Failure to Clearly Define the Boundaries of the Property for Sale May Entitle the Purchaser Not to Complete a Property Transaction

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Introduction
In every sale and purchase of property, the parties will set out in the agreement for sale and purchase the description of the property forming the subject matter of transaction, usually by reference to the number of undivided shares of the relevant lot(s) in which the property is situated and the address of the property. Yes Profit Investment Ltd v Mainly Tone Co Ltd HCA 2656/2008 illustrates that it is in the vendor’s interest to clearly define the boundaries of the property for sale, as any failure to do so may result in the vendor being regarded as not having title to a part of the property which it agrees to sell and cause a sale and purchase to fall through.

Background
By a provisional agreement for sale and purchase dated 4 May 2007 (the “Provisional Agreement”) the Plaintiff as purchaser agreed to purchase from the Defendant as vendor a property which was described in the Provisional Agreement as “Shop 1 on Ground Floor (No 55 Austin Road), Lucky Building Nos 186-194 Woosung St, Nos 55-63, 67-73 Austin Road, Kln” (the “Property”).  A plan marked “For Identification Purpose Only” was attached to the Provisional Agreement. The said plan included the “Ground Floor” plan of Lucky Building (the “Ground Floor Plan”), in which a rectangular area marked “1” (“Shop 1”) was shaded.

On 18 May 2007, the parties entered into a formal agreement for sale and purchase (the “Formal Agreement”), under which the subject matter of the sale and purchase was described by reference to a number of undivided shares of the relevant lots and building together with the sole and exclusive right and privilege to hold use occupy and enjoy “ALL THAT SHOP 1 on the Ground Floor (No 55 Austin Road) of the Building”. There was no floor plan attached to or referred to in the Formal Agreement to further delineate the exact boundaries of the Property forming the subject matter of the sale and purchase.

Clause 8 of the Formal Agreement provided that the vendor shall give a good title to the Property. Further, Clause 10(1) of the Formal Agreement provided, among others, that any requisition or objection in respect of title or otherwise shall be delivered in writing to the vendor’s solicitors within 7 working days after receipt of the title deeds by the purchaser’s solicitors otherwise the same shall be considered as waived.

It was undisputed between the parties that there was (i) a toilet constructed in Shop 1; and (ii) a raised floor platform in Shop 1 (the “Platform”), a part of which extended beyond the boundary of the relevant lots as described under the Formal Agreement and encroached on Government land.

Shortly before the completion date (16 August 2007), on 30 July and 15 August 2007, the purchaser’s solicitors raised two requisitions:-

1.         requesting for evidence to show that the toilet in Shop 1 was an alteration work approved by the relevant authorities; and

2.         whether the Platform, which encroached on Government land, was an unauthorized building work and was liable to enforcement action by the Government.

In reply to the two requisitions, the vendor’s solicitors relied upon Clause 10(1) of the Formal Agreement and contended that the requisitions were new requisitions and raised out of time. Accordingly, such requisitions were deemed to have been waived by the purchaser.

The purchaser did not complete the purchase of the Property on 16 August 2007. The vendor terminated the Formal Agreement and forfeited the initial and further deposits paid by the purchaser.

The purchaser commenced legal proceedings to recover the initial and further deposits and to claim damages against the vendor for loss of bargain. The vendor counterclaimed the purchaser for (i) declarations that the purchaser was in wrongful repudiation of the contract and that the vendor was entitled to forfeit the deposits; and (ii) damages.

Vendor’s title in the Property was defective by reason of the encroachment
The first issue was whether the encroached area formed part of the Property agreed to be sold under the Formal Agreement. The purchaser contended that the encroached area formed part of the Property under the Formal Agreement. On the other hand, the vendor argued that the Property which it had agreed to sell was the shaded area on the Ground Floor Plan attached to the Provisional Agreement (i.e. Shop 1), which excluded the encroached area.

The Court noted that neither the Provisional Agreement nor the Formal Agreement clearly defined the physical boundaries of the Property. Although there was a Ground Floor Plan attached to the Provisional Agreement identifying Shop 1, the Ground Floor Plan was expressly stated to be “For Identification Purpose Only”, it therefore could not be regarded as setting the precise boundaries of the Property. In relation to the Formal Agreement, the Court considered that it was not possible to discover, from the terms and provisions of the Formal Agreement, what were the physical boundaries of the Property which the vendor agreed to sell to the purchaser.

