Jonesky Ltd v. Total Gain Ltd

HCA000595/1998

HCA 595/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 595 OF 1998

____________

____________

Coram: Deputy High Court Judge Saunders in Court

Dates of Hearing: 9-12 and 15-17 March 2004

Date of Handing Down of Judgment: 21 May 2004

_______________

J U D G M E N T

_______________

1.These proceedings are yet another set of proceedings arising from the sudden and unexpected crash in the property market in Hong Kong in October 1997. Once again, a purchaser who signed the contract to buy property at the time when the market was buoyant and rising, when faced at or approaching the time of completion, with a rapidly falling market, seeks to avoid a contract.

The Provisional Agreement for Sale and Purchase:

2.The property involved in this litigation is in Redhill Peninsula. The property in question is at House No. 95 Palm Drive, The Redhill Peninsula, 18 Pak Pat Shan Road, Tai Tam (the house). It is described by the valuers as a luxury three storey detached house, in a reputable residential locality, popular with expatriates and upper income population. It has a southerly aspect and commands a panoramic view of Tai Tam Harbour towards Shek O Peninsula. In all respects it appears to be a very desirable property.

3.The evidence was that Total Gain Limited (the purchaser), having sold a flat in Baguio Villa, then occupied by its directors Mr and Mrs Chan, sought to purchase a property at Redhill Peninsula. Mrs Chan had been looking at various properties for sometime and was particularly keen on the Redhill Peninsula. Her evidence was that this was the first such property that was offered to her for sale in Redhill Peninsula. Prior to the signing of the contract, she endeavoured, through the estate agent involved, to gain access to inspect the interior of the property. Apparently because Madam Ma, one of the directors of Jonesky Limited (the vendor), the directors of which occupied the house, was busy, it was not possible to arrange an inspection.

4.Notwithstanding the fact that she had not inspected the interior of the house, Madam Chan, on behalf of the purchaser, signed a provisional agreement for sale and purchase dated 25 September 1997 to purchase the house for the sum of $50 million (Ex C1, 153). A deposit of $2 million was paid upon the signing of the agreement, and a further deposit of $3 million was to be paid on or before 9 October 1997. The provisional agreement for sale and purchase provided that completion would be on or before 10 January 1998.

The formal Agreement for Sale and Purchase:

5.On 9 October 1997, the parties entered into a formal agreement for sale and purchase (the Agreement) (C1, 155) containing the usual terms. Amongst those terms were a provision that completion was to take place at the office of the vendor's solicitor on or before 1:00 p.m. on Saturday, 10 January 1998.

6.By clause 8(i) of the Agreement, (C1, 158) any requisitions or objections in respect of the title were to be delivered in writing to the vendor's solicitors within 7 working days after the receipt of the title deeds by the purchaser's solicitors otherwise they should be considered as waived (in which respect time was of the essence of the agreement).

7.There was the usual requirement that the vendor must give good title (cl. 9, C1, 159) There was the usual provision in the agreement that time shall in every respect be of the essence of the Agreement (cl. 19, C1, 166).

8.The Agreement also contained the following provision, (C1, 162):

"14(i)

the vendor hereby warrants and declares that the vendor has not received and is not aware of there being any notice from the Government or any other competent authority or the manager or the management committee of the building of which the property forms part requiring the vendor to demolish or reinstate any part of the property. If it should be discovered that such notice existed prior to the date hereof or if any such notice shall be served on or before the day of completion the costs for such demolition or reinstatement shall be borne by the vendor and the purchaser shall have the option to rescind this agreement by giving written notice to the vendor on or before the day of completion whereupon the deposit and all other monies paid hereunder prior to the date of such rescission shall forthwith be returned to the purchaser by the vendor in full but without any costs or compensation, and if such return is made within 7 days, without interest and neither party shall have any claim against the other hereon and the party hereto shall at the cost of the vendor enter into and cause to be registered in the Land Registry an agreement for cancellation."

9.By paragraph 15 of the Agreement, (C1, 164), the purchasers declared that they had duly inspected the house. Of course at that time, they had not in fact inspected the house but nevertheless they elected to make that declaration.

