CITY UNIVERSITY OF HONG KONGSchool of Law

LW3607A Land Law ISemester A, 2012/13

Topic 13 – Government Leases and Conditions

Part 1 - Introduction

Virtually all land in Hong Kong is held under the Government Lease.

A lessee has exclusive possession of the leased land for a fixed duration.

The leasehold system gives the Hong Kong Government a high degree of control over the way in which land is developed and used through covenants imposed on the grantee in the Lease.

The Hong Kong Reunification Ordinance

This came into effect on 1 July 1997.

Under this Ordinance, the term “Crown” becomes “Government”. The Crown Lease becomes the Government Lease and the Crown rent becomes Government rent.

All land in Hong Kong became the property of the People’s Republic of China but the HKSAR Government is responsible for its management, use, development and leasing. See Article 7 of the Basic Law.

The titles of several Ordinances have been changed by the Adaptation of Laws (Interpretative Provisions) Ordinance, Ord No. 29 of 1998.

Part 2 - Land Surveys, Land Boundaries and the Demarcation of Land

Under the Land Survey Ordinance 1995 (Cap 473), a plan must be drawn up by an authorised land surveyor whenever the land is divided by way of sectioning or subdivision. The plan must be registered and a copy deposited with the Land Survey Authority.

Land is divided into lots, e.g. Inland lots, Marine Lots, Rural Building lots.

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In the New Territories, some of the land is referred to by its lot number and the Demarcation District in which it is situate.

The Land Registry Headquarters are located in Queensway Government Office and there are now 7 New Territories Search Offices.

All registries are computerised. The Integrated Registration Information System Online Services enable the public to access them through the Internet.

When a new grant of land is made, a Register is opened.

Subject to any restriction in the Government L ease , an owner can divide a lot by:

(a) Sectioning of the Land

Most of the sectioning of land in Hong Kong is achieved by Deed Polls. However, the naming of the smaller plots of land can be confusing at times. The manner of nomenclature of Hong Kong land in the event of sectioning or division thereof can be illustrated by the following example.

Say X has a plot of land registered as Inland Lot No. 1234. If X wants to divide the land into two portions, X may execute a Deed Poll and by virtue thereof divide it into Section A of Inland Lot No. 1234 and the Remaining Portion of Inland Lot No. 1234:

Section A of Inland Lot No. 1234The Remaining Portion of Inland Lot No. 1234

A plan is usually attached to the Deed Poll to show exactly which portion of Inland Lot No. 1234 is now Section A thereof and which portion is now the Remaining Portion thereof.

(Of course, X may want to divide the land into more than 2 portions from the start. If that is the case, X may divide the land into Section A, Section B and the Remaining Portion. One deed poll may serve to sever the land into any number of portions.

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Section A of Inland Lot No. 1234Section B of Inland Lot No. 1234The Remaining Portion of Inland Lot No. 1234

Alternatively, X may first divide Inland Lot No. 1234 into Section A and the Remaining Portion by virtue of one Deed Poll, then carve out Section B of Inland Lot No. 1234 and further portions out of the Remaining Portion of Inland Lot No. 1234 later by virtue of another Deed Poll.)

After X has, by virtue of a Deed Poll, divided the Lot into Section A and the Remaining Portion, X may then wish to divide Section A of Inland Lot No. 1234 into even smaller plots of land.

By virtue of another Deed Poll , Section A can be divided into Subsection 1 of Section A of Inland Lot No. 1234, subsection 2 of Section A of Inland Lot No. 1234 and the Remaining Portion of Section A of Inland Lot No. 1234.

Subsection 1 of Section A of Inland Lot No. 1234Subsection 2 of Section A of Inland Lot No. 1234The Remaining Portion of Section A of Inland Lot No. 1234The Remaining Portion of Inland Lot No. 1234

If X then wants to further divide the Remaining Portion of Inland Lot No. 1234, X may at any time execute yet another Deed Poll, carving out portions therefrom to be known as Sections B, C and D of Inland Lot No. 1234 (and NOT Section A of the Remaining Portion, Section B of the Remaining Portion and the Remaining Portion of the Remaining Portion). The Remaining Portion of Inland Lot No. 1234 shrinks in size as a result.

Subsection 1 of Section A of Inland Lot No. 1234Subsection 2 of Section A of Inland Lot No. 1234The Remaining Portion of Section A of Inland Lot No. 1234Section B of Inland Lot No. 1234Section C of Inland Lot No. 1234

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Section D of Inland Lot No. 1234The Remaining Portion of Inland Lot No. 1234

Consider the following questions:-

1. If X wants to divide Subsection 2 of Section A of Inland Lot No. 1234 into three smaller plots of land, how should X name them?

The cycle of nomenclature begins again, and these smaller plots of land will be known as

- Section A of Subsection 2 of Section A of Inland Lot No. 1234,- Section B of Subsection 2 of Section A of Inland Lot No. 1234, and- The Remaining Portion of Subsection 2 of Section A of Inland Lot No. 1234.

2. If X wants to divide the Remaining Portion of Section A into four smaller plots of land, how should they be named?

Since Subsection 1 and Subsection 2 of Section A of Inland Lot No. 1234 already exist, the four smaller plots of land should be named:-

- Subsection 3 of Section A of Inland Lot No. 1234,- Subsection 4 of Section A of Inland Lot No. 1234,- Subsection 5 of Section A of Inland Lot No. 1234, and- The Remaining Portion of Section A of Inland Lot No. 1234

3. If X then wants to divide Section C of Inland Lot No. 1234 into five smaller plots of land, what will be the names of the five plots of land?

The names of the five plots of land making up the original Section C would be

- Subsection 1 of Section C of Inland Lot No. 1234,- Subsection 2 of Section C of Inland Lot No. 1234,- Subsection 3 of Section C of Inland Lot No. 1234,- Subsection 4 of Section C of Inland Lot No. 1234, and- The Remaining Portion of Section C of Inland Lot No. 1234,

4. If, last of all, X now wants to carve out one small plot of land from the remaining portion, what will that small plot of land be called?

That small plot of land will be named Section E of Inland Lot No. 1234 (since Sections A, B, C and D of Inland Lot No. 1234 already exist). There is no such thing as Section A of the Remaining Portion.

There are exceptions to this manner of nomenclature but they are rare, so it is always advisable to use this scheme when sectioning a lot or a section of a lot.

When land is sectioned, new section registers are opened in the Land Registry.

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Government rent is apportioned between the various sections. A note of the apportionment will appear in the Land Register.

See the reference to ‘apportioned Government rent’ in the Assignment in Form 1 of the Third Schedule to the CPO.

(b) Subdivision of Land

When a flat in a multi-story building is sold, the sale includes:

(1) undivided shares in the land and the building; together with (2) the right to the exclusive use of the flat.

Thus each owner of a flat has an interest in the land on which the building is erected.

The owners are all tenants in common of the land and the building.

When land is subdivided in this way, new subdivision registers are opened for each flat.

Government rent is sometimes apportioned between each flat, but very often each unit owner’s liability for payment is set out in a Deed of Mutual Covenant, which regulates the rights and interests of all owners of units in the building.

Example Queen’s Court, Old Peak Road, Hong Kong

Subsection 1 of Section Aof Inland Lot No 1234

Flat 4A is sold to Mr Luk. He buys a 1/8th equal undivided share of and in sub-section 1 of Section A of Inland Lot No. 1234 and of and in the building on the lot known as Queen’s Court together with the right to the exclusive use occupation and enjoyment of Flat 4A Queen’s Court.

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4A 4B

3A 3B

4A 4B

3A 3B

It is possible to search in the Land Registry against each lot, each section or subsection of a lot and each subdivision (that is, each flat).

Searches can be historic or current and the Unposted Memorial List and Memorial Day Book can also be searched.

Plain and certified copies of registered documents can be obtained from the Land Registry.

Part 3 - Government Leases and Conditions

When land is sold at a public auction in Hong Kong, as soon as the land is knocked down to the highest bidder, the Memorandum at the end of the Particulars and Conditions is signed on behalf of the Government and by the purchaser. There is no need for sealing because this is an agreement to grant a lease (the interest is equitable).

Since the 1960s, the Government has not granted Leases to private developers. Instead, it has granted Conditions. The Particulars and the Conditions and the Memorandum together constitute a binding agreement for Lease.

On a sale of a new lot, the government grants Conditions of Sale.

When land is exchanged for other land, Conditions of Exchange are issued. (This occurs usually when the grantee agrees to a variation of Lease terms with the government. Instead of executing a deed of variation, the grantee usually surrenders his lease in return for a set of Conditions of Exchange of the same piece of land.)

The government also grants Conditions of Grant or Regrant or Extension (of land, not time).

Most land in Hong Kong is held under Conditions. Thus most owners have an equitable interest. This is significant:

(i) for the purpose of determining priority under the common law rules (since in most cases, priority is now determined by registration, the distinction might have little practical importance);

(ii) in relation to formalities, sealing is required for the creation or transfer of a legal interest;

(iii) in relation to the description of the interest – not ‘the residue of the government lease term’ but ‘the right to a Government Lease’; and

(iv) because a legal charge cannot be created over an equitable interest.

The CPO provides for conversion of the equitable interest to a legal interest.

