XCHRX FUNG KAN WAI and Another v. LEUNG SHUI FAT and Others

1997, No.A6859

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. There are two applications before me :

(1) the Defendants' application under ss.19 and 20 of the Land Registration Ordinance, Cap.128, that the registration (by the Plaintiffs) in the Land Registry of the Writ of Summons in this action as a lis pendens be vacated;

(2) the Plaintiffs' application to amend their Statement of Claim.

2. By an agreement in writing dated 31 March 1994 the Plaintiffs agreed to purchase from the 1^st Defendant a three-storey small house ("the Property") to be built on a piece of land in the New Territories, for a price of $1.48 million. In terms of the Agreement, payment was to be effected as follows :

(a) a deposit of 20% of the purchase price in the sum of $296,000 to be paid upon signing the Agreement;

(b) a further deposit of 10% of the purchase price in the sum of $148,000 to be paid within two weeks of the completion of construction works in respect of the 2^nd floor of the building;

(c) the balance in the sum of $1,036,000 to be paid within one month of the issuance of the Certificate of Compliance and the payment of premium.

3. It is common ground that the Plaintiffs did pay the first deposit in the sum of $296,000 upon signing the Agreement.

4. Construction work upon the house was in due course completed in about September 1995. The Plaintiffs did not pay the further deposit which was required in terms of paragraph (b) above. They alleged that it was an implied term of the Agreement that the 1^st Defendant would give them notice of the completion of the construction work, thus enabling them to comply with their duty to pay the further deposit within two weeks thereof. The Defendants denied the implication of such a term in the Agreement, but alleged that in any event they did repeatedly inform the Plaintiffs of the completion of the construction works, most particularly by letters dated 1 and 15 October 1995 and 8 January 1996.

5. The Plaintiffs denied having received the earlier letters, and claimed that it was only upon their receipt of the letter of 8 January 1996 that they received notice, for the first time, of the completion of the construction works. They contended that by extension of the aforesaid implied term in the Agreement, they had 14 days from 8 January 1996, namely until 22 January 1996, within which to pay the further deposit required. They duly sent cheques in the required amount to the Defendants on 17 and again on 19 January 1996 which were not accepted by the Defendants, who took the view that the Plaintiffs were out of time in attempting to pay the said further deposit and therefore in breach of the Agreement. The Defendants had communicated this stance to the Plaintiffs in a letter dated 15 January 1996, claiming that the Plaintiffs had repudiated the Agreement, which repudiation was accepted by the Defendants who thereupon exercised their rights in terms of the Agreement to forfeit the initial deposit which had been paid by the Plaintiffs, and expressed their intention to sell the property to a third party. (The Plaintiffs claimed that they did not receive this letter either.)

6. On 27 January 1996 the Plaintiffs' solicitors wrote to the 2^nd Defendant (who was acting on behalf of the 1^st Defendant) claiming that in refusing to accept the payments tendered by the Plaintiffs, the Defendants had breached the Agreement, and that unless they rectified such breach and performed all their obligations under the Agreement, including the completion of the construction works and delivery of vacant possession of the premises, the Plaintiffs would take appropriate action to enforce the Agreement and recover any damages due to them.

7. Thereafter there was no further communication between the parties. Some 13 months later, by an agreement dated 5 March 1997, the 1^st Defendant sold the property to the Third-Party Purchasers and on 19 June 1997 formally assigned it to them. Then on 27 June 1997 the Plaintiffs issued their Writ of Summons in this matter, in which they claimed :

1. payment of the sum of $592,000 by way of a refund of the initial deposit which they had paid and compensation in the same amount, as provided for by the Agreement;

2. alternatively -

(a) a declaration that the Agreement of 5 March 1997 is void and of no force or effect;

(b) a decree of specific performance of the Agreement;

3. damages for breach of the Agreement;

4. further and/or other relief.

On 15 July 1997 the Plaintiffs registered the Writ of Summons in the Land Registry. On 8 August 1997 the Defendants registered their Assignment of the property in favour of the Third-Party Purchasers.

Defendants' application to vacate the registration of the Writ

8. The first point taken by Mr Mak who appeared on behalf of the Defendants, was to the effect that the Plaintiffs' Writ of Summons was not properly registrable since it did not fall within the definition of a lis pendens provided by s.1A of the Land Registration Ordinance, namely -

"1A. Any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land".

