Meaning of covenant to reinstate to ‘bare shell’ condition

September 19, 2022

AFH Hong Kong Stores Ltd v Fulton Corporation Ltd ([2022] HKCA 1243) concerned the interpretation of a tenant’s covenant to reinstate the demised premises to a ‘bare shell’ state on the determination of the lease.

The premises were retail premises over five floors of a building in the Central district of Hong Kong. When it took possession, the tenant removed the entire floor slab of one of the floors and part of the floor slab of three others. It installed lifts and staircases.

The lease required the tenant to yield up the premises to the landlord at the end of the lease, ‘in a “bare shell” good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord’ (emphasis added).

The landlord contended that this wording required the tenant to reinstate the floor slabs it had removed while the tenant argued that it was under no such obligation.

There was, perhaps surprisingly if reinstatement had been intended, no express covenant to reinstate the removed floor slabs in the lease nor, so far as can be seen in the judgment, in any license to carry out the alterations.

There was, by contrast, a clause that gave the landlords the option to require the tenant to remove fixtures that the tenant added to the demised premises.

The Court of Appeal referred to the principles of contractual interpretation in the Court of Final Appeal in Eminent Investments (Asia Pacific) Ltd v DIO Corp ([2020] HKCFA 38).

It decided that the reference to ‘on each floor’ supported the landlord’s contention that the tenant had to reinstate the floor slabs that had been removed ([26.1] and [43]).

Michael Lower

Priority contest between a charging order and an assignment

August 27, 2022

Asparouh Ianov Dimitrov v Dominic Tak Ming Lau ([2022] HKCA 1146 ) was a dispute between a creditor with a charging order over the debtor’s property (‘the Property’) and the debtor’s ex-wife to whom the debtor assigned the Property.

The sequence of events was:

  • 20 November 2017 –  charging order nisi obtained
  • 23 November 2017 –  charging order nisi registered
  • 3 January 2018         – debtor assigned the Property to his ex-wife
  • 15 January 2018       – charging order absolute obtained
  • 19 January 2018       – assignment registered
  • 25 January 2018       – charging order absolute registered

The creditor sought a declaration that the charging order had priority over the assignment and an order for sale and succeeded at first instance. The debtor’s wife appealed.

There was no difficulty in confirming that the charging order had priority over the assignment: the priority date for the charging order absolute relates back to the priority date for the charging order nisi ([20]).

Section 5A of the Land Registration Ordinance specifies that a charging order has priority from the day after its registration. The priority date of the charging order was 24 November 2017 (the day after the 23 November 2017 registration).

Section 5 of the Land Registration Ordinance says (in effect) that assignments registered within one month take effect as from the date they were executed. The priority date of the assignment was 3 January 2018.

The debtor’s wife relied (unsuccessfully) on an argument that she had a prior unwritten equitable interest to which the charging order was subject.

She argued, for example, that there was an oral gift of the Property to her before the date of the charging order nisi. She relied on Re Rose to argue that she had an equitable interest because her husband gave her the title deeds.

Hon Chow JA pointed out that her husband had not executed a deed of gift at the relevant time and so had not done everything in his power to divest himself of his interest in the land.

Arguments based on proprietary and / or promissory estoppel failed because, even assuming there to have been an assurance, the wife incurred no detriment.

The declaration that the charging order had priority and the order for sale were upheld.

Michael Lower

Meaning of ‘saleable area’: Top Faith Property Ltd v Wong Ben

July 27, 2022

In Top Faith Property Ltd v Wong Ben ([2022] HKCA 783) Top Faith Property Ltd (‘the buyer’) entered into a Provisional Sale and Purchase Agreement to buy the entire issued share capital of Hero Wealth Corporation Ltd for HK$250 million. Hero Wealth was the vehicle for the ownership of office units in the Lippo Centre.

Pre-contract, the buyer made an inquiry as to the ‘saleable area’ of the office units. The shareholders of Hero Wealth (‘the sellers’) provided a plan stating that the saleable area was 758.46 square metres. This was untrue and the buyer relied on misrepresentation to rescind the contract.