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(a) Section 14 of the CPO provides that where a person has a right to a Government Lease of land upon compliance with any conditions precedent then the equitable interest in the land is converted to a legal interest as if held under a Government Lease upon compliance with the conditions precedent. A Government Lease is, therefore, deemed issued.

Hence, on actual compliance, the grantee holds a legal estate.

Nevertheless, when the grantee wants to deal with his property – for example, by selling or mortgaging it – he will need to produce evidence of compliance.

A certificate of compliance is evidence of compliance.

(b) The conditions precedent are deemed complied with (for the purposes of section 14 of the CPO):

where the agreement for Government Lease is dated before 1   January 1970 ; or

where the agreement is dated after 1 January 1970 and a certificate of compliance has been issued and registered in the Land Registry.

See Tai Wai Kin v Cheung Wan Wah Christina [2004] 3 HKC 198 – held that the registration of the certificate of title essential to the passing of good title.

See also Liu Tak Kin v Chan Yiu Kai [1998] 4 HKC 362 – held that a certificate of compliance must be registered before s 14(3)(a) CPO can be relied on.

Actual compliance with the conditions precedent converts the equitable interest to a legal estate. The certificate of compliance is merely evidence of compliance but note the decisions in Tai Wai Kin and Liu Tak Kin above.

(c) Conditions precedent include payment of the premium and compliance with the building covenant.

(d) Note the different forms that evidence of compliance may take:

under section 14(3)(b) of the CPO, endorsement of a note on the Government Lease and registration of the endorsement.

under section 14(3)(c) of the CPO, entry on the Land Register of a note that there has been compliance;

However, other evidence of compliance might be produced Paul Chen & Anor v Lord Energy Ltd [1999] 1 HKC 1.

(e) When investigating title to land held under Conditions, it is necessary in some cases to ask to see a certificate or other evidence of compliance.

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If registered, a certificate would appear in the encumbrances register in the Land Registry.

Part 4 - The Length of the Lease Term

Hong Kong Island and Kowloon as far as Boundary Street

In the early days of Hong Kong’s history 75-year terms were granted.

In 1848 some leases on Hong Kong island were granted for 999 years (mainly in Central and on the Peak).

At the end of the 1800s, some leases were granted for 75 or 99 years but building land has since then usually been granted for a term of 75 years with a right to renew for a further period of 75 years.

These leases are renewed automatically by the Government Leases Ordinance (Cap 40).

The Basic Law provides that a grant may be made for a term of 50 years from the date of the grant.

New Territories

The New Territories were leased by China to Hong Kong for 99 years from 1st July 1898.

Leases (subleases) were in turn granted by the Hong Kong Government for 75-year terms from 1st July 1898 with rights to renew for further terms of 24 years less the last 3 days.

These leases were automatically renewed by the New Territories (Renewable Government Leases) Ordinance.

Since 1959, terms of 99 years less 3 days from 1 July 1898 were granted.

When there is automatic renewal, there is no requirement to pay any further premium.

Part 5 - The Effect of the Basic Law (Annex III of theJoint Declaration)

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Article 120 - Leases granted before the establishment of the Hong Kong SAR, but expiring after 1997

These leases are recognised.

These include leases granted before and after the Joint Declaration but in relation to leases granted between the Joint Declaration and 30 June 1997, the term will expire no later than 30 June 2047.

For these leases, the government rent is nominal up to 30 June 1997 and will become 3% per annum of the rateable value from time to time thereafter.

Renewable Government Leases (those containing rights to renew on expiry of the initial term) expiring before or after 1997

These leases are automatically renewed by the Government Leases Ordinance for the stipulated period of renewal in the Government Lease.

The renewal is at an annual rental of 3% of the rateable value at the date of renewal and not as adjusted from time to time.

Registration in the Land Registry of the new Government rent is conclusive evidence of the grant of the new lease: section 12 of the Government Leases Ordinance.

Article 121 - Non-renewable Government Leases expiring before 1997

These leases are extended without payment of a premium until 30 June 2047 at an annual rental of 3% of the rateable value as adjusted from time to time (the rent remains unchanged for indigenous New Territories villagers).

Since all leases in the New Territories were due to expire in 1997, they were all automatically extended by the New Territories Leases (Extension) Ordinance (Cap 150) until 30 June 2047 unless the lessee opts otherwise. This Ordinance does not apply to certain leases for special purposes.

Article 123 - The grant of new Government Leases

New Government Leases must be dealt with in accordance with the policy of the HKSAR.

The Hong Kong Government has indicated that it will grant new leases for a period of 50 years from the date of the grant (that is, they can expire beyond 2047) at an annual rent of 3% of the rateable value of the property as adjusted from time to time.

Part 6 - The Terms of Government Leases and Conditions

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They include the following:

(1) Premium

This is payable in a lump sum or sometimes by instalments for industrial sites, regrants or private grants.

(2) Government Rent

This is sometimes a nominal amount which is collected - usually half yearly but sometimes less often.

Government rent is sometimes apportioned between the owners of flats in a multi-storey building under the Government Rent and Premium (Apportionment) Ordinance (Cap 125). Details would be noted on the Land Registry search.

In most cases, however, owners of flats in a multi-storey building contribute to the Government rent in the proportions set out in the Deed of Mutual Covenant.

(3) User

Old Government Leases usually contain an offensive trades clause - a restriction on user for the purposes of certain offensive trades including the business of a victualler (food business). See Sunny Star Ltd v Au Mui (1995) MP No. 897/95 (shop used for sale of roast meat).

Conditions contain terms concerning user – e.g. private residential, industrial.

Modern Conditions usually also specify the number of car parks to be provided and the site coverage and plot ratio.

There are numerous cases concerning construction of user covenants. The following decision is useful – it concerns a private residential lease:

Donald W Shields (No 2) v Mary Chan [1972] HKLR 121:‘premises to be used as private and domestic premises only’. The court held that use of one room for conducting Oxfam business did not breach the covenant.

(4) User in Block Government Leases

Block Government Leases usually include a schedule of lots and description of the land use.

In Attorney General v Melhado Investments Ltd [1983] HKLR 327 it was held that the description of land in the Block Government Lease was descriptive of the use of the land at the time the lease was granted and that the use of the land was not

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restricted to that use. This led to the widespread use of New Territories land for storage.

Amendments to the Town Planning Ordinance (Cap 13) were made in 1991 to restrict change of use of land in Development Permission Areas.

There is often a covenant not to use land for building purposes. See Watford Construction Co v Secretary for the New Territories [1978] HKLR 410 CA.

(5) Restrictions on Alienation

Conditions of Sale and Exchange usually contain a restriction on selling or leasing without the consent of the Director of Lands (formerly the Registrar General) before compliance with the conditions precedent.

This restriction makes it necessary to obtain consent to sell units in the course of construction (pre-sales) under the Consent Scheme. You should be able to identify the restriction on alienation in the attached Conditions.

Usually, there is a restriction on mortgaging except by way of building mortgage to secure building costs. The form of mortgage must require the mortgagee to release individual units on payment of the proceeds of sale to the mortgagee.

There may be a requirement to register dealings. Furthermore, there is usually a requirement to register a car park layout plan before any dealing: Paul Chen & Anor v Lord Energy Ltd [1999] 1 HKC 1. The plan will appear in the encumbrances register in the Land Registry.

(6) The Building Covenant

This requires the grantee to build a building of certain value or with a certain floor area within a fixed period of time.

The Government may extend the time for compliance with the building covenant upon payment of a premium. See the Lands Department Information Note 1/85. See Lok On Co Ltd v Attorney General [1986] HKLR 857 in which the Government’s right to charge a premium for an extension of time for performing the building covenant was upheld.

(7) Allocation of Undivided Shares

When a unit in a multi-storey building is sold, the purchaser buys undivided shares in the land and the building erected on the land together with the right to the exclusive use of the unit.

Modern Conditions usually specify that units cannot be sold without undivided shares. See the attached Conditions of Sale.(8) The Deed of Mutual Covenant and Management Agreement – see a later

Lecture

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The rights and obligations of the owners of flats in a multi-storey building are governed by a Deed of Mutual Covenant, which provides for the building to be managed and maintained and for owners to contribute towards the cost.

Until the 1980’s, there was no obligation for a developer to create a Deed of Mutual Covenant.

In cases where a Deed of Mutual Covenant was created, the terms were at the discretion of the developer.

Modern Conditions require that a Deed of Mutual Covenant is entered into on the first sale of undivided shares and provide that the terms are subject to the approval of the Director of Lands. See the attached Conditions.

(9) Implied Covenants?

There are implied covenants by the government – for example, for quiet enjoyment, not to derogate from grant and to provide reasonable access to permit development.

(10) Waiver?

There are a number of cases in which it has been held that the government has expressly or impliedly waived the right to take action in respect of a breach of covenant by the grantee.

Part 7 - Variation of Government Lease Terms

The terms of any Government Lease or Conditions can be varied only with the consent of the parties. It is common for the Government to agree a variation of the development conditions with the grantee on payment of a premium to the Government.

Application for a variation is made to the Land Advisory and Conveyancing Office (LACO) of the Lands Department.

A Government Lease used to be varied by a Deed of Variation under seal.

