POWER ALLIANCE INVESTMENT LTD v. LAU KAI PIU

HCA 815/2005

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 815 OF 2005

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J U D G M E N T

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1.  This is the plaintiff's appeal from the decision of Master de Souza dated 23 August 2005 whereby he granted unconditional leave to the defendant to defend this action.

2.  The plaintiff is the registered owner of certain commercial premises being the 1st and 2nd floors of Lising Court, no. 34 and no. 36 Granville Road, Hong Kong ("the subject premises").  Its predecessor in title is a company called Top Horn Company Limited ("Top Horn").

3.  The subject premises were let by Top Horn to the defendant under a written tenancy agreement dated 6 May 2002 at an agreed rent of $135,000 per month for a term of 3 years commencing 1st May 2002.  The tenancy agreement was not registered at the Land Registry.

4.  Clause 11 of the tenancy agreement grants to the defendant an option to take a tenancy of the subject premises for a further term of 3 years (i.e. from 1 May 2005 to 30 April 2008) at an agreed rent of HK$162,000 per month.  If the defendant wishes to exercise the option, he has to give to the landlord notice in writing of his intention to do so not less than 6 months before the expiration of the term.  The clause also requires the tenant to enter into a tenancy agreement with the landlord at least one month before the commencement of the further term and effect payment of the balance of the new rental deposit upon signing of the agreement.

5.  In November 2004, a company called Charming Nightingale Ltd. entered into a provisional agreement with Top Horn for the purchase of a number of properties including the subject premises from Top Horn.  There is added in manuscript to clause 17 of the standard form provisional agreement certain words in Chinese to the effect that the properties were purchased together with tenancies, particulars of which were set out.  The parties next entered into a Memorandum of Agreement for Sale and Purchase.  Clause 9 of that memorandum provides that:

“The Property is sold subject to and with the benefit of the Tenancy Agreement set out in the Schedule hereto.  Copies of the Tenancy Agreements have been produced to the Purchase (sic) prior to the signing hereof.”

6.  Charming Nightingale nominated the plaintiff to take the assignment of the subject premises from Top Horn.  The actual assignment was dated 12 April 2005.  It was expressed to be subject to and with the benefit of the existing lettings and tenancies.  The agreements and assignment between Top Horn and the plaintiff/Charming Nightingale were registered at the Land Registry.

7.  It is the defendant's case that he has given oral and written notice of his intention to Top Horn respectively on 28 and 29 October 2004 i.e. before the date of the provisional agreement between Top Horn and Charming Nightingale.  This is a matter in dispute.

8.  In this appeal, Mr Li for the plaintiff contends that the plaintiff is entitled to summary judgment under Order 14 or Order 14A to an order for possession and for mesne profits against the defendant.  He raises two grounds.  His first ground is that the defendant's assertion that he has served notice of his intention to exercise the option is unbelievable.  His second ground is that in any event, the option to renew was void as against the plaintiff for want of registration.

9.  I can dispose of the first ground briefly.  Mr Li's main contention on this aspect is that had the defendant indeed sent the notice to exercise the option as he claimed, it was inconceivable that he would, within the next few days, send another letter asking Top Horn not to increase the rent beyond 10%.  Mr Li also commented on the lack of particulars provided by the defendant in his affirmation as to the manner in which the notice was communicated to Top Horn.  It is unnecessary and indeed undesirable for me to go into the details of the evidence relied on by the defendant.  I am not prepared, on the affirmation evidence alone, to hold that the inference that Mr Li asks me to draw is the only possible or reasonable inference.  I am not satisfied that the defendant's evidence can be said to be unbelievable.  Subject to the second ground relied on by Mr Li, I would hold that the defendant has raised an issue which has to be tried.

10.  I turn to the second ground.  The plaintiff contends that the option was null and void and is not binding against it by reason of want of registration of the tenancy agreement (and the option).  Mr. Li relies on the decision of the Privy Council in Markfaith Investment Ltd. v Chiap Hua Flashlights Ltd. [1990] 2 HKLR 84.  There, the vendors contracted to sell to the purchasers a registered Crown lease.  The sale agreement provided that the premises were sold "subject to such tenancy agreements as specified" in a schedule.  That schedule mentioned thirteen lettings, each of which was less than three years of duration.  The vendors failed to mention to the purchasers that ten of the tenancy agreements contained an option to renew for two years.  The tenancy agreements were not registered at the time when the purchasers registered the sale agreement.  The purchasers declined to complete the sale by accepting an assignment "subject to the existing lettings and tenancies thereon" on the ground that they were entitled to an assignment free from the options to renew.  The Privy Council held that the options to renew were void as against the purchasers by virtue of section 3(2) of the Land Registration Ordinance.  That section provides:

“(2)   All such deeds, conveyances, and other instruments in writing and wills and judgments ... 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: Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.”

11.  In Markfaith Investment Ltd. v Chiap Hua Flashlights Ltd., one of the arguments advanced by counsel for the purchasers was that if the purchasers had completed and accepted the assignment "subject to" the tenancy agreements, the purchasers would have been bound by the options.  That argument was rejected by the Privy Council.  In delivering the opinion of the Board, Lord Templeman said (at p.91D-E):

“But s. 3(2) of the Ordinance is a special provision of legislation which rendered the options to renew contained in the unregistered tenancy agreements void against the purchasers as soon as the purchasers registered their sale agreement on 18th April 1988.  The assignment was not apt to create new obligations by the purchasers to the tenants.  As a general rule, s.3(2) of the Ordinance renders void a registrable and unregistered tenancy agreement against a bona fide purchaser of a head lease who registers and completes his contract for assignment.  The terms of the assignment agreed between vendor and purchaser are irrelevant.  The assignment may be drafted so that it does not mention the tenancy agreement.  Alternatively, the assignment may be expressed to be subject to the tenancy agreement.  Whatever the form of the assignment, the term granted by the head lease vests in the purchaser by force of the assignment subject to the tenancy agreement so far as that tenancy agreement is subsisting and capable of being enforced against the purchaser.”