The buyer succeeded at first instance. The sellers appealed. They argued that the statement was true. There was no standard definition of ‘usable area’ and the architect who prepared the plan took a reasonable approach to calculating the usable area.

The 1999 Code of Measuring Practice of the Hong Kong Institute of Surveyors (‘HKIS’) did incorporate a definition of ‘saleable area’. The representation was false if this definition were applied.

However, the sellers argued that this did not enjoy any special status. The architect who prepared the plan was not bound by it and chose, instead, to use the definition of ‘usable floor space’ in the Building (Planning) Regulations (Cap 123F).

The Court of Appeal said that when interpreting a representation, ‘the proper approach is an objective one that focuses on what the words and conduct constituting the Representation would in the relevant context have conveyed to a reasonable person in the position and with the characteristics of the plaintiff’ ([24]).

The question was as to the common understanding of reasonable vendors, purchasers and estate agents) [25]).

The HKIS code was the only available professional guide as to the meaning of the term at the relevant time and was generally accepted by the market ([28]).

Thus, the representation was ‘indisputably false’ and the appeal failed.

Michael Lower

Interpretation of the management charge provisions of a DMC

June 29, 2022

Sam Woo Marine Works Ltd v Po Hang Building (IO) ([2022] HKCA 733) concerned a dispute as to the interpretation of the management charge provisions of a Deed of Mutual Covenant (DMC).

There were three categories of owners in the building: (a) the ground floor owners); (b) the first-floor owners; and (c) the upper floor owners. Clause 3(f) of the DMC stipulated that the items in respect of which a management charge could be levied varied as between each category; the ground floor owners were not liable to contribute to expenses relating to the lift, for example.

Sam Woo owned a unit on the ground floor of the building. In the Court of Appeal, the incorporated owners accepted that there was implied into clause 3(f) a term that they would keep separate accounts for each category of owner ([29]).

The Court of Appeal decided, on its interpretation of the DMC, that any surplus collected from one category of owner could only be used to cover expenditure which that category of owner was responsible for under clause 3(f). So any surplus collected from ground floor owners could not be used to cover later expenditure relating to the lift. This was eventually accepted by the incorporated owners ([41]).

Sam Woo contended that there was a surplus standing to the account of the ground floor owners and that there was a further implied term that this would be used up before a further management charge would be demanded from them.

This contention was rejected both at first instance and in the Court of Appeal. At first instance, it was pointed out that this was an impractical suggestion; each category of owner would be responsible for some items in respect of which there would be a need to provide for contingencies. This made it unlikely that Sam Woo’s proposed term could be implied ([44] and [45]). Section 20(2) of the Building Management Ordinance requires the incorporated owners to establish a contingency fund.

Michael Lower

Priority as between (1) the assignment of the net proceeds of any future sale of property and (2) a charging order over the property

April 28, 2022

In Winland Finance Limited v Gain Hero Finance Limited ([2022] HKCFA 3) the Court of Final Appeal had to consider the order of priority as between (1) the assignee of the net proceeds of any future sale of a flat; and (2) a creditor with a charging order over the flat.

T owned a flat in Kowloon (‘the flat’). In June 2014, T entered into a loan agreement with Winland Finance Limited (‘WF’). T borrowed HK$2.1 million from WF and assigned to WF the net proceeds of any sale of the flat.

In November 2014, T entered into a further loan agreement with Gain Hero Finance Limited (‘GH’). In June 2015, GH obtained judgment against T for breach of the agreement. In August 2015, GH obtained a charging order absolute over the flat. In March 2017, GH obtained an order for sale of the flat. Under the terms of the order, payment would be made to GH and the surplus of the net proceeds of sale would be paid to T.

WF argued that its earlier loan agreement gave it priority over GH’s charging order. WF failed both at first instance and in the Court of Appeal.The Court of Final Appeal also found in favour of GF.

A charging order takes effect as if it were an equitable charge over the property (High Court Ordinance, s. 20B(3)). A charging order affects land and is registrable at the Land Registry ([31]).

An assignment of the future proceeds of sale of land does not give rise to a proprietary interest in the land ([27]) though a proprietary interest in the net proceeds of sale will arise immediately on sale ([24]). The Court of Appeal had already decided that this assignment was not registrable at the Land Registry.