Conditions are varied by a Letter of Modification signed under land.

Section 14(A) of the CPO provides that a Government Lease may now be varied by a Letter of Modification. This would usually be registered in the encumbrances section of the Land Register.

Any variation or modification of the terms on which land is held from the government is part of the Government Lease or Conditions. These documents would

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appear in the encumbrances register in the Land Registry.

Part 8 - Termination of Government Leases

(1) Expiry of the term

(2) Surrender by the lessee

(3) Resumption by the Government

Many Government Leases contain an express right for the Government to resume for public purposes.

The Government has, however, tended not to exercise its contractual right to resume but has, instead, tended to rely on its rights under the Lands Resumption Ordinance (Cap 124) or under rights contained in Ordinances enacted for a particular purpose – e.g. Mass Transit (Land Resumption and Related Provisions) Ordinance (Cap 276).

Compensation is paid for the land resumed. See Article 6 of the Basic law which provides that no land shall be resumed without compensation being paid. See also Article 14 of the Hong Kong Bill of Rights – no arbitrary or unlawful interference with home.

(4) Re-entry by the Government

All Government Leases or Conditions contain an express right of re-entry for breach of any covenant in the lease.

Re-entry is effected by the registration of a memorial in the Land Registry under section 4(1) of the Government Rights (Re-entry and Vesting Remedies) Ordinance (Cap 126).

The land owner may petition the Chief Executive for relief or apply to the court even after re-entry. Relief may be granted in respect of any breach: Shiloh Spinners v Harding [1973] 1 All ER 90.

Part 9 - Summary

(1) Every title to land in Hong Kong starts with a Government Lease or Conditions.

If the title starts with Conditions, decide whether it is necessary to see evidence of compliance.

(2) The vendor (seller) must always show the lease to a purchaser. The lease includes any document varying its terms (a letter of modification) or

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extending the area of land (Conditions of Extension).

(3) When a purchaser buys a flat, he is buying the flat for the residue (rest) of the term created by the Lease.

You should be able to identify the length of the term from the title deeds and the legislation affecting renewals or extensions to the original term.

Government Leases and Conditions affect land and the way in which it can be used and developed. In the title investigation process, therefore, the terms should be considered very carefully and clients should be advised on them.

(4) A tenant taking a short Lease does not usually investigate the landlord’s title, but a tenant should be aware of user restrictions in the Government Lease that affect him.

The tenancy agreement might contain covenants by the tenant not to breach the terms of the Government Lease.

A tenant should not usually agree to observe and perform the terms of the Government Lease but might agree not to breach them. See the reference to positive and restrictive covenants in s 41(6) CPO.

Essential Reading:

1. Conditions of Sale for Shek O Inland Lot No 96

2. Government Lease of Inland Lot No 4494

3. Section 14 of the CPO (Attachment 1)

4. Tai Wai Kin v. Cheung Wan Wah Christina and Another (Attachment 2)

5. Minchest v. Lau Tsui Kwai & Another (Attachment 3)

Attachment 1: Section 14 of the Conveyancing and Property Ordinance (Cap 219)

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(1) Where a person has a right to a Government lease of any land upon compliance with any conditions precedent, then, upon compliance with those conditions-

(a) the equitable interest under that right shall become a legal estate in that land as if held under a Government lease issued in accordance with that right; and

(b) for the purposes of section 42 and any other law, such a Government lease shall be deemed to have been issued upon compliance with those conditions.

(2) Where, under an agreement for a Government lease entered into before 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent he shall be deemed, for the purposes of this section, to have complied with those conditions on the commencement of this section.

(3) Where under an agreement for a Government lease entered into on or after 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent, he shall be deemed, for the purposes of this section, to have complied with those conditions-

(a) upon the issue by the Government of a certificate that those conditions have been complied with and the registration of that certificate in the Land Registry under the Land Registration Ordinance (Cap 128); or

(b) upon the endorsement by the Government on the Government lease of a note to the effect that those conditions have been complied with and the registration of a copy of that endorsement in the Land Registry under the Land Registration Ordinance (Cap 128); or

(c) upon the entry on the register kept in the Land Registry under the Land Registration Ordinance (Cap 128) relating to the land of a note to the effect that those conditions have been complied with.

(4) Where a person has a right to a Government lease of any land and that right is not subject to any conditions precedent-

(a) the equitable interest under that right shall become a legal estate in that land as if held under a Government lease issued in accordance with that right; and

(b) for the purposes of section 42 and any other law, such a Government lease shall be deemed to have been issued on the commencement of the Conveyancing and Property (Amendment) Ordinance 1988 (31 of 1988) or on the date of the grant of that right, whichever is the later.

(5) Where a person has a right to a Government lease of any land and that land is partitioned by assignment or otherwise by deed, this section shall apply to each part of that land constituted by that partition, as it applies to the whole of that land, as if there were a right to a Government lease of each such part.

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(6) Where a person has a Government lease, or a right to a Government lease, of any land and additional land is granted to that person with the intent that he should hold it as part of the land leased, this section shall apply to that additional land as if that additional land were part of the land originally leased and held subject to any further conditions precedent imposed when that additional land was granted.

Attachment 2 – Tai Wai Kin v. Cheung Wan Wah Christina and Another

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1858 OF 2003

---------------------

IN THE MATTER of an Agreement for Sale and Purchase dated 7 January 2003 and made between Cheung Wan Wah Christina as vendor and Tai Wai Kin as purchaser for the sale of All That one equal undivided 3rd part or share of and in All That piece or ground registered in Sai Kung New Territories Land Registry as Lot No.724 in Demarcation District No.227 (“the Lot”) And of and in the messuages erections and buildings thereon (“the Building”) together with the sole and exclusive right and privilege to enjoy All That the Second Floor together with the Roof of the Building (“the Property”)

and

IN THE MATTER of Section 12 of the Conveyancing and Property Ordinance, Cap.219

BETWEEN

TAI WAI KIN Plaintiff

and

CHEUNG WAN WAH CHRISTINA Defendant

JOHNNIE YAM, JACKY LEE & CO. Third Party(a firm of solicitors)

----------------------Before : : Hon Tang J in Court

Date of Hearing : 7 May 2004

Date of Judgment : 18 May 2004

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----------------------J U D G M E N T

------------------------

Background

1 The plaintiff is the purchaser under an agreement for sale and

purchase dated 7 January 2003 of the 2nd floor and the roof of the building

(“the Building”) erected on Lot 724 in DD227 (“the Lot”) as such the plaintiff

was also purchasing a one third share in the Lot. The plaintiff was the

vendor. Messrs Johnnie Yam, Jacky Lee & Co (“the Third Party”) who have

been joined by order of Reyes J were the vendor’s solicitors in this

transaction. The purchase price was $1,650,000 and a deposit of $165,000

has been paid. Completion was to take place on 7 February 2003. However,

pursuant to clause 37 of the sale and purchase agreement, it was postponed

to 6 March 2003 because the plaintiff required a loan from the Hong Kong

Housing Society (“HKHS”) Home Starters Loan Scheme. It was also agreed

that the defendant must prove good title to the HKHS at least 14 working

days prior to the completion date, namely, 17 February 2003.

2 The transaction fell through as a result of requisitions raised by

the plaintiff.

3 The question before me is whether the defendant has failed to

answer adequately and/or satisfactorily the requisitions raised on behalf of

the plaintiff and whether the defendant has failed to prove or make out a good

title.

4 The Property is held under New Grant No.5501 (“the New

Grant”) dated 10 August 1973. The Lot is described as “as delineated and

shown coloured red on plan annexed” to the New Grant.

5 By a Boundaries Agreement Memorial No.90124 dated 7 July

1977, the then owner surrendered part of the Lot coloured red on the plan

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annexed to the New Grant such that thereafter Lot 724 was as shown

coloured pink on the plan annexed to the Boundaries Agreement.

6 The title documents were provided by the Third Party to the

plaintiff’s solicitors Messrs Terry Yeung & Lai (“TYL”) on 6 January 2003.

These documents included the New Grant, the Boundaries Agreement, the

Modification Letter dated 12 January 1983 and a Certificate of Exemption of

building works dated 12 October 1991.

7 It seemed that the building in which the Property is situated was

erected after the date of the Certificate of Exemption, namely 12 October

1991.

8 The Modification Letter modified special conditions 3 and 5 of

the New Grant such that a three-storey building as opposed to a two-storey

building was permitted but its height must not exceed 7.62 metres and the

maximum built-over area not to exceed 65.03 square metres.

9 The Certificate of Exemption was given pursuant to section 5 of

the Buildings Ordinance (Application to the New Territories) Ordinance,

Cap.121 (“Cap.121”) to exempt the building(s) to be erected on Lot 724 from

the provisions of the Buildings Ordinance, Cap.123. It was in terms a

certificate of exemption of building works. It exempted the building to be

erected from :

“ … the regulations made thereunder in relation to building works, subject to the conditions contained or referred to in the attached schedule and the terms and conditions governing the lot.

The Government reserves the right to revoke and cancel this Certificate in the event of any breach of any of the aforementioned Conditions in which case you would be required to apply formally to the Building Authority for approval of plans. The Government may also be entitled to take enforcement action under the Lease.

