Cashew Holdings Ltd v. Pacific Success Enterprise Ltd

HCA010296A/2000

HCA 10296/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10296 OF 2000

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Coram: Hon Lam J in Court

Dates of Hearing: 17, 18 and 19 February 2004

Date of Judgment: 5 March 2004

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J U D G M E N T

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1.By a Provisional Sale and Purchase Agreement dated 12 September 2000, the Plaintiff as purchaser agreed to purchase from the Defendant the property known as Duplex on 22nd and 23rd Floors (including the Roof thereof) of Tower II, Ruby Court, No. 55 South Bay Road, Hong Kong together with car parking spaces Nos. 52 and 67 ["the Property"]. The purchase price as agreed was $32,200,000. The sale and purchase was to be completed on or before 30 November 2000.

2.On the 23rd Floor, inside the Property, there were three rooms plus two bathrooms, namely a large bedroom with en suite bathroom, and two other rooms. Prior to the making of the Provisional Agreement, a Mr Tung of the Plaintiff had inspected the Property on 11 September 2000. On the date of inspection, apart from the bathrooms, Mr Tung saw two larger rooms and one smaller room. All three rooms had windows.

3.It turned out one of the larger rooms was, according to the approved building plans, a store within the unit plus an encroachment into the adjacent pump room. I shall call this room "the Converted Room". The original store did not have any window. The pump room was part of the common facilities of the whole building. What happened was that some time in the past, someone had removed the wall between the store and the pump room, and then erected another wall around the middle of the pump room. As a result the store was converted into a much larger room with a window. In other words, the premises on the 23rd floor within the Property should originally consist of one large bedroom, one small bedroom and one store. After the conversion, it consists of two large rooms (I refrain from describing the Converted Room as a bedroom since there is dispute between the parties on the point) and one small bedroom.

4.The evidence of the Defendant's representative Mr Tong was that the conversion was done prior to his acquisition of the Property. He however testified that he learnt about the alterations after he had acquired the same. He was so advised by his interior designer. He said he had told the estate agent about the alterations when he put the Property onto the market for sale in 2000.

5.On the other hand, Mr Tung of the Plaintiff said nobody had informed the Plaintiff about the conversion before the making of the Provisional Agreement. He was not shown any floor plan of the Property at any time prior to his solicitor showing the same to him after they had got the title deeds from the Defendant's solicitors. That was after the signing of the Formal Agreement on 3 October 2000. According to the correspondence, the title deeds were sent on 5 October 2000.

6.At the trial, Mr Chow (counsel for the Defendant) told this court that the Defendant did not dispute that the Plaintiff had no knowledge about the conversion prior to the making of the Formal Agreements. In any event, I find Mr Tung to be an honest and reliable witness and I accept his evidence.

7.After noting the difference between the assignment plan and the state of the Property at the time of inspection, the Plaintiff instructed its solicitors to raise the following requisitions on 13 October 2000,

"8. From what our client observed during the inspection of the Property, the existing area of the store room at 23rd Floor seems to be much greater than what appears from the plan annexed to the Assignment Memorial No. 3506987. Please clarify."

In my judgment, any reasonable conveyancer should have understood that the requisition was raised in respect of the conversion of the Converted Room. This was particularly so when it was read together with requisition 11 concerning the pump room.

8.On 18 November 2000, the then solicitors for the Defendant responded as follows,

"With respect, we cannot consider your query as a valid requisition. Your client's perception on the area of the store room can be subjective. Further, although there is scale to assignment plan, it is by no means a diagram by which one can accurately calculate the area of the Property or any part of it."

9.I pause here to observe that this could hardly be regarded as the proper response to deal with the requisition concerning the Converted Room. Since Mr Tong admitted that the Defendant was by that time well aware of the fact that the Converted Room was the result of alteration works, the Defendant and its solicitors should deal with the problem candidly instead of trying to fudge the issue.

10.In Active Keen v. Fok Chi Keong [1994] 1 HKLR 396, Litton JA (as he then was) said at p. 407

"But the solicitor [for the vendor] must act 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."

Then at p. 413,

"If the vendor had responded in a straight-forward manner in the way articulated by the judge so that the purchaser could be reasonably confident that all relevant facts had been revealed by the vendors that would have been a different matter. But that is not what happened. The contractual duty to answer requisitions properly is not an onerous one. All that is required of the vendor is candour and commonsense. ... If there are, or might be, blemishes upon it, these should be faced squarely."

11.More recently, Litton NPJ said in Para. 30 of his judgment in Green Park Properties Ltd v Dorku Ltd (2001) 4 HKCFAR448 at p. 456,

"This case illustrates yet once again the importance of the parties facing up to requisitions as to title squarely when they arise. Conveyancing is not a game. The courts would, generally speaking, assume that in entering into an agreement, the parties intended to carry the transaction through to completion. When problems emerge between the parties before completion it is sometimes the case that these can be dealt with flexibly, with a certain amount of give and take: But only if they had been acknowledged squarely in the first place. But once the parties have adopted an absolute position, as the vendors did in this case, then they must, generally speaking, stand or fall on that position."

12.On 18 November 2000, the then solicitors for the Plaintiff elaborated on the requisition, the substance of which had been raised on 13 October 2000,

"We disagree that our query is not a valid requisition and that our client's perception on the area is in any way subjective. We enclose herewith a copy of floor plan of the 23rd Floor with the actual measurement. The area as hatched on the plan represents the common area occupied by your client for its exclusive use. This confirms our client's observation as stated in paragraph 8 of our letter of 13th October 2000. It follows that the gross floor area of the property has been increased, which is contrary to Building Regulations and there is a breach of the Deed of Mutual Covenant of the estate.