The alterations carried out by the vendor:

10.Madam Ma and her husband had purchased the house brand-new in about 1990. They had undertaken their own decoration of the house. In the course of doing so, they had made a number of alterations to the house. These comprised 10 items. The order in which I set these out follows the order in which they were set out in a requisition letter from the purchaser's solicitors, to which I will later refer (see para. 22-26 below)

(i)	At the master bedroom level, part of the external wall and a sliding glass door of the bedroom had been removed. An aluminium framed, glass walled and roofed extension had been constructed bringing into the bedroom an area of the flat roof and thereby creating a form of conservatory. This extended the size of the master bedroom by some 9.3 m2.
(ii)	Also at the master bedroom level, a skylight had been modified by the installation of a sloping glass panel which had the effect of increasing the height above the old sky light to the roof level of the master bedroom. Previously the skylight had opened to the flat roof outside the master bedroom.
(iii)	At the living room and kitchen level, over an open patio area outside the kitchen, a flat, aluminium framed canopy, with glass panels had been installed giving an open, but covered area of some 19.5 m2.
(iv)	At the pavement level adjacent to the main entrance, a small steel fence and planter box had been removed and replaced by glass partitions and a glass door to form an enclosed lobby space of approximately 4 m2.
(v)	At the roof level, in a void above the staircase, a timber framed enclosed cockloft within individual power point, light fittings, carport floor finishes, windows and doors had been added to provide approximately 5.3 m2 of additional floor space.
(vi)	Also at the living room level, the fire compartmentation partition wall and fire resisting door between the kitchen and living room had been removed so that the kitchen opens directly into the living area. This created a form of open plan kitchen/living area commonly found in western style houses.
(vii)	Next, under the stairs at ground level, a void had been enclosed, to create an under-stair storeroom.
(viii)	Also at the living room level, in conjunction with the opening to between the kitchen and the living area, a void had been constructed at a side wall between the kitchen and the toilet, to house a refrigerator.
(ix)	In addition, at this same level, a partition wall between a bedroom and living room had been removed thus greatly enlarging the size of the living room. This removal had been carried out by removing that part of the wall up to a height of about 8 feet so that the concrete reinforced beam constructed previously in place, and supporting the ceiling, remained.
(x)	With skylight alteration, a new balustrade protecting the access way from the stairs to the master bedroom had been installed to protect the void below.

11.I have been able to see numerous photographs of these items. All have apparently been professionally carried out, and are undertaken in harmony with the building. It is plain that in anything other than a falling market where a purchaser sought to escape from a contract, all these alterations would have been seen by a purchaser as positive attributes, enhancing the appeal and the general liveability of the property. I shall later refer to evidence from professional architects as the structural quality of these alterations.

The first inspection:

12.On 13 October 1997, 4 days after the Agreement was signed, at the request of the purchaser, arrangements were made for Mrs Chan to inspect the property. Madam Ma from the vendor was present.

13.Madam Ma's evidence was that at the inspection, she and the estate agent accompanied Madam Chan around the property. Madam Ma said that as she did so, she pointed out these additional features to Madam Chan. She said that she did so because she was proud of the effect they achieved, an effect that have been planned and executed by her and her husband. Madam Chan said that nothing was pointed out to her and that in fact Madam Ma, while being present, did not accompany her on the inspection. She said that while she noticed the general features of the home, nothing in particular was pointed out to her. She said that following the inspection she took no further interest in the matter leaving the steps for the completion of purchase, and it appears all steps in relation to the subsequent difficulties with the contract, to her husband.

14.Where the evidence of Madam Ma and Madam Chan differ I prefer the evidence of Madam Ma. It is entirely believable that a woman would be proud of alterations and improvements that she had made to her house and that she would show those to a prospective female purchaser. It is equally unbelievable that Madam Chan would not notice these special features, and that she would not take any further interest in the purchase. In any terms, this was a very substantial purchase. Madam Chan acknowledged that for her it was the purchase of her dream home. It was patently unbelievable that a women in that situation would either not notice such features, or take no further interest in the property. I did not find Madam Chan to be a believable witness.