In such circumstances, the Court considered that it was permissible to look at the surrounding, objective circumstances to determine the parties’ intention in respect of the scope of the description “Shop 1” or “ALL THAT SHOP 1” under the Provisional Agreement and Formal Agreement respectively. The Court opined that the most significant surrounding circumstance was that the Platform appeared to be a uniform, continuous, floor slab extending from the interior of Shop 1 and to form an integral part of Shop 1. An objective bystander would naturally regard the Platform as part and parcel of Shop 1. As such, in the absence of any qualification in the Provisional Agreement or Formal Agreement regarding the physical boundaries of the Property, the Court held that it was the parties’ clear intention, objectively ascertained, that the description of “Shop 1” or “ALL THAT SHOP 1” should include the whole area occupied by the Platform. As part of the Platform did encroach on Government land, the vendor did not have title to part of the Property which it agreed to sell under the Formal Agreement. The vendor’s title in the Property was therefore defective.

Purchaser not debarred from raising requisition on title based on the Platform
It is an established principle that a purchaser is entitled to raise a requisition or objection on title out of time if (i) it goes to the root of title; and (ii) the defect in the title could not have been discovered had the purchaser exercised due diligence (Lucky Dragon Corp Ltd v Speedy Vantage Ltd [2009] 5 HKLRD 501).

As mentioned above, the vendor had no title in respect of the part of the Property which encroached on Government land. Further, the area of encroachment, relative to the size of Shop 1, was significant. As such, the Court held that the requisition on title based on the encroachment did go to the root of title in the present case. 

In addition, the Court opined that the encroachment in the present case was not something which the purchaser should have discovered by the exercise of due diligence for reasons that there were similar encroachments in other ground floor shops in the building and that there did not seem to be anything which would have alerted the purchaser to the existence of the encroachment. Therefore, the purchaser was entitled to raise requisition on the encroachment out of time. Since the vendor did not properly answer the requisition, the purchaser was entitled not to complete the purchase of the Property.

Purchaser’s requisition in relation to the toilet
While the Court’s conclusion regarding the requisition on encroachment rendered it unnecessary to resolve the issues concerning the toilet, the Court nevertheless expressed its views on the purchaser’s requisition in relation to the toilet for the sake of completeness. The Court considered that the purchaser’s requisition in relation to the toilet was technically a defect in title for the following reasons:-

1.         the construction of the toilet contravened the Building (Planning) Regulations (Cap. 123F) in that the toilet was not provided with a window or lantern light. Further, the drainage connections in the toilet involved the structure of the building as they required the cutting of ground beams to lay the underground soil pipe leading from the toilet bowl to the manhole. Therefore, the toilet could not be exempted works under the Buildings Ordinance (Cap. 123) and would require approval from the Building Authority.

2.         while the risk of enforcement action being taken by the Building Authority might not be high, the risk was not fanciful.

However, such defect in title did not go to the root of title as the toilet and the drainage connections could be demolished and Shop 1 could be reinstated without much difficulty or expense. Further the Court considered that the purchaser could have discovered the defect in title arising from the toilet earlier by exercising due diligence as the Ground Floor Plan (which was attached to the Provisional Agreement) did not indicate the existence of any toilet in Shop 1, which was inconsistent with the purchaser’s understanding based on the agreement to renew the tenancy of the Property received by the purchaser soon after the signing of the Provisional Agreement.

Pursuant to Clause 10(1) of the Formal Agreement, the purchaser was deemed to have waived the defect in title arising from the toilet and thus could not rely on such defect as an excuse not to complete the purchase of the Property.

Relief to the purchaser
As the vendor’s title to the Property which it agreed to sell was defective by reason of the encroachment, the purchaser was entitled (i) not to complete the purchase of the Property and (ii) to recover the initial and further deposits. However, the purchaser was not awarded damages for loss of bargain as the purchaser failed to prove, on the balance of probabilities, that the open market price of the Property on 16 August 2007 was higher than the contract price under the Formal Agreement.

Conclusion
This case illustrates that in certain circumstances (such as the present case), mere written description of the property forming the subject matter of the transaction may not be sufficient. To avoid ambiguity, parties may identify and further define the property by reference to a floor plan (with the boundaries of the property clearly delineated) and attach such floor plan to the agreement for sale and purchase for delineation of the property purpose.

 
IMPORTANT:
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
 
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Published by ONC Lawyers © 2015