Chong Ho v. Double Value Developments Ltd., CA 90/91, unreported and Active Keen Industries Ltd. v. Fok Chi Keong [1994] 2 HKC 67 distinguished. (8) In the circumstances, the purchasers were not entitled to a declaration that the vendor had not answered requisitions or objections adequately or that the vendor failed to make good title. (9) In the circumstances, the vendor failed on its counterclaim against the purchasers for failure to complete because the vendor was in breach of its duty to convey free from incumbrances.

HCMP 748 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

HCMP NO. 748 OF 1998

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Coram: Deputy Judge Li in Court

Date of Hearing: 30 September 1998.

Date of Handing down Judgment: 22 October 1998.

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J U D G M E N T

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1. This case is more intriguing than it first appeared to me. The authorities cited by counsel barely scratched the surface of the issues. In fact, this case does not fall squarely within any of the leading cases. Worse still, the provisions in the contract between the parties relied upon by counsel hardly covers their respective case. Be that as it may, I would never reach any conclusion if I do not start tackling the matter.

2. By an originating summons under section 12 of the Conveyancing and Property Ordinance, Cap.219 ("the Ordinance") the Plaintiffs apply for, inter alia, a declaration that the Defendant, as the vendor of the premises situate and known as Flat B2, 5th Floor and Portion No. 236 of the Main Roof, Hankow Centre at 47 Peking Road, 4A Ashley Road and 1C Middle Road, Kowloon, Hong Kong ("the Property") under an Agreement for Sale and Purchase dated 16th December, 1997 ("the Agreement"), has not answered satisfactorily and sufficiently the requisitions or objections raised by the Plaintiffs' solicitors and that the Defendant has not shown a good title to the Property pursuant to the Agreement and an order for refund of $530,000 to the Plaintiffs. The dispute concerned illegal alterations to the Property - demolition of the original kitchen walls and the building of a new kitchen over the flat roof at the light well adjoining the Property.

3. The Defendant, on the other hand, relies on three lines of defences, viz. (1) the requisitions or objections on title were contractually time-barred; (2) the requisitions or objections on title were not properly raised; (3) the Plaintiffs had contracted to accept the Defendant's title; and (4) the Defendant's title was good. And the Defendant counterclaims against the Plaintiffs the difference between the purchase price the Plaintiffs agreed to pay and the actual value of the property at the date of completion for their breach of the Agreement in not completing the sale and purchase.

4. The parties having agreed that the court should determine liability on the basis of affidavit evidence, it is necessary to extract the facts and crucial parts of the correspondence between the parties from the trial bundle:-

1997

12th November
The Defendant purchased the Property

20th November
The Plaintiffs inspected the Property.

27th November
The Plaintiffs and the Defendant signed provisional sale and purchase agreement. The sale price stipulated as $4,580,000.

3rd December
Title deeds and documents in respect of the Property, including certified copy Conditions of Re-grant from the government and certified copy Occupation Permit received by Plaintiffs' solicitors.

8th December
Solicitors for the Plaintiffs raised requisitions on certain deeds and documents in the chain of title.

11th December
The Agreement executed by the Plaintiffs delivered to the solicitors for the Defendant for execution by the Defendant.

12th December
The Plaintiffs were informed by estate agent that the kitchen in the Property was an illegal structure. Para. 5, Affirmation of Ng King Wai Terence affirmed 17th April 1998 reads:-

"On or about 12th December 1997, Mr. Choi talked to me over the telephone. Then I was given to know that the kitchen in the Property was an illegal structure. Mr. Choi told me that the vendor had agreed to pay me HK$50,000.00 as costs for me to rectify the kitchen at a later date. I said that I have no idea about the illegal structure and insisted that it was the duty of the vendor to make the necessary rectification if required. I also told Mr. Choi, as a property agent for reward, to make necessary arrangement with the vendor to rectify it if required. In fact, I did not have any or any actual knowledge as to the nature of the illegal structure. As a result, I have not made any agreement with Mr. Choi as alleged or at all. Further I had never authorised Mr. Choi to say anything to the vendor on my behalf."

