CHEN TEK YEE AND OTHERS v. CHAN MOON SHING AND ANOTHER

CACV 136/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVI l appeal no. 136 of 2015

(ON APPEAL FROM HCA 954 OF 2010)

________________

____________________

________________________

REASONS FOR JUDGMENT

________________________

Hon Cheung JA:

1. I agree with the Reasons for Judgment of Yuen JA.

Hon Yuen JA:

2. This is the 2^nd defendant’s appeal from a Judgment of Deputy High Court Judge Marlene Ng given on 7 May 2015 (“the Judgment”) in which a declaration was made that:

“the 1^st, 2^nd and 3^rd Plaintiffs were entitled to sole and exclusive occupation of the Property situated at Flat No.04 on 17^th Floor (with Carpark No.12 on 5^th Car Port), Wun Sha Tower, Nos.33-45 Wun Sha Street, Hong Kong (‘the Property’) during each of their respective lifetime for as long as each of them wishes to continue to occupy the Property to the exclusion of the 1^st Defendant and the 2^nd Defendant and/or their respective successors-in-title”.

3. At the conclusion of the hearing, we dismissed the appeal with costs to be paid by the 2^nd defendant to the plaintiffs, save and except the costs of and occasioned by a respondent’s notice filed by the plaintiffs to affirm the Judgment.  My reasons appear below.

Background

4. The background facts have been set out in detail in the Judgment.  The facts relevant to this appeal can be summarized as follows.

Relationships

5.1.  The 1^st plaintiff, who was born in 1932, is the mother of the 2^nd and 3^rd plaintiffs.  She was divorced from her husband. 

5.2.  In 1967, when the 1^st plaintiff was living and working in Taiwan, she started a relationship with Chan Kwok Cheung (“the Deceased”).  They never married.  The Deceased was the father of the 1^st defendant. 

5.3.  In the decade that followed, the 1^st plaintiff came to Hong Kong and lived, together with the Deceased, the 2^nd and 3^rd plaintiffs and two other children from her previous marriage, in rented accommodation.  She had no contact with the 1^st defendant.

Acquisition of the Property

6. In December 1980, the 1^st plaintiff and the Deceased bought the Property from a developer as joint tenants.  The purchase price was paid from (1) the 1^st plaintiff and the Deceased’s respective savings and (2) banking facilities secured by a mortgage over the Property.  The banking facilities comprised (a) a loan which was used to pay the purchase price and (b) an overdraft for use by the Deceased’s business, at which the 1^st plaintiff also worked.

Occupation of the Property

7. In 1982, the 1^st plaintiff, her children and the Deceased moved into the 3-bedroom Property.  In due course, the 1^st plaintiff’s other children moved abroad, leaving the Property occupied by the 1^st plaintiff, her two unmarried daughters the 2^nd and 3^rd plaintiffs, and the Deceased.  The 1^st defendant never occupied any part of the Property.

Payments for the Property

8.1.  The learned deputy judge accepted the 1^st plaintiff’s evidence that she had paid a substantial portion of the purchase price from her savings.  The judge found that the Deceased had contributed only $35,400 towards the total purchase price of $335,400.

8.2.  Further the judge found that the mortgage repayments were made by the 1^st plaintiff with contributions from her daughters the 2^nd and 3^rd plaintiffs, who were both career women already in gainful employment at the time the Property was purchased.  The Deceased’s business did not do well, and he could not service the overdraft.  In 1989 the 1^st plaintiff obtained a loan from her brother and discharged the mortgage.  She kept the title deeds.

8.3.  In 1993, the building underwent renovation.  By that time, the Deceased was already nearly 80 years old and his business was dwindling (it closed altogether in 1996-7).  The judge found it was the plaintiffs who paid for the Property’s share of the renovation expenses even though the Deceased jointly owned it with the 1^st plaintiff.

9. The judge found that during the course of the occupation of the Property by the Deceased and the plaintiffs, he had made various statements to them which will be discussed later in these Reasons for Judgment.

Severance of the joint tenancy and assignment of half share of the Property

10.1.  As mentioned earlier, the Property had been acquired by the 1^st plaintiff and the Deceased as joint tenants. 

10.2.   In 1997, the Deceased executed a Memorandum of Sale and an Assignment both dated 24 April 1997.  Both were prepared by the same solicitors.

