Archive for the ‘Priorities’ Category

The priority of unwritten equitable interests

April 4, 2017

In Si Tou Choi Kam v Wealth Credit Ltd ([2017] 1 HKLRD 1074) A and B acquired property as legal joint tenants. B’s creditor, C, obtained and registered charging orders over the property. C then applied for an order for sale of the property. A obtained a declaration that A was sole beneficial owner of the property (having supplied the entire purchase price) and registered it at the Land Registry.

The priority of unwritten equitable interests is governed by the doctrine of notice. The charging order is to be treated as if it were an equitable charge. Priority is governed by the first in time rule. A’s interest, having arisen at the time of acquisition, has priority under this rule.

There is no authority for the proposition that A is under a duty to obtain a declaration and register it in order to preserve this priority. It was surprising, therefore, that the court held that A’s priority was governed by the date of registration of the declaration.

Michael Lower

 

 

Abbey National v Cann: mind the gap?

October 23, 2016

In Abbey National Building Society v Cann ([1991] 1 AC 56) the House of Lords considered the relative priorities of a charge used to acquire a home and an unwritten equitable interest in it which came into existence simultaneously. A man bought a home for his mother. She undoubtedly had an equitable interest in the home since this was their common intention and since she had provided part of the purchase price. Title to the home was in the son’s sole name. He borrowed money from the Abbey National Building Society (‘the lender’) to finance the purchase and granted the lender a charge over the home. The son was unable to meet the repayment obligations under the loan and the lender sought possession of the home. The mother argued that her equitable interest had priority over the charge. One of her arguments was that there was a notional gap (a moment in time or scintilla temporis) between the son’s acquisition of the title and the charge granted to the lender. She argued that her equitable interest attached to the property in that moment in time and so took priority over the charge.

The interpretation of the provisions of the Land Registration Act 1925 is an important feature of the judgments. Leaving this aside, the mother failed for what appear to be two (perhaps three) separate reasons. The first was that there is no moment in time in which the son had title to the home unfettered by the lender’s rights. The home could not have been acquired by the son without the aid of the loan. The acquisition of title to the home and the grant of the charge to the lender were a single composite transaction (Lord Oliver at 93 and Lord Jauncey at 102). The second reason given for the priority of the lender’s charge was that the mother knew that a loan would be needed to finance the purchase so that she must be taken to have accepted that the charge would have priority over her own interest (Lord Oliver at 94). Lord Oliver suggested a further argument in favour of the lender’s priority. Before completion it had agreed to advance funds on the security of a loan. This gave the lender an equitable interest that arose before the mother had any such interest (at 89).

Michael Lower

The court’s power to vacate a lis pendens

December 2, 2015

In Join Win Holdings Ltd v City Target Ltd ([2015] HKEC 2477, CA) the first instance judge dismissed P’s claim for a declaration that it had entered into an oral contract for the acquisition of D1’s property and for specific performance of that contract. There was no writing to satisfy section 3(1) of the Conveyancing and Property Ordinance and part performance had not been pleaded. The judge had also ordered that the lis pendens registered at the Land Registry be vacated. P appealed against this judgment and registered the notice of appeal as a lis pendens at the Land Registry. D1 successfully applied for the vacation of the notice of appeal from the Land Registry.

The Court of Appeal (Cheung JA giving the only full judgment) referred to the court’s power under section 19 of the Land Registration Ordinance to order the vacation of a lis pendens when it is satisfied that ‘the litigation is not prosecuted bona fide, or for other good cause shown.’ It also pointed to its inherent jurisdiction to order the vacation of a registration.

In deciding whether or not to vacate the registration, the court had to assess the merits of the appeal. This appeal was doomed to fail given the lack of any writing to satisfy section 3(1) ([2.11]). ‘The notice of appeal should never have been registered because putting the plaintiff’s case at its highest it is not one that can be said to affect the property.’ ([2.16]).