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Please note that ‘building works ’ under the Buildings Ordinance (Application to the New Territories) Ordinance, Chapter 121 do not include site formation or drainage works and you are required to submit plans formally to the Building Authority under the terms of the Buildings Ordinance for the approval of such site formation and drainage works unless separate Certificates of Exemption are issued by me in respect of such works.”

10 Another document that I should mention is a Toleration Letter

Memorial No.203884. The letter confirms that :

“ … that the breach of condition contained in the Modification Letter dated 12.1.1983 set out in the Schedule below will be tolerated by Government only for the life of the building presently erected on the lot.

Schedule

Condition No. Nature of breach

(1)3.(a) House height in excess of 0.06m

As the building erected on the lot is exempted from the provisions of the Buildings Ordinance Cap.123, under the Buildings Ordinance (Application to the New Territories) Ordinance Cap.121, no site formation, building or other plans had been approved by the Building Authority in respect of the above lot and building erected thereon and accordingly this certificate is not to be construed as a representation by Government that the building erected on the above lot or any works in connection therewith are structurally safe and Government expressly excludes any liability arising out of such construction or works.”

11 The Letter of Toleration concluded by saying “A Certificate of

Compliance will/may be issued to you as soon as the registration formalities

attaching to the duplicate of this letter have been completed.”

12 The Letter of Compliance is dated 26 March 1993 and stated :

20

“ The redevelopment of the house on the lot pursuant to the New Grant No.5501 as modified by Memorial No.104472 under which the above lot is held has been inspected and I certify that all the positive obligations imposed on the grantee of the above lot have been complied with the requirement of this office.

I have no objection to the structure to be occupied.”

13 The letter of compliance is important because general

condition 10 in the New Grant provides :

“10.(a)When the conditions herein contained have been complied with to the satisfaction of the District Officer, the grantee shall subject to approval of his title by the District Officer be entitled to a Crown lease of the lot for the term stated in the preamble to these Conditions.”

14 Also under special condition 21(b) :

“ No building at any time hereafter to be erected on the lot shall be occupied in any way except by not more than two watchmen, until the District Officer shall have certified in writing that these Conditions have been complied with to his satisfaction.”

15 Under section 14(3) of the Conveyancing and Property

Ordinance (“CPO”), a person who has a right to a Government lease upon

compliance with any conditions precedent :

“…shall be deemed, for the purposes of this section, to have complied with those conditions —

(a) upon the issue by the Government of a certificate that those conditions have been complied with and the registration of that certificate in the Land Registry under the Land Registration Ordinance (Cap 128);”

Requisitions

16 The requisitions were first raised on 9 January 2003. The first

related to the plans annexed to the New Grant and the Boundaries

21

Agreement. It is said that the Lot could not be identified because the copies

of the plans annexed to those documents were not coloured.

17 The second outstanding requisition related to the Certificate of

Exemption of building works and it asked for Certificates of Exemption in

respect of the site formation and drainage works issued by the District Lands

Officer or proof that plans of such works had been submitted to and approved

by the Building Authority.

18 The third related to the fact that no Certificate of Compliance

had been registered and referred to section 14 of the CPO.

19 The reply by the Third Party dated 11 January 2003 was that

there was no legal requirement that a plan annexed to a certified copy of

documents should be coloured. And it also stated that the location of the

property could be identified easily in accordance with the colour code inside

the plan in question. I should mention that neither of the plan had any colour

code.

20 As for the requisition relating to the site formation and drainage

works, the answer given was that :

“Please refer to the aforesaid toleration letter and letter of compliance dated 2nd November 1993 whereby the building erected on the lot is exempted from the provisions of the Buildings Ordinance Cap.123, no site formation building or other plans have been approved by the building authority in respect of the lot.”

21 On the question of the requisition of the Letter of Compliance

the answer was that the issuance of the Letter of Compliance was “an

evidence to prove that a crown lease is deemed to be granted in accordance

with condition No.10 of the New Grant No.5501, the registration of the letter

of compliance is meaningless”. This is wrong and ignored section 14(3) of

the CPO.

22

22 I will deal with greater detail with the second requisition because

of its complication.

23 In response TYL by their letter dated 15 January 2003 wrote in

relation to the site formation and drainage works :

“Nowhere in the said Toleration Letter and Letter of Compliance dated 2nd November 1993 (copy enclosed) states that Certificates of Exemption of the site formation and drainage works in respect the of Lot have been issued or that the plans in respect of the site formation and drainage works of and in the Lot have been submitted to and approved by the Building Authority. We repeat and maintain our requisitions. As noted from the said Toleration Letter, the height of the building of which the above property forms part exceeds 7.62m by 0.06m, please let us have an Occupation Permit in respect of the said building issued by the Building Authority.”

It is to be noted that they asked for the Occupation Permit.

24 The reply from the Third Party came on 21 January 2003. In

relation to the site formation and drainage plans they said :

“The toleration letter memorial no.203884 clearly stated that no site formation building or other plans has been approved by the Building Authority. However, the Government has exempted this requirement of Certificate of Exemption by way of issuance the compliance of the Lot an estoppel has been arise (sic) in favour of the landowner which prevent the subsequent request for evidential documents.”

25 TYL replied on 24 January 2003 and referred to section7(2) of

Cap.121 and said :

“… Since the height of the building of which the above property forms part exceeds the height of the building described in Part I of the Schedule to the said Ordinance, production of an Occupation permit in respect of the said

23

building issued by the Building Authority is required. We repeat and maintain our requisition.”

26 The Third Party replied on 5 February 2003 and enclosed a

copy of the letter to the Building Authority dated 30 January 2003.

27 That letter after referring to the Letter of Toleration made the

point that :

“ In view of the case Ho Kwok Cheung & other v. Chai Li Jia HCMP No.555 of 1998 that the said toleration letter would not contain any representation that the statutory functions of the Building Authority was being assumed or exercised. We would be grateful if you could let us know whether the Grantee had submitted the plans for site formation and drainage works and/or the rebuilt works for your approval prior to the commencement of building works and/or rebuilt works of the property.

If your answer hereto is affirmative, please let us know whether an occupation permit could be issued by your goodself as soon as possible.”

28 TYL replied on 10 February 2003 and said that since the height

of the building exceeded the height of the building described in 1(1)(b) of Part

I of the Schedule Cap.121 :

“… production of both Certificate of Exemption as well as Occupation Permit issued by the Building Authority under Buildings Ordinance Cap.123 in respect of the Building is required. Certificate of Compliance dated 2nd November 1993 does not remove the necessity for either the Occupation Permit or Certificate of Exemption. Consequently, we repeat and maintain our requisition for production of Certificate of Exemption in respect of the site formation and drainage works and Occupation Permit in respect of the Building. Your client is obliged to produce the aforesaid documents to show and give good title to the above property.”

24

29 The next letter from the Third Party was dated 12 February

2003 and in relation to the Occupation Permit they drew attention to part I of

Schedule of Cap.121

“ … which provides that the height of exempted House should not be more than 8.23 m. Please also refer to Modification Letter dated 12th January 1983, the permitted height of the subject House was 7.62 m. In the Letter of Toleration dated 26th July 1993, it was stated that the height of the subject House was in excess of 0.06 m over the permitted height of 7.62 m under the said Modification Letter. Therefore, the height of the subject House pursuant to the said Letter of Toleration and the said Modification Letter would be less than 7.68 m (i.e. 7.62 m plus 0.06 m excess).

As the height of subject House is of less than 7.68 m which is within the prescribed height limit of 8.23 m under Part I of the Schedule of Cap.121. Accordingly the subject House is exempted from the requirement of having the occupation permit under the Building Ordinance. Your cited cases do not apply to our present case.

3. We would give you on completion our undertaking to send you certified copy Letter of Compliance duly registered in Land Registry.”

30 TYL replied on 13 February 2003  :

“… we repeat and maintain our requisition for production of Certificate of Exemption in respect of the site formation and drainage works and Occupation Permit in respect of the building of which the above property forms part now standing on the said Lot.”

31 TYL also enclosed a copy letter from the Buildings Department

dated 11 February 2003 and made the point that the Property might be

subject to enforcement action.

32 It is necessary to refer the two paragraphs from the letter from

the Buildings Department dated 11 February 2003 :

25

“ I would like to advise you that there is no record of any submission of drainage plans under the Buildings Ordinance in respect of the captioned site. You may apply for certified true copy(ies) or viewing of the approved plans for the proposed site formation works by submitting the attached application form in order to clarify whether the extent of approved works covers any drainage works or not. You may then clarify with the District Lands Office on the subject of Certificate of Exemption on Drainage Works.

I would also like to confirm that for buildings exceeding the parameters on size stipulated under Buildings Ordinance (Application to New Territories) Ordinance, they are subject to compliances with the B O Cap.123. In the absence of approval & consent from the Building Authority in respect of their construction, they are considered unauthorized building works and may be subject to enforcement action under BO s.24(1) in accordance with the prevailing policy against unauthorized building works.”

33 The next letter from the Third Party is dated 14 February 2003

in which it asserted :

“…It is an undisputed fact (please immediately correct us if it is disputed) that the subject House is of the height less than 7.68 m.”