10.3.  The Memorandum of Sale recorded that the Deceased agreed to sell the Property to the 1^st defendant for $2 million.  There are two interesting features in this Memorandum:

(1) the subject matter of sale is described as the Property, not the Deceased’s share therein;

(2) it was expressly stated that “vacant possession of the Property shall be delivered to the Purchaser on completion” which was the same day.

10.4.  However in the Assignment dated the same day, the Deceased:

(1) acknowledged that the Property was vested in himself and the 1^st plaintiff as joint tenants;

(2) expressly severed the joint tenancy to the intent that he and the 1^st plaintiff should hold the Property in equal shares;

(3) acknowledged his receipt of $2 million from the 1^st defendant as consideration; and

(4) assigned his one equal half share of the Property to the 1^st defendant.

10.5.  The Assignment was silent as to possession.  Contrary to the Memorandum, vacant possession was never delivered or sought by the 1^st defendant.  This will be discussed later in these Reasons for Judgment.

Events after the Assignment

11.1. Shortly after the Assignment, sometime in May 1997, the Deceased moved out of the Property and into an old people’s home.

11.2. The Memorandum of Sale and the Assignment were registered in the Land Office on 4 June 1997, about 6 weeks after their execution.  The 1^st plaintiff was however not informed of the Assignment, whether by the Deceased (whom she visited at the old people’s home regularly) or by the 1^st defendant.  The plaintiffs remained undisturbed in sole possession of the Property.

12. In 2003, the building underwent renovation again.  The judge found that the plaintiffs paid for the Property’s share of the renovation expenses again, even though by now the 1^st defendant had owned half of the Property for some 6 years.

Deceased’s death

13. In August 2009, more than 12 years after the Assignment, the Deceased died aged 95.  Throughout this period of time, the 1^st defendant had not entered into possession of the Property and had not at any stage demanded rent from any of the plaintiffs who continued to occupy it exclusively.

1^st defendant’s intention to sell his interest in the Property

14.1. On 7 October 2009, the 1^st defendant’s solicitors wrote to the 1^st plaintiff, informing her of the Assignment and the Deceased’s death, and proposing that (1) she acquire the 1^st defendant’s interest in the Property at a price to be mutually agreed; or (2) they could sell the Property together to a purchaser at market price and divide the proceeds equally.  He did not demand to enter into possession or demand rent from any of the plaintiffs. 

14.2. This was followed by negotiations between the parties’ solicitors which were inconclusive.

15. Eventually on 10 June 2010, the 1^st defendant’s solicitors informed the 1^st plaintiff’s solicitors that he intended to put up his interest in the Property for sale at an auction to be held on 23 June 2010.

16. On 18 June 2010, there was included in an auctioneer’s newspaper advertisement an offer to sell a half-share of the title in the Property.  The reserve price was stated to be $1.2 million.  Under the column for “Time for Inspection of Property” was stated “No vacant possession.  Sold in present condition”.

2^nd defendant’s involvement

17. The 2^nd defendant is a businessman who was experienced in investing in real estate.  He saw the auctioneer’s advertisement and his interest was aroused by the fact that the reserve price “was about 30% lower than the market price”.

18. The auction particulars at that time stated in the Remarks that the half-share of the Property was sold on an “‘as is’ basis which is occupied by the other tenant in common in equal shares”.  Clause 21 of the Conditions of Sale stated:

“The Property is to be sold subject to occupation of one of the tenants in common in equal shares”.

Conversation between 1^st plaintiff and 2^nd defendant

19. The auction due to be held on 23 June 2010 was postponed.  On the same day, the 2^nd defendant visited the Property with a view to “investigating the situation of the owner or the occupier of the Property”.  He met the 1^st plaintiff and had a brief conversation with her lasting 5-6 minutes.  At trial there was no dispute that the 2^nd defendant asked the 1^st plaintiff whether she would sell her share in the Property to him if he bought the 50% share offered at auction.  The judge found that the 1^st plaintiff told the 2^nd defendant she would not sell the Property as she had to live there. 

Issue of writ

20. Within a week, on 28 June 2010 the 1^st plaintiff’s solicitors issued a writ against the 1^st defendant for a declaration that

“ ... the Plaintiff and her daughters are entitled during their lifetime to sole and exclusive occupation of [the Property] to the exclusion of the Defendant and/or his successors in title”.

21. The following day, the 1^st plaintiff’s solicitors informed the 1^st defendant’s solicitors of the issue of the writ and registered the writ in the Land Registry.