He submitted that the Plaintiffs, by their conduct in issuing a summons for default judgment in which they claimed only the return of the initial deposit and damages, had elected not to pursue their claim for specific performance and were bound by such election, and that their aforesaid claim for the return of the initial deposit and damages is not an "action or proceeding ... that relates to land or any interest in or charge on land".

9. Mr Chong who appeared on behalf of the Plaintiffs further refined this issue by formally abandoning the claim for specific performance on behalf of the Plaintiffs, on the basis that it was not open to the Plaintiffs to pursue the mutually inconsistent claims for damages on the one hand and specific performance on the other. He submitted that the Plaintiffs' claim was nevertheless one which "relates to land or any interest in or charge on land", in particular because the Plaintiffs as purchasers acquired a lien on the property upon their payment of the initial deposit. In support of this proposition he referred to Halsbury's Laws of England, 4^th Edn, Vol 28 at para.763 :

"A purchaser of land who has paid a deposit or money on account of the purchase price to the vendor and has then lawfully repudiated his contract has, in addition to a legal lien on any title deeds in his possession, an equitable lien on the vendor's interest in the land agreed to be sold for all sums paid by him under the contract on account of the purchase money, together with interest on it. ... In all these cases the lien is the same in effect as if the vendor had executed a mortgage of the property in the purchaser's favour for the amount covered by the lien."

And at para.764 :

"A purchaser who obtains damages in lieu of specific performance may be entitled at the court's discretion to an equitable lien on the property for his damages if he has formally claimed the declaration of a lien."

I was also referred to the decision of Farwell J in Whitbread & Co., Limited v. Watt [1901] 1 Ch 911 in which he endorsed as a complete and accurate statement of the law the following passage from Robbins on Mortgages, Vol 2, page 1376 :

"If a purchaser advanced all or any part of the money to the vendor, and the contract is broken off, an implied contract arises, by which the purchaser has a lien on the land; and if the purchaser properly declines to complete, he has a lien for the deposit and interest on unpaid purchase-money, and for interest on the payments, and also for the costs of a suit by himself or the vendor to compel performance of the contract, and this lien attaches on the deeds. If the purchase goes off through the fault of the purchaser, of course he has no lien for what he has paid."

Farwell J's decision was subsequently upheld by the Court of Appeal, [1902] 1 Ch 835.

10. In relation to enforcement of the lien, I note the following in Halsbury's Laws of England, loc. cit., at para.754 :

"An equitable lien is a form of equitable charge over the subject property. Both an equitable lien and an equitable charge are enforceable by the same remedies, namely by the appointment by the court of a receiver and a judicial order for sale."

11. I respectfully adopt the foregoing authorities as correctly stating the law. Mr Chong submitted that, applying those principles to the facts of the present case, the Plaintiffs have since 31 March 1994 been entitled to an equitable lien on the suit property, and that the Plaintiffs' action is therefore one which "relates to land or any interest in or charge on land".

12. Mr Mak submitted that it was not open to the Plaintiffs for the purposes of the present application to rely upon the existence of a lien, since they have not specifically pleaded that a lien was raised. He referred to Bullen and Leake and Jacob's Precedents of Pleadings, 13^th Edn., page 1284 where the learned authors state :

"Where the defence of lien is raised, it should in all cases be specially pleaded and particulars of the circumstances giving rise to the lien should be given."

13. I should add that in their Amended Statement of Claim for which they are seeking leave, the Plaintiffs do specifically plead that a purchaser's lien was raised in their favour upon their payment of the initial deposit. However, bearing in mind that the present issue is whether the Writ was properly registrable when the Plaintiffs registered it on 15 July 1997, the point falls to be decided on the basis of the Statement of Claim as it was then framed. Mr Chong submitted that while the Plaintiffs had not specifically pleaded that a purchaser's lien had been raised in their favour, all the necessary facts to found the creation of such a lien by operation of law had been pleaded; further that the lien was in fact brought into being by operation of law when the Plaintiffs paid the deposit, and that it has always been and remains open to them to amend their Statement of Claim in order to specifically plead reliance upon such lien.

