XCHRX PO SANG BANK LTD. v. LUXTON DEVELOPMENT LTD. AND OTHERS

HCMP3232/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3232 OF 1999

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J U D G M E N T

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1. By a Charge dated 4 August 1997 ("the Charge") registered in the Land Registry by Memorial No.7251730 made between the 1st defendant as the mortgagor and the plaintiff as the mortgagee, the plaintiff agreed to grant to the 1st defendant general banking facilities upon the 1st defendant entering into the covenants and obligations contained in the Charge, charging the property particularized in the Schedule of the Charge ("the Property") as security for the due payment of all moneys which may become payable by the 1st defendant to the plaintiff in respect of the loans which may be granted.

2. The Charge included the usual provisions found in these documents. Under clause 1 is the usual covenant for the payment of the secured indebtedness. Clause 2 provided in effect that with the object and intent of affording to the plaintiff a security for the repayment of the moneys, the 1st defendant covenanted to pay to the plaintiff under the terms of the Charge and the fulfillment by it of the agreements, covenants and conditions contained in the Charge. Also, subject to the proviso for redemption contained in clause 3, the 1st defendant as beneficial owner charged the Property to the plaintiff. Clause 5 provided in general for the events of default and the powers of the mortgagee under the Charge. Clause 5(14) provided as follows :

"The Mortgagor shall at all times hereafter keep the said premises available for sale or letting by the Mortgagee under the power herein contained with vacant possession for the benefit of the purchaser or tenant or lessee of the Mortgagee AND during the continuance of this security the Mortgagor shall not be entitled to exercise any power of leasing or (if applicable) accepting surrender of any lease nor except with the written consent of the Mortgagee to create or cause to be created any assignment charge or mortgage or other disposition to be effected on the said premises or otherwise to encumber the equity of redemption in the said premises or any part thereof by which further advances (if any) to the Mortgagor may be postponed or the security hereby afforded to the Mortgagee may be diminished or jeopardised or prejudiced or in any way affected."

The relevant parts of Clause 5(16) provided that :

"... BUT IN ANY EVENT the Mortgagor shall not (except with the prior written consent of the Mortgagee and then only in conformity with any conditions which may be imposed by the Mortgagee including the payment of such fees and charges as may be required by the Mortgagee) let or grant any tenancy or lease of any duration in respect of the said premises or any part or parts thereof or otherwise part with the use occupation or possession of the said premises ..."

I need only to refer to one other provision in the Charge document, namely clause 7(6), which reads :

"No failure to exercise and no delay in exercising on the part of the Mortgagee any right power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right power or privilege preclude any other or further exercise of any other right power or privilege hereunder any rule of law or equity to the contrary notwithstanding."

3. In breach of Clause 5(14) of the Charge, the 1st defendant entered into a tenancy agreement dated 3 October 1998 with the 3rd defendant without the written consent of the plaintiff ("the Tenancy Agreement"). The tenancy was for a term of two years commencing 11 October 1998 to 10 October 2000 subject to the 3rd defendant's right to terminate the lease with two months' written notice to the 1st defendant pursuant to Clause 21 of the Tenancy Agreement. It is accepted by the plaintiff that a copy of the Tenancy Agreement was provided to it shortly after it was executed by the 1st and 3rd defendants.

4. The 4th defendants and others now occupy the Property. The plaintiff instructed a solicitor to negotiate with the 1st and 3rd defendants with a view to gaining possession of the Property without commencing legal proceedings. These negotiations did not bear fruit.

5. The defence of the 3rd and 4th defendants can be taken from the affirmation of Mr Ricky Tsang, who is one of the 4th defendants and who claims authority to represent the 3rd defendant. This is what he said in his affirmation :

"4. Before the 3rd Defendant signed the tenancy agreement with the 1st Defendant on or about 3rd October 1998, the estate agent produced for my reference a copy of the land search record in respect of the Property. I noted that the 1st Defendant was the registered owner of the Property. I also noted that the Property was mortgaged to Po Sang Bank Limited, the Plaintiff in the action. I was informed by the estate agent that the 1st Defendant had contacted the Plaintiff in relation to the proposed letting and the Plaintiff had no objection to the letting of the Property to the 3rd Defendant. The estate agent also informed me that the 3rd Defendant had to sign the tenancy agreement with the 1st Defendant and produced the stamped tenancy agreement to the Plaintiff before the Plaintiff would confirm its consent to the letting in writing because it was not the Plaintiff's policy to give written consent to letting until the Plaintiff was certain that the parties had executed a tenancy agreement.