34 That was immediately disputed by TYL by their letter dated

15 February 2003 relying on the Letter of Toleration.

35 The Third Party’s letter of 14 February 2003 went on to say :

“b. If there is no excess of the said height limit stated in Part I of the Schedule to Cap.121, the Certificate of Exemption issued by the District Lands Office is sufficient proof that occupation permit is not required.

c. We have produced the Certificate of Exemption in respect of building works. As Letter of Compliance has been issued, Certificate of Exemption in respect of drainage and site formation are not required.”

26

36 It went on to say that the letter from the Building Authority dated

11 February 2003 did not support the requisition because the Building

Authority had not said that the Property exceeded the parameters. Then it

asserted as a matter of fact that the Property fell written the parameters

because, according to them, the Property is of a height less than 7.68 m.

Then they asked the purchaser to produce evidence to prove that the

Property exceeded the height limit of 8.32 m.

37 TYL replied on 15 February 2003 and denied that it was agreed

that Occupation Permit was not necessary or that the drainage and site

formation works need not be approved by the Building office or be covered by

a Certificate of Exemption.

38 The Third Party replied on 17 February 2003 enclosing a copy

of a report issued by TMB Architects Ltd dated 17 February 2003. They drew

attention to the analysis and conclusion in the said report and claimed that

having regard to the report, the Property is exempted from the Buildings

Ordinance and that, the building erected on the land does not exceed the

dimensions under Part I of the Schedule to Cap.121. The Third Party

concluded by asking for confirmation by 5 p.m. that the letter was accepted.

39 By a letter dated 19 February 2003 TYL said that the vendor

was in breach of the agreement and reserved the purchaser’s rights and

remedies under the same purchase agreement.

40 By a letter dated 20 February 2003 the Third Party claimed that

they had answered satisfactorily all requisitions and shown a good title on

17 February 2003.

41 By a letter dated 25 February 2003, TYL demanded return of

the deposit.

Provisions of Cap.121

27

42 In order to understand the requisition relating to Cap.121, it is

necessary to have to consider the provisions of Cap.121 in some detail.

Under section 11 the powers of the Director of Lands under Cap.121, other

than his powers under section 4, may be exercised on his behalf by any

District Lands officers. The relevant section are sections 5, 6 and 7 and also

Part I of the schedule :

Section 5:

“Subject to the provisions of this Ordinance, the Director shall issue a certificate of exemption in respect of building works in the New Territories —

(a) for a building to be built by any person and to be used for non-industrial purposes;”

Section 6 :

“Where the Director has issued a certificate of exemption under section 4 or 5 he may also issue —

(a) a certificate of exemption in respect of site formation works;

(b) a certificate of exemption in respect of drainage works.”

Section 7 :

“(1) Subject to subsection (2) and to compliance with any conditions imposed by the Director under section 9 —

(a) sections 4, 9, 14, 21 and 30 of the Buildings Ordinance (Cap 123) and the regulations made under that Ordinance shall not apply —

(i) in respect of building works or site formation works; and

(ii) for any building,

specified in a certificate of exemption; and

28

(b) the provisions and regulations mentioned in paragraph (a) and section 28 of the Buildings Ordinance (Cap 123) shall not apply —

(i) in respect of any drainage works; and

(ii) for any building,

specified in a certificate of exemption,

carried out by or on behalf of the person named in that certificate of exemption.

(2) Subsection (1) shall not apply in relation to a certificate of exemption issued under section 4 or 5 in respect of a building of greater dimensions than the building described —

(a) in the case of —

(i) a certificate of exemption in respect of new housing; …

in Part I of the Schedule;”

Part I of the Schedule :

“ CONDITIONS

PART ICERTIFICATE OF EXEMPTION IN RESPECT OFNEW HOUSING OR COMMUNITY USE, ORISSUED UNDER SECTION 4

1.(1)The building, when constructed, will be a building of not more than 3 storeys and —

(a) of a height of more than 7.62 m but not more than 8.23 m and with a roofed-over area not exceeding 65.03 square metres, and in respect of which the thickness of each load-bearing wall—

(i) in the case of a load-bearing reinforced concrete wall is not less than 175 mm thick; or

(ii) of the lowest storey is in the case of a load-bearing brick wall not less than 340 mm; and

29

(iii) of any higher storey is in the case of a load-bearing brick wall not less than 225 mm; …”

43 Here the Certificate of Exemption granted by the District Lands

Officer was expressly granted under section 5 of Cap.121. It was in terms a

Certificate of Exemption in respect of building works. Section 5 confers

power on the District Lands Officer “to issue certificates of exemption in

respect of building works”. Hence a section 5 certificate of exemption relates

only to building works. Building works does not include site formation works

or drainage works. See section 2 of Cap.121.

44 Where a certificate of exemption in respect of building works

has been issued under section 5 the District Lands Officer may also issue

certificates of exemption in respect of site formation works and drainage

works. See section 6 of Cap.121.

45 The effect of a section 5 or section 6 certificate of exemption

would depend on section 7.

46 Under section 7(1) an occupation permit (section 21 of the

Buildings Ordinance) is not required in respect of building works specified in a

certificate of exemption.

47 Also under section 7(1)(b), section 28 of the Buildings

Ordinance which regulates drainage works, shall not apply in respect of any

drainage works; and for any building specified in a certificate of exemption.

That I believe is the reason why in the Certificate of Exemption quoted in

paragraph 9 above, the final paragraph noted that the Certificate of

Exemption did not cover site formation or drainage works and that “you are

required to submit plans formally to the Building Authority under the terms of

the Buildings Ordinance for the approval of any such site formation and

drainage works unless separate Certificates of Exemption are issued by me

in respect of such works”.

30

48 That being the case, separate certificates of exemption would

be enquired in relation to site formation work or drainage works. As it

transpired the Building Authority had approved site formation and drainage

works in respect of the Building. However this was not made known to TYL

by the Third Party prior to the rescission of the transaction.

49 But the matter did not stop there. It appears from the Letter of

Toleration the height of the building exceeded 7.62 m by 0.06 m. Admittedly,

it is not more than 8.23 m. Under section 7(2) the exemptions granted under

section 7(1) regarding compliance with the requirement of the Buildings

Ordinance would not apply if the building is of greater dimensions than as

described in Part I of the Schedule.

50 Under Part I of the Schedule, if the height of the building is more

than 7.62 m but not more than 8.23 m and if the roofed-over area does not

exceed 65.03 m2, there is a further requirement that the thickness of each

load-bearing wall :

 “(i) in the case of a load-bearing reinforced concrete wall is not less than 175 mm thick; or

(ii) of the lowest storey is in the case of a load-bearing brick wall not less than 340 mm; and

(iii) of any higher storey is in the case of a load-bearing brick wall not less than 225 mm;”

51 Thus, the thickness of the load-bearing wall is significant and

that is probably why in the report of TMB Architects Ltd there was an attempt

to deal with this. According to the report :

“3. Thickness of Load Bearing Walls

3.1 Assuming the thickness of external wall finishing being 25 mm and the thickness of internal wall finishing being 13 mm, the actual thickness of Load Bearing External Wall is 185 mm.

31

3.2 The thickness Load Bearing External Wall, presumably of a Reinforced Concrete construction, exceeds 175 mm.”

52 But unfortunately the report did not go far enough. First it did

not say or certify that the load-bearing external wall was of reinforced

concrete construction. It simply said that it was presumably of reinforced

concrete construction. Furthermore, in regard to the thickness of the

load-bearing external wall it should exceed 175 mm but only because of the

assumption made by the maker of the report that the thickness of the external

wall finishing was 25 mm and the internal wall finishing 13 mm. I am afraid

that is not good enough. On the other hand, if the load-bearing walls were

not of reinforced concrete construction they did not satisfy the thickness

requirement of Part 1 of the Schedule.

53 Mr Lee Yee Hung, who appears on behalf of the defendant, has

made the further point that it appears from the same report that the area of

the house as measured by the architect is 65.079 square metres

(paragraph 1.2.2). But that its conclusion that the area of the house does not

exceed the prescribed maximum of 65.03 square metres under Cap.121 is

based on “Assuming the thickness of external wall finishing being 25 mm, the

actual area of the House measured to the structure is 64.509 s.m.”

(paragraph 2.1) Mr Lee made the point that the TMB Architects Ltd did not

say that the roofed-over area of the house did not exceed 65.03 s.m. since

under Cap.121 it is the roofed-over area which is relevant. He made the

additional point that roofed-over area is defined as meaning “the area of a

building enclosed within the external faces of the main structural wall (which

includes any party wall) of that building …” He said there is no justification

given by TMB Architects Ltd why the thickness of the external wall finishing

should be ignored for the purpose of the calculation of the roofed-over area.

There is force in Mr Lee’s complaint that TMB Architects Ltd had not

explained why in the calculation of the roofed-over area the external wall

finishing could be excluded.

32

54 I believe the thickness of the load-bearing wall is critical to the

Third Party’s case. In order for the exemption from the requirement of the

occupation permit under section 7(1) of Cap.121 to apply to the building, the

vendor must show that if the height of the building exceed 7.62 m although it

is not more than 8.23 m the thickness of the load-bearing wall is not less than

175 mm thick if it is of reinforced concrete construction. The defendant had

failed to show that. That being the case the Certificate of Exemption issued

under section 5 would not have the effect of exempting compliance with

section 21 of the Buildings Ordinance. In other words, an occupation permit

was required. Thus, even though the District Lands officer had issued the

Certificate of Exemption, the Certificate of Exemption was not effective in

exempting compliance with section 21 of the Buildings Ordinance.

