Defective title? Trustee’s purchase of trust property

A defective title is one that exposes a purchaser to risk or hazard and cannot be forced on a doubtful purchaser. Where the title deeds show that a trustee has bought trust property without the authorisation of the court then it is defective.

In Kong Lin Yeung v Lai In Pang ([2012] HKEC 816) H and F acquired property as tenants in common. H’s wife petitioned for divorce and the court in the divorce proceedings gave leave for the property to be sold and for the proceeds of sale to be paid into court. H and F agreed to sell the property to T for a much lower price than that paid by H and F only months before. H and F then agreed to sell it to for a price slightly above that paid by H and F (with T joining as confirmor).  C made a declaration that she held the property partly on trust for H (H having a one half beneficial interest).

C later sold the property to P who had now entered into a contract to sell it to D. D objected that P’s title was defective. The court agreed. The title did expose D to the risk that H’s wife might have a claim that D held the property as constructive trustees for her since they had constructive notice of a disposal in breach of trust. The trust in the wife’s favour was created by the court order. In effect, H had acquired the property from himself as trustee through the sale to C and the intermediate sale to T.

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