LAM SAU WAH v. TAM CHI HUNG AND ANOTHER

CACV 895/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 895 OF 2000

(ON APPEAL FROM HCMP 3135/2000)

_______________

_______________

J U D G M E N T

_______________

Hon Le Pichon JA:

1. This is an appeal from the order of Deputy Judge Muttrie dated 8 November 2000 made on a vendor and purchaser's summons, declaring that the plaintiff ("the vendor") had not shown and could not convey a good title to Flat G, 27th Floor, Yee Shan Mansion, Kao Shan Terrace, Tai Koo Shing ("the property") to the defendants ("the purchasers").

The Facts

2. The vendor became the registered owner of the property in 1992. On 14 November 1997 China Weal Limited ("China Weal") issued a writ and statement of claim against the vendor, claiming a declaration that the property was held by the vendor on trust for China Weal. On 18 November 1997, the writ was registered in the Land Registry as a lis pendens. China Weal was unsuccessful in its action and its claim was dismissed on 18 April 2000.

3. Four days later, on 22 April 2000, the vendor entered into a provisional sale and purchase agreement with the purchasers. On 8 May 2000, a copy of the sealed judgment was registered and the registration of the writ was vacated. The formal sale and purchase agreement was executed by the vendor and the purchasers on 12 May 2000. A week later, on 19 May 2000, the provisional agreement was registered at the Land Registry and this was followed by the registration of the formal agreement on 26 May 2000.

4. Three days later, on 29 May 2000, China Weal lodged an appeal and registered its notice of appeal on the same day. No application was made by China Weal for any stay of execution of the judgment and order dismissing China Weal's claim pending appeal.

5. The formal agreement contained, amongst others, the following provisions:

"5. The Vendor shall assign the Property in such capacity as described in the First Schedule hereto free from incumbrances.

...

23. The Vendor hereby declares and confirms that no third party and/or occupier (whether related or otherwise) has any right or interest whatsoever whether legal or equitable in the Property. The Vendor confirms that he is the sole legal and beneficial owner of the Property. In the event of any third party or occupier claims to the Property, the Vendor shall forthwith return all the deposits or all other money paid by the Purchaser and without prejudice to the Purchaser's right to claim against the Vendor for all losses and damage sustained by the Purchaser (including stamp duty paid or payable) by reason of the Vendor's failure and/or inability to complete the sale in accordance with the terms hereof and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor for execution. This clause shall survive completion of the sale and purchase of the Property hereof.

...

33. The Vendor hereby warrants and undertakes to vacate or discharge the Writ of Summons Memorial No. 7339548 before completion. Otherwise, the Purchaser shall be entitled to rescind this Agreement and all deposits paid hereunder shall be returned forthwith to the Purchaser."

6. So far as the correspondence between the parties' respective solicitors relating to the requisitions are concerned, I need only focus on the requisition relating to the notice of appeal.

7. By letter dated 1 June 2000, the purchasers' solicitors wrote to the vendor's solicitors advising them that they had received from the solicitors to China Weal, a copy of the notice of appeal. The vendor's solicitors were asked to clarify and comment. At the same time, they drew the vendor's solicitors attention to clause 23 of the formal agreement. On the same day, the vendor's solicitors replied to the effect that as the notice of appeal did not operate as a stay of the order and judgment, it did not have any effect on the vendor's title which was indefeasible.

8. The purchasers' solicitors took issue with that view. The vendor's solicitors were asked to provide China Weal's consent to completion of the sale or to take steps "to vacate or discharge" the notice of appeal before completion, that being the vendor's obligation. On 5 June, the vendor's solicitors reiterated their earlier stance to the effect that China Weal's right and interest had been defeated, that the notice of appeal would not affect title and in any event the purchasers' rights had priority over the notice of appeal which was lodged for registration subsequent to the registration of formal agreement. Further correspondence continued in this vein.

9. New solicitors were appointed for the purchasers and by their letter dated 15 June, they set out their position:

"If you are of the view that the said Notice of Appeal Mem. No.8090562 should not be allowed to be registered in the Land Registry, application should be made by you to vacate the same from the Land Register under Section 19 of the Land Registration Ordinance."

10. The vendor's solicitors replied to the effect that in their view the notice of appeal was not a pending land action. This elicited a response from the purchasers' solicitors to the effect that the notice of appeal fell within the phrase "any action or proceeding pending in the court" in section 1A of the Land Registration Ordinance. They reiterated their view that the notice of appeal should be expunged from the Land Register before completion. Further, it was contended that because what was being alleged was the existence of a resulting trust which itself was not registrable, a purchaser could only take free from such unwritten equities if he was a bona fide purchaser for value without notice.