15.Whilst I am satisfied that these items were pointed out to Madam Chan, it is plain that they were not pointed out to her as unlawful building works. I am satisfied that Madam Ma and her husband did not appreciate that, at the time they undertook the work, they should have obtained approval for that work from the Building Authority. Consequently when Madam Ma pointed the features out, it was simply as features, and not as potentially unlawful works. What would have been quite apparent to Madam Chan however, was that there had been reasonably significant departures from the original structure at the time of decoration.

16.In reaching the conclusion that I prefer the evidence of Madam Ma, I bear in mind the fact that on 6 January 1998, at the height of the dispute, when both parties were deeply involved with solicitors, and the purchasers with counsel as well, in a letter from the vendor's solicitor to the purchaser's solicitor, the purchaser was reminded by a letter from the vendor's solicitors, (C1, 291), that 8 of the 10 items, [(i) to (iii), (v), (vi), and (viii) to (x) of the list in para 11 above], that had become an issue between the parties, were specifically pointed out to her in the course of the inspection on 13 October 1997. There was no response to that letter, either by way of acknowledgement of the truth of the statement, or by way of denial. Madam Chan said that she had not seen the letter and had never been consulted about it. That is either unbelievable, or a matter she may wish to take up with those solicitors. At that time, the vendor's solicitors were asserting the fact of the inspection, and the assertion at the time that the items were specifically pointed out is a contemporary statement that it is consistent with Madam Ma's evidence.

The requisitions:

17.The relevant title deeds and documents in relation to the property was sent by the vendor's solicitor to the purchaser's then solicitors under cover of a letter dated 7 October 1997. Those documents included the Deed of Assignment to which were attached assignment plans. By letter dated 16 October 1997 running to some 14 pages, the purchase's solicitor took numerous requisitions. It is common ground that all of those requisitions have been satisfactory answered.

The purchaser's discovery of the unlawful building works:

18.The purchasers had paid a deposit of $5 million. They had available from the sale of the Baguio Villa property approximately $5 million after the deposit was paid. Of that some $1.7 million had to be earmarked for stamp duty and legal expenses on the purchase. They therefore needed to raise by way of mortgage or other loans, a further $45 million. At the time, the maximum amount that a bank could lend on a residential property, according to Government guidelines, was 70% of the value of the property, or in this case a further $35 million.

19.Mr Chan's evidence was that he approached two banks to seek these funds. He went first to Overseas Trust Bank who gave him a verbal approval for an advance of $35 million. His usual bankers, with his business, were Sin Hua, he approached them also and, again, was given verbal approval for the sum of $35 million. He did not make it plain in evidence where the remaining $10 million would come from.

20.His evidence was that sometime between mid-November to late November, the precise time was not be clarified, while in discussions with an officer of Sin Hua Bank, he was told that the properties in Redhill were notorious for illegal alterations and that the presence of illegal alterations might cause the bank to refuse the loan which, in the usual course, would only be granted after an inspection of the property by the bank's own surveyor. He said that he was advised that it was in his interest to get his own surveyor to inspect the property first.

21.Initially, the purchaser had instructed Messrs Fok and Johnson as solicitors to act for it on the purchase. Fok and Johnson had issued the 14-page requisition letter. Without explanation, on 3 November 1997, Messrs Ford, Kwan & Co. were instructed to act for the purchaser. The vendor's solicitors were cooperative in ensuring that the necessary documents were made available. Messrs Ford, Kwan & Co. briefly pursued the requisitions, but nothing was mentioned by them about any unlawful building works. Again without explanation, on 27 November 1997, the vendor's solicitors were notified that a third firm was now acting for the purchasers. Mr Wan of that firm, Messrs Pang, Tang, Wan and Choi wrote to the vendors solicitors, seeking the title deeds.