15th December
Solicitors for the Defendant wrote to solicitors for the Plaintiffs requesting signature and return of a document in Chinese [from the estate agent] declaring that the Defendant would not be held liable for illegal structures in the Property. The requisitions on chain of title dealt with satisfactorily.

Solicitors for the Plaintiffs replied :-

".. that our client has no objection to your request for 5 days to return the Agreement for Sale and Purchase to us. However, we are instructed to reply you that your request for a Chinese Declaration to be signed by our client will not be entertained. In the circumstances, kindly send the Agreement for Sale and Purchase on the 16th December 1997."

16th December
Solicitors for the Defendant wrote to solicitors for the Plaintiffs:-

"We understand that your client is fully aware of the fact that certain building works have been carried out in the Flat Roof of the Property without the prior consent of the Building Authority and yet your client decided to enter into the formal Agreement for Sale and Purchase in respect of the Property with out client. In the circumstances, we are instructed to enclose the Declaration (in Chinese and in duplicate) for your client's signature and return. We shall be grateful if you will arrange your client to sign and return one of the enclosed Declarations to us within the next 2 days."

Solicitors for the Plaintiffs replied that:-

"We are instructed to request you to furnish us with the legal rationale and authority to support your client's assertion that our client is bound to sign the declaration. We are instructed to maintain our stance as set out in our letter to you dated 15th December, 1997. Our client will not sign the Chinese Declaration as it is your client's common law obligation to prove that there are not illegal structures in the captioned premises."

The Defendant effected exchange of contracts and credited the Plaintiffs for payment of deposit.

1998

2nd January

Solicitors for the Defendant wrote to solicitors for the Plaintiffs that the Plaintiffs were deemed to have waived their rights to raise any requisitions on the illegal structures and accepted title.

12th January
Solicitors for the Plaintiffs wrote to solicitors for the Defendant:-

"As admitted by the contents of your letter dated 2nd January 1998 which we have taken instructions that there are in existence illegal structures in the captioned premises, we are instructed that our client shall seek professional advice in respect thereof.

"We have already made arrangement with Mr. Dickie Lau Kam Sing, Authorised person and Registered Architect to conduct a field survey of the captioned premises to see whether there is in existence or any illegal structures in the captioned premises at 12.00 noon the coming Wednesday 14th January 1998.

"We shall appreciate if your client will send in his representative to attend at the relevant time. If it is established there are illegal structures, the title being defective our client shall seek the return of deposit."

14th January
Solicitors for the Plaintiffs wrote to solicitors for the Defendant:-

"We are instructed that out client as a lay man is never able to ascertain whether there is any illegal structure in the captioned matter. Upon receipt of your letter dated 2nd January 1998, our client has arranged a field survey to ascertain the fact disclosed by you. The said field survey did not take place due to your client's refusal for inspection. Basing on the well founded principle in the Giant River Limited v. Asia Marketing Limited (1990) we maintain that if there is illegal structure it goes to the root of title and our present requisition as based on fact disclosed by you should not time-barred. Our client maintains his rights in all respects."

3rd February
Solicitors for the Plaintiffs wrote to solicitors for the Defendant:-

"It is obvious that upon the title deeds available to us, we were unable to discover or identify whether there were any illegal building works/structures which could affect your client's title to the subject premises We were instructed that your client had never informed or identified to our client any illegal building works/structures in the subject premises. As a layman, our client was unable to tell or identify precisely any illegal building works/structures. We hold that, under common law, it is the duty of your client, as the vendor, to fully disclose all information and matters which could or could likely affect your client's title to the subject premises. Upon the exchange of correspondence, it seems plain that the existence of the illegal building works/structures was deliberately concealed until the formal agreement was made and the further deposit was received by your client. Further, your client's unreasonable and unjustifiable refusal of our proposal that a field survey be conducted amounts to a clear breach of your client's duty. .... we still do not have any knowledge and information of the illegal building works/structures and whether such illegal building works/structures would affect your client's title to the subject premises.