11. By letter dated 21 June 2000, the purchasers' solicitors wrote to the vendor's solicitors as follows:

"We are instructed by our clients that unless completion could take place within a reasonable date and time, our clients shall proceed to rescission of the sale and purchase pursuant to clauses 11(a), 16, 18, 23 and 33 of the Agreement for Sale and Purchase dated 12th May 2000 made between our respective clients."

Notwithstanding this intimation of an intention to exercise their contractual right of rescission, it would appear that the right was never exercised.

12. On 28 June 2000 the vendor issued the originating summons seeking first a declaration that good title had been shown and that the requisitions had been sufficiently answered. The parties apparently reached an agreement to the effect that should the court declare that the vendor has shown good title, completion be postponed to 7 days after the grant of the mortgage loan to the purchasers or within one month of the date of the order whichever should be the earlier. This was set out in the affirmation of To Pak Wo, Patrick the purchasers' solicitor, dated 25 August 2000.

13. The judge held that the notice of appeal was within the meaning of a "lis pendens" within section 1A of the Land Registration Ordinance but that because at the time the provisional and formal agreements were registered (which was before the registration of the notice of appeal), the original registration of the writ had been vacated, having regard to the Court of Appeal's decision in Ho King Yim v. Lau King Mo [1980] HKLR 42, which was followed by Cheung J in Country Rich Development Limited v. Ma Chan Fuk-kiu & Others [1995] 1 HKLR 265, the assignment merged with the agreement which ranked in priority. He rejected the purchasers' submission that China Weal's interest was an unwritten interest in land to which the common law principles of priority applied and because the purchasers though bona fide purchasers had notice of that interest before completion, they would remain subject to that interest. He held that the vendor had priority and could successfully resist a claim for possession by China Weal.

14. However, the judge acceded to the purchasers' argument that because the vendor had declined to expunge the notice of appeal from the land register prior to completion, in practice the purchasers were having to "[buy] a law suit". Further, he held that they were not getting what they contracted for, having regard to clauses 5, 23 and 33 of the formal agreement: the purchasers would themselves be required to institute a law suit, at a cost to themselves, to remove the blot on title i.e. the registration of the notice of appeal. In those circumstances, he declared that the vendor had not shown and could not convey a good title to the property.

15. Accordingly, the two issues which arise are whether:

1. the requisition relating to the notice of appeal had been sufficiently answered; and

2. good title to the property had been shown.

The Requisition

16. It appears to be common ground that the notice of appeal was registrable as a lis pendens within the meaning of the Land Registration Ordinance. There is no appeal by the vendor on the judge's holding to that effect.

17. As is clear from the purchasers' solicitor's letter dated 2 June 2000, their requisition relating to the notice of appeal required the vendor either to provide China Weal's consent to the completion of the sale or alternatively to make the necessary application to expunge the registration from the register if it was the vendor's stance that the notice of appeal had no effect because the agreement for sale and purchase had priority. The vendor refused to do either. Was that a sufficient answer to the requisition? This would depend on whether good title had been shown.

Good title

18. It is common ground that the registration of the provisional and formal agreements preceded that of the registration of the notice of appeal. In Ho King-yim v. Lau King-mo (supra), the charging order was registered after the sale and purchase agreement was registered but before the assignment. The chargee contended that he had priority over the purchaser because the agreement merged into the assignment which was subsequent to the registration of the charge. It was held that the purchaser's beneficial interest which the agreement had transferred could not be affected by the registration of the charging order, despite the fact that the purchaser had actual notice of the charge. That seems to me to be correct as a matter of principle.

19. But there is another aspect which arises from that decision. In that case, on completion, the balance of the purchase moneys had been paid to the vendor. Cons J (at p. 48) held that upon receipt of actual notice of the charge, the purchaser became liable to account to the chargee for the balance of the purchase moneys. Huggins JA (at p. 45) agreed but as there was no claim by the chargee against the purchaser before the court, he considered that no holding on that point was necessary. Yang J agreed with both judgments.

20. Is the Ho King-yim case distinguishable on the basis that the subject matter of the registration here was a lis pendens rather than an equitable interest which had already came into existence with the consequence that the purchasers would not be accountable to the party registering the lis pendens should he succeed in establishing his claim?