5. I therefore on behalf of the 3rd Defendant executed the tenancy agreement with the 1st Defendant. ... The 3rd Defendant paid the estate agent the agreed commission for the transaction as well as the 3rd Defendant's share of stamp duty. The estate agent then stamped the tenancy agreement on behalf of the 1st and 3rd Defendants. An original of the tenancy agreement was given by the estate agent to me for the 3rd Defendant's records after stamping. The estate agent told me that the other original of the tenancy agreement was given to the 1st Defendant and a copy of the tenancy agreement had been given by the 1st Defendant to the Plaintiff for its records. ... I did not know the exact date when the copy of the tenancy agreement was given to the Plaintiff but I believe that it should be in about mid October 1998.

6. After the execution of the tenancy agreement, the 3rd Defendant allowed the Property to be used as a residence for myself and my assistants. The 3rd Defendant paid the monthly rental to the 1st Defendant in accordance with the terms of the tenancy agreement. In view of the facts as stated in paragraph 5 above, I verily believe that the Plaintiff was aware of the existence of the tenancy agreement in about mid October 1998. The Plaintiff did not take any steps to show its disapproval of the creation of the tenancy agreement and the occupation of the Property by me and my assistants. Due to an oversight on my part and ignorance of the legal position, I did not chase the 1st Defendant nor the estate agent to give me the written consent of the Plaintiff to the letting, which I believed was only a matter of formality. ..."

Mr Tsang makes certain allegations against a member of the firm of solicitors representing the plaintiff, but I can pass them by at this stage. He continues at paragraph 9 of his affirmation by saying :

"9. I have been advised by a friend of mine who is a solicitor that notwithstanding that the written consent of the Plaintiff to the letting has not been made available, the 3rd Defendant and I still have a valid defence to the claims of the Plaintiff because the Plaintiff was fully aware of the terms of the letting and the Plaintiff did not take any actions to show its disapproval of the letting."

6. The plaintiff applied for judgment before the master who did not order possession in the plaintiff's favour but made certain orders for interim payments into court. The plaintiff appeals to this court.

7. The plaintiff's case is tolerably straightforward. It relies on Clause 5(14) of the Charge and the fact that no written consent was given by it for the creation of the tenancy in favour of the 3rd defendant. It also says that no tenancy has been created between the plaintiff and the 3rd and 4th defendants who had never paid any rent to the plaintiff. Also, on the facts, that there is no new relation established of landlord and tenant between the plaintiff and those defendants. The only rent paid is to the 1st defendant, through its bank account with the plaintiff, but that does not constitute rent paid to the plaintiff. I certainly accept that no rent was ever paid to the plaintiff as landlord.

8. Mr Thomson for the 3rd and 4th defendants, made his points very clearly and succinctly in his skeleton argument and in his oral presentation. He made detailed submissions on the evidence, all of which I have carefully considered. He relied in particular on paragraph 4 of the affirmation of Miss Bien, where she said :

"On or about 24th May 1999, I had a meeting with one Madam Ho and Mr. Chau of the 1st Defendant and Mr. Ricky Tsang of the 4th Defendants at my office. The said meeting was clearly held on a without prejudice basis. On the basis that the 4th Defendant and Mr. Ricky Tsang, however, appear by the contents of the Affirmation, to have agreed to waive the without prejudice privilege in relation to the meeting on 24th May 1999, I have set out below on recollection of events. I was instructed by Mr. Tang Luen Kwong of the Plaintiff to demand that the 1st Defendant (the mortgagor) and 3rd Defendant (the tenant) deliver vacant possession of the Property to the Plaintiff by 31st July 1999 and to demand rental payments from the 3rd Defendant for the period from April to July 1999."

Mr Thomson says that this is clear evidence of the plaintiff's demand for rent and an unequivocal acceptance of the Tenancy Agreement.

9. I do not read Miss Bien's evidence in that light. Paragraph 4 cannot be taken in isolation. Even if it can be, the context shows that she was instructed to seek, on behalf of the plaintiff, possession of the Property and to demand rental. Those were her instructions. What she says in paragraph 5 makes clear the position :

"In the said meeting, I explained to Mr. Ricky Tsang that because the Plaintiff had not given consent to the 1st Defendant prior to the execution of the Tenancy Agreement, the Plaintiff was and is not bound by the Tenancy Agreement. On the Plaintiff's behalf, I demanded the 1st Defendant and 3rd Defendant sign a Deed of Surrender and deliver vacant possession of the Property to the Plaintiff by 31st July 1999, and pay rental to the Plaintiff for the period from April to July 1999."

And later on in paragraph 7, she says :

"... I restated the Plaintiff's position, namely that the Plaintiff was not a party to the Tenancy Agreement and was not liable for any claims arising from it."