"We ..... maintain that our client is entitled to frank and full disclosure of the illegal building works/structures and to raise requisitions relating thereto.

"Should your client fail or refuse to answer to our satisfaction within a reasonable time before completion, we hold that our requisitions have not or have not sufficiently been answered and/or good title to the subject premises has not been shown."

4th February
Field survey conducted by architect appointed by the Plaintiffs.

6th February
Architect reported that:-

"I have inspected the captioned flat on February 4, 1998 and have studied the following documents:

Documents

Assignment Plan registered in the Land Registry by Memorial No. 747397 dated July 10, 1970

It was found on site that the walls of the original kitchen had been demolished and a new kitchen was built over the flat roof at the light well.

That alternation work led to an increase in gross floor area ant was contravening Regulation 21 of Building (Planning) Regulations made under Buildings Ordinance.

The carrying out of that alteration work without getting prior approval and consent from the Building Authority was illegal and should have committed an offense.

Furthermore, that alternation work impose additional loading on the existing building and might impede its structural stability."

11th February
Solicitors for the Plaintiffs wrote to solicitors for the Defendant:-

"Firstly, we put on record that subsequent to our letter dated 3rd February 1998, your client agreed to allow the Registered Architect appointed by us to inspect the subject premises.

The Registered Architect inspected the subject premises on 4th February 1998. The Registered Architect' s letter dated 6th February 198 is attached herewith. We trust that the contents of the said letter are self-explanatory.

Upon the said letter, we are aware of existence of substantial illegal building works/structures at the subject premises. Apart from the comment on the illegal building works/structures mentioned in the said letter, it appears obvious that such illegal building works/structures are in breach of relevant clauses of the Deed of Mutual Covenant Memorial No.624356, in particular clauses 3(a) & 10(a) thereof. We therefore, hold that good title to the subject premises has not been shown.

Unless the defect aforesaid can be satisfactorily answered at a reasonable time before the contractual completion date, our client is entitled to rescind the agreement for sale and purchase and recover all deposits/part payments paid."

13th February
Solicitors for the Defendant wrote to solicitors for the Plaintiffs:-

"We refer to your letter of 11th February 1998 and write to clarify the following:-

"a. Our client has disclosed to your client of the existence of those structure in the Property together with the fact that no approval or consent had been obtained from the Building Authority and/or other competent government authority before the signing of the Provisional Agreement for Sale and Purchase.

"Although this fact was not reviewed in the Provisional Agreement for Sale and Purchase entered into by our respective clients and dated 27 November 1997 the same was reflected in a separate Chinese Declaration (the "Chinese Declaration") which was to be signed by your client acknowledging and agreeing to complete the purchase of the Property notwithstanding the existence of those structures.

"b. In our letter dated 15 December 1997 we were not saying that we were in the course of preparing a Chinese declaration relating to those structure but instead we were pending the return of the Chinese Declaration duly signed by your client from the Estate Agent.

"c. Regarding your letter dated 12 January 1998 requesting for a field survey of the Property, since we only received your fax letter after office hour, we have tried but we were unable to contact our client to take instructions.

"When we could reached our client on 13 January 1998 it turned out that your suggested time of appointment was not convenient to our client and hence our client was not unreasonable as alleged by you in refusing your client's request.....

"e. We have not heard of any title requisitions relating to those structure in the Property during the previous month but only received your first letter of requisition relating to those structure on 3 February 1998.

"........ we would like to reiterate that your clients are well aware of the existence of those structure and the belated legal implication before the contract of the sale and purchase of the Property.

"We would also like to point out that since we have not received any requisitions relating to the structure within the prescribe time limit, your clients are deemed to have accepted the title to the Property and hence we do not agreed that your client is entitled to rescind the agreement for sale and purchase and have a refund of the deposit paid

"Should your client fail to complete the purchase of the Property as scheduled, we shall have no hesitation to advise our client on his right under the Agreement for Sale end Purchase entered into by our respective clients on 16 December 1997 (the "Agreement")."