Michael Lower

 

The Brocklesbury principle: postponing an owner’s rights to those of a later lender or purchaser

August 12, 2015

In Credit and Mercantile plc v Kaymuu Ltd ([2015] EWCA Civ 655) S, W and E were three businessmen who acted as a consortium to carry out property development ventures. There was no formal written agreement between them and they operated on the basis of trust. They agreed to distribute between themselves the proceeds of sale of shares in a company used as the vehicle for one of their ventures. It was agreed that W’s share would be used to finance the purchase of a house (Dalhanna) for occupation by W as his family home. W left all the arrangements for the purchase to S. The property was acquired and W went into occupation. Unknown to W, S had arranged for the property to be acquired by Kaymuu Ltd, a company wholly controlled by S. There was a short interval in the time between the transfer of title to Kaymuu and its registration at the Land Registry. In that interval, S arranged for Kaymuu to grant a charge to C & M in return for a loan of GBP500,000 which S took for himself. S went into bankruptcy and C & M sought possession of the property.

At first instance, W was found to have a beneficial interest under a Pallant v Morgan equity. W argued that his occupation, discoverable on a reasonably careful inspection of the land at the time of the disposition, meant that his interest was an overriding interest and that C & M was subject to it (Land Registration Act 2002, s. 29). This failed; W was prevented from having a right enforceable against C & M by virtue of the Brocklesbury principle (see Brocklesbury v Temperance Permanent BS [1895] AC 173). Sales LJ explained the principle thus:

‘The Brocklesby principle is not based on actual authority given to the agent, but rather on a combination of factors: actual authority given by the owner of an asset to a person authorised to deal with it in some way on his behalf; where the owner has furnished the agent with the means of holding himself out to a purchaser or lender as the owner of the asset or as having the full authority of the owner to deal with it; together with an omission by the owner to bring to the attention of a person dealing with the agent any limitation that exists as to the extent of the actual authority of the agent. This combination of factors creates a situation in which it is fair, as between the owner of the asset and the innocent purchaser or lender, that the owner should bear the risk of fraud on the part of the agent whom he has set in motion and provided (albeit unwittingly) with the means of perpetrating the fraud. The same principle applies where the dishonest vendor or mortgagor of the asset, who by the sale or mortgage raises money from an innocent third party, has been vested with the legal title as a trustee’ ([52])

The principle, which was the basis for the ruling in Abbey National Building Society v Cann, applied in the present case. W had given S authority to act on his behalf in relation to the purchase; S was given the freedom to make whatever arrangements he saw fit to effect the purchase and W exercised no supervision over S’s arrangements. W gave S the means to hold himself out to C & M as the true owner ([57]). As a result, ‘[W] was precluded by operation of the Brocklesbury principle from maintaining that he had a beneficial interest in relation to Dalhanna with potential to have priority over the security interest of C & M’ ([58]).

Michael Lower

Purchasers from squatters take subject to equitable interests of which they have notice

January 20, 2015

Re Nisbet and Potts’ Contract ([1906] 1 Ch. 386, CA (Eng)) concerned N’s contract to sell land to P. N’s title was possessory. The formal title had been defeated and there had been several conveyances of the possessory title before its conveyance to N. The contract beween N and P required P to accept this title. At the time of his purchase, N had not investigated title for the full forty years then demanded by conveyancing practice. Had he done so, investigating the paper title that had been defeated, he would have discovered that the paper title was subject to a restrictive covenant controlling what could be built on the land. P was a builder and he acquired the land with a view to building shops and other buildings on it. Before the contract was completed, the neighbour with the benefit of the restrictive covenant informed him of it and that proceedings would be brought in the event of breach. P refused to complete on the basis of this undisclosed encumbrance. The question was whether the covenant was binding on N; if so, P was justified in refusing to complete.

The English Court of Appeal held that a restrictive covenant is an equitable proprietary interest binding on all but a good faith purchaser for value without notice of it (Collins M.R. at 403; Romer LJ at 405 and 406). It was not defeated merely because the paper title had been extinguished. Time would only begin to run against the covenantee when there had been a breach so that the covenantee had a right to bring proceedings (Collins M.R. at 401 and 402).