21. Counsel for the vendor submitted that it did make a difference and relied on Country Rich Development Limited v. Ma Chan Fuk-kiu & Others [1995] 1 HKLR 265. There, the sale and purchase agreement between P and the former owner (Mr Mah) was registered on 10 April 1992. On 29 April 1992, D1 issued a writ against Mr Mah (claiming a declaration that he held the property in trust for her and a re-transfer) and registered it as a lis pendens. On 26 June 1993, the property was assigned to P. P commenced an action ("the 1993 action") against D1 seeking possession. D1 asserted that she purchased the property from Mr Mah in 1948 for $11,000 evidenced by a Chinese Deed. The agreement between D1 and Mr Mah was executed during the Japanese occupation and could not be registered because the District Land Office ("the DLO") was not functioning. The parties agreed that Mr Mah would cause the property to be registered in the name of D1 and her daughter as soon as the DLO was available for service but Mr Mah failed to do so. P obtained an order for possession in the 1993 action and execution of the judgment had been completed. The proceedings which then came before Cheung J included an appeal by P against the master's refusal to vacate the lis pendens. Noting that (1) the lis was registered after the sale and purchase agreement to P, (2) the sale had been completed, (3) the absence of any application to set aside the sale, (4) P had obtained judgment for possession against D1, and (5) execution had been completed, Cheung J held that whatever right D1 might have against Mr Mah, it was only in respect of damages and no longer in relation to the land itself and vacated the lis pendens.

22. Country Rich is thus distinguishable on the facts. Crucially, the agreement between D1 and Mr Mah was registrable but unregistered: it was not an unregistrable interest as in the present case. As against P, it was thus null and void by reason of section 3(2) of the Land Registration Ordinance. That section as well as section 4 are set out below:

"3(2) All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:

...

4. No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered."

D1's claim against Mr Mah could not thus have been anything but a claim for damages and vis-à-vis P, D1 could not have asserted any claim.

23. In any event, Country Rich is not authority for the proposition that a third party having priority can in no circumstances be accountable to the party registering a lis pendens where the underlying claim is to an unregistrable interest where the third party had notice of the claim prior to completion. That question did not arise for consideration in Country Rich because of the different facts, the application before Cheung J being vacation of the lis pendens and not a claim by D1 against P for paying the completion monies to Mr Mah.

24. I now turn to consider whether as a matter of principle Ho King-yim is distinguishable because a lis pendens is different in nature from an equitable interest created after the registration of the sale and purchase agreement.

25. A lis pendens gives notice of the underlying claim. In Country Rich, the claim was a registrable but unregistered interest which was rendered null and void against a subsequent bone fide purchaser for valuable consideration. Here the underlying claim is an unwritten equity which is unregistrable.

26. The purchasers had submitted that if China Weal were to be successful in the appeal, its equitable interest would have come into existence in 1992 and under the common law rules relating to priorities which apply, the first in time prevails. Counsel for the purchasers sought to rely on the following statements in Megarry and Wade on the Law of Real Property, 9th Ed. 5-008 and 5-010:

"If the purchase is for money consideration, the purchaser must actually pay all the money before receiving notice of the equitable interest; and if such notice is received before the money is paid, no obligation or security for its payment will be enforceable (Tourville v. Naish (1734) 3 P.Wms. 307; Taylor Barnard v. Tozer [1984] 1 E.G. L.R. 21 at 22.

...

The purchaser must have the legal estate properly vested in him (by a conveyance) before he will be safe. If he has paid the purchase-money, but then gets notice of a prior equitable interest before the purchase is completed by the conveyance of the legal estate, he will take subject to the equity."

27. Those passages are of little assistance as they deal with the law in England relating to unregistered conveyancing whereas in Hong Kong, regard must be had to the system of priority introduced by the Land Registration Ordinance which has been part of the Laws of Hong Kong since 1844. In my judgment, the purchasers' reasoning is flawed. Once the writ had been vacated, in the absence of any injunction or prohibitory order prohibiting the vendor from dealing with the property, even if China Weal were to succeed in its appeal, it could not rank as an equitable interest that is prior in time to the provisional and formal agreements which had been registered. There is no doubt that the purchasers have priority because at the time the agreement was registered, they had no notice and cannot, on any footing, be deemed to have had notice of any resulting trust asserted by China Weal since the latter's claim had been adjudicated and found to be unsubstantiated, and the registration of the writ had been vacated. Wong Chim-ying v. Cheng Kam-wing [1991] 2 HKLR 253 which held that the first in time being the unwritten beneficial interest under a resulting trust succeeded because the second in time, being the purchaser's interest under a registrable sale and purchase agreement, took with constructive notice of the resulting trust is distinguishable on the notice point.

