Land law — title/sale of land — unit in multi-storey building — potential liability of unit owner to meet contribution to funds of incorporated owners in ongoing legal proceedings — offer for indemnity insufficient to cover liability
D agreed to sell and P agreed to purchase a unit (the “Property”) in an industrial building (the “Building”) (the “Agreement”). P raised requisitions in relation to the liability of the incorporated owners of the Building (the “IO”) for costs in five sets of ongoing legal proceedings (the “Litigations”). D claimed that there was sufficient surplus in the management funds to satisfy the liability and it was not likely that contribution would be called on from the co-owners. Further, D offered to set aside $25,000 as security money and give an indemnity in favour of P for any contribution to the costs in the Litigations. P did not accept D’s offer. Subsequently, completion did not take place as agreed. D claimed that P had repudiated the Agreement and forfeited the deposits paid by P (which represented 15 percent of the purchase price). P claimed that it was entitled to terminate the Agreement and obtain the return of the deposits as D failed to answer its requisitions and to prove a good title to the Property.
Held, entering judgment for P, that:
- A liability of the incorporated owners would be met from the funds of the corporation established under s. 20 of the Building Management Ordinance (Cap. 344). Contribution might be required from the owners from time to time. Once a demand for payment was made of an owner, the liability attached to his interest in land and passed to his successors-in-title so long as the contribution remained unpaid. Such liability, if it was so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser, would constitute a defect in title. The burden was on the vendor to prove a good title to the very high standard of beyond reasonable doubt that the purchaser would not be at a risk of a successful assertion against him of an encumbrance.
- D failed to answer the requisitions and prove a good title to the Property. The liability of the IO in the Litigations and the potential liability of the owners to contribute towards such liability were by their nature extraordinary and constituted an encumbrance. It was not an ordinary affair of an owners’ corporation to be involved in any litigation, let alone five sets of ongoing legal proceedings against different parties. The liability of the IO had never been ascertained. D’s offer for indemnity did not cover the full amount of the IO’s liability and was not backed up by any security other than $25,000 to be stakeheld by D’s solicitors. A reasonable purchaser of the Property would not have contemplated that the IO had been subject to such a liability.
- (Obiter) The deposits did not amount to a penalty, as argued by P. It was justified for the parties to agree on a deposit of 15 percent to compensate D for a four-month completion period and allowing P to have access to the Property pending completion. Therefore, if contrary to the Court’s conclusion, P had wrongfully repudiated the Agreement, D was entitled to forfeit the deposits.