14th February
Solicitors for the Plaintiffs wrote to solicitors for the Defendant:-

"We are totally surprised by your letter dated 13th February 1998 as under Clause 25 of the formal Sale and Purchase it was expressly provided that this Agreement sets out the full agreement between the parties hereto and supersedes any other commitments, agreements, warranties or understandings, written or verbal, that the parties hereto may have had with respect to the subject matter of this Agreement. Without prejudice to the generality of the foregoing and the warranties made or given in this Agreement, no warranties or representations express or implied or any kind other than those set out above (if any) are or have been made or given by the Vendor or by anybody on his behalf and if any such warranties or representations express or implied has been made, the same is withdrawn or deemed to have been withdrawn immediately before the execution of this Agreement.

"Your client had unreasonably refused our registered architect to conduct a field survey on an earlier date. We hold it as trite law that existence of substantial and/or structural illegal structures or building works would render the title to the property defective.

"Up to the present moment we have not received any or any satisfactorily answer to our requisition relating to the illegal structure or building work in question. We have instructions to give you notice which we hereby do that our said requisitions be satisfactorily answered at a reasonable time before the contractual completion date i.e. 16th February 1998 otherwise our client would rescind the agreement and recover all deposit on part payment paid under the agreement as our client will be entitled to."

16th February
Contractual completion date.

Solicitors for the Defendant wrote to solicitors for the Plaintiffs:-

"We regret to note that up to the very moment we dispatch of this letter (i.e. at 5:30 p.m.), we still have not received the Assignment and the balance of purchase price of the Property from you.

"We would like to draw your attention to the terms of the Agreement for Sale ant Purchase dated 16 December 1997 entered into by our respective clients ("the Agreement"), which clearly states that the balance of purchase price thereof has to be paid by your client to ours by 5:00 p.m. on the completion date. Pursuant to Clause 16 of the Agreement, should your client fail to pay the balance of purchase price on the date and within the time therein stipulated our client should be entitled to terminate the Agreement and forfeit the deposits paid thereunder absolutely

"In the circumstances, we are instructed to give you notice which we hereby do, that as your client has failed and/or refused to complete the purchase in accordance with the terms and conditions of the Agreement and failed and/or refused to pay the balance of purchase price to our client within the stipulated time, i.e. at or before 5:00 p.m. today, the Agreement is hereby terminated and a sum of HK$530,000 00 being the deposit paid by your client to ours thereunder is, without prejudice to our client's other claims, rights and remedies under the Agreement, hereby forfeited absolutely.

"All our client's claims rights and remedies under the Agreement are hereby expressly reserved."

The issues

5. As can be seen from the chronology, the Plaintiffs were informed by estate agent on 12th December, 1997, i.e. before they formally entered into the contract for sale and purchase of the Property that the kitchen in the Property was an illegal structure. The Plaintiffs were further put on notice by the letter dated 16th December 1997 of illegal alterations extending to the flat roof adjoining the Property. It was argued that this notice mentioning the flat roof did not identify clearly the illegal kitchen in the Property. I think this is transparent sophistry. The Plaintiffs well knew that the kitchen was out on the flat roof. Notwithstanding knowledge of the illegal kitchen or illegal work extending to the flat roof, the Plaintiffs through their solicitors asked solicitors for the Defendant to proceed with exchange of contract. Solicitors for the Defendant dispatched the Agreement executed by the Defendant to solicitors for the Plaintiffs on 16th December 1997 whenceforth the parties became bound by the Agreement. Then the Plaintiffs remained silent until 9th January 1998. It was not until 12th January 1998 that solicitors for the Plaintiffs issued a letter that may be regarded by stretch of imagination as requisition or objection to title. By then, the contractual period for raising requisitions or objections to title had expired. The parties then locked horns, each side holding the other to the terms of the Agreement.