Please confirm that your client has the requisite approval from the Building Department for such occupation and let us have the relevant architect certificates and the consent of the Building Department. Please also confirm that your client has the consent of all the owners and the Manager of Ruby Court to exclusively occupy the hatched area."

The hatched area was the part of the pump room which had been encroached upon.

13.The answer from the vendor was contained in a letter dated 24 November 2000 from the solicitors then acting for the Defendant.

"Regarding the area as hatched on the copy floor plan enclosed in your letter ("the Area"), we are instructed that our client had never made any alteration to the room concerned. When our client acquired the property years ago, the purchase was made on an "as is" basis. However, if which is not admitted, the Area should be a common part of the Building, on a without prejudice and without admission of liability basis, (1) our client is prepared to carry out the necessary works in the room to reinstate the wall in question, so that the layout of the room tally with the assignment plan; and (2) our client is prepared to offer an abatement in the purchase price for the Area in question subject to a valuation report to be made by a professional valuer.

In order to avoid any unnecessary argument, the aforesaid reinstatement works will be carried out. Also for the sake of record, there is no evidence to suggest that the Building Authority or the Manager of Ruby Court has taken or will take any action on to (sic.) works done to the room. There is no title issue at all once the reinstatement has been done. As to the abatement of price, we would wait for your suggestion albeit we will instruct a valuer to give his opinion."

14.That was not acceptable to the Plaintiff. In a letter dated 24 November 2000, its then solicitors replied,

"We are instructed to put on record that the reason for our client's purchase of the captioned property is that the size and the existing layout of the property suited the purposes of our client. The property at present consists of two reasonable size bedrooms (the master bedroom and the existing and extended store room) and two smaller size study rooms. It has always been our client's intention to have the use of the existing and extended area of the store room to be one of the major bedrooms. By reinstating the wall of the store room as suggested by your client, the net floor area of the room would be dramatically reduced by approximately 12 square metres, thereby cutting the size of the room by more than half. This is definitely unable to serve as one of the major bedrooms as intended by our client."

The proposal of the Defendant was rejected. The Plaintiff indicated that it would still purchase the Property "if the existing size and layout can be made legitimate" and offered an additional four to six weeks' time for the Defendant to achieve the same by obtaining approval and/or consent from the Building Department and the Manager of Ruby Court if the latter had authority to represent all the co-owners.

15.In a letter dated 27 November 2000, the Defendant's then solicitors averred for the first time that the Plaintiff had no right to insist on the requisition by alleging knowledge on the part of the Plaintiff as to the alterations before the contract was made. As mentioned, this point is no longer pursued by Mr Chow. The solicitors then demanded the Plaintiff to confirm by 5:30pm on that day as to whether the Plaintiff wanted the Converted Room reinstated. The Defendant also rejected the suggestion of extension of time.

16.The Plaintiff's then solicitors wrote to inform the Defendant that the Plaintiff's person in charge was not in Hong Kong until late evening on 28 November 2000 and they would therefore need time to take instructions. Given the fact that the letter of 27 November 2000 contained new allegations of fact which were highly relevant but were not raised throughout the previous correspondence, I do not find such request of the Plaintiff's then solicitors to be unreasonable. In my view, the Defendant or those advising it only had themselves to blame in respect of the tight time schedule for they had chosen not to deal with the requisition in a candid and timely manner at the earlier stage.

17.The Defendant's solicitors wrote back on 28 November 2000 saying that the Defendant was only prepared to wait until 5:00pm 28 November 2000. They indicated that if there were no response, they would go ahead with reinstatement.

18.There was no further response prior to 5:00 pm on 28 November 2000. Reinstatement works were carried out by the Defendant.

19.On 29 November 2000, the Plaintiff's then solicitors responded at length on the factual matrix refuting the allegation of knowledge on the part of the Plaintiff as to the alterations and asserting that the Defendant should have knowledge about the Plaintiff's intended use of the Converted Room. It also commented on the change of stance of the Defendant in dealing with the requisition and the dilatoriness on their part in responding directly to the issue. The last paragraph of that letter reads,

"Subject to your client being able to assign a good title of the Property as shown by the Estate Agents to our client during the inspection (i.e. including the area which encroached on the common parts of the Building), our client is ready willing and able to proceed with the purchase. Please therefore take immediate step to solve the problem."

20.On 30 November 2000, the scheduled date for completion, the Defendant's then solicitor put forward for the first time the figure of $1,560,000 as price abatement on account of reinstatement. The valuation report supporting the figure was not sent on that day although a draft report was sent. Reference was also made to three cases (which I shall have to discuss later) to justify the stance of the Defendant, viz. Goldful Way Development v Well Stable Development [1999] 1 HKLRD 563; Leung Wing Fai v Onlink Investments [2000] 1 HKLRD 725 and Summit Link v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724).

21.By agreement, the time for completion was extended to 4 December 2000. An inspection of the Property by the representative of the Plaintiff took place on 2 December 2000. After that inspection, the Plaintiff's then solicitors wrote on 4 December 2000 setting out the position of the Plaintiff,

"1. At the inspection of the captioned property on 2nd December 2000, our client observed that the [Converted Room], after being reinstated, no longer has any window. Therefore, it cannot realistically be used as bedroom any more. The only realistic usage of the room now is a store room. This is entirely different from the usage by your client as a family room at the time of viewing of the property by our client.

