Sunny Shine Investment Ltd v. Eve International Enterprise Ltd and Others

HCMP 1953/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1953 OF 2007

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BETWEEN

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Before: Hon Reyes J in Court

Date of Hearing: 30 April 2008

Date of Judgment: 30 April 2008

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J U D G M E N T

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I.    INTRODUCTION

1.This case concerns 3 sets of requisitions relating to the sale of 3 Properties in the Lung Cheung Building in Kowloon. 

2.The 1^st Property is the Building’s Ground Floor Corridor.  The 2^nd Property consists of Car Parking Spaces 3, 4, 5 and 6 in the Building’s Ground Floor.  The 3^rd Property consists of the Corridor and Car Parking Spaces in the Building’s Basement. 

3.The Sale and Purchase Agreement for each Property includes a provision entitling the Purchaser (Sunny Shine) to rescind in the event of a failure to prove good title by any of the respective Vendors (Eve International, Long Faith and Parkwin) of the 1^st, 2^nd or 3^rd Properties.

II.    DISCUSSION

A.  The 1st Property

A.1    Background

4.On 19 August 1986 Mr. Tang Man acquired the 1^st Property. 

5.On 1 August 2002, exercising its power under Building Ordinance (Cap.123) (BO) s. 24(1), the Building Authority (BA) ordered Mr. Tang to rectify certain unauthorised works in relation to the 1^st Property.  But Mr. Tang did not carry out the works.  The BA itself had to cause the works to be executed between 9 October 2003 and 3 February 2004.

6.On 30 July 2004 Luck Famous Investment Ltd. acquired the 1^st Property.

7.On 27 May 2005 Luck Famous sold the 1^st Property to Eve International.

8.On 25 January 2006 the BA registered a Certificate under BO s. 33(1) in the Land Registry.  By that Certificate the BA stated his opinion that the cost of the remedial works ($42,148.50) to the 1^st Property were recoverable from Mr. Tang Man as owner of the premises when the works were completed.

9.On 25 May 2007 Eve International signed a Provisional Sale and Purchase Agreement with Sunny Shine for the 1^st Property.  The Formal Sale and Purchase Agreement followed on 6 June 2007.

10.BO s. 33(9) concerns the recovery of costs (including interest) incurred by the BA in respect of remedial works such as those carried out on the 1^st Property.  The section provides:-

“At any time before such costs and any interest accrued thereon has been wholly recovered, a memorial of the certificate referred to, in subsection (1) may be registered in the Land Registry against the title of any premises or land in respect of which such cost arose, and upon such registration the cost and any interest accrued or thereafter accruing shall:-

(a)     be recoverable by action in Court in accordance with the provisions of this section from any person who from such Land Registry register then or thereafter appears to be the owner of such premises or land:

Provided that:-

(i)  the amount recovered by virtue of this subsection shall not exceed the value of that person’s interest in the premises or land charged; and

(ii)  where the amount so recovered is equal to the value of the premises or land the charge created under paragraph (b) shall become void; and

(b)     constitute a first charge on the said premises or land which shall give the [BA] the same powers and remedies in respect thereof as if he were a mortgagee under a mortgage by deed in common form having power of sale and lease and of appointing a receiver:

Provided that the charge shall be void and no liability shall accrue under this subsection against a bona fide purchaser or mortgagee of the premises or land for valuable consideration who, subsequent to the completion of the works specified in the certificate and before the registration of the memorial thereof, has acquired and registered an interest in the premises or land to be charged.”

11.I shall refer to that part of s. 33(9) which I have italicised and marked in bold as “the Proviso”.

12.The question is whether the s. 33(1) Certificate must be discharged if Eve International is to “give show and prove good title” in accordance with the Sale and Purchase Agreement for the 1^st Property.

A.2   Analysis

13.Mr. Victor Chiu (appearing for Sunny Shine) submits that the answer to the question just posed must be “Yes”.  For this he relies on Wah Ying Properties Ltd. v. Sound Cash Ltd. [1994] 1 HKC 786 (Deputy Judge Cheung).

14.In Wah Ying the BA carried out remedial works on property while X were still owners.  X did not pay the costs of the works.  X sold the property to S.  S on-sold the property to W.  W then entered into an agreement to sell the property to Portwealth.  At this point, the BA registered a s. 33(1) Certificate for the outstanding costs of the remedial works.  Portwealth demanded that W settle the amount certified.  W sued S claiming that S had failed to show good title because, the remedial works not having been paid at the time of sale by S to W, the property was subject to the potential liability of having a s. 33(1) Certificate issued against it.