Auction particulars and Conditions of Sale

22. The issue of the writ led to some additional text in the auction particulars and conditions of sale.  The auction particulars stated the Property was to be sold on an

“‘as is’ basis which is occupied by the other tenant in common in equal shares and subject to a writ of Summons in HCA954/2010 registered in the Land Registry”.

Clause 5 of the Special Conditions stated that apart from the Deed of Mutual Covenant, the Property was to be sold also subject to and with the benefit of the writ, and Clause 21 of the General Conditions of Sale stated that

“the Property is to be sold subject to occupation of one of the tenants in common in equal shares and a writ of Summons in High Court Action No.954 of 2010 ...”.

The 2^nd defendant’s acquisition of half-share in Property

23. It was on those terms that the 2^nd defendant bid for the half-share of the Property at auction.  He was the only bidder and acquired the half-share at the reserve price only.  The assignment was executed on 19 August 2010.

24. In due course, the action commenced before the auction developed into the present form, with the addition of the 1^st plaintiff’s two daughters as the 2^nd and 3^rd plaintiffs, and the addition of the 2^nd defendant. The 1^st defendant was apparently not served and he did not take part in the proceedings.

Issues at trial

25.1. By the time the matter came on for trial before the judge, the issues between the plaintiffs and the 2^nd defendant were as follows:

(1) whether there was a common intention constructive trust whereby the Deceased held his 50% share (or part thereof) as trustee for the 1^st plaintiff as beneficial owner, which was binding on the 1^st defendant and later the 2^nd defendant? (“the common intention constructive trust issue”)

alternatively,

(2) whether the Deceased had given a contractual licence to the plaintiffs when he told them that if they were responsible for the mortgage repayments and household expenses, the Property would be their home for the rest of their lives, which gave rise to a constructive trust binding on the conscience of the 2^nd defendant? (“the contractual licence issue”)

25.2. For reasons unknown to this court, the plaintiffs’ counsel at trial (not Mr Bernard Man SC who appeared before us) did not rely on principles of promissory/proprietary estoppel (para. 6, Judgment). 

25.3. However it was accepted by the 2^nd defendant’s counsel that he would also not rely on the argument that his client was a bona fide purchaser of the legal estate without notice if the plaintiffs could establish their case under either issue (para. 6, Judgment).

Judgment

26.1. The trial took 4 days.  The 1^st and 2^nd plaintiffs and the 2^nd defendant gave evidence. 

26.2. In the Judgment, the judge dismissed the 1^st plaintiff’s claim of a common intention constructive trust.  There is no cross-appeal. 

26.3. In relation to the contractual licence issue, the judge found that when the Property was purchased in 1980, the Deceased had promised the plaintiffs that if they undertook responsibility for the mortgage repayments and household expenses, the Property would be their home for the rest of their lives, and relying on that promise, they had paid the mortgage repayments and renovation expenses. 

26.4. The judge also found that over the years, even as the Deceased was about to move out to the old people’s home, he continued to give express assurances to the plaintiffs that the Property would be their permanent family home during their lifetimes. 

26.5. Importantly, the judge found that the 2^nd defendant’s conscience was affected by the contractual licence so as to give rise to a constructive trust.  The judge regarded it as significant that the reserve price was 30% less than the market price, and she found that it had been reduced on the footing that any purchaser would have to give effect to the plaintiffs’ interest.  The 2^nd defendant therefore assumed a new obligation to the plaintiffs to give effect to their rights.

26.6. Accordingly the judge gave the declaration set out in para. 2 of these Reasons for Judgment.

Appeal

27. The 2^nd defendant appealed.  Essentially it was submitted by his counsel Mr Richard Leung that:

(1) the judge was wrong to find on the evidence that the plaintiffs had a valid claim for a contractual licence; and

(2) the judge was wrong to find that the 2^nd defendant had assumed a new obligation to the plaintiffs such as to give rise to a constructive trust binding upon him.

Discussion

(1) Finding of a contractual licence

28. In respect of the first submission, Mr Leung referred to the courts’ recognition that there is a “special burden assumed by a person claiming to be a donee under a gift made by a deceased person” (Yung Shu Wu v Vivienne Sung Wu (2011) 14 HKCFAR 39, para.76).  He emphasized that there was no written evidence of any of the assurances that the Deceased was found to have made.  Mr Leung also pointed to the absence of contemporaneous documentary evidence, such as banking documents evidencing payment of mortgage instalments or the loan from the 1^st plaintiff’s brother.  He submitted that the plaintiffs’ case was based on only bare assertions.