6. As I see it, the relevant terms and conditions of the Agreement are:

"5. Completion shall take place on or before [16th February, 1998] ("the Completion Date") at the offices of Messrs. Robertson Double & Lee, at 20th & 21st Floors, Gitic Centre, 28 Queen's Road East, Hong Kong

6. Time shall in every respect be of the essence of this Agreement.

11(a) Any requisitions or objection on title shall be delivered in writing to the Vendors' solicitors within 7 working days after the receipt of the title deeds by the Purchaser's solicitors.

11(b) The Purchaser shall be deemed to have accepted the Vendor's title if requisition or objection on title is not delivered to the Vendor's solicitors within the time stipulated above (in which respect time shall be of the essence).

14(a) The Vendor shall give a good title to the Property in accordance with Section 13 of the Conveyancing and Property Ordinance Cap.219 at his own expense .....

15(a) If the Property is subject to any Mortgage/Legal Charge/incumbrance, the Vendor shall prior to or on completion at his sole expense procure a Release/Discharge of the existing Mortgage/Legal Charge/incumbrance and shall pay all legal costs and registration fee of such Release/Discharge.

17. If the vendor shall for any cause (other than the default of the Purchaser) fail to complete in accordance with the terms hereof then the deposits paid hereunder shall be returned to the Purchaser forthwith who shall also be entitled to recover from the Vendor such further damages (if any) over and above the deposits as the Purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor.

19(a) The Purchaser hereby expressly declares that he has duly inspected and is fully satisfied with and accepts in all respects the physical state, condition and finishes of the Property, all its installations, fixtures and fittings and the furniture and chattels (if any) prior to the signing of this Agreement and is fully aware that he is purchasing the Property, all its installations, fixtures and fittings and the furniture and chattels (if any) in their present state and condition and shall not make any objection or requisition thereto or in connection therewith. The property, all its installations, fixtures and fittings and the furniture and chattels (if any) are and will be sold on as "as is" basis and in the physical state and condition as they stand and no warranty or representation whatsoever has been given or is made by the Vendor or his agents regarding the physical state and condition thereof or of the Building.

19(b) Without prejudice to the generality of sub-clause (a) of this Clause, no warranty or representation is given or made by the Vendor or his agents on any of the following matters:-

(i) the physical state and condition quality or fitness of the fixtures fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the Building;

(ii) the physical state and condition or the legality or the user of the Property or of the Building or of any structures or erections therein or thereto;

(iii) the physical state and condition, quality or fitness for use of the furniture and chattels (if any) sold with the Property;

(iv) the area of the Property; and

(v) the composition of the Property or of the Building or the nature or manner of their construction."

The Defendant's Title

7. The fairest way to summarize the Plaintiffs' attack on the Defendant's title is to reproduce verbatim the relevant parts of the skeleton arguments of counsel for the Plaintiffs:-

"5. OUTSTANDING REQUISITION

5.1 The outstanding requisition concerned illegal structures. Those illegal structures were described in the Architect's letter dated 6.2.1998 [P.73 of Bundle].

5.2 The alternation work falls within the meaning of "building works" in S. 2 of the Buildings Ordinance. As admitted by the Defendant, there had been no prior approval and consent by the Authority. Therefore, such alternation work must clearly be illegal. Against such illegal structures, the Authority can:

i. serve notice on the owner or occupier to remove the illegal structures - S.24(1)) & (2) of the Buildings Ordinance.

ii. Failure to observe the terms of the notice will enable the Authority to enter and carry out the necessary remedial work at the expense of the owner - S. 24(3) &(4) of the Buildings Ordinance.

iii. If the said amount is unpaid, it then becomes a charge on the property - S.33(9)) of the Buildings Ordinance.

5.3 Because of the alternation work, one can infer that the layout of the Property must be different from the Occupation Permit and there was a breach of the Crown lease.

