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

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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

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.

Conveyancing: Imprecise requisitions: substantial performance

In Continental Zone Ltd v More Glory International Ltd ([2013] HKEC 568, CFI) M had entered into an agreement to sell property to C. In August 2011, C raised the following requisition:

‘Please take instructions from your client and advise us whether there is/are any unauthorized or illegal structure(s) or alteration(s) of and in the Property.’

In December 2011, C followed up by forwarding a report from architects and engineers to the effect that 10% of the net area to be sold encroached into public land. The letter forwarding the report began by making it clear that C was rescinding.

Deputy Judge Keith Yeung S.C. held that the August requisition was too vague to amount to a requisition and so there was no duty to reply ([28]). The December requisition did not suffer from this defect but C purported to rescind before raising the matter ([34]).

Nevertheless, a seller remains under a duty to give good title if the defect cannot be removed by completion or where it has kept the agreement alive ([43] and [51]). There was still a duty to give good title here.

While M could invoke the doctrine of substantial performance ([62]) the burden of proof was on M ([77]) and this burden had not been discharged:

‘The Property would have been a substantially different one both objectively and from Mr. Tsang’s subjective perspective. The Defendant could not have substantially performed the Agreement.’ ([79])

Michael Lower

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.

Requisitions concerning the identity of the seller

Chan Hei Leung Thomson v Kuo Yu Chien ([2012] HKEC 1255, DC) was a vendor and purchaser summons. The question was whether two of the buyer’s requisitions had been answered satisfactorily.

The first requisition concerned the identity of the seller. In the 2007 assignment to him he was identified by reference to his Taiwanese passport number. His 2012 agreement to sell the property identified him by reference to his Hong Kong ID number. There was also a suggestion of some differences between his signature on the two documents. The buyers sought a statutory declaration to confirm that the 2007 buyer and the 2012 seller was one and the same. This was not necessary in the circumstances. The same firm of solicitors (and the same person within the firm) had acted in both transactions and they were willing to confirm that the 2012 seller was the same as the 2007 buyer. This was sufficient; there was no real risk of a third party coming forward claiming to be the true owner ([8]):

‘In my view, approaching the matter from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense and both intending to complete the transaction … the plaintiffs ought to have been satisfied that the defendant has satisfactorily answered any concern that they may have in respect of the defendant in the two instruments.’ ([14])

The second requisition asked for certain pre-intermediate root of title documents. The buyers argued that the sellers had not identified the document that was to be regarded as the intermediate root. The court held that the sellers had no duty to teach the buyer’s solicitors how to identify an intermediate root of title ([18]).