The requisition in relation to unlawful building works:

22.On 4 December 1997, at best, 2 weeks after Mr. Chan had been told of the possibility of unlawful building works by his bankers, Mr Wan wrote to the vendor's solicitors a simple three-line letter stating the following:

"We are instructed that there are structural alterations and/or unauthorised structures in the above property. Therefore our client shall appoint architect and/or surveyor to inspect the above property. Please confirm the time and date for this purpose."(sic).

Plainly that letter itself could not constitute a requisition for nothing is detailed at all, there is merely a request to inspect for a particular purpose.

23.The vendor's solicitors replied the very next day, seeking clarification of the allegation of structural alterations or unauthorised structure, and stating that any requisition or objection that was raised was out of time and that it was unreasonably late to raise an objection or requisition. On 6 December 1997, Mr Wan responded, pointing out authority in which it was held that requisitions which go to the root of the title may be raised even after the contractual period for doing so has expired. Promptly, on the same day, the vendor's solicitor advised Mr. Wan that an inspection could be arranged between 9 a.m. and 5 p.m. on either 9 December 1997 or 10 December 1997. The second of these two days was chosen by the purchaser and on that day, Madam Chan, together with an architect and two solicitors from the vendor's solicitors, inspected the property.

24.Five days passed before the purchasers tool the matter further. On 15 December 1997, Mr Wan wrote saying that the architect had formed a preliminary view that there were structural alterations and/or unauthorized structures in the property, "subject to final report". However, still no details were supplied of the alleged unlawful alterations, and no formal requisition was made. The letter use of the expression, "preliminary view" necessarily implies that the view may change in the final report.

25.It took over two weeks for the architect to reach his final conclusion. His view did not change. By a letter late on New Year's eve, 31 December 1997, received by the vendor's solicitors at 5:20 p.m. in the evening, Mr. Wan wrote to the vendor's solicitors, formally raising requisitions in relation to unlawful building works as I have set out in paragraph 9 above. That was 10 days prior to completion. He did not enclose with the requisition letter, as one might have expected, a copy of the architects report setting out the nature of the alleged unlawful building works. Instead he merely itemised them in the letter.

26.On 6 January 1998, the vendor's solicitors responded to the purported requisition of 31 December 1997. They first took the point that the letter dated 4 December 1997 was out of time, that they were not obliged to answer it as it was out of time, and in any event it was unreasonably late. They asserted further that the purported requisitions of 31 December 1997 were also unreasonably late being 11 days after the inspection and less than two weeks before the scheduled completion date.

The negotiations prior to the completion date:

27.At no stage did the vendor's solicitors suggest there were no unlawful building works. Sensibly, they were not, at that time, prepared to admit that there were unlawful building works, however the tenor of the letter is plain. They sought to resolve the matter rather than to steadfastly deny the existence of any such works.

28.By the letter, an offer was made to reinstate the unlawful works. The vendors themselves had obtained advice and that advice had been that all of the items may be suitably and easily restored at a cost of approximately $208,000. The offer made was in three alternatives:

(i) that the vendor would forthwith commence the reinstatement works and postpone the completion of sale until a reasonable date after the completion of the reinstatement works, when completion would then take place; or:

(ii) the purchaser was invited to complete the purchase and upon completion the vendor would pay the purchaser a sum of $600,000 in order that the purchaser may themselves carry out the reinstatement works. A further sum, yet to be agreed was offered to compensate the purchasers for any loss of space; or:

(iii) the vendor offered to the purchaser the sum of $600,000 with no condition that sum be applied to reinstate the works. In other words, if the purchasers took the view that the works were in fact an enhancement to the property, albeit carrying some risk of action by the Building Authority, they could keep the $600,000 and take the risk of no action by the Building Authority. The additional, yet to be agreed sum, for loss of area was also offered.

29.The offer was further enhanced on 8 January 1998. By a letter on that day, the vendor's solicitors first pointed out that one merely had to walk down the road at Redhill Peninsula and look at other houses to notice many and more substantial alterations. They pointed out that neither they nor their client had ever heard of the Government ever having taken steps in respect of the Redhill Peninsular Premises. The offer was enhanced by an additional offer to cover the total cost of reinstatement should there be any enforcement action being taken by the Building Authority in future.