Our client observed that the size of the reinstated room by comparison to the original room has been very much reduced by over 50%.

As previously stated, the overall area of the Property has been reduced by 7.6%.

In the premises, our client cannot accept your client's offer contained in your letter dated 30 November 2000, namely to compensate our client's loss in monetary terms. Our client therefore maintains its stance and insists on the original size and layout of the [Converted Room] at the time of our client viewing the Property."

The offer from the Plaintiff in the letter of 24 November 2000 was repeated.

22.On the same date, 4 December 2000 which was the extended deadline for completion, the Defendant's solicitors supplied a valuation report by Dudley Surveyors Limited to support the abatement figure of $1,560,000. The report was dated 29 November 2000. A draft report had been sent previously on 30 November 2000.

23.In response to the offer of the Plaintiff, the Defendant's then solicitors wrote on 4 December 2000 rejecting the same and insisting on completion by 5:00 pm on 4 December 2000. The Plaintiff did not accede to that demand. Hence, at about 6:50 pm on 4 December 2000, the Defendant's then solicitors wrote by way of purported acceptance the alleged repudiation of the contract by the Plaintiff and forfeited the deposit in the sum of $3,220,000.

24.The Plaintiff's then solicitor wrote back to assert that it was the Defendant who failed to prove and give good title and wrongfully forfeited the deposit, hence acted in repudiation of the contract. Demand for return of deposit was made. Writ of Summons in this action was issued on behalf of the Plaintiff on 5 December 2000.

25.Mr Chow informed this court at the pretrial review that the sole issue in this case is whether the Defendant had tendered substantial performance of the contract to the Plaintiff. There is no dispute that the Converted Room as inspected by Mr Tung prior to the contract encroached into the pump room area according to the approved building plans and that area should be a common area under the Deed of Mutual Covenant of Ruby Court.

26.However, there are disputes between Mr Chan SC (leading counsel for the Plaintiff) and Mr Chow as to the legal analysis with regard to the significance of the reinstatement of the Converted Room. In his closing submissions, Mr Chow considered the matter by reference to the usual "as is" clause under the Formal Agreement, viz. Clause 7. He submitted that by virtue of Yuen J's dicta in Leung Wing Fai v Onlink Investments Ltd [2000] 1 HKLRD 725 as applied by the Court of Appeal in Summit Link Ltd v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724, the Plaintiff could not object to the reinstatement of the Converted Room. He submitted that this was the complete answer to the Plaintiff's claim, i.e. if this court is with him on this point, there is no need to consider the question of substantial performance. Hence, Mr Chow took a somewhat different position as that taken by him at the pretrial review.

27.On the other hand, Mr Chan submitted it is a question of title. His contention was that the Property as agreed to be sold included the encroached area which formed part of the Converted Room. The Defendant could not give a good title in respect of the Converted Room. Hence, that was a breach of contract. Mr Chan expressly disavowed any reliance on the "as is" clause since he did not need to do so.

28.To test these submissions, it is necessary, in my judgment, to distinguish between two different scenarios. From a legal point of view, there is a distinction between an illegal structure within the boundaries of the property and one encroached upon common area or land of the others. In the former case, once the illegal structure has been removed and the premises reinstated properly in accordance with the authorized building plans, there would not be any risk of enforcement and the blemish to the title would have been cured. The size of the property remains the same. The only outstanding question is whether the reinstatement works so altered the physical state of the property that the purchaser could complain that he did not get what he bargained for. This is the question of substantial performance.

29.As I see it, the "as is" clause is a red herring. There are conflicting first instance decisions on the legal effect of this sort of provision, see Homyip Investment Ltd v Chu Kang Ming Trade Development Co Ltd [1995] 2 HKC 458 at p. 466F to I and Leung Wing Fai v Onlink Investments Ltd [2000] 1 HKLRD 725 at p. 731 A to F. In Summit Link v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724 at p. 742F to H, the Court of Appeal adopted the reasoning of Yuen J (as she then was) in Leung Wing Fai. The prevalent view is therefore that the "as is" clause is only for the protection of the vendor and does not give rise to any right that could be asserted by a purchaser to restrain a vendor from demolishing what is undisputed to be unauthorized building works.

30.But even without the "as is" clause, it seems to me that a vendor is obliged to preserve the property pending completion. After all, the property agreed to be sold includes all fixtures and annexure to the land. See Farrand, Contract and Conveyance, 4th Edn., p. 170-172. Reinstatement works would invariably involve the destruction of some fixtures and prima facie constitutes a breach of that duty. As I understand, Mr Chow has no quarrel with this.

31.More to the point is the paramount right of the vendor. It was held by Yuen J in Goldful Way Development Ltd v Wellstable Development Ltd [1998] 4 HKC 679 that this common law duty is not absolute and has to be qualified. At p. 685 C to F, Her Ladyship held that the position of the vendor as trustee of the property is subject to the paramount right of the vendor to protect his own interest as vendor. As such, the vendor is at liberty to demolish an unauthorized building works. But that is not the end of the matter. As Her Ladyship pointed out succinctly at p. 685F,

"The issue is not whether the vendor has the right to demolish the enclosure. The issue is whether the vendor could still be regarded as performing the agreement if it assigns the property without the enclosure."