15.Judge Cheung held that, although the registration at a future date of a s. 33(1) Certificate only imposed a potential liability, that possibility constituted an encumbrance on property.  S (Judge Cheung concluded) had failed to show good title.

16.In his reasoning, Judge Cheung expressed the view that the Proviso merely qualified BO s. 33(9)(b).  He believed that the BA could nonetheless proceed to recover the cost of the remedial work from Portwealth under BO s. 33(9)(a).  He said (at 790H):-

“Although by virtue of the [P]roviso to s. 33(9), the charge has no effect against the plaintiff and Portwealth, the registration of the memorial of the certificate has an effect against Portwealth who was and still is the registered owner of the property when the certificate was registered.  Under s. 33(9)(a), the Building Authority may proceed by action to recover from Portwealth the amount of the cost.”

17.Mr. Chiu submits that, even if the charge created by the registration of the s. 33(1) Certificate here is void against Eve International (which may be regarded as a bona fide purchaser since it bought the 1^st Property before the Certificate was registered), the BA could still recover under s. 33(9)(a) against Sunny Shine.  The Certificate would then still be a blot against title insofar as Sunny Shine was concerned.

18.Mr. Chiu adds that, in contrast to the position in Wah Ying, Sunny Shine would be acquiring the 1^st Property after registration of the Certificate.  Thus, unlike Eve International or Portwealth, Sunny Shine would not be protected by the Proviso from the operation of BO s. 33(9)(b).

19.Mr. Jenkin Suen (appearing for the Vendors) argues that Judge Cheung’s reasoning just summarised was flawed.

20.The Proviso (Mr. Suen suggests) must govern both BA ss. 33(9)(a) and (b).  Sections 33(9)(a) and (b) are, on their face, intertwined and meant to be read together. 

21.Thus, sub-section (a) enables the BA to mount a personal action against the registered owner of premises on which works have been carried out.  Sub-section (b), on the other hand, gives teeth to that personal right by deeming a registered Certificate to be equivalent to a first charge of the relevant premises.

22.The Proviso (Mr. Suen contends) then qualifies both the personal and proprietary remedy created by sub-sections (a) and (b).  The proprietary right of a charge is qualified by the words “Provided that the charge shall be void ... against a bona fide purchaser, etc.”.  The personal right is qualified by the words “Provided that ... no liability shall accrue against a bona fide purchaser, etc.”.

23.If Judge Cheung in Wah Ying were right and the Proviso simply limited the scope of the charge in sub-section (b), the words “and no liability shall accrue” in the Proviso would (Mr. Suen submits) become superfluous.  This is because, if there were no charge, there would be no need to add that “no liability shall accrue” unless the Legislator also intended to cut down on the personal right created by sub-section (a).

24.Consequently (Mr. Suen concludes), given the Proviso, the BA in the present situation would have neither an in personam right against Eve International nor an in rem right against the 1^st Property in Eve International’s ownership.

25.If the charge created by the s. 33(1) Certificate is wholly invalid against Eve International, how (Mr. Suen asks) can it affect Eve International’s title to the 1^st Property, such that Eve International would have to pay the costs of the remedial works before it can give good title to Sunny Shine?  That would be contrary (the argument goes) to the operation of the Proviso, which states that the charge shall be void and Eve International shall have no personal liability in respect of the remedial costs.

26.Does it follow from the foregoing that Sunny Shine takes free of any charge under the s. 33(1) Certificate so that Sunny Shine can itself assign the 1^st Property to later purchasers free from incumbrance under the Certificate?

27.Mr. Suen says “Yes” as a matter of common sense.  It is because (according to Mr. Suen) to hold otherwise would mean that Eve International could not convey a good title to Sunny Shine.  Eve International, although a bona fide purchaser within the terms of the Proviso, would thus be indirectly affected by the charge contrary to the terms of the Proviso.

28.I think that there is force in Mr. Suen’s submission that the reasoning in Wah Ying may be flawed insofar as the ambit of the Proviso is concerned.  I think that, for the reasons identified by Mr. Suen, the Proviso applies to both sub-sections (a) and (b).  It would follow from this that, as against Eve International, the s. 33(1) Certificate gives rise neither to a personal right of action or an enforceable charge.