30.This brought the extraordinary response from the purchasers, notwithstanding the comprehensive terms and significant offers that had been made, that the vendors were not serious in answering the requisitions. Confirmation was sought that there were in fact structural alterations and/or unauthorized structures and advice was sought as to whether or not approval for those alterations had been obtained from the Building Authority. An assertion was made that the purchaser was, subject to satisfactory answers to the requisitions, ready, willing and able to complete the transaction on 10 January.

31.By a letter dated 9 January 1998, the vendors repeated the offers that had previously being made and by way of further, fourth, alternative proposal, offered to discount the purchase price by a sum of $4 million if the purchasers would complete. By a further letter of the same date, the vendors' solicitors noted that no report or documentation from surveyors or architects had been submitted to them and that the only knowledge they had of the alleged requisition was the solicitors' letter of description.

The Protech letter is discovered:

32.On the morning of Saturday 10 January 1998, by a letter received by the purchaser's solicitors at 9:34 a.m., the vendor's solicitors reminded the purchaser that the four alternative proposals were still open until 1:00 p.m. that day for acceptance. That was the final time for completion in terms of the Agreement.

33.At 9:42 a.m. on that Saturday morning, the day provided for completion, the vendors received a fax copy of a letter from the purchaser's solicitors dated the previous day, 9 January 1998. The hard copy had arrived at 9:35 a.m. on 10 January 1998. The letter drew attention to clause 14 of the Sale and Purchase Agreement and, enclosing a copy, set out the terms of a letter received from the manager of Redhill estate, Protech Property Management Limited dated 23 November 1993, addressed to the vendors, requesting them to demolish 5 unauthorised structures. This comprised:

(i) an extension of level 4;

(ii) a storeroom in the garage;

(iii) a roofed-over structure at the roof top entrance;

(iv) a roofed-over structure at the garden; and,

(v) a metal fence erected on the top of the party wall.

34.The extension at level 4 comprises the master bedroom conservatory area, para 10 above, item (i). The roofed over structure at the garden is the roofed patio area, para. 10, item (iii). The storeroom in the garage has been created by building a wall with doors, out from the rear wall of the garage, reducing the area of the garage to create a storage area. The roofed over structure at the roof top entrance is an aluminium canopy about one metre square, attached to the outer wall above the door, to provide a cover to the door leading to the roof.

35.Four of these, items (i) -(iv), like the other alterations I have referred to, appear to have been professionally undertaken and all enhance the property. No photos of the metal fence on the party wall were provided, however, most significantly, there is not the slightest suggestion that the neighbour who shares the party wall has in any way objected to the fence.

36.The vendor's solicitor responded immediately that the letter had been received in 1993, but that no action had been taken on it and by September 1997, the vendor's had forgotten about it. They pointed out that in their view a letter issued 4 years earlier, upon which no action had ever been taken, must necessarily have ceased to be effective.

The steps taken on completion day:

37.Further letters were exchanged between the solicitors on that morning. At 1:00 p.m., the final time for completion came and passed and the purchaser did not complete. By a letter dated 10 January 1998 and received by the vendor's solicitors on that day, by fax, at 12:38 p.m. (the hard copy at 12:51 p.m.) the four alternative offers made by the vendor to resolve the matter were formally rejected by the purchaser. Apparently deliberately, the purchaser chose, in that letter, not to exercise any right of rescission they may have under clause 14 of the Agreement.

38.By a further letter dated 10 January 1998 and received by facsimile at 1:27 p.m., and hard copy at 1:43 p.m., the purchasers demanded a refund of the deposit and, in reliance upon the non-disclosure of the Protech letter, purported to rescind the Agreement for breach of the warranty in clause 14.

39.The vendor's solicitors responded to both of those letters on 12 January 1998. They recorded the time at which the letter purporting to rescind had been received and, on the basis of the purchaser's failure to complete the property purchase at 1:00 p.m. on 10 January 1998 accepted that act as a repudiation of the contract and forfeited the deposit and rescinded the Agreement.

