Land Law Presentation

Jumbo King Ltd v Faithful Properties Ltd & Others (1999) 2 HKCFAR 279 Chui Shin Hang Clifford (54696378) Or Hoi Yan Denise (54505161)

DRAMATIS PERSONAE Jumbo King Ltd (“JK”)

Faithful Properties Ltd

2

Target Power Ltd$704.78 & Gold Nation Development$191.01 Ltd $189.31

Plaintiff, Appellant (Purchaser)

1st Defendant, Respondent (Vendor 1)

Shanghai Commercial Bank (“SCB”)

Joseph Edward Hotung (“HT”)

Cheng Ah Loong (“CAL”)

1st Purchaser

Developer/1st Owner

Assignee

Upcoming Deposits

2nd/3rd Defendant, Respondent (Vendor 2/3) $186.54

PREMISE – HANKOW CENTRE IN TSIM SHA TSUI, KOWLOON

5/F – 16/F + Main roof (Domestic Part)

(Served by entrances, lobbies, corridors, staircases, lifts etc. exclusive to those floors) No need to pass through any part of the commercial floors

V1: Shops G-5 & G-6 on G/F – 6,734 of undivided 720,000 shares V2: Shops G-7 & G-8 on G/F, utility rooms U3A and 302A on 3/F, flat roofs on 10/F, and flat roofs on the main roof of the building V3: Shops G-9/9A & G-10 on G/F, utility rooms 213A on 2/F, and utility room 413A on 4/F

Basement, G/F – 4/F + Piping service floor (Commercial Part)

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SCB bought shops G4 & G5A on G/F (7,399/720K) Parties entered into sub-DMC relating to commercial portion Recited the fact that developer retained exclusive possession of the yellow parts on floor plans (common parts)

The 482/720th shares (G/F – 4/F) were subdivided into 482K/720K shares Shares were allotted to various shop spaces No share was allocated to the flat roof space on 10/F

Subdivision of Shares

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22 Mar 1997

1st Sale of Shop Space

7 Apr 1992

Developer assigned to CAL 1/720th undivided share in the land & building for $63K Developer retained 719/720th shares in the land and building & exclusive occupation for the rest of the building (retained exclusive possession of the whole of the commercial portion)

1 Sep 1981

Deed of Assignment

Aug 1981

1 May 1968

CHRONOLOGY Provisional Agreement Signing of an earlier provisional agreement between P & D Initial deposit $10M paid

HT assigned TPL 204,587 shares with the right to occupy shops (subject of the present sale) Attached to the same shares the right to occupy the utility rooms & roofs

Share Assignment

D’s solicitors sent the title deeds & documents to P’s solicitors

P paid $15.75M deposit

Payment of Deposit

14 Nov 1997

Title Deeds

3 Nov 1997

Made by written agreement Inc. 2 flat roofs & 4 utility rooms Total consideration: $257.5M • $10M: initial deposit à 22 Mar 1997 • $15.75M: deposit à 20 Oct 1997 • $25.75M: deposit à 15 Nov 1997 • Balance à 26 Jan 98

22 Oct 1997

Sale of Undivided Shares

20 Oct 1997

14 Oct 1997

CHRONOLOGY (CONT’D)

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Agreement Rescinded P’s solicitors rescinded agreement before requisition was answered • Discovered cocklofts à unauthorized structures à renders D’s title defective & liable to be demolished à size reduced • Ds are obliged to show good title à DMC of building Memorial has not mentioned the said units at all

“It appears that no undivided shares were allotted to units U3A, 302A, 213A, 413A, flat roof on 10/F and flat roof on the main roof of the building…” Nothing was asked about the cocklofts Raised not within 10 working days after receipt of title deeds

P’s Requisition

To recover the paid deposit • Requisition of title: insufficiently answered • Good title had not been shown • Fundamental breach of contract by vendors

Premature to say the matters raised constituted any defect in title/if they do constitute defect that they cannot be remedied before completion Cl. 18(e): unauthorized structures Terminated the said agreement à deposit of $25.75M forfeited

D’s Reply

1998-1999

P instituted proceedings (s.12 CPO)

26 Jan 1998

P failed to pay the agreed deposit of $25.75M

13 Jan 1998

Default of Deposit

18 Nov 1997

15 Nov 1997

CHRONOLOGY (CONT’D)

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Lower Courts’ Decision 9 Jul 1998: CFI gave judgment in P’s favour 12 Feb 1999: CA entered judgment in D’s favour

Never completed

Agreed Completion Date

ISSUES ON APPEAL TO CFA 15

(1) THE “UNDIVIDED SHARES” POINT Whether the fact that the utility rooms & flat roofs had not been allotted shares prevented the right to exclusive use of these properties from being assigned when Rs were at the same time assigning other units which had been allotted undivided shares? [289I290H; 295F-299A]