29. In my view, when the parties are in a personal relationship (as contrasted with parties in a commercial transaction), it would be unrealistic to expect written records of assurances such as the ones which the judge found the Deceased had made. 

30. As for the lack of banking documents, in the present case the mortgagee bank had closed down well before the commencement of litigation, and in any event the mortgage had been redeemed some 20 years before the 1^st defendant disclosed his half-share in the Property. The judge found that given the lapse of some 34-25 years (from purchase of the Property to the redemption of the mortgage), it was “readily understandable” that there was no longer any documentary evidence of the 1^st plaintiff’s savings at the time, or of contributions made to her by her children, or of the loan her brother gave her to redeem the mortgage. 

31.1.  Further it is of course correct that when one party is asserting a benefit allegedly given to her by a person who has died, the court must exercise special caution.  But it is clear in the present case that the judge had carefully evaluated the evidence of the witnesses.  She described the evidence of the 1^st plaintiff as “forthcoming and articulate” and “firm on most of the material matters”.  The judge recognized that there were some matters which the 1^st plaintiff could not recollect and there were minor discrepancies, but after giving some allowance for her advanced age, found that “they do not detract from the reliability and truthfulness” of her evidence.  The judge also found the 2^nd plaintiff to be “on the whole truthful and reliable”. 

31.2.  These are observations made by a judge who had seen and heard the witnesses under cross-examination.  This court (Lam VP, Kwan and Barma JJA) has recently reiterated in Hoptai Sharksfins Co Ltd v Productos Pesqueros Gallegos SL CACV240/2014, 7 December 2015, unrep. the onerous burden imposed on an appellant who seeks to overturn a finding of primary fact reached on an evaluation of oral evidence and the trial judge’s assessment of the credibility of witnesses (paras.18-23).  Mr Leung has not identified any conclusion on the primary facts reached by the judge which either (i) was unsupported by any evidence, or (ii) was based on a misunderstanding of the evidence by the judge, or (iii) was such that no reasonable judge could have reached. 

32.1.  In any event, with respect to Mr Leung, I do not agree that the plaintiffs’ case was based entirely on their bare assertions.  When one considers the evidence of the parties’ conduct, it is material not only to consider what they have done, but also what they have not done. 

32.2.  In the present case, it is pertinent to note that the 1^st defendant acquired the Deceased’s half-share in the Property in April 1997. Shortly after that, the Deceased moved out of the Property.  Yet in the 12 years between 1997 and 2009, the 1^st defendant did not seek to enter into possession of the Property (unity of possession being enjoyed by tenants in common) or to demand rent from the plaintiffs for their exclusive occupation.

32.3.  In my view, this is entirely consistent with (1) the promise which the plaintiffs say the Deceased had made to them and (2) the 1^st defendant giving effect to that promise. Otherwise one would have expected someone who had paid out $2 million to have taken steps to recoup some income or return on a sizeable investment. 

32.4.  Even if it is assumed that the 1^st defendant had not paid the $2 million consideration and his father had made a gift of the half-share of the Property to him, the 1^st defendant’s conduct over those 12 years was still consistent with his giving effect to the Deceased’s promise. Otherwise, as a tenant in common entitled to unity of possession, one would have expected him to demand payment by the plaintiffs for their exclusive occupation of the entire Property. 

32.5.  There was no evidence proffering any other explanation for the 1^st defendant’s inactivity.  In my view, the 1^st defendant’s conduct over this lengthy period of 12 years supported the plaintiffs’ case and also showed that he was giving effect to their right under the contractual licence.

(2) The 2^nd defendant’s assumption of new obligation giving rise to constructive trust

33. Before discussing Mr Leung’s second submission, it may be helpful to set out my understanding of the principles under which a contractual licence can give rise to a constructive trust, as derived from the English cases (starting with Binions and another v Evans [1972] 1 Ch 359, and as discussed and refined in Ashburn Anstalt v Arnold and another [1989] 1 Ch 1, Lloyd v Dugdale [2002] 2 P. & C.R. 167, Chaudhary v Yavuz [2012] 3 WLR 987 and Groveholt Ltd v Hughes [2013] 1 P. & C.R. 342).

