Introduction
It is well established that in any sale and purchase of property, if a vendor relies on the terms of the sales and purchase agreement (the “SPA”) to shift the risk of any defect in title to the purchaser, the language of the SPA must clearly do so. General words which do not identify the specific defect in title may be inadequate to excuse the vendor from a title defect.

Case Study
The recent case of Long Life Chinese Health Food Limited v Luen Fat Air Condition (H.K.) Trading & Engineering Company Limited HCA 1376/2013 demonstrates the importance of specifically stating the title defects in the SPA instead of merely relying on the general terms.

Facts
The Plaintiff was the purchaser and the Defendant was the vendor of the subject property (the “Property”). The Provisional SPA and the Formal SPA were entered into. The Plaintiff’s solicitors then raised requisitions (the “Requisitions”) in relation to a notice and a building order from the Building Authority (the “Demolition Order”), ordering the demolition of an unauthorized building work (the “UBW”). The Defendant relied on condition 2 of the Provisional SPA as an exclusion clause but the Plaintiff contested that it was not wide enough to cover the UBW. Eventually, completion did not take place.

The issue was whether on the true and proper construction of the agreements as a whole and condition 2 of the Provisional SPA, the Plaintiff was entitled to raise the Requisitions.

Condition 2 of the Provisional SPA
The Judge examined condition 2 of the Provisional SPA in 5 parts so as to assess whether such a clause was wide enough to bar the Plaintiff from raising the Requisitions.

1.         Condition 2(A): “The Purchaser…clearly knows of and accepts all the internal and external fitting condition of the shop premises and clearly knows of (a) the cockloft(s) constructed within the shop premises, (a) staircase(s) connecting the cockloft and the ground floor shop, and the existing extended area of the cockloft.”

The UBW was not mentioned in this condition 2(A). The Judge found that a reasonable potential purchaser might be led into thinking that there was nothing other than the three matters specifically mentioned.

2.         Condition 2(B): “The Purchaser knows of no application has been made to the government or relevant authorities in respect of the relevant condition section.”

The Judge found that there was no evidence and no basis to suggest that the Plaintiff knew of the Demolition Order before execution of the Provisional SPA.

3.         Condition 2(C): “The Vendor gives no warranty as to whether or not the relevant condition is amounting to unauthorized alteration, illegal or non-compliant project, or related matter.”

Firstly, it was held that the Plaintiff did not have to rely on a warranty from the Vendor in order to object to a title defect because it could have relied on clauses 4 and 7 of the Formal SPA and condition 5 of the Provisional SPA, which provided that (i) the Property was to be sold free from encumbrances, (ii) the Defendant has to give good title to the Property and (iii) the basis of the contract was the title being in good order, respectively.

Secondly, the Judge found this condition 2(C) must be read together with clause 9(b) of the Formal SPA, under which the Defendant “warrants that the Property is not adversely affected by any…liability of which he is aware…other than those disclosed in this [Formal SPA]…” While there was no evidence to show that the Plaintiff was aware of the Demolition Order when the Provisional SPA and the Formal SPA was entered into, the Vendor in fact breached the said clause 9(b) due to the existence of the Demolition Order.

4.         Condition 2(D): “After consideration, the Purchaser has decided to accept the existing condition of the Property and is willing to undertake the liability of retaining the existing condition.”

It was held that this condition 2(D) did not mean that the Plaintiff was prepared to assume liability under any existing enforcement order against the Plaintiff of which the Defendant was aware. The Judge reiterates that the scope of the risk that the purchaser undertakes depends on the terms of the clause and the “most express language” is required if a vender wishes to shift to the purchaser the risks arising from serious defects in title, which the vendor has actual knowledge but has not disclosed to the purchaser. 

5.         Condition 2(E): “The Purchaser and its legal representatives shall not raise any requisition on title and/or claim compensation and/or seek a reduction in purchase price by reason of the existing state of the Property and/or the aforementioned condition, and shall also not refuse to complete the transaction by reason thereof.”

It was found that the “aforesaid condition” appear to be a reference to the three specific matters mentioned in condition 2(A) while “existing state” was a general term. The Judge held that a general statement not to raise requisition on title arising from the existing condition of the Property did not preclude the Plaintiff from objecting to a defect which the vendor knows of but failed to disclose before the contract.

Decision
As illustrated above, condition 2 of the Provisional SPA did not assist the Defendant’s case. The Judge concluded that the Plaintiff was entitled to raise, and not debarred by Condition 2 from raising, the Requisitions concerning the apparently outstanding demolition order.

Conclusion
As can be seen from the case above, in construing a sale and purchase agreement, the court leans against an interpretation that would enable the vendor to mislead the purchaser, or would impose a defect of title on the purchaser of which the vendor was aware but had failed to disclose. Taking the above case as an example, the particularity required by the court to be disclosed in the SPA is specifically the existence of the Demolition Order.

More importantly, any specific title defects which the vendor intends to shift to the purchaser should be clearly stated as early as when the provisional SPA is entered into because it is the governing principle that each of the vendor and the purchaser is only entitled to insert in a formal SPA terms which a binding provisional SPA expressly or by necessary implication contains, but no others unless by mutual consent.

Thus, provisional SPA should not be casually executed (e.g. the estate agent’s standard provisional SPA). Both the vendor and the purchaser should consult their lawyers in order to fully understand their rights and interests before entering into a binding provisional SPA.

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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.