25 January, 2016
One of the common fears of a purchaser of a property is the discovery of unauthorised structures on the property after the exercise of an option or the purchase of the property. On the one hand, the caveat emptor or “buyer beware” principle places the burden on the purchaser to ensure that all due diligence is conducted before the sale. On the other hand, the law requires the vendor to disclose latent defects of title (as opposed to latent defects of quality of the property and other matters) to the purchaser. If a latent defect of title was not disclosed at the date of the contract, the purchaser is entitled to rescind the contract of sale.
A difficult issue arises as to whether an unauthorised structure on the property necessarily amounts to a latent defect of title which the vendor is required to disclose at the date of the contract. Further, unauthorised structures may call into question whether vacant possession had been delivered and whether completion had in fact occurred. These issues were recently considered in the High Court decision of Ajit Chandrasekar Prabhu v Yap Beng Kooi (“Ajit”) [2015] SGHC 280.
FACTS
The Defendants (“ the Vendors”) owned a property at Camden Park (“the Property”) which they put on sale in late 2012. In early 2013, the Plaintiffs (“the Purchasers”) viewed the Property which included a structure described as, amongst others, a rumpus room and gym (the “Room”). The Purchasers paid the Option fee and exercised the Option, with completion scheduled for April 2013, at the purchase price of $25,000,000. The Option incorporated the Law Society of Singapore’s Conditions of Sale 2012 (“Law Society Conditions”). Upon paying the balance purchase price at completion, the Purchasers were handed the keys to the Property and commenced renovation works on the Property by mid-2013.
In July 2013, the Vendors received a letter from the Purchasers’ solicitors contending that the Room was constructed without the relevant approvals and was therefore a breach of warranty under Condition 10.1 of the Law Society Conditions of Sale. Condition 10.1 required the Vendors to represent and warrant to the Purchasers that the Vendors had not carried out any unauthorised additions or alterations to the Property.
In addition, the Purchasers claimed that the Vendors had breached Clause 11 of the Option by failing to obtain the required regulatory approval for constructing the Room. Clause 11 of the Option read:
“The Vendor confirms that no changes from the Specifications and Approved Building Plans have been made except changes which has [sic] been approved or are required by the Commissioner of Building Control or other relevant Authorities. The Vendor shall provide the Purchaser a copy of the Building Plans.”
At the trial, the Vendors did not deny: (a) that regulatory approval for the Room was not obtained; (b) that the Vendors were in breach of the warranty in Clause 11 of the Option and Condition 10.1 of the Law Society Conditions; and (c) the Room should be rectified.
However, the Vendors denied that the Room had rendered the title defective, or that they had failed to deliver vacant possession, or that completion had not occurred.
SUMMARY OF DECISION
The High Court found that there was a breach of warranty as the required regulatory approval for the Room had not been obtained.
Hence, the Purchasers were entitled to damages for the cost of rectification of the defective structure to the extent that the Room was brought into compliance with the law. However, such a breach did not lead to any defect in title or a failure to give vacant possession and complete the conveyance.
We will now turn to the three concepts of defect in title, vacant possession and completion that the High Court discussed in Ajit.
1. DEFECT IN TITLE
The High Court held that no defect in title arose from the unauthorised construction of the Room.
The Purchasers had argued that the Room was “an unauthorised construction, which was only discoverable upon inspecting the approved plans, and was constructed in violation of building regulations, and this could not be discovered without the structural plans and calculations”.1
Hence, the Purchasers contended that the Vendors had breached Clauses 2 and 3 of the Option which required title to the Property to be free from encumbrances and properly deduced.
The High Court, however, held that Clauses 2 and 3 were concerned with encumbrances properly speaking and did not appear to cover the failure to obtain regulatory approval for the Room. The High Court applied the Court of Appeal’s decision in Huang Ching Hwee v Heng Kay Pah [1992] 3 SLR(R) 452 (“Huang”) that a failure to obtain regulatory approval “would only be an encumbrance if there was actual regulatory action taken, such as the sending of a notice from the authority”.2
In other words, actual action must be taken by the authority, “not just an expectation or likelihood of such action”.3
If the mere potential of enforcement action could create a defect in title, there would be great uncertainty and unnecessary disputes.
The High Court observed that the concern of the Court of Appeal in Huang was to ensure “certainty in the conveyancing process and no second-guessing of the actions of the regulators”.4
By opining that the Vendors were in clear breach of the Building Control Act and that the Building Control Authority (“BCA”) would not approve the changes, the Purchasers were in fact second-guessing the regulatory action that may be taken when no evidence had been tendered as to what the BCA would do in this case. Moreover, even if a breach of a provision occurred, the authorities might not necessarily take action in all cases due to, for instance, resource constraints.
2. VACANT POSSESSION
The High Court rejected the Purchasers’ claim that as the Purchasers were unable to occupy the Property due to the repair works required, the Vendors had failed to deliver vacant possession of the Property. Vacant possession required “no impediment to the use and occupation of the property because of something actually on the property obstructing such use”.5
Vacant possession was intended to ensure that the purchaser can put the property to its intended use. Hence, a material attenuation of vacant possession must be substantial.
On the facts, although the Purchasers were unable to occupy the Property because of repair works, such inability arose from the Purchasers’ own activities and did not affect the right of possession over the Property at the time of completion. To affect the right of possession, the inability to use the Room must arise from some physical or legal impediment going to the whole of the Property, and not from the repair efforts themselve
In Addition, an obligation to give vacant possession was not the same as giving a right to immediate and full occupation, enjoyment and use of the property. The High Court suggested that the latter right could be agreed between the parties, but it would place a heavy obligation on the vendor as any minor physical defect could constitute a breach.
3. COMPLETION
The High Court also found that completion had in fact occurred. Firstly, the Purchasers’ argument that constructive non-completion had occurred because of the Vendors’ breaches was not tenable, given the High Court’s clear findings that there was neither a defect of title nor a failure to deliver vacant possession. The Purchasers’ attempt to push the boundaries of defective title and vacant possession would only create “greater uncertainty in conveyancing transactions”.6
Secondly, completion would generally involve “conveyance of the estate of land and final settlement of business”,7 such as the handing over of documents of title and the giving of vacant possession. It did not require the absence of disputes between the parties, and non-completion would occur only if fraud or nullity was involved.
On the facts, the Purchasers were in possession and control of the Property and were not intending to return it to the Vendors. Once the keys were handed over, “factual completion should not be unravelled or put in doubt”8 as it would result in greater uncertainty.
CONCLUSION
As noted by the High Court in Ajit, the three concepts of defect in title, vacant possession and completion are matters “at the heart of conveyancing”9 and would therefore be of interest to every vendor and purchaser in a contract of sale of property.
The High Court’s decision suggests that certainty in sale and purchase transactions is the predominant consideration and a high threshold is required to unwind the completion of a transaction. Hence, the High Court was not inclined to depart from the traditional view of the concepts of defect in title, vacant possession and completion in conveyancing transactions
It is reported that the Purchasers have appealed against the High Court’s decision in Ajit. We expect that this will be a very closely watched case if the appeal is proceeded with.
1Ajit at [23].
2 Ajit at [24].
3 Ajit at [24].
4 Ajit at [27].
5 Ajit at [33].
6 Ajit at [41].
7 Ajit at [42].
8 Ajit at [43].
9 Ajit at [1].
For more information, please contact:
Sandra Han, Partner, RHT Taylor Wessing
sandra.han@rhtlawtaylorwessing.com