5.4 By the combined effect of Clause 3 of and the 1st Schedule to the Agreement, the Defendant agreed to sell as the beneficial owner. Williams on Title, 4th Ed. p. 519 as quoted in Chu Wing Ning v Ngan Hing Cheung & Another, HCA No. A9409 of 1991 provided that "A statement that the vendor is selling as absolute beneficial owner does not mean that he [the purchaser] is entitled at the date of the contract free from encumbrances, but that any incumbrances there are will be cleared off before completion". The would plainly attract encumbrances to the Property, if not other enforcement by the Authority or re-entry by the Government. Therefore, the illegal structures must go to the root of the title."

8. I do not think Paras. 5.3 can be taken seriously. In re Heaysman's and Tweedy's Contract (1893) 69 LT 89, Lindley LJ at p. 91 said that,

"It is a general principle that a purchase ought not to be forced to accept a doubtful title or to buy a lawsuit. In applying that principle, however, we must exercise our common sense and see if the supported lawsuit has any basis whatever."

9. Certified copies of the Government lease by way of Conditions of Re-grant ("the Conditions") and the Occupation Permit having been sent to the solicitors for the Plaintiff, I see absolutely no excuse for the Plaintiffs' failing to identify chapter and verse where the Conditions and the Occupation Permit have been breached. Where direct evidence can be led, the court should be exceedingly slow to draw inference. Moreover, no basis has been shown that breach of the Conditions or the Occupation Permit must necessarily empower the government to forfeit the grant. Also, one cannot preclude possibilities of provision in the Conditions that a breach may be cured by payment of additional land premium: see Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 at 309 D - E. Even if the government has a contractual right to re-enter, it is highly questionable that after so many years the government would exercise the right to re-enter the whole lot for illegal alteration in a unit having only a fraction of all undivided shares representing the whole lot. Without proof of possibility of re-entry by the government, the present case is distinguishable from Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 which counsel for the Plaintiffs relies upon heavily.

10. Para. 5.4 lumps together the duty to deliver good title with that to convey free from encumbrances. The two duties, arising from contract, are usually concommitant but nevertheless quite distinct. In this case, the duty to deliver good title is founded on Clause 14(a) of the Agreement. The duty to convey property free from incumbrances is stipulated in Clause 15(a) of the Agreement. It has been said by Pollock B in Want v. Stallibrass (1873) LR 8 Exch. 175 at 185 that the right of a purchaser to a good title is a right not merely growing out of the agreement between the parties, but is given by law. All authoritative works on the subject treat this common law right as the corollary of the duty to convey good title free from incumbrances other than those identified in the contract. Plainly, the right or duty of the vendor and purchaser at common law is no different from that under the usual contract in Hong Kong. This is because the common law right or duty comprises two limbs, one obliges the vendor to deliver title of good root and unbroken chain, the other to convey property free from incumbrances as agreed. Even if there is a difference, in view of the elaborate sets of standard terms and conditions incorporated or implied into sale and purchase agreements in Hong Kong, I am prepared to hold that the parties herein contracting as they did must have intended to displace the common law to the extent that common law is inconsistent with contractual provisions.

11. In re Stirrup's Contract [1961] 1 WLR 449 at 454, Wilberforce J, as he then was, held that a purchaser is entitled to be satisfied that the vendor is possessed of the estate he is purporting to sell. That obligation is discharged if the vendor shows beyond reasonable doubt that he:

".... is in the position, without the possibility of dispute or litigation, to pass that [title] to the purchaser."

The "possibility of dispute or litigation" should not be taken out of context to mean any dispute or litigation. The litigation should be such as amounting to a challenge to title. If the title is defeasible at the challenge of another party, it is not good title. In this connection, it is important to note that "good" is used in contradistinction to "bad" or "doubtful" as in the passage by Lindley LJ quoted above or in M.P.E.C. Ltd. v. Christian-Edwards [1981] AC 205 where Lord Russell of Killowen confirmed that the burden on the vendor is to prove good title to the very high standard of beyond reasonable doubt. An incumbrance, such as a restrictive covenant or a charge, does not render a title bad or doubtful; it is a burden on the property; hence the second limb of the common law duty or the contractual duty to convey property free from incumbrances.