The squatter himself is always subject to the covenant whether or not he had notice of it (Cozens Hardy L.J. at 410). A purchaser of the squatter’s title is subject to the restrictive covenant unless he is a good faith purchaser for value without notice (Cozens Hardy L.J. at 410). N was not such a purchaser. He had not investigated the title for the full forty year period  and so had constructive notice of any interests that he would have discovered had he done so. N’s title was subject to the restrictive covenant and P was entitled to resile from the contract.

Michael Lower

Effect of failure to register a written declaration of trust

July 15, 2014

In HKSAR v Lau Kam Ying ([2013] HKEC 1503, CFA)  Company X transferred the title to land to indigenous villagers. The villagers executed declarations of trust to the effect that each of them held his section on trust for company X. This declaration was never registered. Company X was wound up.  When the Government resumed the land, some of the villagers assigned their land to Company Y which had been set up to collect compensation on their behalf. They made false statutory declarations to the effect that the title deeds had been lost. These were then submitted to the Government as part of the process of claiming the compensation.

The leading players behind the scheme were convicted of conspiracy to defraud. They had falsely represented that company Y was a bona fide purchaser for valuable consideration and concealed the beneficial interest of company X. In this decision, the Court of Final Appeal rejected the defendants’ application for leave to appeal against the convictions.

The defendants argued, first, that the declarations were null and void as against company Y as a result of section 3(2) of the Land Registration Ordinance. This failed since sections 3 and 4 of the Land Registration Ordinance, ‘concern priorities between registered instruments but do not affect remedies which may be available whether in contract, tort or equity.’ (Tang P.J. at [19]). The second argument was that the declaration was unenforceable on the grounds of public policy. This would have failed anyway since company X would not need to plead an illegal act (Tinsley v Milligan) ([20]).

In any event, the conviction relied on the fact of the concealment not on whether company X had an indefeasible beneficial interest ([21]).

 

 

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.

Lender who provides funds to pay off secured lender steps into the latter’s shoes

November 2, 2012

In Ghana Commercial Bank v D.T. Chandiram ([1960] A.C. 732, PC) the following events happened:

16th July 1954               – Debtor created equitable mortgage over certain property in favour of B Bank

24th September 1954 – (At the instance of creditor X) a writ of fieri facias was issued for the attachment of the property (this had the statutory effect of rendering null and void any subsequent dealing with the property without the court’s leave)

27th October 1954      – Debtor created a legal mortgage of the property in favour of G bank

– G Bank paid B Bank the amount owed to it by the debtor

4th November 1954    – Debtor granted a lease to T

16th April 1955            – The property was sold to C at auction.

The question was whether T should pay rent to G Bank or C.

It was accepted that C had the same rights (and his interest in the property was subject to the same encumbrances) as creditor X.

It was also accepted that the legal mortgage was null and void as a result of the attachment.

Nevertheless, G bank had stepped into B Bank’s shoes for priority purposes:

‘their Lordships take the intention of the Ghana Bank to have been to replace the equitable charge by a valid and effective legal mortgage, but to keep it alive for their own benefit save in so far as it was so replaced’. (745, per Lord Jenkins).

C’s interest was subject to the equitable mortgage.

In any event, the equitable mortgage gave B Bank (and G Bank) no right to possession so the rent should be paid to C.

Charging order made after debtor had assigned the property to another

November 1, 2012

In Ng Kam Ha v Vincent Sina Traders (HK) Ltd [1987] HKLR 1193, HC):

C assigned a flat to N on 10 December 1985 and this was registered on 7th February 1986,

V obtained a charging order nisi over the flat in respect of a debt owed to it by C on 3rd February 1986 and this was registered on 6th February 1986.

It was held that the charging order did not affect N’s interest in the flat. C had assigned the flat, and so had no interest in it, by the time of the charging order. There was nothing for the charging order to attach to.

V could not invoke section 3(2) of the Land Registration Ordinance since it was not a purchaser or mortgagee.