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • Prima facie, the co-owners of land have the right of possession in common to every part of the land • Multi-storied building: no proprietary right to the exclusive possession of part of the building except as an incident of common ownership in the land & building • The vendors were, at the time of the agreement, co-owners à they all derive their title from the developer

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • Developer retained exclusive possession of the whole of the commercial portion as an incident of his 719/720th shares which he kept after the 1st sale • The assignment by HT to CAL would have entitled each to the use & possession of the whole building: see Bull v. Bull [1955] 1 QB 234 at p.237 • By DMC, each co-owner covenanted with the other, as owner of an undivided share, that he would by virtue of that share be entitled to the exclusive occupation of a specific part of the building • Such covenant is binding contractually between parties & runs with the undivided shares in the land to enure for the benefit of & be binding upon successors-in-title

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • The true analysis is that an undivided share may “carry” a right to exclusive possession of a defined space • Not the other way round • So long as the vendors were owners of undivided shares in the land & building, deriving title from the developer à they were entitled to assert rights of exclusive possession to parts of the building • There is no difficulty about the part allotted to CAL: the problem is on what was allotted to HT

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? Part of the building being allocated with 482/720th shares by HT: 10/F

Flat roof

4/F

Offices

3/F

Offices

2/F

Offices

1/F

Shop spaces

G/F

Shop spaces

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • The Sch. says he took the “shop spaces” on G/F & 1/F, the “offices” on 2/F, 3/F, 4/F & flat roof on 10/F • G/F-4/F included more space than could literally be described a “shop spaces” & “offices” • No specific mention of spaces on those floors • E.g. “utility”, “storage”, “air-handling plant room”, “meter” etc. • P: this made the property rights vested in the developer in respect of those floors uncertain • A grantor who desires to reserve something out of his grant must be clear about what he is keeping • If the grant is ambiguous, the doubts will be resolved against him 21

(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • Rejected by CFA • (1) Construction of a document is an attempt to discover what a reasonable person would have understood the parties to mean→ needs to consider not merely to the individual words they have used, but to the agreement as a whole:• The factual & legal background against which it was concluded; and • The practical objects which it was intended to achieve • Even with linguistic problems à if the meaning is clear, that meaning must prevail

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • The deed of assignment & DMC (both d.d. 1.5.1968) read together were clear • The building consisted of 2 self-contained parts & each had their own staircases and lifts • It makes no practical sense to interpret the parties have intended that CAL in his flat on 6/F of the domestic part should have rights of occupation in the commercial portion of the building • (2) Contemporaneously executed assignment

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.1: Whether the developer retained the right of exclusive possession towards the rooms & flat roofs? • Sub-conclusion: developer did retain the right of exclusive possession over the rest as a legal incident of his 719/720th shares of land & building

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.2: Whether HT passed on those rights of occupation to the vendors? • Any person who acquires an undivided share can acquire the exclusive use of any space in the building & exercise proprietary rights over such space • Unity of possession: the owner is prima facie entitled to exert rights of possession to every part of the building, in common with his co-owners • So long as the developer had the right of exclusive possession to the utility rooms & roof spaces, he was able to pass such right to subsequent purchasers of undivided shares, inc. the vendors in this case

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.2: Whether HT passed on those rights of occupation to the vendors? • The sub-DMC specifically dealt with the right to assign the right to occupy the utility rooms & 10/F roofs: see cl. 4(ii) • P: not conceptually possible à a right to occupy that has not been attached to specific shares cannot be assigned

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.2: Whether HT passed on those rights of occupation to the vendors? • Rejected by Lord Hoffmann NPJ:• A covenant which will run with the land must be made between owners of land, inc. owners of undivided shares in the same land: s.41(7) CPO • But since the owner of any undivided share has a share in the whole building, a covenant concerning the occupation of any part will relate to his land

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(1) THE “UNDIVIDED SHARES” POINT Issue 1.2: Whether HT passed on those rights of occupation to the vendors? • Rejected by Lord Hoffmann NPJ:• HT was entitled, as against anyone bound by the first DMC, to the exclusive occupation of the parts of the building • HT was entitled to occupy: • (1) the roof spaces; • (2) utility rooms and so forth under the first DMC; and • (3) as owner of 474,601/482,000 shares under the sub-DMC through which occupation of the commercial portion was attributable • HT was therefore entitled to assign those rights of occupation to TPL together with 204,587 of those shares, even they had not previously been “attached” to any particular no. of his undivided shares 28

(1) THE “UNDIVIDED SHARES” POINT Issue 1.2: Whether HT passed on those rights of occupation to the vendors? • Developer also retained exclusive possession of the yellow portions (inc. the utility rooms) when the commercial portion came to be sold in 1981 • A right that he could assign to subsequent purchasers of shares that he had retained after the first sale to SCB • CA was correct on this point in reversing Recorder’s judgment in CFI