If T were to sell the flat, the proceeds of sale would have to be applied to discharge the charging order before T would become entitled to the net proceeds of sale (Conveyancing and Property Ordinance, s. 54(1)). T could not give WF any greater interest than he was entitled to ([40]).

In a sense, there is no priority battle between GH and WF since only GH had a proprietary interest in land. On sale, WF would acquire a proprietary interest in the net proceeds of sale after GH’s order had been paid off.

In a loose sense, GH could be said to have priority over WF ([41]).

Michael Lower

Undue influence: presumption of undue influence where lender’s lawyer fails to properly advise borrower for whom it also acts

April 8, 2022

Introduction

In Nature Resorts Ltd v First Citizens Bank Ltd ([2022] UKPC 10) Nature Resorts Ltd (‘NRL’) owned the Culloden Estate (‘the Estate’) in Tobago. It was accepted that Mr. Dankou was the sole shareholder and ‘controlling mind and will’ of NRL so that Mr Dankou and NRL could be treated as one and the same for the purposes of the case except where Mr. Dankou was clearly acting in a personal capacity ([2]).

Mr. Dankou’s intention was to develop the Estate as an eco-resort and he secured investment from ‘silent investors’. He was, however, unable to secure all the finance needed for the development.

Mr. Dankou agreed to sell 75% of his shares in NRL to Simon Paler and Christopher James. Messrs. Paler and James borrowed part of the purchase price from First Citizens Bank Ltd (‘the Bank’). The Bank insisted that NRL grant it a charge over the Estate as security for the loan. Part of the purchase price payable to Mr. Dankou was left outstanding and Messrs. Paler and James provided a promissory note in respect of this sum.

Mr. Wheeler was the lawyer who acted for all parties in relation to the above transactions.

Messrs. Paley and James did not make any loan repayments. The Bank decided to exercise its power of sale under the charge over the Estate.

NRL argued that the charge was voidable because of the undue influence exerted by Mr. Wheeler over Mr. Dankou / NRL. This argument failed both in the High Court and the Court of Appeal of Trinidad and Tobago. NRL appealed to the Privy Council. Lord Briggs and Lord Burrows gave a joint judgment with which the other members agreed (on the undue influence question).

What is undue influence?

The Privy Council accepted that the law of Trinidad and Tobago concerning undue influence was the same as the English law ([1]). Undue influence was explained in these terms:

‘undue influence is concerned with a situation where, by reason of the relationship between them, one party (B) has such influence over the other (A) that A does not exercise a free judgment, independent of B, in relation to the making of a transaction between A and B (or, in a three-party situation, between A and a third party, C)’ ([10]).

In Pesticcio v Huet ([2004] EWCA Civ 372) Mummery LJ explained:

‘Although undue influence is sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention is not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction is not satisfactorily explained by ordinary motives … A transaction may be set aside by the court, even though the actions and conduct of the person who benefits from it could not be criticised as wrongful. ([Pesticcio v Huet at [20]].

Presumed undue influence

The party seeking to rely on undue influence must prove their claim on the balance of probabilities. They can, however, try to raise a presumption of undue influence and the burden would then pass to the other party to show that the decision to enter into the transaction was the result of a free and informed decision. Mr. Dankou argued that there was a presumption of undue influence in the present case.

Following the decision in Royal Bank of Scotland plc v Etridge (No 2) ([2001] UKHL 44) the presumption of undue influence is said to arise where, ‘the nature and / or contents of the transaction must make one conclude, in the context of the relationship of influence, that, absent evidence to the contrary, undue influence has been exercised.’ ([12])

Mr. Dankou argued that the relationship between himself / NRL and Mr. Wheeler was one of influence and that Mr. Dankou / NRL did not benefit from the grant of the charge to the Bank so that the transaction was not readily explicable on ordinary motives.

