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

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

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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

Illegal structure: blot on title?

In More Alliance Ltd v Shing Samuel ([2013] HKEC 629, CFI) V agreed to sell property to P. P refused to complete contending that a number of requisitions had not been satisfactorily answered and that V had not shown good title. P successfully sought an order confirming his right to rescind and to recover the deposits paid under the preliminary and formal agreements.

In 2008, an order had been made against the property under section 24(1) of the Buildings Ordinance requiring the demolition of a structure on the roof of the property. V made no attempt to respond to P’s requisition calling for evidence that the order had been discharged / released. This was a blot on title since V had done nothing to show beyond reasonable doubt that the order did not create a risk of a successful claim against P. Thus, V had failed to give good title ([35]). The argument that the order had been registered before the contracts and that the property was sold ‘as is’ did not help V ([31]).

The agreements had been signed by V’s mother pursuant to an undated power of attorney. P promptly raised a requisition seeking evidence as to the date of execution and this was never properly dealt with. Later, outside the contractual timetable for raising requisitions, V’s mother claimed that she was in possession and was the beneficial owner. P raised a requisition in this regard and, again, this was not fully answered. It was held that as the requisition concerning ownership went to the root of title and P had shown due diligence in raising requisitions, the contractual timetable could not be held against him. A simple denial that V’s mother had any claim was not sufficient in the circumstances ([55]). This too amounted to a failure to show good title ([56]).

Finally, the title deeds were not in V’s possession and there were genuine doubts as to whether he would be able to deliver them on completion and so give good title.

Michael Lower