Archive for the ‘equity’ Category

Equity’s darling

September 17, 2013

In Pilcher v Rawlins ((1871 – 72) LR 7 Ch. App. 259) a father set up a trust for his children. There were three trustees, one of whom was P the children’s uncle (a solicitor). The trustees advanced money to R on the security of a mortgage (the mortgage deed explained the existence of the trust). Two of the trustees died leaving P as the sole trustee.

P and R connived in a fraudulent scheme. R (also a solicitor) prepared an abstract of title making no mention of the mortgage. R then purported to convey the property to S and L (who had no notice of the trust or the fraud). Immediately before that P executed a deed reconveying the property to R free of the mortgage (despite the fact that the loan had not been repaid). P and R agreed that the reconveyance to R would only be produced if necessary. S and L had no notice of this conveyance either.

The fraud came to light and the beneficiaries sought a declaration that they were the beneficial owners and an order that S and L convey the title back to the trust. They failed on the basis that S and L were bona fide purchasers for value without notice of a legal estate (Sir G Mellish LJ at 273).

Given the facts above, the conveyance of the property by P to R (with its reference to the trust) was an essential element of S and L’s title. This did not fix them with constructive notice. They had acted diligently and at the time of the purchase had reasonably believed that they had good title. The later conveyance to R only came to light in the course of the proceedings. At the relevant time, S and L had ‘neither knowledge nor means of knowledge’ of the trust (Sir G Mellish LJ at 274).

Michael Lower

Part performance: contract unregistered and in breach of New Grant

May 6, 2013

In Silver Hope Ltd v Chan Kwai Wah Alice ([2013] 1 HKLRD 823, CFI) W had entered into a contract to purchase the property in 1996. The contract amounted to a breach of the New Grant covenants concerning the property. W paid the entire purchase price and entered into possession. The contract was stamped but not registered. In 2012, P obtained a charging order in respect of the property and later an order for sale. W now sought to be joined as a defendant to the proceedings and to stay the execution of the order. To succeed, W needed to show that there was an arguable case that he had an equitable interest in the property. W was met by two arguments. First, that the contract was unlawful and so void (because it was formed in breach of covenant). Second, that the charging order (which had been duly registered) had priority over the unregistered contract.

W succeeded in being joined as a party. He was not relying on the contract but on the equity that arouse out of his having paid the entire purchase price and gone into possession (presumably this is on the basis of the doctrine of part performance). Hence, it could be argued that W would not need to plead the unlawful contract (see Tinsley v Milligan).

As for registration, after Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd, it is clear that the court can look at the substance of the competing interests (and then consider the impact of registration or a failure to register). This could be seen as a contest between two equitable interests (Hong Kong Civil Procedure 2012 50/9A/17). Thus, it is arguable that W’s equitable interest has priority over the charging order notwithstanding the failure to register it.

Agreement concerning distribution of proceeds of sale of land: a proprietary interest?

January 14, 2013

In Hughes v Central Stream Services Ltd ([2011] EWCA Civ 1720, CA (Eng)) CSS brought proceedings against D. The parties entered into a compromise agreement: CSS agreed to a stay of the proceedings and D entered into an agreement whereby he agreed to sell a property he owned and then to distribute the proceeds of sale in a way described in the agreement. CSS was to be second in line behind the mortgagee of the property. H were D’s solicitors and they later obtained a charging order which they then registered against the title to the property. The net proceeds of sale were not enough to meet the amount due to CSS and so, if CSS had a proprietary interest, there would be no funds to meet the debt owing by D to H. The English Court of Appeal decided that the agreement did not amount to an equitable charge but that it did give rise to an equitable (proprietary) interest in the property.

Ward LJ spoke of a:

‘general principle that if for valuable consideration the owner of property agrees to hold the property on terms which appropriate it for the benefit of another party, and the agreement is one which the court will enforce by an order for specific performance, the effect of the agreement is to create an equitable interest in the property in favour of the latter party.’ ([26])

Owner seeking to enforce DMC covenants must come with clean hands

July 24, 2012

In Perfect China International Ltd v Chan Yat Siu ([2012] HKEC 1025, Lands Tribunal) P and C were neighbours. There were structures on each of their properties that were in breach of the DMC. Each sought equitable remedies in the form of declarations and injunctions. Each failed on the basis that they did not come with clean hands since each of them had unlawful structures on their own property ([46] and [67]). In the case of P, there was also the fact that he had encouraged C to commit the breach. This gave rise to a successful defence based on acquiescence so that he was estopped from seeking relief in respect of the works that he had encouraged. It may also have been an aspect of the finding that he did not come to equity with clean hands ([46]).

Even if the unlawful structures existed before the owner bought his property, this fact would afford no defence. Nor would the fact that the Estate was full of unlawful structures (appalling though this would be if true) afford any defence.

Time of the essence for completion: the common law demands strict compliance

April 20, 2012

Where time is of the essence for completion even a short delay is a repudiatory breach. In the normal course of events, there is no reason for equity to relieve the buyer from this nor from the loss of his deposit (if the contract so provides).

In Union Eagle Ltd v Golden Achievement Ltd ([1997] A.C. 514, PC) the Privy Council heard an appeal from the Hong Kong Court of Appeal. A seller had agreed to sell a flat in Hong Kong. The buyer had paid a 10% deposit. The contract provided that time was of the essence in all respects. It also provided that the deposit would be forfeited if the buyer failed to complete. Completion was to take place by 5pm on the completion date but the buyer’s solicitors arrived 10 minutes after that with the completion monies. The seller rescinded on the grounds of the buyer’s failure to comply with the term of the contract stipulating the time for completion. The buyer sought specific performance. It argued that there was an equitable jurisdiction to relieve against the forfeiture of the equitable interest created by the contract. This failed in the Hong Kong courts and in the Privy Council.