32.Hence, it is clear to me that Yuen J was of the view that even though the paramount interest of a vendor enabled him to demolish the illegal structure, the purchaser could still rescind the contract if the result of the alterations was that the vendor could not tender substantial performance. This is precisely why Yuen J went on to deal with the question of substantial performance in Goldful Way.

33.I do not read the judgment of Woo JA (as he then was) in Summit Link v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724 at p. 742F to H as holding otherwise. I note that after deciding that the purchaser in that case could not complain about the demolition of the pantry, Woo JA went on to discuss the question of substantial performance. Counsel for the purchaser conceded that substantial performance was available. The only issue seems to be whether the vendor could rely on that when he had purported to terminate the contract without first making any offer of abatement of price (see p. 742 I to 743B).

34.Therefore, I cannot agree with Mr Chow when he submitted that Leung Wing Fai and Summit Link provide him a complete answer to the challenge of the Plaintiff. The question of substantial performance had to be examined even though the vendor could rely on his paramount right to demolish illegal structures.

35.Up to now, I have considered the question in the context of an illegal structure within the property to be sold. The question has another dimension when the illegal structure encroaches upon common area or the land of others. Even if reinstatement works were carried out (as in the present case), there is still a title problem. The problem does not stem from the risk of enforcement actions by the Government or the manager of the building. The problem stems from the fact that the vendor simply cannot pass a good title nor give exclusive physical possession to the purchaser regarding the encroached area. This is the analysis put forward by Mr Chan. As illustrated by Green Park Properties Ltd v Dorku Ltd (2001) 4 HKCFAR 448, the first question in this sort of scenario is the boundary of the property sold.

36.No plan had been attached to the Provisional Agreement or the Formal Agreement. The description of the Property in the agreements did not state whether the encroached area was part of the Property. Mr Chow referred to the parcels clause in Schedule 2 of the Formal Agreement. Like the court in Green Park, I do not find it to be of much assistance in defining the boundary of the duplex that were to be sold. However, it was common ground that when Mr Tung inspected the Property before the contract, he saw the Converted Room with a window (hence including the encroached area) and that appeared to be part of the Property. Mr Chan also correctly pointed out that throughout the requisition stage, and in the pleadings and evidence filed and adduced in this action as well as in the conduct of the trial up to closing submissions, the matter has been argued on the basis that the encroached area was part of the subject matter of the sale. Mr Chow was unable to gainsay that. In the circumstances, I find as a fact that it was the common intention of the parties that the encroached area was included in the subject matter of the sale.

37.It follows that even with the reinstatement, the Defendant was in breach of contract in that it was unable to give a good title nor to deliver vacant possession in respect of the encroached area by the deadline for completion.

38.As regards substantial performance, I wish to reserve my conclusion as to the proper scope of operation of the same. Mr Chan was content to argue the matter on the basis that the doctrine is applicable and I shall deal with the case accordingly. I shall come back to my reservation later.

39.Mr Chan submitted that on the facts of the present case there could not be any doubt that the Defendant could not tender substantial performance of the contract. He principally relied on the fact that the size of the Converted Room had been cut by more than half and it no longer had a window after the reinstatement. He also submitted that the Defendant could not rely on substantial performance because prior to the forfeiture of the deposit, the Defendant had not produced any evidence to show that the reinstatement works had been carried out properly. In this connection, he relied on Leung Wing Fai v Onlink Investments Ltd [2000] 1 HKLRD 725 and Chan Man Choi v Poon Fook Wah [2001] 3 HKC 493.

40.In respect of the last point, Mr Chow submitted that the Plaintiff's solicitors had not raised any requisition as to whether the reinstatement works had been carried out properly. Mr Chow referred to an architect certificate by Michael Yuen dated 17 November 2000 to show that the relocation of the wall in the Converted Room did not constitute structural works. He said in his oral closing submissions that the certificate was sent to the Plaintiff's then solicitors by reference to a letter dated 18 November 2000 (Bundle D215 to 216).

41.With respect to Mr Chow, the letter dated 18 November 2000 did not evidence that the certificate of 17 November 2000 had been sent. There was only a promise to send an architect certificate in that letter. From the letter dated 24 November 2000 from the Defendant's then solicitors (at Bundle D 225), it can be seen that up to that date, such certificate was not sent. A certificate was eventually sent on 29 November 2000. However, a comparison of that certificate dated 29 November 2000 (at Bundle D 237) with the one dated 17 November 2000 (at Bundle C18) revealed that it was almost the same certificate except that Paragraph 1 in the certificate of 17 November 2000, which dealt with the relocation of the wall of the Converted Room, had been taken out in the certificate of 29 November 2000. That paragraph reads,

"The wall of the store room at 23rd Floor has been relocated (as per plan attached) and such alteration work is a non-structural alteration in accordance with Section 41(3) of the Buildings Ordinance. As such, no approval from the Building Authority is required."

It was a clear acknowledgement that there had been alteration at the Converted Room and did not sit comfortably with the stance adopted by the Defendant's then solicitors in their letter of 18 November 2000.

42.Taking into account of the date of the earlier certificate (17 November 2000) and the contents of the letter from the Defendant's then solicitor on 18 November 2000 regarding the requisition as to the Converted Room (quoted in Paragraph 8 above), the subsequent unexplained deletion of that Paragraph 1 in the subsequent certificate of 29 November 2000 strongly suggests that the architect was asked to delete the same to suit the purposes of the Defendant. Be that as it may, since Mr Chan did not find it necessary to rely on any concealment by the Defendant to advance his case, I will say no more about this. I will just reiterate that such a tactic would not be of any real assistance to a vendor and conveyancers should bear in mind the observations of Litton NPJ as to the proper attitude to be adopted in dealing with a real problem in title.

