Good title: not affected by ‘fanciful’ risks of a successful legal challenge

In Jovian Corporate Communications Ltd v Link Wide International Investment Ltd ([2016] HKEC 808, CA) the dispute arose out of a contract for the sale of an office unit. The building had been jointly developed by four developers. One of the developers was a charity and it needed the consent of the Governor of Hong Kong for any dealing with its land, including any partition. The developers had entered into a series of agreements at the time of the development in the 1980s. One of these bore the title ‘Deed of Mutual Covenant and Partition’ (‘DMC & P’). The purchaser of the office unit raised a requisition asking for evidence that the Governor had consented to this partition. The seller argued that this requisition was misconceived. Completion did not take place and the seller sought a declaration that it was entitled to forfeit the deposit and to damages. It was successful at first instance and on appeal.

In the Court of Appeal, the principal question was whether the title was good or not even in the absence of some specific written approval directed at the charity’s involvement. The question had to be approached ‘from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain. (Mexon Holdings Ltd v Silver Bay International Ltd, per Litton PJ). The title is good unless there is the risk of the successful assertion of an encumbrance against the purchaser. When assessing the level of risk, regard must be had to the circumstances of the case (De Monsa Investments Ltd v Whole Win Management Ltd, Litton NPJ).

Here the Government was well aware of the transaction. The MTR Corporation was a party to some of the agreements and the Governor’s approval was endorsed on them. The DMC & P had the approval of the Registrar General (Lands Office) as required by the agreement with the MTR Corporation. In these circumstances, it was fanciful to suggest that the DMC & P had not been approved by the Government ([17] per Lam V-P). There was no prospect that the Government could successfully assert that it had not approved the DMC & P ([18]). The written approval of the Governor on an assignment to the MTR agreement which was one of the core agreements relating to the development provided any approval which might be necessary ([19] – [20]). Even if it could challenge this, neither the Government nor any other interested party had any reason to do so ([21]).

In any event, ‘partition’ in the DMC & P bore its technical legal meaning as an arrangement that brought an end to co-ownership. The DMC & P (despite its title) did not do this.

Michael Lower

Advertisement

Contractual obligation to produce an architect’s certificate before completion: an implied term that it will be produced within a reasonable time before completion

In Guo Jianjun v Dragon Fame Investment Ltd ([2015] HKEC 1986, CA) S entered into an agreement to sell to P four office units (all on the same floor of the building). The agreement contemplated that there would be a re-partitioning of the office units owned by S. The units to be sold were the units as they would be after the re-partitioning. The contract contained a clause obliging S to obtain the certificate of an ‘Authorized Person’ to confirm the legality of the re-partitioning works. The agreement went on to provide that P would not raise any requisitions, queries or objections concerning the re-partitioning works. The re-partitioning works were carried out soon after the agreement was entered into. S produced an architect’s certificate of compliance. This satisfied S’s contractual obligations but it was produced at 6.07 pm on the completion date. It was common ground that the midnight rule applied. P argued that S was in breach of an implied obligation to produce the certificate at a reasonable time. It rescinded and sought the return of the deposit and damages. S argued that there was no implied term and that it was enough for it to have produced the certificate before midnight on the completion date.

The Court of Appeal (Lam V-P giving the judgment) looked at the English and Hong Kong authorities setting out the modern approach to contractual interpretation. This required the court to look at the rest of the contract and the whole of the relevant context / factual matrix. It also looked at what was said in Belize Telecom concerning the implication of terms (and linking this process to the broader process of contractual interpretation).

The obligation had to be construed in the context of the related clause which barred the raising of requisitions concerning the partitioning. It was also necessary to take account of the obvious commercial purpose served by the obligation: if S did not produce an adequate certificate there could be a doubt as to the legality of the works which could prevent P from giving good title on any future sale. Thus, there was to be implied a term ‘that the certificate would be a proper certificate prepared by an authorized person in good faith’ ([34]).

Given that the architect was commissioned by, and would report to, S P had to be given a reasonable time to assess whether or not the certificate satisfied the contractual obligation. They had to be given a reasonable time in which to do so. A term to this effect was to be implied ([41]).

What was a reasonable time? Had the implied obligation been observed in this case? The court referred to its earlier decision in Summit Link v Sunlink Group:

‘What should be considered as a reasonable time must be considered in the light of the prevailing circumstances, including the parties’ knowledge at the time if it can be proved and what the parties would each be reasonably contemplating at the time.’ (at 735 – 6 per Woo JA).