Lord Hoffman gave the only judgment. Authority and policy combined to persuade him that there was no scope for equity to intervene to save the buyer from the breach of contract:

‘When a vendor exercises his right to rescind, he terminates the contract. The purchaser’s loss of the right to specific performance may be said to amount to a forfeiture of the equitable interest which the contract gave him in the land. But this forfeiture is different in its nature from, for example, the vendor’s right to retain a deposit or part payments of the purchase price. So far as these retentions exceed a genuine pre-estimate of damage or a reasonable deposit they will constitute a penalty which can be said to be essentially to provide security for payment of the full price. No objectionable uncertainty is created by the existence of a restitutionary form of relief against forfeiture, which gives the court a discretion to order repayment of all or part of the retained money. But the right to rescind the contract, though it involves termination of the purchaser’s equitable interest, stands upon a rather different footing. Its purpose is, upon breach of an essential term, to restore to the vendor his freedom to deal with his land as he pleases. In a rising market, such a right may be valuable but volatile. Their Lordships think that in such circumstances a vendor should be able to know with reasonable certainty whether he may resell the land or not.’ (at 520)

The case illustrated the need for commercial certainty and to resist the temptation to allow equity to rewrite contracts in the name of fairness (at 519). There was no useful distinction to be drawn for this purpose between ‘commercial’ and other cases, ‘Land can also be an article of commerce and a flat in Hong Kong is probably as good an example as one could find.’ (at 519). Lord Hoffman summed up his position:

‘The fact is that the purchaser was late. Any suggestion that relief can be obtained on the ground that he was only slightly late is bound to lead to arguments over how late is too late, which can be resolved only by litigation.’ (at 523).

The seller was entitled to know with certainty whether he could re-sell or not (at 520). It may be different if there were any question of unjust enrichment or estoppel (at 523).

Michael Lower

Time of the essence?

February 29, 2012

Equity took the view that time is not of the essence for performance of contractual obligations unless the express words of the contract, the nature of the subject matter or the surrounding circumstances indicated to the contrary. After the Judicature Act 1873, this is the common law rule too. Thus, time is not usually of the essence with respect to the timetable in a rent review clause; the right to a review is not lost because of  a delay in taking any step envisaged by the clause.

Rent is a contractual payment for the use of the landlord’s land. There is no legal reason why a rent review cannot operate retrospectively.

United Scientific Holdings Ltd v Burnley Borough Council ([1978] A.C. 904, HL) concerned the rent review provisions in two leases. In each case, there was a failure to strictly adhere to the timetable established by the rent review clauses. The tenants claimed that time was of the essence with regard to each element of this timetable and that the result was that the landlord had lost its right to a review. The tenants also argued that, even if the landlord was entitled to a  review, the reviewed rent would only be payable once it had been fixed; there could be no retrospective obligation to pay the increased rent as from the review date. This, they argued, would run counter to the requirement that the rent be certain.

The tenants failed on both counts. The House of Lords pointed out that equity had taken the line that time is not of the essence for performance of contractual obligations unless the express words of the contract, the nature of the subject matter or the surrounding circumstances indicated to the contrary. After the Judicature Act 1873, this is the common law rule too (Judicature Act 1873, ss. 25(7) and (11) and Law of Property Act 1925, s. 41). Lord Simon of Glaisdale referred to the approach now adopted following Hongkong Fir.

There was nothing here to indicate that time was of the essence. Thus, the landlords could still invoke the rent review clause. The right could only be lost if the delay meant that it would be inequitable (not so here). It might be otherwise in cases where the tenant has a break clause that it can invoke once the review date has passed; this might be a circumstance indicating that time is of the essence.

The contractual provision that required the tenant to pay the arrears (if any) of the increased rent from the review date to the date when the revised rent is ascertained was also lawful. Rent is a contractual payment for the use of the landlord’s land. There is no legal reason why a rent review cannot operate retrospectively.

The nature of the process of fusion begun by the Judicature Acts is a major theme in several of the judgments.

Proprietary estoppel: need to balance the needs of the property owner and the detriment suffered by the claimant?

April 9, 2011

When deciding on how to satisfy the estoppel, it is legitimate to take into account the circumstances of the owner.

In Sledmore v Dalby ((1996) 72 P & CR 196 CA (Eng)) Mr and Mrs Sledmore owned a house that they leased to their daughter and son-in-law. Mr Sledmore represented to Mr Dalby (the son-in-law) that the house would belong to Mr and Mrs Dalby. Mr Dalby carried out substantial work to the property in reliance. Mr. Sledmore and his daughter, Mrs. Dalby, died. Mr Dalby and his two children lived rent-free at the property over many years. Mrs. Sledmore then sought possession. She was in great financial difficulty and needed to live in the house. Mr. Dalby only occupied the house on two evenings a week. One of his daughters, now in her late 20’s, also lived there. Mr. Dalby relied on proprietary estoppel and the assurance given by Mr. Sledmore.

The English Court of Appeal was unanimous in ordering that possession be given to Mrs. Sledmore. The majority thought that there was an equity arising out of the assurance and Mr. Dalby had suffered detriment in carrying out work to the property. Nevertheless, when deciding on how to satisfy the equity, it was legitimate to compare Mrs. Sledmore’s difficult financial situation and dire need for the property with Mr. Dalby’s scant use (and therefore presumably little need) of it. Hobhouse LJ took a different route to the same conclusion. He thought that the only assurance was that the property would be given to the daughter and as she had died that assurance could not be carried into effect.