29.But I do not think that it follows from this that the s. 33(1) Certificate would be void as against Sunny Shine.  Nor does it follow that the Certificate would give rise to no personal right of recovery by the BA against Sunny Shine.  Sunny Shine acquiring the 1^st Property after registration of the Certificate, I do not believe that Sunny Shine could qualify as:-

“a bona fide purchaser who, subsequent to the completion of the works specified in the certificate and before the registration of the memorial thereof, has acquired and registered an interest in the premises.”

in accordance with the Proviso.

30.Thus, as far as Sunny Shine is concerned, the Certificate would constitute an incumbrance and, to the extent that the 1^st Property was assigned to it without the incumbrance having been removed, Sunny Shine would not be acquiring a good title to the 1^st Property.

31.As a result, having contracted to convey a good title to Sunny Shine, Eve International would not be doing so without clearing the charge created by the registered s. 33(1) Certificate.  This consequence is not, in spite of Mr. Suen’s suggestion, a form of indirect enforcement of the charge against Eve International contrary to the Proviso.  It is simply the consequence of Eve International voluntarily undertaking by the Sale and Purchase Agreement, regardless of whether the Certificate is or is not enforceable against itself, to give good title to Sunny Shine.

32.In my view, therefore, by refusing to do anything about the incumbrance created by the registered Certificate prior to conveyance, Eve International failed to deal sufficiently with Sunny Shine’s requisition.

B.   The 2nd Property

B.1    Background

33.By a letter dated 9 March 2005 to Luck Famous the BA noted that works had been carried out to modify certain unauthorised building works in Car Parking Space 5 pursuant to a previous Order by the BA. 

34.The letter stated:-

“I note that modifications have been carried out to the said [unauthorised] building works, and having taken into consideration of the circumstances, I am prepared to withhold further enforcement of my order for the time being.  My Order ... is hereby withdrawn.

However, please note that the remaining building works comprising:-

(a)     Structures erected at Car Parking Space No.5 on G/F and the adjacent garage carriageway.

(b)     Air-conditioning unit supporting frames erected at Car Parking Spaces No. 5 on G/F and the adjacent garage carriageway.

are still considered illegal and may be subject to enforcement action under the Buildings Ordinance should changes in circumstances so require.

You are therefore advised to remove these works.  You should also ensure that no further unauthorized building works are carried out lest prosecution action would be initiated against you under section 40 of the Building Ordinance.”

35.In July 2007 Sunny Shine asked Long Faith whether the illegal structures mentioned in the BA’s letter had been removed.

36.In August 2007 Long Faith responded that:-

(1)     The Order had been complied with in 2005.

(2)     There was no existing Order against Car Parking Space 5 requiring the removal of any structure.  At most, the BA was only advising that certain structures be removed.

(3)     Long Faith had itself inspected the premises and took the view that no illegal structures existed.

37.Long Faith concluded that there was no real risk of enforcement against the 2^nd Property by the BA.

38.I note that on 6 July 2007 the BA gave a Notice to Long Faith requiring “1 Structure erected at Car Parking Space [5]” to be demolished.  It is not wholly clear whether the “1 Structure” referred to is the same as that described in paragraph (a) of the BA’s March 2005 letter quoted above.  In any case, on 15 August 2007 the BA wrote to Long Faith, acknowledging that the unauthorised works mentioned in the 6 July 2007 letter (whatever they may have been) had been demolished.

39.As far as paragraph (b) of the BA’s March 2005 letter is concerned, I have been shown photographs indicating that the air-conditioning supporting frames mentioned there have possibly been taken down.  All that remains appears from the photographs to be horizontal bars supporting fluorescent lights fixed over Car Parking Space 5.  But I find the photographs to be ambiguous.  I am not sure that they constitute a comprehensive view of Car Parking Space 5. Thus, the precise status of the air-conditioning frames mentioned by the BA is unclear. 

B.2    Analysis

40.The question is whether any remaining unauthorised structures at Car Parking Space 5 constitute a significant or substantial risk that enforcement action will be taken by the BA.

41.In my view, in light of the authorities, the risk must be regarded as substantial or significant.

42.By its March 2005 letter, the BA stated that it was prepared to withhold further enforcement action for the time being and to withdraw its previous Order requiring rectification of the remaining structures.  But the BA warned that further enforcement action may be taken in the future.  That is expressly stated to be in the event that “changes in the circumstances so require”.

43.In Modern Sino Ltd. v. Art Fair Co. Ltd. [1999] 3 HKLRD 847 Yuen J held that similar wording in a letter from the BA meant (at 851D) that there “is clearly a risk of enforcement action by the [BA]”. 