55 I should also mention that TMB Architects Ltd also purported to

certify that the height of the building did not exceed 7.62 m. But having

regard to the Letter of Toleration I do not believe the plaintiff could be

expected to rely on TMB Architects Ltd’s certification, which is based on the

“normal” thickness of the make-up roof finishing, and not its actual thickness.

56 I turn to consider the fact that no certificate of exemption was

issued in respect of drainage works or site formation work. It has transpired,

though this only became known subsequent to 17 February 2003 and

therefore does not avail the defendant, drainage works plans and site

formation plans were indeed approved by the Building Authority in respect of

the building.

57 What I should consider is whether on the assumption that they

had not be approved by the Building Office, the fact that a certificate of

compliance had been issued is sufficient.

58 I do not believe the Letter of Compliance or the Letter of

Toleration would preclude the Building Authority from taking action. Both the

Letter of Compliance and the Letter of Toleration were issued by the District

33

Officer pursuant to the provisions of the New Grant and not under any

statutory power. The reference to the New Grant in the Letter of Compliance,

and the language of the Letter of Toleration have made that clear. Moreover,

the District Lands office only has limited power under Cap.121, and as I have

said, the effect of any certificate of exemption granted by him would depend

on whether section 7(2) applied. Furthermore, the letter from the Buildings

Department dated 11 February 2003, quoted in paragraph 32 above, shows

that enforcement action might be undertaken.

59 Mr Samuel Chan who appears for the Third Party argued that

the plaintiff should have applied for certified true copies or inspection of the

approved plans for drainage works and formation work in order to preserve

the bargain relying on Mexon Holdings Ltd v. Silver Bay International Ltd

[2000] 3 HKCFAR 109 at 117D-H and 118G-119G. I do not think that can be

right. During the requisitions it was maintained by the defendant that site

formation and drainage works were not required to be approved nor

certificate of exemption in relation to them necessary. Moreover, the letter

from the Buildings Department dated 11 February 2003 which I have referred

to in paragraph 32 above does not say in terms that there were approved

plans for drainage works though it may be possible to gather from that letter

that there were approved plans for site formation works. Also it is difficult to

see on a transaction of this kind what more one could have expected the

plaintiff to do to see the bargain through. Mexon Holdings Ltd requires me to

approach the matter with common sense. I am concerned with a modest

property and a purchaser who was applying for a Homestarter’s loan from

HKHS. I do not believe the vendor could refuse to do its part, wait for the

time for completion to arrive and then forfeit the deposit when the purchaser

failed to complete, putting the heavy burden on the purchaser to seek to

recover the deposit paid. In this case, the deposit paid was $165,000. The

costs of litigation in this case must be quite a heavy burden on the plaintiff

already. Vendors must recognise that the duty is on them to show and prove

good title. A falling property market does not relieve them from this duty. If

anything, it behoves them to be more vigilant. Here I am not concerned with

34

a falling market but that is an irrelevant consideration anyway. Depending on

the circumstances, the purchaser may be expected to do more or less in

order to see the bargain through. But that does not mean the vendor can

shift his burden onto the purchaser.

60 In my opinion, the defendant has failed to answer the

second requisition adequately or satisfactorily, nor was it able to show good

title.

61 I return to consider the first requisition, namely, the colouring of

the plan.

62 Section 13(2) of the Conveyancing and Properties Ordinance,

Cap.219, permits the production of a copy, certified by a solicitor, “to be a

true copy” of any document. Here the New Grant and the Boundaries

Agreement were certified true copies. However, they were not coloured. It is

quite clear that the plans annexed to the certified copies were photocopies

so, although the colour red in the New Grant and the colour pink in the plan

annexed to the Boundaries Agreement was not reproduced, one can see a

shaded area or smudge in these plans. It has not been said, and I do not

think it is the case, that it was not possible for properly coloured plans to be

obtained. Presumably the government would have a copy with colours. The

original grantee must also have a copy with colour. It may be as Mr Lee has

submitted that the coloured copy had been given to one or other of the

owners of the other third share in the Building. Be that as it may, if the

question of the forfeiture of the deposit depended on it, I do not understand

why the duty to cooperate relied upon by Mr Samuel Chan should make it fair

that the deposit should be forfeited when it was within the power and ability of

the vendor to procure certified true copies with colour or colour coded. As I

have said it has not been asserted on behalf of the defendant that it was

difficult or impracticable for the vendor to procure a certified true copy. If both

parties to a bargain acted with a lack of common sense or unreasonably, I

would let the loss fall on the party who had the primary duty to produce the

35

document, leaving him to his redress, if any, against his solicitors. Here the

Building was erected on a small lot of land with an area of 700 sq.ft only. As

is clear from the Boundaries Agreement, “the situation, area and boundaries

of the lot as re-sited shall as from the date of execution hereof be as shown

coloured pink on the new plan annexed hereto and not as shown coloured

red on the original plan”. So the plan is important, I see no reason why the

purchaser should be required to accept a smudge on the plan instead. So I

am also of the view that the first requisition had not been satisfactorily

answered.

63 Now I turn to consider the third requisition. It seems that by

14 February 2003, the Third Party realised that the letter of compliance

should be registered and they said in their letter that they would register the

letter of compliance before completion. In their second letter dated

14 February 2003 from the Third Party to TYL which reads: “We would inform

you that the certified copy Letter of Compliance had been lodged to the Sai

Kung New Territories Land Registry for registration with Memorial No.546680

refers. Copy receipt from the relevant land registry enclosed for easy

reference.” The receipt shows that a document has been submitted for

registration and the Land Registry receipt reads : “We pledge to register and

return the instruments by 12/03/2003 under normal circumstances (target

97%).” Now under the Land Registration Regulation, Cap.128, registration of

an instrument when completed “take effect from the date recorded on the

memorial of the instrument…” See regulation 16. However, that is so only

after the registration has been completed. Here according to the receipt,

there was a pledge “to register and return the instruments by 12/03/2003”.

The date for completion was 6/03/2003. TYL referred the Third Party to

Lui Tak Kin v. Chan Yin Kai [1998] HKC 362 as early as 24 January 2003.

The delay on the part of the Third Party to effect registration of the Certificate

of Compliance is inexplicable. Their earlier assertion that registration was

unnecessary was plainly wrong. Registration of the certificate of compliance

was essential to the passing of legal title on completion. As of 14 February

2003, the certificate of compliance was in the course of registration. It is

36

possible that the registration could have been completed by 7 March 2003.

In that case on completion, legal title could be conveyed. This argument had

not been fully explored at the hearing. TYL had not responded to the

Third Party’s 2nd letter of 14 February 2003. Had they done so the Third Party

might have been able to demonstrate that the vendor would be in a position

to convey the legal title on 7 March 2003. In all the circumstances I am of the

view that this requisition has been satisfactory answered, or was not pursued

by TYL after 14 February 2003.

Conclusion

64 For the above reasons I grant a declaration in terms of

paragraphs (1), (2), (3) and (4) of the amended originating summons. I  order

that the defendant pays the sum of $165,000 and $5,000 together with

interest from 30 April 2003 at the judgment rate until payment. As for the

stamp duty of $12,475, I would grant a declaration that the plaintiff is entitled

to be indemnified by the defendant in case the plaintiff is unable despite

reasonable effort to reclaim the same from the Collector of Stamp Duties.

65 The Third Party took part in this part of the proceedings and

agrees to be bound by its result. As for the claim against the Third Party, it

was agreed that it should be tried separately.

Costs

66 Costs of the plaintiff’s claim against the defendant should be

borne by the defendant. Such costs to be taxed if not agreed.

67 The Third Party has argued that such costs should be on the

District Court scale. I think the claim involves difficult points of law. An

earlier application by the Third Party to have the proceedings transferred to

the District Court was refused by Reyes J. I would not order costs on the

District Court scale. Of course, the Third Party’s liability for such costs will

depend on the outcome of the Third Party claim.

37

( Robert Tang )

Judge of the Court of First Instance, High Court

Miss Grace Chow, instructed by Messrs Terry Yeung & Lai,for the Plaintiff

Mr Lee Yee Hung, instructed by Messrs Danny Lau & Lam, for the Defendant

Mr Samuel Chan, instructed by Messrs Baker & McKenzie, for the Third Party

38

Attachment 3 – Minchest v. Lau Tsui Kwai and Others

IN THE COURT OF FINAL APPEAL OF THEHONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 12 OF 2007 (CIVIL)(ON APPEAL FROM CACV NO. 334 OF 2006)_____________________

Between:

MINCHEST LIMITED Appellant/Plaintiff

- and -

LAU TSUI KWAICHEONG NIN INVESTMENT COMPANY LIMITED YIU YING SHEUNG MARTINHO SIU KEI LAU SZE KIT

1st Respondent/Defendant2nd Respondent/Defendant

3rd Respondent/Defendant4th Respondent/Defendant5th Respondent/Defendant

_____________________

Court: Chief Justice Li, Mr Justice Bokhary PJ,Mr Justice Chan PJ, Mr Justice Ribeiro PJ and Mr Justice McHugh NPJ

Date of Hearing: 11 January 2008

Date of Judgment: 31 January 2008

J U D G M E N T

Chief Justice Li:

1. This appeal concerns a dispute between vendor and purchaser

as to whether the vendor has shown good title. The properties in question

39

are held under Conditions of Grant entered into with the Government before

1 January 1970 and this case is only concerned with pre-1 January 1970

Conditions of Grant. The matter turns on the proper interpretation of s. 14(1)

and 14(2) of the Conveyancing and Property Ordinance, Cap 219 (“the

Ordinance”). Save where otherwise stated, references to sections in this

judgment will be to sections in the Ordinance.

