Removing internal staircase: infringement of right of way: encumbrance?

In Ho Ching Group Ltd v Tsang Pui Lin ([2013] HKEC 780, CFI) S agreed to sell the property (a ground floor shop) to P. There had been an internal staircase leading from the shop to the cockloft above (in separate ownership) and the owner of the cockloft had a right of way to use the staircase to get to the cockloft. The staircase had been removed and S acknowledged that this amounted to an infringement of the easement. The internal staircase had been replaced by an external staircase before S bought the property in 1998 and there had been no complaint by the owner of the cockloft. On the other hand, when approached by P, the owner of the cockloft refused to renounce its right to use the internal staircase. The question was whether the infringement of the easement amounted to an encumbrance on title.

The court held that it was not an encumbrance. J Poon J. stated the test thus:

‘In considering if a risk of litigation may constitute an encumbrance, the court will ask : are the facts and circumstances of the case so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the encumbrance.’ ([12]).

Here, there had been no complaint by the owner of the cockloft. There had been no threat of action concerning the removal of the staircase by other owners in the building or the Government. It seemed clear that the owner of the cockloft had abandoned the right of way. The risk of litigation was fanciful ([13]).

The sale and purchase agreement contained a clause requiring P to accept the situation as regards the staircase but the presence of this clause was not a factor in the judgment.

Michael Lower

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When is there sufficient evidence that a resulting trust has been brought to an end?

In Rose Palace Ltd v Jung Christopher Lam ([2013] HKEC 146, CFI) in October 1988 W and C were the purchasers of the property in question under a sale and purchase agreement. They each contributed to the 10% deposit and they were to acquire the property as tenants in common in equal shares. Then they entered into a Memorandum of Direction providing that the property would be assigned solely to C. In fact, C entered into a sub-sale with SF Ltd and the property was assigned directly to SF Ltd. C joined in as confirmor but W did not. P acquired the property from a successor of SF Ltd and had entered into an agreement to sell it to D.

D raised a requisition asking how W’s beneficial interest under the resulting trust that arose when he contributed to the deposit had been brought to an end. P relied on statutory declarations from a partner in the firm that acted for W and C to the effect that his firm’s practice at that time was to explain to W that the Memorandum brought an end to his interest. It was held that this was sufficient evidence that the interest had come to an end (and this was corroborated by the fact that W had never made any claim in the intervening years ([20]).

The court also considered whether any potential action by W would be barred by virtue of section 7(2) of the Limitation Ordinance. The question here was whether P was a trustee for the purposes of section 20(1)(b) of the Limitation Ordinance since, if so, there would be no limitation defence to W’s action. The court held that the section did not apply to constructive trustees who were strangers to the trust but became trustees by virtue of some dishonest acts of interference. P (if it was a constructive trustee at all) could only belong to this category of constructive trustee and so section 20 did not apply. W’s action would be time-barred.

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.

‘Owner’ for the purposes of section 17(1)(b) of the Building Management Ordinance.

Section 17(1)(b) of the Building Management Ordinance empowers the Lands Tribunal to give leave for the execution against any owner of a judgment given or order made against a corporation. In this context, ‘owner’ means any owner for the time being. Very large and unanticipated liabilities of the corporation that have not been disclosed in the contract are encumbrances. They amount to a defect in title and this title cannot be forced on a purchaser in the absence of a clear contractual provision to the contrary.

In Chi Kit Co Ltd v Lucky Health International Enterprise Ltd ([2002] 2 HKLRD 503, CFA) a workman was rendered quadriplegic when he fell from scaffolding on the common parts of a building when acting under the directions of an employee of the incorporated owners. The litigation was pending at the time when R agreed to buy an 11.5% share in the building from A. Judgment was given between the date of the contract and the contractual completion date.  The matter only came to R’s attention after contract and R refused to complete.

The first question was whether R, had it completed, would have faced a real risk of an order being made against it personally under section 17(1)(b) of the Building Management Ordinance in respect of the workman’s claim. A argued that there was no such risk and that ‘owner’ in that section meant an owner at the time that the liability was incurred. This failed. ‘Owner’ means an owner for the time being.

Since this liability ran with the ownership of the relevant shares it was an encumbrance. It amounted to a defect in title since the potential liability was much larger than would be anticipated by a purchaser (as proof of this potential lenders and sub-purchasers had lost interest when they learned of the workman’s claim). In the absence of a clear contractual provision to the contrary, the title, thus encumbered, could not be forced on a purchaser.