The court also referred to the headnote to the report of Kensland Realty Ltd v Whale View Investment Ltd ((2001) 4 HKCFAR 381):

‘The time which a vendor must allow, was the time reasonably required by the purchaser to perform its obligations, in relation to completion, in the ordinary course of business. This would include the purchaser’s dealing with bankers and solicitors.’

Lam V-P explained what this meant in the present case:

‘I am therefore of the view that the certificate should have been provided to the plaintiffs’ solicitors within a reasonable time before the end of the office hours [on the completion date]. The reasonable time should be long enough to afford the plaintiff’s solicitors a reasonable opportunity to conduct the checks which are reasonably necessary and to do so in the normal course of business. The time should not be so short that the solicitors would have to stretch all their available resources to the extreme so as to accomplish the tasks.’ ([46]).

Further, ‘one should proceed on the general assumption that purchasers will rely on mortgage financing in a conveyancing transaction’ ([50]).

Production of the certificate after the close of business on the date of completion did not satisfy the reasonable time requirement.

Michael Lower

 

 

 

Missing title deeds: showing good title in accordance with section 13 of the Conveyancing and Property Ordinance

In Zhang Xueshai v Lai Chin Wing ([2015] HKEC 295, CA) LCW had been appointed as the Committee of the estate of his mentally incapacitated brother (LMW) and was authorised to sell LMW’s flat. The flat had been acquired under the Home Ownership Scheme. The mortgage had been paid off. There had been two later agreements to sell the property to financial institutions (which may well have been connected with each other). These agreements had been cancelled. A charging order nisi and a charging order absolute had also been registered against the property but these had been discharged by LCW.

LCW agreed to sell the property to the plaintiff (ZX). The agreement required LCW to prove title in accordance with section 13 of the Conveyancing and Property Ordinance. LCW was unable to provide the originals of any of the title deeds and offered to provide a statutory declaration to address this problem. ZX was not satisfied with the statutory declaration and sought declarations that LCW had failed to answer his requisition and to prove and show a good title. ZX also sought the return of the deposits.

Cheung CJHC referred to the Court of Final Appeal decision in De Monsa Investments. Missing title deeds are only a problem if this gives rise to a real possibility of the successful assertion of an encumbrance against the property after completion (such as the risk of the creation of an equitable mortgage by deposit of title deeds ([30])). Where there is a problem, it may be possible to address it either by a statutory declaration or by the production of any other type of evidence that is sufficient to dispel the doubt that has arisen ([31]).

There was a real risk, on the facts of this case, that LMW might have tried to raise finance on the security of an equitable charge. All of the title deeds were missing. The cancelled ‘sales’ to financial institutions may well have been disguised loan arrangements. The charging orders also suggested that LMW needed to raise funds ([35] – [37]). LCW did not have the personal knowledge needed to give a statutory declaration that would deal with this risk ([38]).

LCW argued that there was no risk of the successful assertion of an encumbrance against the property since it had been acquired under the Home Ownership Scheme and any unauthorized dealing would be void (section 17B of the Housing Ordinance). The argument failed in this case because it had been raised too late; if LCW intended to rely on this legal provision he should have mentioned it. The argument also failed  because no evidence had been produced to show that there had been no approval.

Michael Lower

Procedure when seeking a vesting order in respect of the property of a dissolved company

In Fook Tai Investment Co Ltd v Secretary for Justice ([2013] HKEC 1229, CFI) FT sought a declaration that it was the legal and beneficial owner of certain property. Title had been vested in an associated company that had been dissolved. There had in fact been an assignment of the property by the associated company to FT but it appears that this was defective in some respects.

The Court of First Instance approved the following statement of the procedure in such cases:

‘(a) the functions performed in England by the Treasury Solicitor are to be performed by the Attorney General in Hong Kong (there being no such separate official as the Treasury Solicitor);

(b) one of such functions is that, where there is an application for a vesting order in relation to the legal interest in property being vested in a dissolved company (effectively as trustee), the application can be made under the Trustee Act (the equivalent being the Trustee Ordinance (Cap 29) in Hong Kong), and by making the Attorney General as the sole respondent;

(c) the Attorney General is involved in two capacities. First, he represents the government as the person to be divested of the property. Secondly, he is involved in a separate capacity if it is sought to assert on the government’s behalf that the property is bona vacantia;

(d) after having been served with the originating summons, the Attorney General will indicate by letter whether or not the government claims bona vacantia;

(e) it remains necessary for the Attorney General to continue as a party in the first capacity even if there is no claim for bona vacantia;
(f) there is no reason why the Attorney General should be liable for the costs (it being the applicant who seeks the relief for its own benefit), the applicant should thus not only bear its own costs, but also the costs of those required to attend the proceedings.’ ([12] per Andrew Chung J in Chambers).’