14. I agree with Mr Chong's submissions. It is clear on the authorities that provided the contract did not fail through the fault of the Plaintiffs, and that it was the Plaintiffs who lawfully repudiated the contract, they did acquire an equitable lien on the Property to secure the return of the initial deposit paid by them, which lien is enforceable by the appointment by the court of a receiver and a judicial order for sale. The question as to which of the parties was in breach of the Agreement is of course disputed, which dispute will be determined at the trial of this matter : for present purposes it suffices to note that the Plaintiffs will be entitled to rely upon their purchaser's lien provided they can make good their allegations that it was the Defendants, and not themselves, who were in breach of the Agreement. All the facts necessary to establish such lien have been pleaded in the Statement of Claim, and it is procedurally open to the Plaintiffs at any time to amend in order to plead express reliance upon it. That is a relevant factor to bear in mind in considering this issue.

15. Mr Mak further submitted that if the Plaintiffs are permitted to amend their Statement of Claim to plead their reliance upon a purchaser's lien, such "new" Statement of Claim would require to be registered afresh in the Land Registry, and would thus rank lower in priority to the Assignment of the property in favour of the Third-Party Purchasers which was registered on 8 August 1997. That is fallacious in my view : any amendment to plead reliance upon a purchaser's lien will take effect not from the date of the amendment, but from the date of the original statement of claim. (See The Supreme Court Practice 1997 Vol 1 page 357, 20/5-8/2.)

16. In Chow Chiu-tai v. Chan Tak-ming [1994] 1 HKLR 274 P. Chan J (as he then was) analysed in depth the question as to what actions or proceedings do properly constitute lites pendentes as defined in the Ordinance, and after a detailed review of the English authorities (concerning an almost identical statutory provision in the English Act) summarised the position as follows :

"A lis pendens, to be registrable, must be one which affects an interest in land so that if it is not registered or registered in time, the interest affected by it may lose priority to some other interest in the same land if the document relating to that other interest is registered. In other words, the question to be answered is : will the interest which is to be affected by the action or proceeding be adversely affected by or deferred to some other interest in the land if the action or proceeding is not registered or registered in time? ... Little or no difficulty will arise in an action which makes a claim for a proprietary interest or an easement in land. However, there may be actions in which there are no direct or expressed claims for an interest in land and yet the judgment or order to be given may affect the land in question. This type of action should also be registrable because if they are not registered, they are not binding on any purchaser or mortgagee of the land intended to be affected. And if the purchaser or mortgagee is to be bound, it is only fair that he can have notice of the pending action (that is the lis pendens) if the same is registered. On the other hand, there are cases which although they can be said to be in one way or another relating to land, are not registrable because whatever their outcome, the subsequent purchaser or mortgagee of the land in question will not be affected by the registration, or lack of it, of the action at the Land Office. The material consideration is therefore .... whether any subsequent purchaser or mortgagee will take a free title in the land or lose priority if the action is not registered."

17. I respectfully adopt those dicta as correctly stating the law. On the facts of the present case it is clear that the interest of the Plaintiffs as embodied in their Statement of Claim would have lost priority to the interests of the Third-Party Purchasers to whom the Property was subsequently sold, if the Plaintiffs' interest had not been registered when it was, prior to the registration of the later transaction by the Defendants.

18. It is clear, in my view, that the Plaintiffs' action is one which "relates to land or any interest in or charge on land", and was therefore properly registrable as a lis pendens.

19. Mr Mak submits that even if it was properly registrable, the registration of the Plaintiffs' Writ ought to be vacated under s.19 of the Ordinance which provides as follows :

"19. The court or judge before whom any property sought to be bound is in litigation, may on the determination of the lis pendens, or during the pendency thereof, where the said court or judge is satisfied that the litigation is not prosecuted bona fide, or for other good cause shown, make an order for the vacating of the registration in the Land Office of such lis pendens without the consent of the party who registered it...."