44.The evidence in Modern Sino was (at 850J-851B) that “under the current policy of the Buildings Department, enforcement action ... will be taken if the unauthorised building works have posed an obvious hazard to life or property”.  On the other hand, “for those works existing for some time and not posing an obvious hazard, enforcement action would be taken in sequence”. 

45.Yuen J came to a similar view in Heung Sui Kei v. Benefit Charter Ltd. [1999] 3 HKC 543 where the BA issued a similar letter as that here.

46.Yuen J pointed out that, the owner of land having been ordered by the BA to remove certain unauthorised structures, there was clearly a threat of enforcement action by the BA if the relevant structures were not demolished.

47.The BA’s order could not be complied with (Yuen J held) except by the owner doing what the BA told him to do.  Partial demolition, where the BA continued to regard the remaining works as unauthorised, could not be compliance.

48.Further, although in Heung Sui Kei (as here) the BA had withdrawn its order upon the demolition of some (but not all) of the offending structures, the withdrawal letter could not be treated as a letter of compliance.

49.Yuen J continued (at 550H-551D):-

“Thus, where the order had not been ‘complied’ with, where the letter from the [BA] showed that there remained on the property unauthorised building works which the [BA] has not forgiven, for which the owner’s obligation of removal remains under threat of enforcement sometime in the future, it cannot be said that good title has been shown.

....

... I differ with great respect from the opinion of the late Jerome Chan J in Ultra Eternal Ltd. v. Liu Tai Cheong [1997] 1 HKC 258, where he held that similar wording (less the express withdrawal) showed that ‘the risk of further enforcement without a new order being issued by the [BA] would be negligible’ [at 268c].

... [T]he point is not whether there would be enforcement without a new order, or not.  The point is that the order evidenced that there were unauthorised building works on the property: although the order may have been withdrawn, unauthorised building works remained on the property which the [BA] knew about and on which (the [BA] has stated) he is only ‘withholding’ action ‘for the time being’.  I do not see why it is said that there is no risk of enforcement, or that the risk is negligible.  I fail to see how such a title could be enforced on an unwilling purchaser.”

50.Mr. Suen submits that in light of the withdrawal of the BA’s previous Order, the compliance with the later Notice and what the photographs possibly show, it cannot be said that there is still a significant or substantial risk that the BA would take enforcement action culminating in re-entry.

51.But, like Yuen J, I am not persuaded.  It seems to me in particular that, far more cogent evidence than the ambiguous photographs shown to me, would be necessary to establish that all unauthorised structures referred to in the previous Order had been removed.

52.I do not believe that the requisition in relation to the 2^nd Property has been adequately dealt with by Long Faith.

C.    The 3rd Property

C.1  Background

53.The problem here is similar to that encountered in relation to the 2nd Property.

54.The BA ordered that certain works in the 3^rd Property be removed.  There was partial compliance with the Order.  But unauthorised “canopies and metal frames erected over the vehicular ramp” remained.  Nevertheless, in April 2005 the BA wrote to Luck Famous in relation to the 3^rd Property in similar terms to those set out in the March 2005 letter relating to the 2^nd Property.

55.Now, asked by Sunny Shine’s solicitors whether the “canopies and metal frames” had been removed, Parkwin’s solicitors replied in similar terms as they had done with the requisition to Long Faith.

56.I have also been shown photographs which (Mr. Suen suggests) show that the “canopies and metal frames” have been demolished.  This, however, is again far from clear from the photographs.  For instance, there appear to some sort of frames or bars suspended over the area in question.

C.2   Analysis

57.The analysis here is similar to that in relation to the 2^nd Property.  On the evidence, I am not satisfied that there has been full compliance with the BA’s previous Order.  Following Modern Sino and Heung Sui Kei, I cannot say that the risk of enforcement action by the BA is negligible.  I therefore do not think that the requisition in relation to the 3^rd Property was adequately answered by Parkwin.

III.     CONCLUSION

58.Sunny Shine’s requisitions have not been satisfactorily answered by Eve International, Long Faith and Parkwin.  Good title has not been shown in respect of the 1^st, 2^nd and 3^rd Properties.  I shall now hear the parties on appropriate consequential Orders.

Mr Victor K H Chiu, instructed by Messrs Wong, Fung & Co., for the Plaintiff

Mr Jenkin Suen, instructed by Messrs Li, Kwok & Law, for the Defendants