34. (1) A mere contractual licence to occupy land (which term includes, as in our case, a unit in a building) is a personal right only¹.  It does not give the licensee a proprietary interest in the land which is binding on a purchaser from the licensor².

(2) That is the case even if a purchaser had express notice of the licence prior to purchase.³  The mere fact that the land is expressed to be conveyed “subject to” a contractual licence does not imply that the purchaser would be obliged per se to give effect to it⁴.  

(3) However the court may impose a constructive trust if it is satisfied, having regard to all the circumstances, that the conscience of the purchaser is affected such that it would be inequitable to allow him to deny the licensee the right she (the licensee) claims in the land⁵. 

(4) In this regard, it is crucial to see whether the purchaser has undertaken or come under a new obligation of his own, not otherwise existing, to give effect to the licensee’s right⁶.

(5) Proof that the purchase price has been reduced on the footing that the purchaser would give effect to the licensee’s right may be an indication that he has undertaken or come under a new obligation to give effect to it⁷. 

(6) However, as certainty is of paramount importance in dealings with land, the court should be careful not to impose a constructive trust when the licensee’s case is based on slender materials only⁸.

35. Mr Leung and Mr Man did not challenge these principles.  However Mr Leung submitted that the judge erred in her application of these principles to the facts of this case.

36.1. In my view, the court is entitled to find that the 1^st defendant had set the reserve price of his half-share at substantially less than the market price to reflect the plaintiffs’ right under the contractual licence. First, this is consistent with his conduct for the past 12 years when he had given effect to it by not entering into possession or demanding rent from them for their exclusive possession. 

36.2. Secondly, if he had only wished to protect his obligations as vendor, he could have simply imposed restrictions on requisitions and put up the half-share for sale without vacant possession.  However the particulars did not simply state the fact that the Property was being occupied by the other tenant in common. Instead it was expressly acknowledged in the auction particulars and Conditions of Sale that the Property was sold subject to occupation by one of the tenants in common, as well as the writ in High Court Action No.954 of 2010 (which had already been registered at the Land Registry) which included the right of occupation of her daughters. 

36.3. In my view those two features, considered together, evidenced an intent on the part of the 1^st defendant that the reduction in price was to give effect to the plaintiffs’ right.

37.1. The other party to the transaction the 2^nd defendant was well aware of the substantial reduction in price.  The reduction was not because for instance, a mortgagee bank was pursuing an early conclusion to a foreclosure. Nor did the 2^nd defendant claim that he thought the price had been fixed by a vendor ignorant of the market price.  On the contrary, the 2^nd defendant was aware of the background of the reduction.  He went to visit the Property, knew the 1^st plaintiff was determined to remain in occupation and was also aware (through the auction particulars and Conditions of Sale) of the claims in the writ. 

37.2. Thus, on the day of the auction, when he decided to take the benefit of the substantially lower-than-market reserve price by making a bid, he did so recognizing that the setting of the reduced price by the 1^st defendant reflected the plaintiffs’ actual, and asserted right of, exclusive occupation. Put another way, knowing the background of the reduction and taking the benefit of that reduction, he had conducted himself in such a way that it would be inequitable to allow him to deny the plaintiffs’ right in the Property.  In my view the judge was entitled to hold on those facts that there was imposed on the 2^nd defendant as principal at the time of his acquisition⁹ a new obligation to give effect to the plaintiffs’ right even if he had hoped that they might not succeed in proving it in the action. 

38. The judge found that the reduction was “upon the footing that any purchaser would have to give effect to such encumbrance and prior interest” (para. 113), and “[the 2^nd defendant’s] conscience was effected [affected] by the Contractual Licence giving rise to a trust, and it is therefore unconscionable for him to claim he could revoke and deny the Contractual Licence in favour of [the plaintiffs]” (para. 114).  The matters discussed in the preceding paragraphs provide evidence on which the judge was entitled to make that finding of fact and in the words of the learned authors of Gray & Gray, Elements of Land Law, 5^th ed at para. 10.5.7,

“it is always a question of fact whether there are any circumstances which a court of equity might regard as binding the conscience of the disponee so that he must hold on trust for the licensee”.

39. Accordingly I dismissed the appeal with costs to the plaintiffs save and except the costs of and occasioned by a respondent’s notice filed by the plaintiffs to affirm the Judgment which Mr Man accepted was unnecessary.

Hon Kwan JA:

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