12. The thrust of the Plaintiffs' case lies in the contravention of s. 14 and s. 40 of the Buildings Ordinance, Cap. 123 and Regulation 21 of the Buildings (Planning) Regulations, Cap. 123 on account of the illegal alterations. The consequence of such contravention is that the government may issue notice requiring restoration. In default of compliance with the notice, the government may carry out the restoration at the expense of the Plaintiffs. If the plaintiffs do not pay the expenses, the government may register a charge against the property. For the contravention, one may also assume that the other owners of the building may take action against the Plaintiffs under the deed of mutual covenant and, again, register a charge against the property should the Plaintiffs fail to satisfy judgment obtained by the other owners. Thus, putting the Plaintiffs' case at its highest, the property would be charged if and only if it is not restored to its original state on demand.

13. The possibility of enforcement action by the Building Authority against illegal alterations to property has been considered by our Court of Appeal in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297, Kok Chong Ho v. Double Value Developments Ltd., CA 90/91, unreported and Active Keen Industries Ltd. v. Fok Chi Keong [1994] 2 HKC 67. Litton JA, as he then was, in his judgment in the latter case analysed the three cases in quite some detail. All three cases involved illegal structures against which enforcement action by the Building Authority under s. 24 of the Buildings Ordinance, Cap. 123 could be taken. In the Giant River case, a detached property had three illegal basement floors, a roofed-over court and balconies. It was held, with approval by Litton LJ, by Deputy Judge Cruden that the possibility of enforcement action rendered the vendor's title defective. In the Kok case, two flats were constructed on space designated in approved plans as "children playground", the Court of Appeal held that since the vendor failed to answer a reasonable requisition on title the purchaser was entitled to rescind. Litton LJ in his judgment in the Active Keen case at p. 85 observed that the Kok case at best supports the proposition that the presence of illegal structures in another part of a multi-storey building in which the flat to be sold is located does not per se render the title of the flat-owner defective. In the Active Keen case, the property being sold was situated on one of the floors partitioned into nine flats per floor when in fact the Occupation Permit allowed only seven flats per floor. The Court of Appeal held that the fact that the possibility of sharing the burden of restoration costs did not pose an incumbrance on the property nor render the title defective.

14. The present case does not fall neatly within any of the three leading cases in Hong Kong. Here the Property is within a multi-storey building but the illegal alterations complained of are specific to the Property. Nonetheless, I think I am encouraged by the distinction drawn by Litton LJ in his judgment between title and encumbrance. The learned judge applied the distinction to the case before him in this way:

"A possibility that, sometime in the future, the owner of [the unit] might have to share with the other co-owners the costs arising out of something done to the building does not affect the title to the flat...

"The facts of the present case are wholly different. The Building Authority had no claim of right, legal or equitable, by way of charge or anything else, to [the unit]" (p.83)

15. As I understand it, the learned judge took the view that (1) liability to incur or pay restoration costs is not a matter affecting title, it is a matter of incumbrance; but that (2) since action by the Building Authority against the illegal partitioning of several floors could only be taken against all co-owners and not against the owner of an individual unit, there is no encumbrance upon the property of the individual unit. In the present case, adopting the first approach, I should hold that the possibility of enforcement action by the Building Authority against the illegal kitchen does not affect the Defendant's title. Since enforcement action may be taken against the registered owner of one unit alone, the Building Authority does have a claim against the Property constituting an incumbrance.

