CHEN LILY v. YIP TSUN WAH ALVAN

CACV4/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 4 OF 2016

(ON APPEAL FROM HCA NO 1695 OF 2013)

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R E A S O N S F O R J U D G M E N T

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Hon Cheung JA:

1.  I agree with the reasons for judgment of Yuen JA.

Hon Yuen JA:

2.  On 7 December 2015, Au-Yeung J gave judgment (“the Judgment”):

(1) declaring that a property was beneficially owned equally by the plaintiff and the defendant;

(2) giving directions for sale; 

(3) ordering that the plaintiff shall recover a sum of $500,000 from the defendant’s share of the net proceeds; and

(4) ordering that the plaintiff should pay the defendant’s costs.

3.  On 6 January 2016, the plaintiff filed a notice of appeal for an order that “there be a division of the sale price of the Property at the ratio of 68.6%:31.4% between the Plaintiff and the Defendant or as such ratio more favourable to the Plaintiff than 50% as the Court of Appeal may think fit to determine” and consequential costs orders.

4.  On 8 March 2016, the defendant filed a cross-appeal seeking to set aside the judge’s order that the plaintiff recover the sum of $500,000 from his share of the net proceeds.

5.  At the conclusion of the hearing before us, we dismissed both the appeal and cross-appeal with costs.  My reasons appear below.

Background

6.  In 2006, the plaintiff and the defendant began a relationship.  They intended to cohabit with a view to getting married.

7.  On 24 May 2007, they entered into a provisional sale and purchase agreement to purchase a flat (“the Property”).  As the judge said in the Judgment¹:

“There is no dispute that the parties had intended, at the time of purchase, to use the Property as their matrimonial home. It was agreed that Mr Yip [the defendant] would be solely responsible for the costs of acquiring and maintaining the Property and the living expenses of the couple (“Mr Yip’s promise”)”.

8.  The purchase price was $3.4m. The defendant paid the initial and further deposits in the total sum of $170,000 and commission of $33,500.

9.1.   Under the terms of the sale and purchase agreement, completion was scheduled to take place on 9 July 2007.  However the defendant was unable to secure a mortgage for the balance of the purchase price.  He (as well as the plaintiff) had insufficient credit.

9.2.   In the plaintiff’s own words:²

“Notwithstanding the Defendant’s said promise to be responsible for all costs and expenses for acquiring the Property, shortly prior to the date of completion (9 July 2007), it was realized that the Defendant did not have sufficient money to complete the purchase of the Property. Upon that, the Defendant proposed to cancel the transaction and let the vendor forfeit the deposits paid (HK$170,000). (Emphasis added)

With the view to enabling the Defendant and me to proceed with the purchase of the Property, I forthwith contacted the vendor repeatedly asking ... for an indulgence to defer the date of completion, so as to enable the Defendant to raise the sufficient fund for the completion. Eventually, the vendor agreed to extend the time for completion to 10 August 2007 in consideration of paying him $20,000”.

9.3.   At the same time, the plaintiff took out a mortgage loan on a property held in her sole name in order to finance the purchase.  However the funds could not be obtained in time for completion.  Consequently on 7 August 2007, a short-term loan of $400,000 was obtained from the plaintiff’s mother for which the defendant signed an IOU³. According to the plaintiff⁴:

“If there were not my Mother’s Loan, the defendant and I would not have been able to acquire the Property at all”.

10.  On 10 August 2007, the plaintiff and defendant acquired the Property as joint tenants, subject to a mortgage in favour of a finance company in the sum of more than $3.1m.  Thereafter, the loan was rolled over with finance from various other financial institutions. The list of loans is set out in para. 4 of the Judgment.  In the meantime, the Property rose in value.  As at the date of the Judgment⁵, the equity of the Property was estimated at $4.6m.

11.1.   Returning to events at the time, after completion the plaintiff and defendant moved into the Property.  Their finances were arranged in the following way:⁶ 

“There is no dispute that at all times during their cohabitation, [the defendant’s] income ... was on average $50,000 per month and [the plaintiff] about $20,000. [The defendant] gave [the plaintiff] all his salary. [The plaintiff] had been in charge of the finances of [the defendant]”.