The facts

2. By three agreements dated 27 May 2005, following earlier

provisional agreements, the appellant (“the purchaser”) agreed to purchase

various properties in Cheong Nin Building, Kwai Chung, New Territories (“the

properties”) from the various respondents (“the vendors”). The total purchase

price was $55 million. The terms of the agreements in so far as they are

material to this appeal were identical. They provided for completion on or

before 28 October 2005 and that time shall in every respect be of the

essence. The agreements were linked in that each provided for completion

simultaneously with the others and that failure to complete under one

agreement was deemed to be a refusal to complete under the other

agreements.

3. On 22 September 2005, pursuant to its obligation to show good

title, the vendors’ solicitors sent to the purchaser’s solicitors certain title

deeds. These included a certified copy of New Grant No. 4699 (“the New

Grant”) and also a certified copy of the occupation permit for the building

dated 5 January 1973.

The New Grant

4. The New Grant of the lot in question was dated 13 November

1969. It contains the agreement between the Government and the grantee of

the lot, Cheong Nin Investment Company Limited (“Cheong Nin”), one of the

vendors in the present case.

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5. Under the New Grant, Cheong Nin’s obligations included the

payment of premium and the fulfilment of the building covenant involving the

completion of the building before the prescribed deadline and the expenditure

of a minimum amount. General Condition 8 provided that the fulfilment by the

grantee of his obligations under the Conditions shall be a condition precedent

to the grant or continuance of the tenancy and any default shall be deemed a

continuing breach. General Condition 9 gave the Government a right of re-

entry in the event of breach of any conditions.

6. General Condition 10 entitled the grantee to a Government

lease for the lot in accordance with its terms

“when the conditions herein contained have been complied with to the satisfaction of the District Commissioner, New Territories.”

The conditions contemplated in this Condition constituted the conditions

precedent, compliance with which entitled the grantee to a Government

lease. Their identification is a matter of interpretation of the New Grant. The

conditions precedent would include conditions such as the payment of the

premium and the fulfilment of the building covenant.

The requisition

7. The New Grant constitutes the root of title of the properties in

question. No Government lease has been issued. On 27 September 2005,

the purchaser’s solicitors raised four requisitions. The relevant requisition

(“the requisition”) read:

“Please send us a certified copy of the Certificate of Compliance of New Grant No. 4699.”

8. On 6 October 2005, the purchaser’s solicitors replied to the

requisition as follows:

“We note that New Grant No. 4699 was dated 13th November 1969. Pursuant to Section 14(2) of the Conveyancing and Property Ordinance, any conditions precedent of New Grant No. 4699 should be deemed to have been complied with on 1st November 1984. Therefore, production of Certificate of Compliance of the said New Grant is unnecessary in proving title to the above property.”

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9. This reply was not accepted. On 10 October 2005, the

purchaser’s solicitors maintained:

“Production of the Certificate of Compliance is necessary. Section 14(2) of the Conveyancing and Property Ordinance does not dispense with the physical production of certificate of compliance or other matters of title.”

10. There ensued further correspondence in which the parties

reiterated their previous positions. The vendors’ solicitors also noted that no

Certificate of Compliance of the New Grant had been registered in the Land

Registry.

11. The matter was unresolved by the deadline for completion on

28 October 2005. On that day, the purchaser’s solicitors accepted the

vendors’ alleged repudiation of the agreements and demanded the return of

the deposits paid. A few days later, on 2 November 2005, the vendors’

solicitors determined and rescinded the agreements on the ground of the

purchaser’s alleged failure to complete and forfeited the deposits.

12. Subsequently, the purchaser issued three originating

summonses relating to the three agreements respectively. These

proceedings were later consolidated. The vendors lodged counterclaims.

The reliefs claimed by the purchaser and the vendors respectively included

declarations that the other party or parties had repudiated the agreements

and that such repudiation had been accepted as well as damages. The

purchaser sought a declaration of its entitlement to the return of the deposits,

whilst the vendors claimed a declaration of its entitlement to their forfeiture.

The courts below

13. Before the Judge (Deputy Judge L Chan), the vendors

succeeded. The purchaser’s appeal to the Court of Appeal (Rogers VP, Le

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Pichon JA and Barma J) was dismissed. By a consent order, the purchaser

was granted leave to appeal as of right to the Court.

The question

14. The requisition called for the production of a certified copy of the

Certificate of Compliance of the New Grant (“the Certificate of Compliance”).

The vendors’ answer stated that production of such a Certificate was

unnecessary for proving title, relying on s. 14(2) of the Ordinance. The

question is whether this answer was satisfactory. If so, the vendors had

shown good title. If not, they had failed to do so. The matter turns on the

proper interpretation of s. 14(1) and 14(2).

The statutory provisions

15. Section 14(1) provides:

“Where a person has a right to a Government lease of any land upon compliance with any conditions precedent, then, upon compliance with those conditions –

(a) the equitable interest under that right shall become a legal estate in that land as if held under a Government lease issued in accordance with that right; and

(b) for the purposes of section 42 and any other law, such a Government lease shall be deemed to have been issued upon compliance with those conditions.”

Section 42(1) and 42(2) preserve, after the issue of Government leases, the

effect of prior instruments, that is, instruments entered into and taking effect

after an agreement for a Government lease but before the issue of such

lease, and the effect of their registration under the Land Registration

Ordinance, Cap 128.

16. For s. 14(1) to be engaged, there must be a right to a

Government lease of land upon compliance with the prescribed conditions

precedent. Where there is such a right, then upon compliance with the

conditions precedent, two consequences follow by operation of law. First, the

equitable interest is converted into a legal estate as if held under a

Government lease issued in accordance with the right. Secondly, for the

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purposes of s. 42 and any other law, a Government lease shall be deemed to

have been issued upon compliance with the conditions precedent. The

triggering event for these consequences is compliance. These legal

consequences follow from compliance, notwithstanding that a Government

lease has not in fact been issued. Section 14(2) and 14(3) may be regarded

as provisions supplementary to s. 14(1). They provide for the means for

establishing compliance with the conditions precedent. Section 14(2) applies

to agreements for Government leases entered into before 1 January 1970

whereas s. 14(3) applies to agreements entered into on or after that date.

17. Section 14(2) provides:

“Where, under an agreement for a Government lease entered into before 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent he shall be deemed, for the purposes of this section, to have complied with those conditions on the commencement of this section.”

The section commenced on 1 November 1984. Under s. 14(2), the person,

who under a pre-1 January 1970 agreement has a right to a Government

lease upon compliance with the conditions precedent provided for therein,

“shall be deemed for the purposes of this section to have complied with those

conditions” on 1 November 1984. The phrase “for the purposes of this

section” is a reference to the purposes of s. 14(1). Thus there is deemed

compliance on 1 November 1984 with the conditions precedent. Under

s. 14(1), such compliance triggers the legal consequences provided for

therein.

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18. Section 14(3)1 relates to agreements for Government leases

entered into on or after 1 January 1970. In contrast to the deeming of

compliance for pre-1 January 1970 agreements, s. 14(3) provides for various

methods of establishing compliance. Under this provision, the person

concerned “shall be deemed for the purposes of this section” to have

complied with the conditions precedent in one of three ways. One of them is

the issue by the Government of a certificate that the conditions have been

complied with and the registration of that certificate in the Land Registry

under the Land Registration Ordinance. The phrase in s. 14(3) of “for the

purposes of this section” is again a reference to the purposes of s. 14(1), that

is, in order to establish compliance so that the legal consequences set out

therein would flow.

19. Thus, s. 14(2) and 14(3) provide for different ways of

establishing compliance for pre- and post-1 January 1970 agreements

respectively. For the former, s. 14(2) deems compliance to have occurred on

1 November 1984. For the latter, s. 14(3) provides for the type of document

required and its registration in the Land Registry. The reason for this

distinction is that whilst the practice has been to issue certificates of

compliance for post-1 January 1970 agreements, there was no such practice

for pre-1 January 1970 agreements. In his letter dated 7 November 1984 to

the Law Society which was intended to be and was circulated to its members,

the Registrar General (Land Officer) explained:

1 Section 14(3) provides:

“Where under an agreement for a Government lease entered into on or after 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent, he shall be deemed, for the purposes of this section, to have complied with those conditions –

(a) upon the issue by the Government of a certificate that those conditions have been complied with and the registration of that certificate in the Land Registry under the Land Registration Ordinance (Cap. 128); or

(b) upon the endorsement by the Government on the Government lease of a note to the effect that those conditions have been complied with the registration of a copy of that endorsement in the Land Registry under the Land Registration Ordinance (Cap. 128); or

(c) upon the entry on the register kept in the Land Registry under the Land Registration Ordinance (Cap. 128) relating to the land of a note to the effect that those conditions have been complied with. ”

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“The 1st January 1970 was chosen as a ‘cut off’ date for this purpose because it is believed that in almost all instances subsequent to that date the certificate of compliance has in fact been issued by the Government upon compliance with the General and Special Conditions.”