43.There is therefore no evidence before me to show that the certificate dated 17 November 2000 had been sent to the Plaintiff's then solicitors before 4 December 2000. I have to decide the case on the basis that as at 4 December 2000, the Plaintiff had not been told by the Defendant that the reinstatement works did not involve any structural alterations. Coming back to the question of lack of evidence as to reinstatement works being properly executed, I still need to consider the submission of Mr Chow that the point had never been raised by the Plaintiff prior to 4 December 2000.

44.In Leung Wing Fai, the purchaser's architect had stated in a letter that the reinstatement works would involve structural alterations (see p. 726F to J). It is not clear from the report whether such letter had been shown to the vendor prior to the scheduled date of completion although at p. 730C, the letter was described as a warning bell that had been rung. Yuen J (as she then was) identified the issues at p. 729H,

"The question in this case is whether the demolition had been done before completion date, and whether it had been done properly. In both these respects, the burden is on the vendor to prove to the purchaser that the demolition had been done before the completion date, and that it had been done properly."

At p. 730I, Yuen J said,

"Given that the existence of unauthorized building works has been acknowledged, if the vendor were to say that such an unauthorized building work had been removed, the burden is on the vendor to show that the removal had been properly, competently and completely performed."

Her Ladyship held that good title had not been shown because there was no evidence that the demolition work had been properly done. It does not appear that Her Ladyship regarded it as a prerequisite that the purchaser had to raise requisition as to the proper execution of the works.

45.The same principle was applied by the Court of Appeal in Chan Man Choi v Poon Fook Wah [2001] 3 HKC 493. That was also a case in which there was evidence before the court suggesting that the works could affect structural stability (see p. 502F). Woo JA (as he then was) said at p. 502G that,

"To show good title, the burden was on [the vendor] to show that the removal of the unauthorized building work had been properly, competently and completely performed."

46.On the facts of that case, there was evidence that the works had not been properly done and the purchaser's solicitors had raised the same with the vendor's solicitors (see p. 503B to G). Woo JA regarded this as answer to the contention that this had not been the subject matter of any requisitions, see p. 504F to G.

47.On this state of authorities, it seems to me there are two points which have yet to be decided,

(a) whether a specific requisition has to be made before the duty to show that the reinstatement works had been properly, competently and completely performed arises;

(b) what is the extent of the duty in respect of non-structural alterations.

48.In respect of (b), before a vendor could reduce the extent of his duty by pleading that the works were non-structural in nature, it seems to me as a matter of principle, he should have informed the purchaser and supplied him with proper evidence to show that the works were non-structural. I have already concluded on the facts of the present case the Defendant had not done so.

49.In respect of (a), one should bear in mind that the demolition of illegal structure were undertaken by the vendor by way of an answer to a requisition already raised, viz. requisition about the illegal structure. Hence, there is no question of requisition not having been raised, the question is whether it is a sufficient answer if the vendor just informs the purchaser that demolition works have been done without showing that the works have been properly, competently and completely performed. In Active Keen v. Fok Chi Keong [1994] 1 HKLR 396, Litton JA said the following at p. 407 with regard to the manner in which a vendor's solicitor should answer a substantial requisition,

"But the vendor's solicitor must act 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."

50.Since the works were undertaken by the vendor, it is solely within his knowledge and control as to how and by whom such works were executed. It is also solely with his knowledge and control whether the works were supervised by an authorized person. These are matters relevant to the answer that the illegal structure had been demolished. If the works were not properly executed, there could be outstanding implications under the Building Ordinance. Hence, in my judgment, these matters should be regarded as part and partial of the answer to the original requisition and without proper evidence to show that the reinstatement works had been properly, competently and completely performed, the answer is incomplete. If a purchaser's solicitor were only told of the fact that the illegal structure had been demolished, he could not be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not yet been disclosed. Therefore, I agree with Mr Chan that there is no need for a fresh requisition to be raised specifically in relation to the proper execution of the works.

51.From a practical point of view, it would often be impractical to wait until the purchaser raising a specific requisition about the proper execution of the works. Take the present case as an example, the demolition work was done on 28 November 2000 and the purchaser was told of the same on 29 November 2000. Completion was scheduled to take place on 30 November 2000. How many days should the purchaser be given to raise this additional requisition and how many days should he be given to consider the answer of the vendor to this additional requisition? The process could be further complicated if more than two parties were involved, e.g. mortgagees or confirmors. Further, by the time the works have been completed, it might be too late for a vendor to remedy the situation if he has not engaged proper contractor and authorized person to execute and supervise the works in the first place. Under the general law, it is the duty of the vendor as owner of the property to ensure that the works were properly done and it would not add much to his burden to require the same to be certified by a proper person when he needs to rely on the demolition works as part of his answer to a requisition.

52.Therefore, given that the Defendant did not put forward any evidence that the reinstatement works had been properly executed prior to the forfeiture of the deposit, it failed in its duty to show a good title by reference to the demolition works.