Michael Lower

Good title can be partly possessory

In Ease Kind Development Ltd v Land Source Investment Ltd ([2013] HKEC 1155, CFI) S had contracted to sell property to P and to give good title in accordance with section 13 of the Conveyancing and Property Ordinance. In respect of part of the property, it had the title deeds up to the assignment of a Government lease to Madam Leung. Madam Leung built a 6-storey residential building on most of the lot covered by the lease and assigned each storey to separate purchasers. The documentary title to the building was complete. Madam Leung had, however, retained title to a strip of land just over four inches wide. In earlier proceedings, it had been established that S and its predecessors had defeated Madam Leung’s title to that strip by adverse possession. In the present proceedings, the Court of First Instance held that S could give good title. The title deeds and the possessory title defeating that established by the deeds were sufficient to amount to a good title.

Michael Lower

Interpretation of clause modifying duty to respond to requisitions concerning unauthorised structures

In Channel Green Ltd v Huge Grand Ltd ([2013] HKEC 1124, CFI) CG had entered into a contract to buy property from HG. It had paid a 15% deposit. The contract contained a clause to the effect that the property was sold on an ‘as is’ basis. The clause provided that CG could neither raise requisitions concerning unauthorised additions, alterations or illegal structures nor refuse to complete or delay completion on account of any such matters. There were several unauthorised structures at the property. CG raised requisitions concerning these structures and refused to complete. HG elected to terminate the contract and forfeit the deposit as a result.

The question was whether, as a matter of contractual interpretation, the relevant clause meant that CG had no right to raise requisitions nor to refuse to complete on account of the unauthorised structures. The Court of First Instance decided that this was the case ([91] – [98] per Recorder Coleman SC).

The court noted that although the content of pre-contractual negotiations is irrelevant to the process of interpretation, statements of fact made in the course of negotiations are good evidence as to the context or factual matrix and so  are relevant to the construction of the contract ([23]). Thus, the fact that HG had informed CG of the existence of a number of the unauthorised structures before contracts had been exchanged was relevant to the construction of the clause.

The court also considered whether the 15% deposit was a true deposit or whether it could potentially be a penalty and decided that it was a true deposit. While the amount exceeded the conventional 10%, this was justifiable in the context of a lengthy period between contract and completion ([109]).

Michael Lower

Missing title deeds, giving good title and Yiu Ping Fong

In De Monsa Investments Ltd  v Whole Win Management Fund Ltd ([2013] HKEC 1162, CFA) V had entered into an agreement to sell office space in Central to P. V was unable to produce the originals of certain title deeds affecting the property. The relevant facts occurred before 11th July 2008 and so section 13A of the Conveyancing and Property Ordinance did not apply.

The principal question for the Court of Final Appeal was whether there is a common law rule to the effect that:

‘Unless excluded by express contractual provisions, a vendor at completion was duty bound to deliver to the purchaser all original title documents going back to the root of title, however remote, if those documents relate exclusively to the property sold. If, prior to completion, the vendor was unable to provide a satisfactory explanation as to why he would not be able to do this at completion, the purchaser was entitled to rescind.’ ([78] per Litton NPJ)

The Court of Final Appeal decided that this rule is too broadly stated in that there would only be a breach of the duty and a right to rescind if the circumstances were such that the inability to produce the original or to give a satisfactory explanation as to its loss exposed the purchaser to a real risk that some encumbrance might have been created to which he would be subject ([31] per Chan PJ, [45] per Ribeiro PJ and Gleeson NPJ, [107] – [108] per Litton NPJ). The risk must be real and not merely theoretical ([133] per Litton NPJ).

Litton NPJ suggested that the risk here would be that an equitable charge might have been created by deposit of the missing title deeds. If, however, this was accompanied by a written agreement or commitment then this would need to be registered in accordance with the Land Registration Ordinance. Failing this, the purchaser would not be subject to it. The purchaser was still entitled to a satisfactory explanation so that he could be sure that no encumbrance had been created in the very recent past that could still be registered and take priority over the purchaser’s interest. It was inconceivable that an equitable mortgage relying on a purely oral commitment would have priority over the purchaser’s interest ([111] – [120]).