Application of the statutory provisions

20. Section 14(1) and 14(2) apply in the present case. Under the

New Grant, the grantee undoubtedly has a right to a Government lease upon

compliance with the conditions precedent contemplated therein. Since the

New Grant was a pre-1 January 1970 agreement, s. 14(2) applies so that for

the purposes of s. 14(1), the grantee is deemed to have complied with the

conditions precedent on 1 November 1984.

The scope of the requisition

21. In dealing with a dispute concerning title such as the present

one, the court must approach the matter

“from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain.”

Mexon Holdings Ltd v Silver Bay International Ltd (2000) 3 HKCFAR 109 at

117E.

22. “Requisitions on title must be formulated with reasonable

precision if they are to be effective.” Chan Chik Sum v Great Pearl Industries

Ltd [1997] 1 HKC 27 at 33 C-D. In considering whether the requisition was

satisfactorily answered, the starting point must be to consider its scope. The

question is what a reasonable conveyancer would regard the requisition to

mean.

23. The requisition called for the production of a certified copy of the

Certificate of Compliance of the New Grant. General Condition 10 conferred

on the grantee a right to a Government lease upon compliance with

conditions precedent contemplated therein. Considering the requisition in the

context of the New Grant, a reasonable conveyancer would regard it to be

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directed at the production of a certificate issued on behalf of the Government

to show compliance with the conditions precedent therein which would entitle

the grantee to a Government lease. The requisition properly considered did

not have any wider scope.

Purpose of the provisions

24. Mr Thomas SC for the purchaser submits that the requisition

had not been sufficiently answered. The linchpin of his submission is that

s. 14(1) has a limited purpose. Where there is a right to a Government lease

upon compliance with conditions precedent, he contends that the only

purpose of s. 14(1) is to effect upon compliance the conversion of the

equitable interest to the legal estate. In support, he relies on the heading to

s. 142 and the Explanatory Memorandum to the bill3. Having regard to this

limited purpose, it is argued that where compliance is deemed by s. 14(2) to

have occurred on 1 November 1984 for pre-1 January 1970 agreements, this

only achieves the conversion to the legal estate. And it remains necessary to

produce a certificate to show compliance; if such a certificate cannot be

produced, secondary evidence of compliance would be necessary.

25. If the purchaser’s argument is correct, such a certificate or

secondary evidence must be produced, notwithstanding that as previously

noted, there was no practice of issuing certificates of compliance for pre-1

January agreements and that compliance with conditions precedent for pre-1

January 1970 agreements would have occurred a long time ago.

26. To ascertain the true purpose of s. 14(1), it is important to

understand the background to its enactment. On disposal of land by

Government, the agreement contained in the Conditions of Grant usually

provides that the grantee has a right to a Government lease upon compliance

2 The heading to s. 14 reads: “Conversion of equitable interest to legal estate where right to Government lease”.

3 The Explanatory Memorandum to the bill in relation to clause 14 stated: “Clause 14 deals with the conversion of an equitable interest under a Crown lease to the legal estate.”

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with the conditions precedent provided for therein. But upon compliance, the

normal practice has been that no formal Government lease is issued4.

Legislation was necessary to provide a solution to deal with this situation.

The purpose of s. 14(1) was to render the legal position to be the same as

that which would have resulted from the actual issue of a Government lease

upon compliance with the conditions precedent, notwithstanding that no lease

is in fact issued. To legislate for the same legal position, s. 14(1) provides

that upon compliance, not only is the equitable interest converted into the

legal estate but also that for the purposes of s. 42 and any other law, such a

Government lease shall be deemed to have been issued upon compliance.

27. The purpose of s. 14(1) is thus not limited to achieving the

conversion of the equitable interest into a legal estate and the purchaser’s

argument that its purpose is so limited must be rejected. In this context, the

heading does not assist. It does not have any legislative effect and does not

in any way vary, limit or extend the interpretation of s. 14. Section 18(3) of

the Interpretation and General Clauses Ordinance, Cap 1. A heading is

necessarily brief. In this instance, it is an incomplete guide to the section.

The Explanatory Memorandum is similarly insufficient and is of no assistance.

“Any other law”

28. Mr Thomas further submits that the operation of s. 14(1) is in

any event limited. Section 14(1)(b) provides that the deemed issue of a

Government lease upon compliance with the conditions precedent is “for the

purposes of section 42 and any other law”. Mr Thomas argues that the

phrase “any other law” is confined to statutory provisions such as s. 42 which

expressly refer to the issue of a Government lease. This argument cannot be

accepted. The phrase must be interpreted consistently with the true purpose

of the provision as discussed above. So interpreted, it cannot be so limited

and includes not only all statutory provisions but also the common law and

rules of equity.

4 See The Annotated Ordinances of Hong Kong: The Conveyancing and Property Ordinance (Cap 219) (2007 reissue: Sarah Nield) p. 116-7; Sihombing and Wilkinson, Hong Kong Conveyancing, Vol 1 Chap I para 1.1, Chap II para 154 and Halsbury’s Laws of Hong Kong, Vol 16 (2007 Reissue) paras 230.0107-0108.

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Effect of provisions

29. Interpreting s. 14(1) consistently with its true purpose, its effect

is that, where there is a right to a Government lease upon compliance with

conditions precedent, the legal consequences which follow from compliance

include both (a) the conversion of the equitable interest into a legal estate as

if held under a Government lease issued in accordance with the right thereto

and (b) for the purposes of statutory provisions, the common law and rules of

equity, such a Government lease shall be deemed to have been issued upon

compliance with those conditions. For the New Grant, which was pre-

1 January 1970, s. 14(2) deems compliance with the conditions precedent to

have taken place on 1 November 1984 for the purpose of s. 14(1). Thus,

both legal consequences resulted from the deemed compliance on that date.

This includes the deemed issue of a Government lease on 1 November 1984

for the purposes referred to above. It is plain from s. 14(1), which contains

three references to “upon compliance”, that the deemed issue of a

Government lease on that date was on the basis that the conditions

precedent had been complied with.

Answer to requisition

30. Having regard to the conclusions above on the interpretation of

s. 14(1) and 14(2), it follows that the requisition had been satisfactorily

answered and that the vendors had shown good title to the properties in

question. The requisition called for the production of a certificate to show

compliance with the conditions precedent provided for in the New Grant

which would entitle the grantee to a Government lease. As the answer to the

requisition stated, production of such a certificate of compliance was

unnecessary. Section 14(2) deemed compliance to have taken place on

1 November 1984. Such deemed compliance triggered the legal

consequences in s. 14(1) including for the purposes of statutory provisions,

the common law and rules of equity, the deemed issue of a Government

lease on the basis of that the conditions precedent had been complied with.

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31. Mr Thomas also relies on s. 66(1)5 of the Interpretation and

General Clauses Ordinance to argue that s. 14(1) and 14(2) should not be

construed to adversely affect the position of the Government. The present

dispute is not between the Government and its lessee and it is unnecessary

to decide whether and if so, the extent to which Government’s position is

affected by s. 14(1) and 14(2) in relation to taking action for breaches prior to

1 November 1984 of conditions precedent in pre-1 January 1970 agreements

which would entitle the lessee to a Government lease. It should be noted that

some breaches may be regarded as continuing breaches by reason of their

nature or may be deemed to be continuing breaches by virtue of a provision

such as General Condition 8.

Disposal

32. Accordingly, the appeal should be dismissed with costs. An

order should be made for the release of the monies paid into court by the

respondents together with interest thereon.

Mr Justice Bokhary PJ:

33. I agree with the judgment of the Chief Justice.

Mr Justice Chan PJ:

34. I agree with the judgment of the Chief Justice.

Mr Justice Ribeiro PJ:

35. I agree with the judgment of the Chief Justice.

Mr Justice McHugh NPJ:

36. I agree with the judgment of the Chief Justice.

5 Section 66(1) of the Interpretation and General Clauses Ordinance provides :“No Ordinance (whether enacted before, on or after 1 July 1997) shall in any manner whatsoever affect the right of or be binding on the State unless it is therein expressly provided or unless it appears by necessary implication that the State is bound thereby.”

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Chief Justice Li:

37. The Court unanimously dismisses the appeal with costs

and makes an order for the release of the monies paid into court by

the respondents together with interest thereon.

(Andrew Li) (Kemal Bokhary) (Patrick Chan)Chief Justice Permanent Judge Permanent Judge

(R.A.V. Ribeiro) (Michael McHugh)Permanent Judge Non-Permanent Judge

Mr Michael Thomas SC and Ms Sara Tong (instructed by Messrs Kok & Ha) for the appellant

Mr Johnny Mok SC and Mr C.Y. Li (instructed by Messrs Lo & Lo) for the respondents

51