Introduction

In our previous newsletter “Raising Requisitions in the Context of Discrepancies Found in Provisional and Formal Agreements”, we have discussed the decision of the Court in Join Union Investment Ltd v China Tree Investment Ltd [2016] 2 HKLRD 901 particularly on the implication of different wordings used in a provisional agreement and a subsequent formal agreement in relation to unauthorised building works found in the property.  In this newsletter, we will discuss another issue raised in that case concerning the legal effect of an “as is” clause.

Background

To recap, in the Join Union case, the Vendor and the Purchaser entered into a provisional agreement which contains an illegal structure clause (the “Illegal Structure Clause”), the English translation of which states that:-

“The Property is sold on an ‘as is’ basis to the Purchaser. The Purchaser has inspected the status quo of the Property and shall not at any time hereafter raise any requisitions or refuse completion or defer completion with respect to any unauthorised additions, alterations or unauthorised building structures.”

Subsequently, the Vendor and the Purchaser entered into a Formal Agreement in which the Illegal Structure Clause was amended to include only the first part in the clause, namely “the Property is sold on an ‘as is’ basis” (the “As Is Clause”).  This gave rise to one of the issues raised in the Court, that is whether the As Is Clause alone could preclude the Purchaser from raising requisitions or objections arising from illegal structures or other matters as to title.

Legal Principles

In Part A of the Second Schedule to the Conveyancing and Property Ordinance (Cap. 219), there are a number of typical covenants and conditions which can be incorporated into an agreement for sale and purchase of property by reference.  The third condition therein provides that “the purchaser purchases with full knowledge of the physical condition of the property and takes it as it stands”.  This is also commonly known as the “as is” condition.  If the “as is” condition is incorporated into an agreement for sale and purchase of property, the purchaser is deemed to be aware of the physical condition of the property, and the vendor is not liable for any physical defects, whether the defects are patent or, in some cases, latent[1], nor is he obliged to abate the purchase price for any such defects.

Although the “as is” condition might sound a bit unfair to the purchaser, it actually corresponds with the traditional common law notion of “caveat emptor”, literally meaning “let the buyer beware”.  As such, it is perfectly appropriate to incorporate an “as is” condition into an agreement for sale and purchase of property, provided that the insertion of which is agreed upon between the parties.

However, it should be noted that, a property stated to be sold on “as is” basis refers only to its physical states and condition but does not extend to illegal structures in the absence of clear wordings to such effect.  This can be illustrated by the following cases.

Case Illustration

Leung Wing Fai

In the case of Leung Wing Fai v Onlink Investments Ltd [2000] 1 HKLRD 725, after signing a sale and purchase agreement of a property, the purchaser discovered that the property contained unauthorized structures and raised requisitions to the vendor.  The vendor responded that it would demolish the structures before completion.  On the day of completion, the purchaser terminated the sale and purchase agreement and sought relief from the vendor on the basis that good title had not been shown.  One of the arguments advanced by the purchaser was that the “as is” clause contained in the sale and purchase agreement had prevented the vendor from demolishing the unauthorized building works.

Despite holding in favor of the purchaser, the Court held that the “as is” clause there was for the protection of the vendor that the vendor would not need to improve the property.  It was in the Court’s view that the “as is” clause was not a right that can be asserted by a purchaser to restrain a vendor from demolishing what is undisputed to be unauthorized building works, nor can it be used as the purchaser’s justification for insisting that unauthorized building works be sold to him together with the rest of the property.

All Ports Holdings

In the case of All Ports Holdings v Grandfix Limited [2001] 2 HKLRD 630 which was considered by the Court in Join Union, the purchaser entered into an agreement to purchase a property from the vendor.  At issue was whether the vendor had satisfactorily answered two requisitions.  One of the requisitions concerned with an alleged illegal structure.  The vendor argued, as in the case of Join Union, that it was under no obligation to answer the requisition since there was a handwritten clause in the agreement barring the purchaser from raising requisitions on illegal structures (the “Handwritten Clause”).  The Handwritten Clause provided that the purchaser accepted “all existing condition/states of the Property and shall not rely upon any pretext to refuse to complete the transaction or to raise any objections”.  The vendor further argued that the Handwritten Clause meant something more than the standard “as is” clause which was already contained in the agreement, and that the parties had understood it to include illegal structures.

In arguing that the Handwritten Clause was capable of being construed as including illegal or unauthorized structures, the vendor relied on several canons of construction and presumptions, such as the presumption against redundant words which provides that no part of a contract should be treated as inoperative or surplus.  However, the vendor’s arguments were not accepted by the Court, since the Court found that those canons of construction or presumptions relied by the vendor would not assist if on the face of the provision, no ambiguity arises.  In this case, although it was the vendor’s case that the parties understood between themselves that “condition/states” included illegal structures, that was not evident from a reading of the Handwritten Clause.  As such, the Court found no ambiguity on the face of the Handwritten Clause.

On the other hand, the Court emphasized that, if the vendor wanted to rely upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so.  In this case, as found by the Court, the Handwritten Clause clearly fell short of what was required.  Accordingly, the Court held that the Handwritten Clause referring only to the physical states and condition of the property was not capable of extending to illegal structures.  For this reason, the Handwritten Clause was not a proper answer to the requisition raised by the purchaser concerning illegal structures.

Poon Mee Kuen

In another case of Poon Mee Kuen v Chan Hor Tong & Others HCMP 1431, 1432 and 1433/2004, the purchaser claimed relief from the vendors on the basis that the vendors had failed to satisfactorily answer requisitions on title and had thereby failed to show good title before completion.  One of the requisitions concerned the legality of certain alteration works in the property.  Instead of answering this requisition, the vendor simply replied that the property was sold “as is”.  After considering the similar cases, the Court held that it was plain that the “as is” clause in that case did not have the effect of shifting the risk of any defect in title to the purchaser.

With the cases of All Ports Holdings and Poon Mee Kuen in mind, the Court in Join Union also concluded that the As Is Clause in that case, which provided that the property was sold on an “as is” basis, related only to the physical condition of the property and did not preclude the Purchaser from raising requisitions arising from illegal structures.

Conclusion

The above cases had clearly demonstrated the well settled principle that an “as is” clause relates only to the physical states and condition of a property and it is not a matter of title on its own.  If a vendor wants to rely on a contractual provision to limit or qualify the title to be conveyed, there must be very clear language to that effect and an “as is” clause alone is certainly not enough.

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Important: The law and procedure on this subject are very specialised 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.