40.It may be noted that even by that time, the purchaser's solicitors had not delivered to the vendor's solicitors the report received by them from their engineer, as to the unlawful building works. It was not to be until discovery in pre-trial procedures that the architect's report would be finally revealed.

The writ is issued:

41.On 13 January 1998, the writ was issued seeking a declaration that the purchaser was in repudiatory breach of the Agreement, a declaration that the vendor had lawfully forfeited the deposit and lawfully rescinded the Agreement and damages. The purchaser counterclaimed seeking a return of the deposit, the stamp duty has paid and the legal expenses it incurred in the aborted transaction.

The consequences of the unlawful building works:

42.I do not need to consider the legality or otherwise of each of the alterations carried out by the vendor, or the additional matters raised in the Protech letter. It is sufficient if I proceed on the basis that some at least constitute unlawful building works which have been undertaken without the consent of the Building Authority. Some would fall into the category of works that are exempted from approval under s. 41(3) Buildings Ordinance, Cap 123, as works not involving the structure of the building. Sensibly, Mr. Mok for the vendor, did not dispute that, at least, of the items on para 10 above, items (i), (ii), (iii), (v), (vi), and (ix), were works that potentially involved the structure of the building and accordingly would have required permission. Without permission, no matter how well they were constructed, they would constitute unlawful building works. I proceed therefore, on the basis that the purchaser has discharged the burden of establishing that there are, on the property, unlawful building works.

43.Where there are unlawful building works established, the onus is on the vendor to establish that the risk of enforcement action is remote. The mere presence of unlawful building works does not, of itself mean that the vendor cannot give good title pursuant to the obligation in the agreement. An objection to title, if it is to result in a conclusion that a vendor cannot give good title, must go to the root of title. While a query as to whether the configuration of a building complies with the Building Ordinance will, in a broad sense, affect the vendor's title, it will not necessarily go to the root of title: see Mexon Holdings Ltd. v Silver Bay International Ltd. [2000] 2 HKC 1. The relevant principle is stated by Litton PJ in Mexon in the following terms:

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain."

It is thus necessary to determine whether the unlawful building works should be of real concern to a willing purchaser in the circumstances of this case.

44.The precise nature of the alterations in this case raise a second issue. They have the effect of increasing the floor area of the property by, at the most, some 37.9 m². The matter was not seriously pressed by the purchasers but I must deal with it. It was contended that that increase may result in the maximum gross floor area permitted pursuant to the Deed of Mutual Covenant being exceeded thereby giving rise to a right in the government to renter. The maximum permitted gross floor area was not established on the evidence.

45.The purchaser's architect, who asserted that there was a breach of the Deed of Mutual Covenant had done no calculation, other than calculating his view of the increased area as a result of the alterations. He made the assertion that there was a breach of the covenant based upon "his experience". He was not however prepared to use that experience to make an assessment as to whether other works would in fact have a structural consequence. He even went so far as to say that the removal of the 1 m² cover over the door to the roof top entrance, (item (iii) of the Protech letter), would have a structural consequences, a suggestion that in reality bordered on the farcical. In the whole of the circumstances I am not satisfied that there has, as a consequence of any of the alterations undertaken by the vendors, been any breach of the Deed of Mutual Covenant.

Are the unlawful building works of real concern to the purchaser:

46.This is simply a factual question. First I am satisfied that none of the works carry any structural issues that would render them unsuitable for approval. The architect for the vendors was of the view, having inspected all of the works, that they were professionally carried out, and that they were structurally sound. He did not undertake actual calculations but gave his opinion based upon many years of experience as an architect in Hong Kong. I accept that view. The purchaser's architect was of the view that structural issues were raised by the alterations but that he could not say, without proper measurements and calculations, whether the works were sufficiently constructed. He was not prepared, so far as the structural aspects of the works, to use his experience as an architect. In this respect his attitude was in marked contrast to the area issue (see para. 45) where he was, in a circumstance which favoured the purchaser, willing to make an assessment without a precise calculation, and based merely upon "experience".