He submitted that the history of this litigation demonstrates that the Plaintiffs have not prosecuted their claim bona fide, bearing in mind in particular the long period of inaction (18 months) following the Defendants' refusal to accept the payments tendered by the Plaintiffs, and the letter subsequently sent by the Plaintiffs' solicitors dated 27 January 1996. (It will be recalled that thereafter there was no further communication between the parties, that the Defendants sold the property to the Third-Party Purchasers on 5 March 1997, and assigned it to them on 19 June 1997, and it was only thereafter on 27 June 1997 that the Writ of Summons was issued by the Plaintiffs.) He contended that when the Plaintiffs' delay in taking any action to enforce their alleged rights under the Agreement of March 1994 is considered in conjunction with the fact that it was the estate agency for whom the 1^st Plaintiff was working at the time who in due course introduced the property to the Third-Party Purchasers and drafted the agreement of sale, it becomes abundantly clear that the Plaintiffs issued the Writ and subsequently registered it on 15 July 1997 simply by way of spoiling tactics to put pressure upon the Defendants to "pay the Plaintiffs off" in order to clear the registration of the lis pendens (whatever the demerits of the claim therein), so that they would be in a position to deliver good title to the Third-Party Purchasers.

20. The extent of the 1^st Plaintiff's involvement in the introduction of the property to the Third-Party Purchasers and in the preparation of the agreement of sale to them are matters in dispute which can only be resolved upon evidence at the trial of this matter. For present purposes, while there may be ground for some disquiet on the face of the facts relating to the Plaintiffs' prosecution of their claim, this falls short of establishing that they have not prosecuted the litigation bona fide.

21. Under the category of "other good cause shown", Mr Mak submitted that since it is common ground that the parties' Agreement of purchase and sale dated 31 March 1994 has never been registered, by virtue of the provisions of s.3(2) of the Ordinance it is "absolutely null and void to all intents and purposes" as against any subsequent bona fide purchaser for valuable consideration, which the Third-Party Purchasers were; and since the Plaintiffs' claim as contained in the Writ is founded squarely upon the aforesaid unregistered Agreement, that the Writ itself is similarly condemned by the provisions of s.3(2), which constitutes good cause for the registration of it to be vacated under s.19.

22. While it is clear that in terms of s.3(2) of the Ordinance the unregistered Agreement of 31 March 1994 is indeed "absolutely null and void to all intents and purposes" as against the admittedlybona fide Third-Party Purchasers, it is not correct to say that the Writ itself is directly impacted by the aforesaid provisions of the Ordinance. What I believe Mr Mak was really submitting was that because the Plaintiffs' claim as contained in the Writ is founded squarely upon the Agreement, which Agreement is thus relegated by the provisions of s.3(2), the claim is doomed to failure as against the Third-Party Purchasers, and that this constitutes good cause for the Writ to be set aside under s.19 of the Ordinance. These submissions however miss the point that the Plaintiffs' claim against the Defendants is not one for the recovery of the property but for the return of the deposit and/or damages, which is not dependent upon the registration of the Agreement or upon any question of priority of registration.

23. In sum, the Defendants' application to vacate the registration in the Land Registry of the Writ of Summons in this action is refused. I make an order nisi that the Defendants are to pay the Plaintiffs' costs of this application.

Plaintiffs' application to amend the Statement of Claim

24. The Plaintiffs' application to amend their Statement of Claim was not opposed save for those amendments which seek to plead Plaintiffs' reliance upon the purchaser's lien, and also the claim for specific performance. (Since this latter claim has now been formally abandoned by the Plaintiffs, no issue arises in this respect.) Mr Mak relied upon the same arguments in relation to the lien point which he advanced in support of the application to vacate the registration of the Plaintiffs' Writ, which I have rejected for the reasons indicated above.

25. Applying the general principle which is applicable to an application for leave to amend - that amendments made "for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings" should be allowed - I grant the Plaintiffs' application for leave to amend, subject to the further amendments which will be necessitated by the Plaintiffs' abandonment during this hearing of their claim for specific performance.

26. As far as costs are concerned, the normal principle is that the party seeking the amendment should pay in any event all the costs incurred and thrown away by the amendment : The Supreme Court Practice, 1997, Volume 1, page 371, 20/5-8/33. I accordingly make an order nisi that the Plaintiffs are to pay in any event all the costs incurred and thrown away by the amendment and the costs of any consequent amendment, save for those costs which are attributable to the Defendants' opposition to this application - which in practical terms have merged with the costs of the Defendants' application to vacate the registration of the Writ, all of which are payable by the Defendants.