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(2) THE “COMMON AREAS” POINT Since the DMC made no express reservation of the utility rooms & flat roofs to the original developer, would those areas become “common parts” & developer could not have validly assigned any right of exclusive occupation over those areas? [290I291B]

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(2) THE “COMMON AREAS” POINT • Although there was no specific mention of “utility room” etc., when the DMC is read as a whole, developer has clearly reserved exclusive possession towards those parts • CA was correct on this point

31

(3) THE “COCKLOFTS” POINT Whether R might rely on a contractual clause & the presence of unauthorised structures to exclude A from raising an objection to title? [291C-295C; 298J299I]

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(3) THE “COCKLOFTS” POINT Bear in mind that… • P had took his chance to inspect the property & knew there were extensive cocklofts • Nothing was asked about the cocklofts on P’s requisition d.d. 3.11.1997

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(3) THE “COCKLOFTS” POINT Issue 3.1: Whether, having regard to cls. 18(e) & 19 of the agreement, P could raise objections to Ds’ title on the ground that the cocklofts were/might have been unauthorised structures? • CFI: Found against D • Cl. 18(e) might cover innocent non-disclosure • No suggestion that the non-disclosure was innocent • A: There was a rule of equity that prevented a vendor, as a matter of law, from relying on such clauses in a case in which he knows/ought to know of a defect in title

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(3) THE “COCKLOFTS” POINT Issue 3.1: Whether, having regard to cls. 18(e) & 19 of the agreement, P could raise objections to Ds’ title on the ground that the cocklofts were/might have been unauthorised structures? • The only proper basis here is to regard the factual situation as neutral at the time the parties entered into the agreement • The shops were occupied by tenants • The existence of cocklofts was known fact • The evidence was neutral as regards the vendors’ knowledge as to whether the cocklofts were unauthorised structures • P made no inquiries • Both parties must have been well aware of the possibility that some/all of the cocklofts were unauthorised structures à they were contracting on that basis

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(3) THE “COCKLOFTS” POINT Issue 3.1: Whether, having regard to cls. 18(e) & 19 of the agreement, P could raise objections to Ds’ title on the ground that the cocklofts were/might have been unauthorised structures? • First principles: an agreement to sell & convey an interest in land is, like any other contract, a matter for the parties themselves • Contracts for sale of land are not exceptions to the principle that parties have freedom of contract & may agree to whatever terms they like • The question is whether the purchaser would have been aware of the risk he was being asked to take: Farrand, Contract and Conveyance (4th ed.) at p.93 • Here, parties have made elaborate provisions as regards existing encumbrances & the possibility of future encumbrances that might affect the property title 36

(3) THE “COCKLOFTS” POINT Issue 3.1: Whether, having regard to cls. 18(e) & 19 of the agreement, P could raise objections to Ds’ title on the ground that the cocklofts were/might have been unauthorised structures? • No one who had read that clause & saw the cocklofts could have failed to appreciate that he was being asked to bear the risk that they were unauthorised structures • CFA agrees with Godfrey JA & Mortimer V-P in CA that, if the purchaser had raised, in time, an objection to the title based on the (alleged) unauthorised nature of the cocklofts, the vendors would have been entitled to reply that, by virtue of cl.18(e), the purchaser was not entitled to take that objection to the title

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(3) THE “COCKLOFTS” POINT Issue 3.2: Assuming that P was not so debarred, whether P must be deemed nevertheless to have accepted the title, it not having raised requisitions or objections within 10 working days after receipt of the title deeds, in terms of cl.10 of the agreement

• CA: Found against P • The mere presence of cocklofts is no evidence of there being unauthorised structures • P purported to rescind on this ground on 14.11.1997 without having raised with D any enquiry, requisition or objection & without showing how the cocklofts were said to be “unauthorised structures” • D was not given an opportunity to consider/investigate this alleged defect in title

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(3) THE “COCKLOFTS” POINT Issue 3.2: Assuming that P was not so debarred, whether P must be deemed nevertheless to have accepted the title, it not having raised requisitions or objections within 10 working days after receipt of the title deeds, in terms of cl.10 of the agreement

• There are cases where a clause restricting inquiries into the title offered by the vendor was held not to be a bar to rescission when the purchaser discovered from other sources that the proffered title was worthless: Becker v. Partridge [1966] 2 QB 155 • But not relevant to this case • Cl. 10 is clear: CA was correct to find that P was debarred by the time limit in cl. 10 from objecting to the vendors’ title on the “common areas” & “cocklofts” point

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TAKE HOME MESSAGE • When construing an agreement, the court tries to discover what a reasonable person would have understood the parties to mean • The court will respect the freedom of contract as far as possible

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THANK YOU