These paragraphs clearly show that the parties were discussing a compromise of the difficulties and that while the 3rd and 4th defendants would have been allowed to stay on as part of that compromise to the end of July 1999, they had to, as it were, pay for the privilege.

10. I ought also to refer to a letter from the plaintiff's solicitors to the 3rd defendant dated 26 May 1999 which spells out the position. It starts off by saying :

"We act for Po Sang Bank Limited, the mortgagee of the Property which is owned by Luxton Development Limited ('Luxton')."

After referring to the meeting on 24th May 1999, the letter continues :

"Luxton entered into a tenancy agreement dated 3rd October 1998 with you without our client's prior consent, contrary to clause5(14) of the charge dated 4th August 1997 entered into between Luxton and our client ('the Charge'). Our client is not bound by the tenancy agreement and is not liable for any claims arising from it.

Luxton has committed an event of default stated in the Charge. Pursuant to clause 5(20) of the Charge, our client is entitled to demand rental of the Property from you in addition to recovering possession of the Property. Our client is exercising its power as a mortgagee under the Charge to demand and receive rental from you. Its conduct does not create a tenancy between you and our client."

There was a demand for rent in this letter but, as I have already pointed out, this was part of the negotiation between the parties and, in any event, the 3rd and 4th defendants never paid any rent to the plaintiff.

11. Mr Thomson referred to, first of all, Halsbury's Laws of England, 4th ed., Vol.32, 1999 Reissue, at paragraph 497 for the proposition that a lease may be established against the mortgagee by his conduct. This proposition is not uncontroversial. The position is neatly summarised by Pennycuick J in Barclays Bank Limited v. Kiley and Another [1961] 1 WLR 1050 at 1054 as follows :

"... If a mortgagor grants a tenancy not authorised by the terms of the mortgage, the mortgagee is not bound by the tenancy and can assert his paramount title and treated the tenant as a trespasser, but the mortgagee and the tenant may by mutual agreement create the relationship of landlord and tenant as between themselves. Such relation may be created by express words or by conduct, and the question whether it has been created is one to be determined on the facts : ..."

12. Given that the plaintiff consented to the Tenancy Agreement and was benefitted by the payment of rent, so says Mr Thomson, by its conduct the plaintiff is not entitled to possession and he relied on Quennell v. Maltby [1979] 1 ALL ER 568 in a passage from the judgment of Lord Denning MR at page 571E :

" So here in modern times equity can step in so as to prevent a mortgagee, or a transferee from him, from getting possession of a house contrary to the justice of the case. A mortgagee will be restrained from getting possession except when it is sought bona fide and reasonably for the purpose of enforcing the security and then only subject to such conditions as the court thinks fit to impose."

13. In my judgment, that passage has nothing to do with the issues in this appeal. It is directed to the bona fides of the mortgagee in seeking possession, and he would not be allowed to do so for an ulterior motive. In that case, it was to get round the protection afforded by the Rent Acts.

14. Both Mr Wither for the plaintiff and Mr Thomson refer to Taylor v. Ellis and Another [1960] Ch 368. Mr Thomson contends, relying on a passage at page 375 that the plaintiff had by its conduct, and notwithstanding any prohibition, waived its rights or consented in some way to the lease.

15. For completeness, I ought to begin reading from the judgment of Cross J, as he then was, from the bottom of page 374 :

" Then there comes the question of defence. Mr Clauson suggests that it would be sufficient for the defendant to set up the tenancy by way of defence without asserting that the mortgagee had consented in writing to its creation, and that that would raise (as it were) a prima facie case on his side which would force the plaintiff by way of reply to make a negative allegation that the mortgagee had never consented in writing to granting a tenancy. If that is the case, of course, the plaintiff in his case would not be able to establish that proposition.

In my judgment, that is not the right way of looking at the matter. I think that it can be tested in this way : suppose there had been, as there might well have been, in the mortgage deed an absolute prohibition on the granting of any leases. Had that been so, it is always possible that the mortgagee might have so conducted himself as not to be able to rely on that absolute prohibition. He might, notwithstanding the prohibition, have waived his rights or consented in some way to the lease. But if a tenant were going to allege that in the face of an absolute prohibition, he would have to set it out in his defence. It seems to me that in the same way here, where the provision in the mortgage is that a lease will only be binding on the mortgagee if he consents thereto in writing the defendant would have to show that there had been a consent in writing. It is an additional argument in favour of that way of looking at the matter that the courts lean somewhat against imposing on any party to litigation the burden of proving a negative....

In my judgment, therefore, on the first point, the plaintiff is right, and in the absence of any evidence that the mortgagee did consent in writing-and, indeed, the evidence as far as it goes strongly suggests that he did not, because if he had consented in writing one would have expected the document to be available- I think that it must be taken that to begin with this tenancy was not binding on the plaintiff.