Michael Lower

Duty to show and give good title: the MEPC principle as a last resort

In Xu Xiaoqi v Tsui Yuet Lai Teresa ([2013] HKEC 636, CFI) D agreed to sell a property to P. The agreement required D to show and give good title in accordance with sections 13 and 13A of the Conveyancing and Property Ordinance. One of the assignments forming part of the title had been executed by one tenant in common on behalf of the other under the terms of a Power of Attorney. The sellers were only able to produce a certified copy of the power. D’s solicitors argued that there was no real risk that an adverse interest could have been created as a result of the loss of the original. Nevertheless, on the day before completion they sent P’s solicitors a draft of a statutory declaration that the solicitors who had acted in relation to the power of attorney were prepared to give. P’s solicitors said that they would need time to consider it. D’s solicitors would not undertake to deliver the sworn declaration on completion since the solicitor who was to make the declaration would not give such an undertaking. Completion did not take place and D purported to rescind.

The court held that D had failed in his duty. The power of attorney was a document of title and section 13(1) obliged him to deliver the original to P.

D sought to invoke ‘the MEPC principle’ :

‘In other words, notwithstanding the law that it is a purchaser’s proprietary right to have all the originals of all the title documents (see Yiu Ping Fong, p 798H), in circumstances where there is no reasonable doubt that the missing original document would not affect the title to the property the vendor may be relieved of the obligation to produce it upon completion’. ([28] Anthony Chan J)

The principle can only be invoked, however, where the seller has made all reasonable efforts to produce the original or adequately explain its loss or destruction ([30]). D had not lived up to this responsibility. His solicitors had only produced a draft statutory declaration on the eve of completion having refused to acknowledge the validity of the requisition up to that point nor to explain the loss. There was no undertaking to produce the sworn statutory declaration on completion and P’s solicitors had not been given adequate time to consider it ([31]).

Michael Lower

Unregistered legal charge: void but still an encumbrance

In Siu Wing Yee Angeline v Earning Yield Ltd ([2013] HKEC 868, CFI) S had agreed to sell property to P. Both parties wanted to proceed. The question was, though, whether S’s title was subject to an encumbrance. S had been a shareholder and director of company H. She had granted a charge to company N, a fellow shareholder in H. H was struck off the register. N was later also struck off the register. There had been no release of the charge granted by S to N.

The District Court had ordered the vacation of the entry relating to the legal charge at the Land Registry so that the charge was now unregistered and so void, as between N and a later bona fide purchaser or mortgagee (Land Registration Ordinance s.3(2)). The shareholders of N had sworn statutory declarations purporting to acknowledge that any action to recover debts due to N from S would be time-barred, The statutory declarations stated that they had no intention of enforcing the charge and had no objection to the entry relating to it from being vacated from the Land Registry.

The Court held, nevertheless, that S’s title was bad. The court order dealt with registration but the legal estate remained in existence. The effect of the order was not (and could not be) to bring the legal estate to an end.  There was no evidence to show when the debts secured by the mortgage would fall due and so the Limitation Ordinance could not help. Although the charge could not be enforced against a subsequent purchaser or mortgagee, it was still in existence. Section 12A of the Conveyancing and Property Ordinance could, potentially, have been of use but there was no information to show what the appropriate payment into court would be.

The risk of enforcement may be low but this is irrelevant when the title is indisputably bad. S had agreed to sell the property free from encumbrances but could not do so.

Can the standard requirement to pay a sum equivalent to the deposit as liquidated damages be enforced?

In Chan Yuen Ka Crystal v Chu Cheong Kit Raymond ([2009] HKEC 1705, CFI) the provisional sale and purchase agreement provided that should the seller fail to complete the sale then he was to refund the deposits paid and pay an additional sum equivalent to the deposit as liquidated damages. The clause went on to provide that if the seller were to do this then the purchaser had no right to claim damages or seek specific performance.

The seller was unable to complete. The question was whether the buyer could require the seller to make the payment of liquidated damages just referred to.

There was no doubt that the deposit(s) had to be returned. Rogers V-P was of the view, however, that the buyer could not enforce the requirement to pay the equivalent sum as liquidated damages; this was a penalty unless the buyer could show that it was a genuine pre-estimate of damages.

Unless the buyer could do this, the seller had an option either (i) to comply with the clause (repay the deposits plus the additional sum) as an alternative method of performance of the contract or (ii) to return the deposit(s) and accept that the buyer might bring an action against him for damages for breach of contract ([31] – [32]).

Michael Lower