11.2.   The plaintiff said that from the defendant’s income, she would on his instructions first pay his credit card bills as he needed to maintain a good credit record for his job at a bank.  After that, she would pay her own credit card bills which represented their joint living expenses.  The balance of the defendant’s income after these payments however was not sufficient to pay the mortgage repayments.  The plaintiff accordingly used her own resources (and loans from her mother and friends) to do so. 

12.  Unfortunately the parties’ relationship broke down.  In June 2011, the defendant moved out of the Property.  At that time, there were outstanding mortgage loans owed to two financial institutions.

13.1.   The next month, the defendant gave the plaintiff half of the mortgage loan instalments for the month, and told the plaintiff that he would continue to make such payments until the Property was sold.

13.2.   That offer was however rejected by the plaintiff.  The defendant’s subsequent proposal made through his solicitors that the Property be leased out was also rejected by the plaintiff.  The plaintiff remained in sole possession of the Property until she moved out in September 2013.

14.  On 6 September 2013, the plaintiff issued a writ for a declaration that the Property was beneficially owned by herself and the defendant in the respective shares of 95:5.  In the defence and counterclaim, the defendant sought a declaration that the Property was beneficially owned by the plaintiff and himself in the respective shares of 20:80. 

15.  In the reply and defence to counterclaim, the plaintiff deviated from the resulting trust case in her statement of claim.  Instead it was pleaded that when the Property was registered in their joint names, it was the parties’ mutual intention to be joint tenants in law and in equity, but thereafter there was a change in the mutual intention, primarily because the defendant had failed to fulfil his promise.  In other words, the plaintiff’s case in the reply and defence to counterclaim was that whilst they originally intended to own the Property in equal shares without her making any financial contributions, they changed their intention such that she would own a greater share in the Property when she made financial contributions.  

Judgment of Au Yeung, J

16.  At trial, both parties gave oral evidence.  It is not necessary for present purposes to set out the judge’s findings of fact.  Suffice it to say that the judge applied the common intention constructive trust principles laid down by the House of Lords in Stack v Dowden [2007] 2 AC 432 and the UK Supreme Court in Jones v Kernott [2012] 1 AC 776, ie. that for a property held by co-habitees in joint names, there was a presumption that the parties were equal beneficial owners.  The judge found on the evidence that there was no change of that intention.  Accordingly the judge decided that the Property was beneficially owned by the parties in 50:50 shares. 

17.1.   The judge ordered that the Property be sold at open market value, with the defendant to have charge of the sale⁷.

17.2.   The judge further ordered that a sum of $500,000 be paid to the plaintiff from the defendant’s portion of the net proceeds.  This was a rounded-up figure consisting of two sums:

(a) when the parties separated in June 2011, the plaintiff had credit card debts of about $100,000 which had been incurred for their joint living expenses prior to separation, for which the defendant had promised to be responsible;

(b) after the parties separated, the plaintiff, upon rejecting the defendant’s proposal to pay half the mortgage instalments, had been paying the mortgage instalments on her own.  The total sum from the time of separation to time of trial⁸ was $731,425.69.  The defendant’s 50% share of these instalments was therefore $365,712.85. As for the interest on this sum, the judge treated it as having been set off against the value of the plaintiff’s sole occupation of the Property from June 2011.

Appeal

18.  As mentioned earlier, the plaintiff appealed against the judge’s finding of equal beneficial ownership, while the defendant cross-appealed against the judge’s order that he pay to the plaintiff a sum of $500,000 from his portion of the net sale proceeds.

Discussion  

Plaintiff’s appeal - 

19.  It was clear from the written and oral submissions of Mr Yau counsel for the plaintiff that “the only challenge [on appeal] is to [the judge’s] finding of common intention”⁹.