53.Even if I were wrong about that, the Defendant still has to show that despite the reinstatement of the Converted Room, it could tender substantial performance to the Plaintiff. It seems that the test has both a subjective as well as an objective elements. In Goldful Way Development, Yuen J discussed the relevant approach at p. 686H to 687C. There was also a discussion by Woo JA in Chan Man Choi at p. 511E to 512B. Those are useful guidelines, to which I would add the discussion in Farrand, Contract & Conveyance, 4th Edn. p. 52-53. The leading case is Flight v Booth (1834) 1 Bing NC 370 in which Tindal CJ formulated the test as follows, a misdescription is substantial if it "so far affecting the subject matter of the contract that it may reasonably be supposed, that, but for such misdescription, the purchaser might never have entered into the contract at all".

54.Farrand also pointed out that what the purchaser wants is not simply value for money and in Lee v Rayson [1917] 1 Ch 613 at p. 618, Eve J said,

"A vendor could not fulfil a contract to sell Whiteacre by conveying Blackacre, although he might prove to demonstration that the value of the latter was largely in excess of the value of the former. Value, no doubt, is an element to be taken into account in determining whether an error in description is substantial or material, but it is certainly not the only element, nor, in my opinion, the dominant one."

55.In Hamilton v Munro (1951) 51 SR (NSW) 250, Sugerman J expressed the view that in considering the question of misdescription, it is not correct to approach the matter solely by reference to the immediate use to which the purchasers may have intended to put the property. At p. 254, His Lordship said,

"The materiality or importance of the [discrepancy] ... depends on the impact of the [discrepancy] upon the continued ability to use the land freely over the period of ownership. So, too, as to a restriction operating directly or indirectly upon freedom to alienate."

This is a reminder that given the nature of landed property, in assessing whether substantial performance was tendered, one must also have regard to the future including the possible impact on future uses and the eventual sale of the property by this particular purchaser.

56.Hence, the difference in value is not conclusive. In the present case, according to the valuation report of the Defendant's expert, Dudley Surveyors Limited, it recommended a deduction of $1,560,000 in price on account of the reduction of the Converted Room in terms of the encroached area. Mr Chow submitted in his oral closing submissions that this was a fair valuation of the market value. Although it is not a large percentage of the overall contract price of $33,200,000, it is by no means a negligible amount. At the same time, there is another valuation report from Landscope (which was prepared on instructions from the Defendant and had not been shown to the purchaser at the conveyancing stage) which gave a valuation of $300,000 for the "self-erected structure". No explanation has been offered for this difference in valuation and I cannot speculate. Given the stance of Mr Chow, I consider the case on the basis that $1,560,000 was the fair market value for the encroached area.

57.By the same token, although the size of the affected area is relevant, it is again not determinative. This is borne out by a comparison between Watson v Burton [1957] 1 WLR 19 and Re Fawcett and Holmes' Contract (1889) 42 Ch D 150. The encroached area in the present case was about 12 square metres in terms of net floor area. It was agreed between the experts that in terms of saleable floor area, the size was 14.5 square metres. In terms of percentage, various figures have been put forward depending on whether it was calculated on the basis of saleable floor areas or gross floor areas. Mr Chow's calculations, based on the figures from the Plaintiff's expert, arrived at 6.35% or 6.29% by reference to saleable floor area. It does not matter which figure is more accurate.

58.Ultimately it is a matter of fact and degree having regard to the circumstances of the case. On the application of the Defendant, I made a site visit to the Property and conducted a viewing on the first day of trial. The physical state of the Converted Room was again restored by the Defendant to how it had looked like in September 2000 when Mr Tung inspected the Property. The viewing reinforced my impression from examining the floor plans that the Converted Room was one of the larger rooms on the 23rd Floor and it could reasonably be used as a bedroom comparable to the master bedroom. By comparison, the remaining room was very small. I also paid attention to the likely impact on the Converted Room if the encroached area were cut away from it. Of course I had to do it notionally since the Converted Room had been restored to its physical state with the encroachment. It would no longer be a room with a window and the lighting and ventilation of the room would be adversely affected. I agree with Mr Chan that given the price of the Property and its location, a reasonable purchaser buying this Property could not be expected to use that room as a bedroom. It could only be used as a store room.

59.One might in fact asked rhetorically if the alteration was not substantial and had no significant impact on the use of the Property, why did the Defendant restore it to its unlawful physical state after the transaction in question fell through? Why did the Defendant not keep it as it was after the reinstatement works on 28 November 2000?

60.As highlighted in Hamilton v Munro (1951) 51 SR (NSW) 250, one must have regard to the potential future use of the property and the impact of the discrepancy on its resale. In my judgment, the conversion of the Converted Room surely affects the marketability and the price of the Property. Without the conversion, the 23rd Floor would consist of one large bedroom, one small bedroom and one store room. With the conversion, it consists of two large bedrooms (or rooms capable of being used as bedrooms) and one small bedroom. The number of bedrooms must be a highly relevant consideration to a purchaser of a residential property.

61.Hence, I agree with Mr Chan that the objective factors in the present case overwhelmingly point to the conclusion that the conversion has a substantial impact on the decision of a reasonable purchaser in buying or not buying the Property.

62.I turn to the evidence of Mr Tung. He said when he decided to purchase the Property for his residence, he planned to use the Converted Room as one of the two reasonably sized bedrooms he needed. He planned to use the smaller bedroom on the 23rd Floor as a study and likewise the smaller room on the 22nd Floor. If the Converted Room were reinstated, the Property simply did not fit his requirements and he would not consider buying it in the first place. In his answer to Mr Chow's cross-examination, Mr Tung explained that he would not purchase a property with only 3 bedrooms, and each of which were smaller than the one he had been living in, when he was hoping to buy a property with 4 bedrooms, two large ones (to serve as bedrooms) and two small ones (to serve as studies). Before the purchase of the Property, Mr Tung had been living at a unit at May Road which had three bedrooms and the corresponding size of those rooms were larger than the 3 bedrooms in the Property if the Converted Room were reinstated to a store room. Hence, there was simply not much point for Mr Tung to purchase this Property from a functional point of view but for the Converted Room being capable of serving as a bedroom.