47.Next, in the present case the purchaser entered into the both the provisional agreement and the agreement without first inspecting the property. That fact alone indicates that the physical condition of the house was simply of no concern to the purchaser. It is no answer to the failure to inspect to say that the purchaser was somehow denied the opportunity to inspect before signing either document.

48.It is right that When Madam Chan sought to inspect the house before signing the provisional agreement she was unable to do so because Madam Ma was not available. But it was entirely in Madam Chan's hands to wait until she had inspected the property before signing any agreement. It is equally no answer to say that in a rising market a prospective buyer is somehow "forced" to sign an agreement without an inspection, if they wish to secure the property. If that is the case they ought to include a provision allowing them to escape from the contract after an inspection and before a formal agreement is signed, if, upon inspection, they are not satisfied with the property. But that was not done.

49.The speed, or rather the lack of speed, with which the purchaser attended to the issue of unlawful building works also demonstrates that the potential that there were such works was not of real concern to them, not at least as a willing purchaser intending to see the bargain through to completion. Mr. Chan was first told of the possibility of unlawful building works in mid to late November 1997. He did not take steps to arrange an architect's inspection until early December, and then took the later of the two days offered. The architect was instructed to prepare his report, but not with any request for urgency, as one might expect. It took until 31 December 1997, some 6 weeks after the issue was first raised with the purchaser before a requisition was notified to the vendors. If the purchasers were genuinely concerned as to the unlawful building works, and not merely seeking a way out of the contract in the face of a rapidly falling market, I have no doubt that these matters would have been raised with much greater expedition.

50.No evidence was called by either party from the Buildings Department to say just what risk there was that enforcement action might be taken. It is plain from the authorities on these types of cases that no matter how insignificant a departure from the regulations there might be, thereby resulting in a situation where there is technically an unlawful building work, the Buildings Department will not say that enforcement action will not be taken. Their position is that unlawful works are prioritised, with the most serious, those that place the public at risk being the highest priority: see e.g. Spark Rich (China) Ltd. v Valrose Ltd. (unreported MP 3739 of 1997).

51.Even when viewed subjectively I am satisfied that there was, in the circumstances of this case, no reason for the purchaser to have been concerned about the unlawful building works. The evidence of the plaintiff's architect established that there was, in reality, no real problem in effecting a full reinstatement. His assessment of the cost of reinstatement at $281,000 (or $331,000 if scaffolding was required), was not challenged by the purchaser's architect, who preferred to make no estimate. This sum must be seen in the context of a $50 million purchase. It is but 0.662% of the purchase price.

52.It should be noted that the potential requirement for a scaffold arose because of the additional matters raised in the Protech letter, particularly the removal of the metal fence erected on the top of the party wall. This would, he said, cost about a further $80,000. However that estimate was based upon a misconception that a scaffold would be required in the removal of the iron rail fence on the party wall. It was later demonstrated that the party wall fence was in a position which in my view would not require a scaffold for its removal.

53.The only real point of difference between the architects, was that the purchaser's expert took the view that for both demolition and reinstatement, a formal building approval would be required whereas it was the view of the vendor's expert that all of the work could be completed without a formal building approval under the provisions of section 41(3) of the Buildings Ordinance. I prefer the view of the vendor's architect. In all of the situations required to be rectified, no new structural issues arise, and all would be restoring the structure to that previously approved by the Building Authority.

54.In viewing the matter subjectively, I have regard to the extensive and reasonable offers made by the vendors, no doubt made with Gladson China Ltd. v Lam Alexander, Chun June & Anor [2001] 1 HKC 318 CA in mind.

55.Having regard to the evidence of the architects, the nature and quality of the alterations and the whole of the circumstances I am satisfied that the prospect of enforcement action by the Building Authority is so remote that it can be discounted entirely. Even now, five years after the events giving rise to this litigation, neither the buildings Authority nor the Redhill Estate Management have taken any steps whatsoever, either in terms of the Protech letter or in respect of the items disclosed by the architect's inspection. I am satisfied that the breaches of the Buildings Ordinance are, in the circumstances of this case minor and trivial, and are capable of being simply, quickly and inexpensively remedied. There is no real risk of title being held to be defeasible by reason of those unlawful works.