20.1.   The Statement of Claim pleaded a resulting trust and did not plead a common intention constructive trust.  Mr Yau, counsel for the plaintiff, did not dispute that an acquisition of a property in joint names in a domestic context creates, under the principle of common intention constructive trust, a presumption of equal beneficial ownership.  The plaintiff’s case in her reply and defence to counterclaim was that there had been a change in that common intention.  The burden was of course on her to prove that. 

20.2.   In paras. 3(c) and (d) of the Reply, the plaintiff’s case was stated as follows:

“(c) ... in early 2007, the Defendant proposed to purchase a property as the parties’ future matrimonial home and purportedly asserted that he would be a responsible husband bearing all responsibilities for acquiring the property, as a result, the Property was registered in the joint names of the parties, with the then mutual intention of the parties that they were joint tenants of the Property both in law and in equity;

(d) nevertheless, by reason of the thereafter conducts of the parties, including inter alia the Defendant’s failure to make contribution for repayment of mortgage loans of the Property ... as well as the Defendant’s eventual moving out of the Property and leaving the Plaintiff to assume sole responsibility for all mortgage repayments, outgoings and maintenance of the Property, the then mutual intention has been altered”. (Emphasis added).

21.  The judge rejected the plaintiff’s case of a change in common intention, holding¹⁰:  

“It was only in her reply that [the plaintiff] first mentioned a change in the parties’ intention, clearly an after-thought. Even so, the evidence shows only a change in the sense that [the plaintiff], who was not expected to contribute to the mortgage repayments or living expenses, had to contribute. There was no suggestion that it was commonly intended that it should bring about a change over the beneficial ownership”.

22.1.   Indeed, it is apparent that the plaintiff’s case and evidence were contrary to her claim in paras. 3(c) and (d) of a change in mutual intention by reason of the defendant’s inability to fulfil his promise after the registration of the Property in joint names.

22.2.   According to the plaintiff’s witness statement, even before the registration in August 2007, she was aware that the defendant was not able to fulfil his promise to be solely responsible to pay for the Property.  She said¹¹:

“Insofar as I know, during the period from July 2007 to June 2011, the Defendant was always in financial difficulty owing personal and/or credit card debts, and I often at the Defendant’s requests made payment for him.” (Emphasis added).

22.3.   It is notable that the defendant’s financial difficulty was so substantial that he had intended to cancel the purchase and suffer the forfeiture of the deposits in the sizable sum of $170,000. 

22.4.   The purchase could only proceed because the plaintiff asked her mother for a loan of $400,000, which was repaid from the mortgage loan taken out by the plaintiff on her own property.

22.5.   Indeed it was acknowledged in Mr Yau’s skeleton submissions for the appeal¹² that:

“The material facts stated clearly showed that D could not honour ‘the said proposal’ (which was the word used to describe D’s promise) right from the outset of the relationship: see para. 5. ... He had to borrow from his sister in order to pay the first 5% deposit. He still needed to borrow $0.4m from P’s mother, so as to complete the purchase”. (Emphasis added).

22.6.   The judge also found that “it must have been clear to [the plaintiff] right from the start” that the defendant’s financial resources were not enough to meet the mortgage repayments and credit card debts of both parties¹³. 

23.  Thus it was clear before the Property was registered in the parties’ names that they needed to pool their resources.  The plaintiff could not look to the defendant alone to pay for the Property.  However she nevertheless took up the assignment with the defendant as joint tenants.  This was entirely natural and understandable as they were in an intimate relationship and had purchased the Property as a home for their cohabitation and future married life¹⁴.  But it shows that, contrary to the plaintiff’s case pleaded at paras. 3(c) and (d) of her reply and defence to counterclaim, the plaintiff was aware that the defendant was not able to fulfil his promise even before registration in joint names, and it was not as if it was a revelation to her only after such registration, which aroused a change of intention of equal ownership.

24.1.   In any event, even if it is assumed that it was only after a passage of time into their cohabitation that the plaintiff became aware of the defendant’s inability to be solely responsible for the payment for the Property, there was no evidence that the parties “later formed a common intention that their respective shares would change” (Jones v Kernott paras. 51, 68). 

