Introduction

In several of our past newsletters, we have discussed issues relating to the sale and purchase of properties involving unauthorised building works. In general, the existence of unauthorised building works in a property affects its vendor’s ability to fulfil its obligation of showing good title to such property. As such, in relation to such transactions, it is not uncommon to see clauses in the sale and purchase agreement which preclude the purchaser from raising requisitions regarding specific unauthorised building works found in the property.

However, where the wordings of such clauses in a provisional agreement are different from that in the subsequent formal agreement, there may be significant impact on the extent of requisitions to which the purchaser of the property is entitled to raise. This principle is well illustrated in a recent Hong Kong Court of First Instance decision.

The Illegal Structure Clause

In Join Union Investment Ltd v China Tree Investment Ltd [2016] 2 HKLRD 901, one of the issues before the Court concerns an illegal structure clause (the “Illegal Structure Clause”) in the provisional agreement between the Vendor and the Purchaser (the “Provisional Agreement”) in relation to the sale and purchase of a shop on the ground floor of a building (the “Property”). The Illegal Structure Clause 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.”

However, in the subsequent formal agreement between the Vendor and the Purchaser (the “Formal Agreement”), the majority of the Illegal Structure Clause had not been included, save and except it was provided in the Formal Agreement that “[t]he Property is sold on an ‘as is’ basis”, being the first part of the Illegal Structure Clause only.

The Purchaser then instructed a registered structural engineer to prepare a report relating to the Property. The report states that, amongst others, a substantial cockloft was found to have been constructed in the Property (the “Cockloft”). It was the opinion of the registered structural engineer that the Cockloft amounted to unauthorised building works alterations carried out without the approval of the Building Authority. Hence, there was a real risk of the government taking enforcement action against the owner of the Property in respect of such unauthorised building works.

By reasons of the above, the Purchaser’s solicitors raised requisitions and asked the Vendor’s solicitors to produce satisfactory evidence to show that the Cockloft had been approved by the Building Authority and the Incorporated Owners or all other co-owners of the said building. The Purchaser argued that failure to do so would mean that the Vendor failed to prove and give a good title to the Property, which is a breach of the Formal Agreement. As such, the Purchaser had to accept the Vendor’s repudiation and demanded the Vendor to refund all the deposits paid.

The Vendor argued that the Purchaser was barred from raising any requisitions or objections on title arising from the Cockloft by the Illegal Structure Clause which was expressly provided in the Provisional Agreement. Among other things, the Vendor claimed against the Purchaser for a rectification of the Formal Agreement to incorporate the Illegal Structure Clause into it.

Why rectification is impossible here

While the Court of First Instance decided that the Cockloft gives rise to a title defect which does not go to the root of title and hence dismissed the Purchaser’s claim on other basis, the Court very clearly rejected the Vendor’s invitation to rectify the Formal Agreement by incorporating the Illegal Structure Clause into it.

The Court recognised that, in the context of sale and purchase of real properties in Hong Kong, once a formal agreement is drawn up and signed between the parties, it supersedes any provisional agreement entered into in respect of the sale and purchase of such real properties. The Court referred to the initial draft Formal Agreement prepared by the Vendor’s solicitors and found references therein to the effect that the Vendor does not warrant whether the construction of the Property is in accordance with the approved building plans of the building. However, such references had been crossed out by the Purchaser’s solicitors which had subsequently been accepted by the Vendor’s solicitors. Viewing the matter objectively, the Court opined that it is clear that the Vendor and the Purchaser agreed that only the first part of the Illegal Structure Clause was to be retained in the final version. Further, the Court found that despite the Vendor was fully aware of the fact that only the first part of the Illegal Structure Clause was adopted in the Formal Agreement with the rest being omitted and that such omission had been brought to the attention of the Vendor’s solicitors, the Vendor nevertheless signed the Formal Agreement in the form presented to it.

Given the above, the Court held that the omission of the rest of the Illegal Structure Clause was not because of any mistake in failing to express or reflect the common intention of the Vendor and the Purchaser. Thus, there was no proper basis to support rectification of the Formal Agreement as requested by the Vendor. The Court also found that the Purchaser was not precluded from raising requisitions or objections arising from any illegal structures found in the Property, including the Cockloft, merely based on a clause in the Formal Agreement which provides that the Property is sold on an “as is” basis.

Conclusion

This case once again reminds parties to sale and purchase of properties that they (and their solicitors) must pay extra care in drafting and preparing sale and purchase agreement when such properties contain unauthorised building works. In particular, if a vendor wants to rely on a contractual provision to limit or qualify the title to be conveyed to a purchaser in a sale and purchase transaction of a property which contains unauthorised building works or illegal structures, the language must be very clear in doing so. If the language is not sufficiently clear in identifying any specific defect in title, the vendor may run the risk that the purchaser may back out from the purchase because of the existence of the unauthorised building works which the vendor is unable to resolve before completion. It is also important to check if the clauses contained in a formal agreement for sale and purchase match such special provisions, like the Illegal Structure Clause in the present case, as agreed between the vendor and the purchaser at the stage when they entered into the relevant provisional agreement.

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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.