The High Court decided that neither requirement of the presumption of undue influence was satisfied. The Privy Council preferred not to comment on the view that there was no relationship of trust and influence between Mr. Wheeler, on the one hand, and Mr. Dankou / NRL on the other. The Privy Council thought that this raised, ‘difficult questions as to the operation of the so-called irrebuttable legal presumption that the relationship is one of influence’ on which they were not addressed ([29]).

The Privy Council, nevertheless, agreed that there was no presumption of undue influence in this case. The transaction was readily explicable on ordinary motives; the commercial interests of Mr. Dankou / NRL were furthered. The High Court found that the sale of the shares enabled Mr Dankou to pay money to his silent investors and also enabled various debts of the company to be paid off. The Court of Appeal disagreed with this and thought that there was a presumption of undue influence.

The Privy Council sided with the High Court in this regard:

‘The deed of mortgage opened the money-box from which Mr Dankou received payment for his shares. Without it, the sale would have fallen through. Although the Court of Appeal was careful to say, at para 53, that it was NRL that derived no benefit from the mortgage, the Board considers it unrealistic to ignore the benefit to Mr Dankou when considering whether the mortgage was readily explicable. It was the benefit to Mr Dankou, as the sole shareholder in NRL at the time when the transaction was entered into, that rendered the transaction readily explicable. In the Board’s view the Court of Appeal was wrong to ignore this bigger picture and therefore wrong to take the view that the deed of mortgage was not readily explicable.’ ([28])

The presumption of undue influence where the same lawyer acts for borrower and lender

As we have seen, the Court of Appeal thought that a presumption of undue influence was raised in this case. The Privy Council disagreed and expressed concerns about the implications of the Court of Appeal’s reasoning. It was worried that it would mean that parties would be able to raise a presumption of undue influence, arising out of the advice of their lawyers, whenever a transaction worked out badly. If the same lawyer advised both sides then any party for whom the transaction worked out badly might be offered an unjustified escape route on the basis that the lawyer was the agent of the other party (so that any undue influence of the lawyer could be attributed to the client):

‘[26] The Board has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor (or attorney) is providing professional advice to a client, and the client then enters into a disadvantageous commercial transaction with a third party, the client would be able to invoke the law on undue influence (including the law of agency) to set aside the transaction. There are many instances where, for example, the solicitor is acting for both a purchaser of land and a lender of the money for the purchase where that relationship should not operate to give rise to a presumption of undue influence for either client to be used against the other. This is so where the solicitor does not obtain any personal benefit (beyond his normal fees) from the transaction.

[27] In the Board’s view, where the other party to the transaction is not the solicitor obtaining some benefit from the client but is rather a third party, an ordinary commercial transaction such as a mortgage, entered into by a person engaged in business, should rarely be regarded as one that is not readily explicable on ordinary motives, merely because it is, or turns out to be, disadvantageous. It is readily explicable that the client will enter into such a transaction without being under the undue influence of the solicitor.’

If there was a presumption of undue influence, was it rebutted?

The Court of Appeal decided that there was a presumption of undue influence but that this presumption was rebutted. The Privy Council decided that the Court of Appeal was justified in deciding that, even if a presumption arose, it was rebutted.

Rebutting the presumption requires the other party to show that the transaction was the result of a free and informed decision. The Privy Council commented:

‘Although neither necessary nor conclusive, the main method of rebuttal is to show that A obtained the fully informed and competent independent advice of a qualified person, most obviously a lawyer.’ ([13])

The Court of Appeal thought that the presumption of undue influence was rebutted; it was satisfied that Mr. Dankou understood what he was doing and the associated risks. The Privy Council agreed: ‘advice from a lawyer is not the only way in which it can be established that free and independent judgment was being exercised.’ ([23]).

The corporate veil

Clearly, the Privy Council’s analysis relies on treating Mr. Dankou and NRL as being one person. The commercial interests of Mr Dankou are treated as being those of the company; Mr. Dankou’s independent judgment is that of the company.

Michael Lower

Part performance and the balance of probabilities: Ng Yuk Pui Kelly v Ng Lai Ling Winnie in the Court of Final Appeal

March 9, 2022

Introduction

In Ng Yuk Pui Kelly v Ng Lai Ling Winnie  ([2021] HKCFA 40) the Court of Final Appeal explained the approach to the doctrine of part performance in Hong Kong. It settles any lingering doubts as to whether the balance of probabilities test is the relevant standard when seeking to show that the acts of part performance point to the existence of the alleged contract.

