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

Interpretation of a clause barring requisitions about unauthorised structures. Justification of a large deposit.

In Channel Green Ltd v Huge Grand Ltd ([2015] 1 HKLRD 655, CA) C agreed to buy commercial property from H. The agreement contained a clause (clause 30) to the effect that the purchaser ‘shall not raise any questions / inquiries or refuse to complete or delay completion of transaction on the ground that there are any unauthorised additions, alterations or illegal structures on the Property’. There were defects arising out of the physical condition of the property. Stalls occupied areas designated for car parking under the terms of the Government Lease. Parts of shop premises were built on areas that the Government Lease stipulated should not be built upon. Despite the terms of the agreement, C raised requisitions about these matters and later failed to complete. The question was whether clause 30 prevented  C from raising these requisitions and from asserting that H could not give good title.

C argued that the effect of the clause was only to prevent it from objecting to unauthorised or illegal structures to the extent that they amounted to a breach of the Buildings Ordinance but not to the same problems considered as breaches of the terms of the Government Lease or the Deed of Mutual Covenant. The argument failed:

‘In our view, illegal structure simply means any structure erected against the law. The relevant illegality can stem from a breach of the Buildings Ordinance, it can equally stem from a breach of the terms of  the Government lease or the terms of the DMC.’ ([27], Lam V-P)

Applying Jumbo King the plain words of the clause prevented C from raising requisitions or objecting to the title on the grounds of the defects relied on ([39]). The fact that C knew of the problems at the time of the contract was part of the factual matrix and this made it even clearer that the clause prevented C from objecting to the defects ([40]). While Lord Hoffmann had spoken of an ovepowering principle that a vendor could not knowingly impose on a purchaser a seriously defective title, this was to be balanced against freedom of contract ([42] – [43]).

C had paid a 15% deposit and this was forfeited. C argued that the fact that the deposit was larger than the customary 10% meant that the onus was on H to justify it being treated as a deposit. This proposition was accepted ([50]) but H had provided the necessary justification. H had agreed to a four and a half month gap between contract and completion:

‘whether a higher deposit is reasonable in the circumstances of a particular case is a matter of fact and degree. In the present case, the Judge was clearly entitled to take account of the fact that the longer the completion period, the longer the vendor is at risk from the vicissitudes of the market and there is objective justification for a 15% deposit.’ ([56]).

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

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.