28. An unregistrable interest holder is subject to the notice rules. See Sihombing and Wilkinson's Hong Kong Conveyancing Vol 1A, XIV [136]. When the notice of appeal was registered, the unregistrable interest holder took with notice of the prior interest which was registered. Section 5A of the Land Registration Ordinance provides as follows:

"Notwithstanding section 3 or section 5 a charging order or lis pendens which is duly registered shall have priority from the commencement of the day following the date of its registration."

If China Weal were to be successful in its appeal, then for the purposes of determining priority, it has priority from the commencement of the day following the date of its registration. As the notice of appeal was registered on 29 May, it had priority as from 30 May 2000.

29. Were it otherwise, the system of priority which the Land Registration Ordinance introduced and which is based on the abrogation of notice would effectively be emasculated. The statutory system affects written interests whereas the common law principles of priority affect unwritten interests which are unregistrable. In any event, China Weal's interest, unlike that of the husband in the Wong Chim-ying case, was not protected by occupation and it is open to doubt whether an interest not so protected can be considered in the priority battle. See Halsbury's Laws of Hong Kong, Vol. 16 at [230.0389].

30. Nevertheless, the fact that the purchasers have priority does not resolve the question whether the purchasers who had notice of the lis pendens would be accountable to China Weal for the completion monies should China Weal succeed in its appeal (which in fact it did not). Assuming that it did succeed in its appeal, the fact that it does not have priority vis-à-vis the purchasers is not necessarily dispositive of the further question as to the purchasers' accountability for the completion monies. As section 3(2) of the Land Registration Ordinance does not apply because the interest was unregistrable, China Weal's equitable interest (assuming it could be established) would not be "absolutely null and void". Rather, the interest-holder would arguably have a tracing claim. Vis-à-vis the trustee i.e. the vendor, the interest-holder's claim would not be relegated to one sounding in damages only. If that be correct, then there is no basis for concluding that the interest of the beneficiary would be overreached by the act of the trustee in entering into the agreement.

31. For my part, I do not consider that the Ho King-yim case can be distinguished on any satisfactory basis. In any event, the purchasers ought not be put in the position of being vulnerable to a claim based on the Ho King-yim case which on no footing can be considered fanciful.

32. In brief, it is my view that the vendor's title was problematic: in the present case, completion had not taken place, the balance of the purchase moneys being of the order of some $2.7 million. Faced with the Ho King-yim case which is a Court of Appeal authority, then short of the consent of China Weal or the vacation of the registration upon the vendor's application under section 19 or some agreement reached between the vendor and China Weal pending the outcome of the appeal, the purchasers would have rendered themselves vulnerable to a potential claim based on the Ho King-yim case had they completed and paid the completion monies to the vendor. In my view, the purchasers' stance was correct. It was for the vendor to take the necessary action to remove the apparent difficulty over title outlined above. That the vendor refused to do.

33. Accordingly, in my judgment, the vendor had not sufficiently answered the requisition and had not shown a good title to the property.

Clause 23

34. In view of the conclusion I have reached on the sufficiency of the vendor's answer to the requisition and whether or not he had shown good title, it is not strictly necessary to consider the true construction of clause 23 since it would not alter the outcome to this appeal. But in deference to counsel's submission, I will deal briefly with clause 23.

35. Counsel for the vendor invited the court to read clause 23 together with clause 33. He submitted that having regard to clause 33, clause 23 could only refer to claims by a third party other than China Weal whose writ against the vendor was the subject matter of clause 33. In my judgment, such a construction would artificially restrict the very general wording of clause 23. It is not a construction that I would adopt unless so constrained and I see no good reason for doing so. Clause 23 is a provision that offers a purchaser an 'escape' from the transaction should any third party or occupier claims be made. This is irrespective of the quality of the vendor's title, whether it is good or otherwise.

36. From the summary of facts set out above, it is clear beyond peradventure that the purchasers never sought to invoke their contractual rights under clause 23. Had they wanted to exercise the right of rescission conferred on them by clause 23, they would not have reached the agreement referred to in Mr To's affirmation. The two are mutually exclusive.

Conclusion

37. For the reasons stated, I would dismiss this appeal with an order nisi for costs to the purchasers.

Hon Keith JA:

38. I agree with the judgment of Le Pichon JA. There is nothing I wish to add.

Hon Rogers V-P:

39. I agree with the judgement of Le Pichon JA. The appeal will therefore be dismissed with an order nisi for costs to the purchasers.