Mrs Ng was the legal owner of two neighbouring flats in the Central district of Hong Kong. She held the flats on trust for her husband, Kuen, who supplied the entire purchase price.

Kuen orally agreed to sell the two flats to his brother, Kelly, for HK$1 million. Kelly paid the entire purchase price but agreed to Kuen’s requests not to insist on the formal transfer of the title to Kelly. This was because Kuen feared the effect that news of the sale would have on Mrs Ng who had suffered some mental health issues. Kelly was tenant of the flats before the agreement and he stopped paying rent as a result of it.  

Ultimately, the question of the ownership of the flats came to a head when Mrs Ng contracted to sell one of the flats. Kelly brought proceedings to recover the two flats. Mrs. Ng argued that the oral agreement between Kuen and Kelly was unenforceable because of the failure to comply with the formalities requirements in section 3(1) of the Conveyancing and Property Ordinance.

Kelly relied on part performance, common intention constructive trust and proprietary estoppel. Kelly’s claim succeeded insofar as it relied on common constructive trust and proprietary estoppel. It was held that part performance had not been successfully established.

On appeal, Kelly’s claim succeeded based on part performance ([2021] HKCA 724). Mrs. Ng applied for leave to appeal to the Court of Final Appeal. The Court of Final Appeal refused this leave and its reasons for doing so provide extremely valuable guidance concerning the law of part performance.

Part performance

In Steadman v Steadman, Viscount Dilhorne said:

‘the acts of part performance which are alleged to have taken place must point to the existence of some such contract as that alleged.’

This leaves open the question as to whether the linkage between the acts and the contract had to be shown on the balance of probabilities or according to a more demanding ‘unequivocal referability’ test. Steadman adopted the balance of probabilities test, but this seems not (before now) to have been explicitly adopted in Hong Kong.

The Court of Appeal referred to the fact that Kelly remained in possession of the flats without paying rent and demands made by Kelly that the title should be transferred to him as acts of part performance. Mrs Ng argued that none of these, taken individually, satisfied the unequivocal  referability test.

In the Court of Final Appeal, however, Ribeiro PJ said:

‘In deciding whether the doctrine applies, the court looks at all the acts relied on as part performance to see whether, leaving aside evidence of the oral agreement, those acts prove on the balance of probability that they were done in reliance on a contract between the parties consistent with the contract sued upon by the plaintiff. There is no arguable basis for suggesting that one must look at each act individually to see if it is “unequivocally referable” to the contract. Nor is there any basis for the suggestion that one must refrain from assessing the cumulative effect of the acts relied on unless the individual test is satisfied. The authorities are clearly to the contrary.’ ([14] emphasis added)

Michael Lower

Adverse Possession: Woo Sai Mui v Lam Island Development Company Limited

March 1, 2022

Background

In Woo Sai Mui v Lam Island Development Company Limited ([2022] HKCFI 39) Woo Sai Mui (‘the plaintiff’) sought a declaration that the defendant’s title to land in Peng Chau had been defeated by the plaintiff’s adverse possession.

The plaintiff claimed to have used the land for farming since 1980 and to have erected a building to store tools, equipment and seeds. The plaintiff’s claim failed. The court was of the clear opinion that the plaintiff had failed to come anywhere near establishing that she had taken possession of the land. It seems to have thought that she may have done little more than make occasional use of the land.

Standard of proof

The plaintiff must provide ‘compelling evidence’ of factual possession, but the standard remains the balance of probabilities test (Chang Shun Tak v Leung Sun Fat HCA 13809 / 1997 at [65]).

Is simply planting trees on open land enough?

There is a question mark over whether simply planting fruit trees on open land can be enough to demonstrate possession and intention to possess if not accompanied by some form of enclosure (Gatland Enterprises Ltd v Kwok Chi Yau CACV 260 / 2014 at [36] – [38]).