Then the question arises : did the mortgagee become bound by the tenancy by reason of subsequent events? It is, of course, quite common for a mortgagee who is not previously bound by a tenancy to consent to take the mortgagor's tenant, whom he could have treated as a trespasser, as his own tenant. The commonest way in which that happens is when a mortgagor fails to pay the mortgage interest and the mortgagee serves a notice on the tenant to pay the rent to him. Then a new tenancy is created between the mortgagee and the mortgagor's tenant. But all that happened in this case was that for a great many years the tenant was allowed to remain in occupation of the property, ....

Apart from that second point, it does not seem to me that the fact that the tenant of the mortgagor, who could have been treated by the mortgagee as a trespasser, was allowed to remain in possession for a long period could itself in any way preclude the mortgagee from treating him as a trespasser if and when he desired to do so. After all, as long as the mortgage interest is being paid, the mortgagee may perfectly well be content to allow the tenant to remain in possession. The only way in which he can turn him out of possession is by going into possession himself, which is a thing a mortgagee is generally very unwilling to do. I think that it would be quite wrong to infer merely from the fact that the mortgagee allowed the tenant to remain in possession, having knowledge of the tenancy-there is no doubt in this case, and it is accepted, that Thomas Taylor knew of the tenancy-that the mortgagee consented to take the tenant as his tenant.

In that connection I entirely agree with the passage in the judgment of Monroe J. in In re O'Rourke's Estate, quoted by Danckwerts J. in Parker v. Braithwaite. Monroe J. said :

'I certainly cannot infer the creation of a new tenancy between the tenant and the mortgagee merely because the mortgagee takes no active steps to disavow a tenancy created by the mortgagor. The mortgagor, while in possession, and bound to keep down the interest on his mortgage, is at liberty to manage the lands as he pleases. It is not for the mortgagee to interfere with that management unless he choose to go into possession. He treats the tenancy as one binding on the mortgagor, but in no way binding upon himself if he find it afterwards for his interest to repudiate it.'"

I agree with the sentiments expressed by Cross J.

16. Despite Mr Thomson's submissions, I am quite unable to see that there was any special relationship between the plaintiff, the 1st defendant and the 3rd defendant, nor what this would have meant on the facts and issues in this case. Mr Thomson also relied on the fact that four months after the tenancy agreement, the plaintiff, on 3 February 1999, made a loan to the 1st defendant of just under $6 million. This loan was also credited to the account into which the rentals were paid as was the loan of $14 million under the facility letter. Again, I am quite unable to see the relevance of this loan of just under $6 million, especially since it was made some four months after the tenancy.

17. Mr Thomson made the point that the reference in the plaintiff's solicitors' letter of 26 May to a Deed of Surrender is inconsistent with the plaintiff treating the 3rd defendant as a trespasser and entirely consistent, so he says, with the claim to adopting the tenancy agreement.

18. Again, I have to say that I do not read that letter in that light, nor can I take that letter in isolation. That letter was clearly written as part of the negotiations to compromise the difficulties. The plaintiff was prepared to allow, as part of that compromise, the 3rd and 4th defendants to remain until the end of July, but they had to leave by then.

19. On these facts, it seems to me that none of the 1st, 3rd or 4th defendants have a defence to the plaintiff's application for judgment for possession. The fact that the plaintiff was supplied with a copy of the tenancy agreement after it was signed, and even assuming then that the plaintiff had knowledge of the letting, clause 5(14) is clear that the validity of the tenancy agreement in respect of the property vis-à-vis the plaintiff and the mortgagor depends on the plaintiff's written consent which was never forthcoming. There is also nothing on the evidence to show that the lease was granted or accepted by the plaintiff's conduct, nor is there any evidence to justify a reliance on some appropriate estoppel or even waiver. There is nothing before me to suggest that any of the 1st, 3rd and 4th defendants have any defence to an order for possession. Taylor v. Ellis is, for our purposes, not distinguishable and I see no reason for not following the principles stated by Cross J, extracts of which I have already referred to.

20. The plaintiff's case seemed to me to be plain. The appeal must be allowed and an order for possession made in its favour as against the 1st, 3rd and 4th defendants of the property known as Flat A, 3rd Floor and Roof and Car Park No.P5, Ground Floor of No.18 Tung Shan Terrace, Hong Kong and more particularly set out in the Schedule to the Charge with Memorial No.7251730 dated 4 August 1997. I further order possession to take place within 28 days of the order to be made in these proceedings.

21. The plaintiff is to have the costs of this appeal as well as the costs of the hearing before the Master on 19 October 1999.