63.Mr Chow cross-examined Mr Tung on the percentage of reduction in floor area. Mr Tung answered that from a purchaser's point of view, the gross floor area and saleable floor area were not the most important factors. He said that the more relevant consideration was how the rooms in the Property could be used. I find that to be a very sensible answer.

64.Mr Chow also tried to discredit Mr Tung's evidence as to his proposed uses of the rooms in the Property by reference to some of the wordings used in the correspondence between solicitors. Mr Tung explained that although his solicitor did discuss with him about the correspondence, the solicitor did not show him draft of the letters before they were dispatched. Mr Tung also explained how the list of furniture at Bundle D p. 30-34 had come about. I accept his explanation and having duly considered Mr Chow's submission, I do not think the reference to the room as "TV/Play room" in that list cast any doubt on the credibility of Mr Tung.

65.As I have said, having carefully heard and considered all the evidence and submissions, I find Mr Tung to be an honest and reliable witness and I accept his evidence, including his evidence about the intended uses of the rooms by the Plaintiff. Against that evidence, insofar as the subjective intention of the Plaintiff is relevant on the question of substantial performance, it is quite clear that the conversion of the Converted Room was a material and substantial consideration in the Plaintiff's decision to purchase the Property.

66.Mr Chow took the point that such intended uses had never been communicated to the Defendant prior to the letter of 24 November 2000. Mr Tung said he had made this known to the agent of Midland Realty International Limited. Whether Midland was acting in the capacity of agent for the vendor or for the purchaser had not been clearly raised as an issue on the pleadings. Paragraph 3 (d) of the Re-amended Defence and Counterclaim seems to be suggesting that the agent was acting for the Defendant in allegedly informing the Plaintiff about the alterations. As said, this line of defence was no longer pursued at the trial. Mr Chow however argued in his closing submission that the agent should be regarded as agent for the Plaintiff. He relied on the fact that the agent had taken Mr Tung to inspect other units. On the other hand, the evidence of Mr Tong was that the Defendant placed the Property for sale with Midland and Midland was to host an open house sale and act as the Defendant's exclusive sale agent. Due to the lack of pleadings and consequently insufficient evidence being adduced on the issue, I do not find it possible to reach a concluded view on this point.

67.But that is not very important. Even if I were to assume that when Mr Tung told the agent his intended uses of the rooms, the agent was acting as the agent for the Plaintiff (but it does not necessarily follow from that assumption that the agent was not acting as agent for the Defendant in other respects of the transaction) and the Defendant was therefore ignorant of such intention, it cannot assist the Defendant very much. The fact remains that the intended uses of the rooms by the Plaintiff must be, objectively speaking, for reasons which I have given earlier, a reasonable one and of high relevance to any reasonable purchaser's decision in buying the Property.

68.Hence, no matter how one views it, the conversion of the Converted Room is highly material and by reinstating the same, the Defendant was unable to give substantial performance of the contract to the Plaintiff. It follows that even if the Defendant could rely on the doctrine of substantial performance, it would not succeed and it was acting wrongly in forfeiting the deposit of the Plaintiff on 4 December 2000. Such wrongful act constituted repudiation of the contract, which was duly accepted by the Plaintiff on the same date.

69.Although it was not raised in the pleadings, Mr Chow referred to Clause 12 of the Formal Agreement in cross-examining Mr Tung. That was what was usually known as compensation clause, the relevant part is as follows,

"Any such error or omission or misstatement or misdescription shown to be material shall entitle the Purchaser to proper compensation. No immaterial error, omission, misstatement or misdescription (including a mistake in any plan furnished for identification only) shall entitle either party to compensation."

This clause does not add anything to the defence case. It is well established that this clause could not bar a purchaser from rescinding the contract on account of material and substantial misdescription, see Flight v Booth (1834) 1 Bing NC 370, Spry, Equitable Remedies 6th Edn. p. 296 to 300.

70.Given my above conclusions, it is unnecessary for me to consider the claim of the Plaintiff based on misrepresentation. I therefore hold that the Plaintiff succeeds in its claim and I will grant the following relief to the Plaintiff.

(1) A declaration that the Plaintiff is entitled to and has validly and effectively terminated the Agreement for Sale and Purchase dated 3 October 2000 ("the Agreement") made between the Defendant as vendor of one part and the Plaintiff as purchaser of the other part for the property ("the Property") known as FIRSTLY ALL THAT DUPLEX on the TWENTY-SECOND and TWENTY-THIRD FLOORS (including the ROOF thereof) of TOWER II and SECONDLY ALL THOSE CAR PARKING SPACES NOS. 52 AND 67 on the FIRST LEVEL of RUBY COURT（嘉麟閣）55 South Bay Road, Hong Kong by reason of the Defendant's wrongful repudiation of the same.

(2) An Order that the Defendant do forthwith return the deposit paid by the Plaintiff to the Defendant under the Agreement in the sum of HK$3,220,000.00.