56.Consequently, although there may be, by reason of the unlawful building works, a blot on the title, there is no deficiency going to the root of the title It follows that I find that the matters raised in the purchaser's letter of 31 December 1997 are not sufficient to allow them to avoid the contract, and that in terms of cl. 9 of the contract the vendor was able to give good title.

Substantial performance:

57.There may be a blot on the title but I am satisfied that notwithstanding that blot, the purchaser will get substantially what he contracted to get. I adopt the words of Yuen J (as she then was), in Goldful Way Development Ltd v. Wellstable Development Ltd. [1998] 4 HKC 679:

"The test is whether the vendor will be conveying substantially what the purchaser has contracted to get: Rutherford v Acton-Adams [1915] AC 866, PC. As stated in Spry, whether a deficiency is essential and prevents substantial performance depends on the nature of the defect and also on the proportion of the whole of the land affected by it, and the purposes or uses for which the parties knew it was being sold, and for any other matters which might reasonably have affected the decision of the purchaser to enter into the agreement or which were known by the vendor to have affected the decision. It is a matter of fact and degree in each case."

58.In this case the vendor, just as in the Goldful case, was prepared to give a discount , in addition to the cost of re-instatement. Even without re-instatement or a discount, it is plain that the purchaser was getting, physically, precisely what it contracted to buy.

The breach of warranty and the Protech letter:

59.There is no doubt that by failing to disclose the Protech letter the vendor was on breach of the warranty under clause 14 of the agreement (see para 8 above). The manner in which a clause such as clause 14 is to be approached is set out in the judgement of Stock JA in Gladson (supra); in these terms:

"The clause is not to be placed in an artificial setting, but rather in a setting which envisages a measure of cooperation between the vendor and the purchaser, which assumes that when a bargain is struck the parties intend to give effect to that bargain, and to bring it to fruition, so that they each secure substantially that for which they have bargained, and, in this case, cooperation to ensure that such works would be carried out to the purchaser's satisfaction."

The clause contemplates demolition or reinstatement, and it is only when the vendor is unwilling to shoulder the burden of demolition or re-instatement or that cannot be carried out and the purchaser still get substantially that which he contracted to get, does the purchaser's right of recession arise. The whole purpose of the clause is to prevent a purchaser from avoiding a contract by relying on matters that are capable of remedy, in circumstances where there can still be substantial performance, if the remedial work is carried out. That is precisely the situation here.

60.I have already set out the steps the vendor was willing to take. The offers made were both sensible and reasonable. They were rejected by the purchaser, not because they would not satisfy the terms of clause 14, but because the purchaser was determined to try and find a way out of the agreement in the light of the falling market. In the circumstances, the purchaser was not entitled to reject those offers and consequently any right to rescind given by the clause simply did not arise.

61.The option to rescind, if it arose, could, in terms of clause 14, only be exercised "on or before the day of completion". Having found that the right to rescind did not, on the facts, arise, I do not need to consider in detail the argument that by purporting to exercise that right after 1.00 p.m. on Saturday 10 January 1998, i.e. after the time for completion had passed, the purchaser was too late. It is sufficient if I say that I am persuaded that Mr. Mok is right and that the purchaser lost the right to rescind under clause 14, by not having exercised it prior to the time for completion.

Conclusion:

62.I accordingly find that the vendor Plaintiff succeeds on both the claim and the counter claim. There will be declarations in terms of paragraphs 1, 2, and 3 of the prayer for relief in the Statement of Claim. Damages are awarded to the Plaintiff in the sum of $10 million. The Plaintiff is entitled to costs against the Defendant on both the claim and counterclaim.

Representation:

Mr. Y.C. Mok, instructed by Messrs Ho, Tse, Wai & Partners, for the Plaintiff

Mr. C.Y. Li, instructed by Messrs Chiu, Szeto, & Chong, for the Defendant.