The Time Bar

16. Much reliance is placed by the Defendant on the contractual time limit for raising requisition and acceptance of title by default under Clause 11(a) of the Agreement. On the other hand, counsel for the Plaintiffs contends that time does not run against the Plaintiffs because there was defect going to the root of title and because the Plaintiffs were unable to ascertain whether there is any illegal structure in the Property. For reasons already given, the illegal alterations in this case in any event do not prejudice good title. As to the Plaintiffs' knowledge about the illegal alterations, there is incontrovertible evidence that the Plaintiffs did know of illegal alterations in the Property as early as 12th December 1997 and yet the Plaintiffs went ahead with exchange of contract on 16th December 1997. The Plaintiffs said and still say that they needed expert technical advice on the illegal structures. But it was not until 12th January 1998 that the Plaintiffs sought inspection of the Property by their nominated architect. Judging from the letter dated 16th December 1997 by solicitors for the Plaintiffs to solicitors for the Defendant, the Plaintiffs must have thought that it was sufficient to hold the Defendant to the Agreement to convey the Property free from incumbrances. There was no presence of mind to raise requisition or objection. No requisition or objection was raised until some four weeks after the Agreement was concluded and even longer counting from actual delivery of title deeds. Such delay is inexcusable.

17. In the premises, I hold that the Defendant was not obliged to answer the Plaintiffs' belated requisitions or objections and that the Plaintiffs must be deemed to have accepted the Defendant's title.

18. However, this is not to say that the Plaintiffs have lost or waived their right to conveyance of the property free from incumbrances. In the first place, by the wording of Clause 11(a), the time bar applies only to requisitions and objections to title. Secondly, since the duty under common law or Clause 15(a) of the Agreement to clear incumbrances on property to be conveyed free from them is distinct from that to furnish good title under common law or under Clause 14(a) of the Agreement, even though no requisition or objection has been raised by the Plaintiffs in relation to title or incumbrance at any time, the Defendant is obliged to purge any mortgage, charge or incumbrance on the Property before or on completion. Indeed, no one with any conveyancing experience would ever think that a requisition or objection needs to be raised before a vendor who has contracted to convey free from incumbrances is bound to clear incumbrances such as mortgages and legal charges.

19. Counsel for the Defendant contends that Clause 19 of the Agreement protects the Defendant. It is said that the Plaintiffs contracted to purchase the Property "as is". In my view, it is amply clear from the wording of Clause 19(a) of the Agreement that it only binds the Plaintiffs to accept the physical state or conditions, not other attributes, of the Property. Clause 19(b) merely says that the Defendant did not give or make any warranty or representation on the user or legality of any part of Property. But the Plaintiffs are not claiming breach of warranty or misrepresentation. The Plaintiffs rely on common law right and contractual condition embodied in Clause 15(a) to conveyance free from encumbrances.

20. There is no question of waiver or election as in Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 or Peyman v. Lanjani [1985] 1 Ch. 457. The refusal by the Plaintiffs to sign the Chinese declaration on the 15th and 16th December 1997 must be the clearest indication of no waiver of right to the Property free from incumbrances or election to accept the Property with illegal alterations.

Order

21. In conclusion, in so far as this application seeks a declaration that the Defendant has not answered satisfactorily and sufficiently the requisitions or objections raised by the Plaintiffs' solicitors and that the Defendant has not shown a good title to the Property pursuant to the Agreement, the Plaintiffs have failed. As to the counterclaim for breach of Agreement on the part of the Plaintiffs in refusing to complete the sale and purchase of the Property, there can be no doubt that the Defendant was unable on the completion date to convey the Property cleared of all incumbrances. The Defendant was in breach of the Agreement, not the Plaintiffs. There is judgment for the Plaintiffs on the Defendant's counterclaim.

22. In reference to Clause 17 of the Agreement, I make an order nisi that the Defendant return to the Plaintiffs the sum of $530,000 being deposits paid by the Plaintiffs with interest thereon at judgment rate calculated from 16th February 1998 until payment in satisfaction. There is also order nisi that the Defendant bears the Plaintiffs' costs herein, to be taxed if not agreed. Both orders nisi to be made absolute within 21 days from today unless application is made by either party to the court for variation or otherwise.

23. Z. E. Li

Deputy Judge

Representation:

Mr. Philip T.S. Lam instructed by Messrs. Sam Leung & Co. for the Plaintiffs.

Mr. Kenny Lin instructed by Messrs. Robertson, Double & Lee for the Defendant.