(3) Interest on the said deposit as follows:

(a) Interest on the sum of HK$1,610,000.00 at the rate of 1% above the prime rate from 12 September 2000 to the date of Judgment; and

(b) Interest on the sum of HK$1,610,000.00 at the rate of 1% above the prime rate from 3 October 2000 to the date of Judgment.

(4) An Order that the Defendant do forthwith pay HK$302,880.00 to the Plaintiff being conveyancing expenses wasted due to the Defendant's wrongful repudiation of the Agreement and/or misrepresentation.

(5) Interest on the said HK$302,880.00 as follows:

(a) Interest on the sum of HK$80,000.00 at the rate of 1% above the prime rate from 6 December 2000 to the date of Judgment;

(b) Interest on the sum of HK$200,000.00 at the rate of 1% above the prime rate from 28 December 2000 to the date of the Judgment; and

(c) Interest on the sum of HK$22,880.00 at the rate of 1% above the prime rate from 7 August 2001 to the date of Judgment.

(6) A declaration that the Defendant is liable to indemnify the Plaintiff for the stamp duty in the sum of HK$1,207,500.00 payable by the Plaintiff to the Collector of Stamp Revenue (in the event the Plaintiff is liable to pay the same despite the Plaintiff having used its best endeavour to avoid the payment).

(7) A declaration that the Defendant is liable to indemnify the Plaintiff for the estate agent commission in the sum of HK$161,000.00 payable by the Plaintiff to Midland Realty under the Provisional Agreement (in the event the Plaintiff is liable to pay the same despite the Plaintiff having used its best endeavour to avoid the payment)

(8) A declaration that the Plaintiff has an equitable lien over the Property for all the sums stated above.

(9) Costs of the action, including all costs reserved.

71.Before I end this judgment, I will like to come back to my reservations about the proper scope of operation of the doctrine of substantial performance. The basis of the doctrine as explained in Goldlful Way is the equitable remedy of specific performance with abatement of price at the instance of a vendor who could tender substantial performance. It should be remembered that on the facts of Goldful Way, the contract was kept alive by the parties (see p. 684G). Hence, although the matter came before the court by way of a vendor and purchaser summons and the question was framed by reference to whether good title can be given, Yuen J in substance considered the matter as if she was dealing with a claim for specific performance with abatement of price by the vendor.

72.The situation could be quite different if by the time the parties came before the court the contract had been terminated (as in the present case). Due to the termination of the contract, there is no scope for either party seeking any relief by way of specific performance, not to mention specific performance with an abatement of price (see Spry, Equitable Remedies 6th Edn. p. 221-4). As in the present case, the vendor is not seeking specific performance, he called off the contract by his own act in forfeiting the deposit. A fundamental distinction is that if the remedy sought is specific performance, the purchaser would still have an opportunity to pay the abated price after the court has decided on the issues and his deposit would not be forfeited in the meantime. The hardship to a purchaser is obviously lessen accordingly. I have some doubts whether a vendor can rely on substantial performance to forfeit deposit. In so doing, a vendor is in effect elevating a remedy into a contractual right. In Pang Chor Ying Annie v Lifton Investment [1993] 2 HKC 57, Litton JA (as he then was) held that this should not be permitted. After referring to the equitable remedy of specific performance with an abatement of price, His Lordship said at p. 61G

"This is a remedy which a court of equity is entitled to give; it is not to be translated into a contractual obligation falling on the shoulders of the purchaser, in anticipation of the vendor's default, on the day fixed for completion."

73.Yuen J also referred to this point in Goldful Way at p. 686E to G although on the facts of that case, the difficulty that could be faced by a purchaser as to the uncertainty of the abated price did not arise. However, one could see how a purchaser like the Plaintiff would be put into a difficult position. In our case, Mr Tung got an offer of abatement of $1,560,000 from the Defendant. Suppose the facts are slightly different, let us assume that the Plaintiff was advised by Dudley Surveyors Ltd and the Defendant was advised by Landscope before the deadline for completion. The Plaintiff got a valuation of $1,560,000 whilst the Defendant got one for $300,000. The Defendant made an offer of $300,000 by way of abatement. How did the Plaintiff suppose to react? How much time would he be given to react? No-one can tell which valuation would be accepted by the court and if the Plaintiff acted on its surveyor's advice and rejected the offer, it took the risk of its deposit being forfeited and the risk of litigation with it. This hypothetical scenario illustrates the mischief that could be introduced into the conveyancing field if the doctrine of substantial performance can be relied upon as a ground for forfeiting deposit when an offer of abatement of price was not accepted.

74.The difficulty could be compounded when some other parties like confirmors and mortgagees are involved in the transaction. This is not uncommon in Hong Kong.

75.In Summit Link v Sunlink Group [2000] 2 HKLRD 724, the doctrine was applied in favour of a vendor who had terminated the contract. However, it was conceded by counsel that the doctrine was available and no point seems to have been taken as to whether it was applicable when the vendor was terminating the contract instead of seeking specific performance (see p. 742J to 743B). Hence, the decision of the Court of Appeal did not deal with the issue.

76.Since the parties have not argued these points before me, I shall not express any final conclusions in this regard. I only wish to take this opportunity to highlight the difficulties which may have to be resolved in future cases. Lastly, I like to thank counsel for their succinct submissions and helpful assistance in this trial.

Representation:

Mr Warren Chan, SC and Liu Man Kit, instructed by Messrs Chan, Lau & Wai, for the Plaintiff

Mr Kenneth Chow and Mr Kan Fook Yee, instructed by Messrs Yung, Yu, Yuen & Co., for the Defendant