Constructive notice: when is a purchaser or mortgagee put on enquiry?

When can a purchaser or mortgagee rely on an owner’s statement that there is no-one other than the owner living at the property? When must a purchaser or mortgagee make a physical inspection of the property to see whether there is anyone living there who might have an equitable interest under a resulting or constructive trust?

This question had to be considered in HKCB Finance v Yuen Yi Wan [2006] HKEC 230 (CA). A wife claimed an equitable interest in a property owned by her husband based on her financial contributions.  Her husband agreed to sell the property to Wong and Wong agreed a sub-sale to the first defendant. The sale to Wong was at a gross undervalue and the sub-sale was at a substantially higher price. The three were conspiring to defeat the wife’s claim to the property. The first defendant granted a mortgage to the plaintiff bank.The husband had replied to an enquiry by Wong’s solicitor saying that only he lived at the property. The sale and sub-sale agreements contained warranties to the effect that no-one else lived at the property with a legal or equitable interest in it. The bank had seen these agreements.

The question was whether the plaintiff bank had constructive notice of the wife’s equitable interest. Tang JA held that the wife had an arguable case that the bank had been put on enquiry as to her interest and should have made a physical inspection to see whether anyone else was living there. This was because her husband had sold the property at a gross undervalue and this is often a sign of a fraudulent transaction. If the bank had made the physical inspection they would have discovered the wife’s presence and she would have explained that she was claiming an equitable interest in the property.

Michael Lower

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