Willingness to pay rent

A squatter’s admission in cross-examination that they would have been willing to pay rent if asked is evidence of a lack of intention to possess ([49] – [57]), relying on Wong Tak Yue v Kung Kwok Wai at [49] – [57]).

Michael Lower

Adverse Possession: Wu Yim Chung v Lo Wai Ching

February 28, 2022

Background

In Wu Yim Chung v Lo Wai Ching ([2022] HKCA 100) Wu Yim Chung (‘the plaintiff’) argued that he had defeated the defendants’ title to land in Sai Kung through the doctrine of adverse possession.

The plaintiff was the original owner of the land. He sold it to the defendants’ predecessors in title but retained possession under the terms of two successive leases. The plaintiff remained in possession when the second of these leases came to an end on 14 October 1993.

In October 2013, the defendants’ solicitors wrote to the plaintiff in November 2013 complaining that the plaintiff was trespassing on the land and continuing to use it for the storage of materials. In the same month, the plaintiff began proceedings seeking a declaration that the defendants’ title was defeated by adverse possession.

Factual possession

The following facts, taken together, persuaded the first instance judge that the plaintiff was not in possession of the land for the full limitation period and that the plaintiff’s claim was defeated:

  • There was an entrance on the southern boundary giving access to a driveway through the land which served not only the disputed land but also other land serving third parties;
  • Unknown third parties simply abandoned scrap vehicles on the land;
  • The defendants’ predecessor in title used containers to block the southern entrance (thus interrupting any possession that the plaintiff might have enjoyed before then);
  • The defendants and their surveyors were able to access the land easily and without permission when they were carrying out pre-purchase inspections and investigations on the land (though this might have occurred after the end of the limitation period and so might not be relevant);
  • The plaintiff’s alleged possession was not apparent to the plaintiffs when they carried out their pre-purchase inspection. ([11] – [15]).

Intention to possess

Giving the judgment of the Court of Appeal, Hon Chow JA pointed to the statement of the relevant principles concerning intention to possess in Tsang Hu (also known as FU) Keung v Chu Jim Mi Jimmy ([2017] 3 HKC 527).

Intention to possess:

‘involves the intention, in one’s own name and on one’s own behalf, to exclude the world at large, including the owner with a paper title if he be not the possessor, so far as is reasonably practicable and so far as the processes of the law will allow’ (Powell v McFarlane at 471 – 2 and Wong Tak Yue v Kung Kwok Wai (No 2) (1997 – 98) 1 HKCFAR 55 at 68 (Li CJ)).

Where a squatter can establish possession then intention to possess will also normally have been demonstrated. Additional evidence of intention may be needed where the acts said to demonstrate possession are open to more than one interpretation (JA Pye (Oxford) Ltd v Graham [2003] 1 AC 419 at [76] (Lord Hutton) and Powell v McFarlane (1979) 38 P & CR 452 at 472 (Slade J)).

The first instance judge found that there was no barrier at the entrance on the southern boundary. This lack of control of access to the site was obviously a key issue, both as regards possession and intention to possess:

‘Bearing in mind the nature and use of the Suit Land (an open ground for storage of construction materials and vehicles) and its location (in the New Territories) an occupying owner would normally be expected to control access, or secure entrance, to the Suit Land. A failure to do so would naturally attract unauthorized parking or storage, or other unauthorized uses, such as a dumping ground for construction waste or unwanted scrap vehicles.’ ([29]).

The significance of the fact that the plaintiff was previously the registered owner and tenant in occupation of the land

The plaintiff argued that the fact that he was undoubtedly in possession, as owner and then as tenant, was significant. There was no change in the nature of the occupation after the end of the second lease. Logically, the plaintiff remained in possession as before ([33]).

The Court of Appeal said that this may be relevant in cases where the question was whether a formal owner was excluded. It was irrelevant where, as here, the plaintiff had not ‘shown the requisite intention to possess vis-à-vis the world at large (other than the owner)’ (at [37]).

Michael Lower

Online Property Law seminar – 16 March 2022 – details and registration

February 22, 2022

Steven Gallagher and I will give an Property Law seminar on 16th March at 5pm (Hong Kong time).

Details and registration link HERE.

Michael Lower