24.2.   When the defendant moved out, he proposed to pay half of the mortgage repayments. That was entirely consistent with the original 50:50 shares of a joint-name purchase in a domestic context.  The plaintiff rejected that proposal but the matter rested there.  There was no evidence that they formed any common intention to change their share of ownership in the Property. 

24.3.   A change in the parties’ common intention does not need to be express, but there must be some conduct of both parties from which a court could infer a change in common intention.  For example in Jones v Kernott, the parties cashed in a life insurance policy and shared the proceeds, and Mr Kernott used his share to acquire another property.  The Supreme Court held that this was evidence of a new plan by both parties for Mr Kernott’s share in the jointly-held property to be crystallized at this time.  

24.4.   In the present case, although the plaintiff in her own mind might have considered it fair (given the defendant’s promise) that she should have a greater share in the Property because she had to pool her resources with the defendant’s, there was no evidence that both parties had such a change in common intention.  The parties were still in an intimate relationship, sharing their lives in a joint home on a basis of mutual trust and in the expectation that their relationship would endure¹⁵.  The plaintiff’s claim in the notice of appeal for a 68.6%:31.4% share, calculated ex post facto for the purpose of litigation by trawling through the parties’ financial documents, is precisely the sort of artificial “balance sheet approach” that was disapproved by the House of Lords in Stack v Dowden.

25.1.   Mr Yau’s further argument was that the judge was wrong to order the defendant to pay the plaintiff only $500,000 from his share of the proceeds of sale.  He submitted with reference to the table at para. 51 of the Judgment that there was a total sum of $800,000 which were “joint living expenses paid through [the plaintiff’s] credit cards and then PPS”. 

25.2.   In my view, the judge was entitled to order payment of the rounded-up sum of $500,000 which included $100,000 as credit card expenses at the time of separation, but not those before.  Prior to separation, the parties had been living together as a family, pooling their resources and sharing their expenses in a cohabiting relationship.  The fact that they separated afterwards does not turn the clock back and create a new liability in law for past events.

26.  For these reasons, I dismissed the plaintiff’s appeal with costs.    The defendant’s costs shall be taxed according to Legal Aid Regulations.

Defendant’s Cross-appeal -

27.  The defendant cross-appealed the judge’s order that $500,000 be paid to the plaintiff from his portion of the net proceeds of sale.

28.1.   As noted earlier, this was a rounded up sum consisting of (a) credit card debts which the plaintiff was left to clear by herself after the separation and (b) mortgage instalments which the plaintiff paid. 

28.2.   First, regarding the pleading point taken by the defendant’s counsel, it was admitted by the defendant that by the time of separation, he no longer had credit card debts but that the plaintiff did (para. 44, Judgment), as a result of his instructions that his debts be cleared off first. 

28.3.   Secondly, it is clear that the judge was entitled to order the defendant to pay half of the mortgage instalments after separation.  The defendant himself had offered to pay half the instalments after he moved out.  It is clear that he did not reasonably expect to maintain his equal ownership of the Property without making equal contributions with the plaintiff after the breakdown in their relationship.  In any event, contrary to the submission made by the defendant’s counsel that the order for reimbursement was unknown to law, payment of the instalments was clearly necessary to preserve the Property.

29.  For these reasons, I dismissed the defendant’s cross-appeal with costs.  The defendant’s costs shall be taxed according to Legal Aid Regulations.

30.  Finally I would record that at the conclusion of the hearing before us, Mr Yau disclosed that the Property has still not been sold, despite the fact that the judge’s order was made in December 2015.  This fact, as well as the reasons (if any) for the delay in sale, had not been made known to this court, as there was no application to adduce fresh evidence.  Further neither party had, whether in the notice of appeal or the respondent’s notice, asked this court to vary the judge’s order in relation to the sale.  Accordingly, in so far as any orders are sought by either party consequential to the delay in sale, they should be sought from the Court of First Instance.  

Hon Kwan JA:

31.  I agree with the reasons for judgment of Yuen JA.