12.  Markfaith Investment Ltd. v Chiap Hua Flashlights Ltd. was followed by the Court of Appeal in Wellmade Investments Ltd. v Chan Yiu Tong [1996] 2 HKLR 44.  There, the vendor agreed to sell his reversionary interest in certain property to the purchaser.  The agreement for sale contained a provision by which the property was expressed to be sold subject to tenancy of which particulars (including the option to renew) were given.  The tenant claimed that the want of registration was immaterial, contending that the agreement for sale between the vendor and the purchaser should be construed as containing a positive stipulation to the effect that the purchaser will recognize and be bound by the tenant's option.  The tenant relied on the decision of Dillon J in Lyus v Prowsa Developments Ltd. [1982] 1 WLR 1044.  The Court of Appeal observed that although Lyus should be accepted as correctly decided, the Court

“should be careful to apply it in our case only if we are satisfied that in our case the purchaser is rightly to be regarded on the facts as reneging on a positive stipulation in favour of the tenant in the bargain under which the purchaser acquired the reversion.” (see p.  47A-B).

13.  In Lamaya Ltd. v Supreme Honour Development Ltd. [1991] 1 HKC 198, the Court of Appeal has earlier affirmed the prosposition summarised by the English Court of Appeal in Ashburn Anstalt v Arnold & another [1989] 1 Ch 1 at 26:

“The words `subject to' will, of course, impose notice.  But notice is not enough to impose on somebody an obligation to give effect to a contract into which he did not enter.”

14.  In Lloyd v Dudgale [2002] 2 P & CR 167 at 182, Sir Christopher Slade said:

“In deciding whether or not the conscience of the new estate owner is affected in such circumstances, the crucially important question is whether he has undertaken a new obligation, not otherwise existing, to give effect to the relevant incumbrance or prior interest.”

15.  The legal principle that can be distilled from these authorities is clear.  The mere fact that a purchaser agrees to take the property “subject to” existing tenancies (which contain an option) is not sufficient to oust the operation of the priority in accordance with time of registration rule ordained by the Ordinance.  The beneficiary of the option has to show that the purchaser has agreed to take on an independent obligation to give effect to the prior interest such that it would be unconscionable for him to be allowed to renege on it.  Miss Wong for the defendant does not dispute any of the foregoing propositions.  She seeks to distinguish Wellmade Investments Ltd. v Chan Yiu Tong and relies on Lyus.  Her contention is that the words “subject to and with the benefit of” (emphasizing the words in italics which appeared in the contracts in the Lyus case and in the present case but not in the agreement in Markfaith) conferred new rights on the defendant.  I reject that submission.  The words “with the benefit of” could not be so construed.  Those words are apt to suggest a benefit conferred on the purchaser and is the very opposite of a suggestion that the purchaser has taken on a new obligation.  In Markfaith Investment Ltd. v Chiap Hua Flashlights Ltd., Lord Templeman referred to one case (Hollington Brothers Ltd. v Rhodes [1951] 2 All ER 578) where the words were “subject to and with the benefit of”.   It was never suggested that the words “with the benefit of” could have made any difference.  As was pointed out in Wellmade Investments Ltd. v Chan Yiu Tong at p. 45J to p. 46G, the facts of Lyus were exceptional.  But what was exceptional was not the addition of the words “with the benefit of”.  It was the fact that the vendor was the legal chargee which was under no liability to complete the plaintiff's contract, and yet stipulated in its contract of sale that it should be subject to the plaintiff's contract.

16.  In the course of argument, I asked counsel whether the fact that it was the defendant's case that he has exercised the option before the relevant registration of the agreements and assignment relied on by the plaintiff made any difference.  An option supported by consideration can be said to constitute an irrevocable offer.  Upon exercise, it becomes a bilateral contract binding on both parties and the parties are brought into a new legal relationship: United Scientific Holdings Ltd. v Burnley B.C. [1978] AC 904 per Lord Simon of Glaisdale at p. 945.  Although no lease has yet been made, the resultant contract may, by virtue of the principle of Walsh v Lonsdale (1882) 21 Ch D 9, arguably create in the tenant an equitable lease for the renewed term.

17.  Two questions arise.  First, if there has come into being a new legal relationship of an agreement for a 3 year lease, would the proviso to section 3(2) of the Land Registration Ordinance apply? Second, would the equitable lease come within the term “deeds conveyances, and other instruments in writing” which are required to be registered under the Ordinance or would it be an unwritten equity and therefore not registrable, so as to take the case out of section 3(2).

18.  As to the former, Mr Li submits that the proviso cannot be invoked when the option and the notice seeking to exercise the option are registrable.  He further argues that the proviso is not meant to cover an equitable lease, but only a subsisting informal oral lease which takes effect in possession.  He has, however, not been able to cite any authority to support his contention.

19.  As to the latter question, Mr Li submits on the authority of Financial and Investment Services for Asia Ltd. v Baik Wha International Trading Co. Ltd. [1985] HKLR 103 that equities or equitable interest would only be unregistrable if the rights which arise in equity are not dependant on any actual document or agreement.  Baik Wha was a case where the plaintiff's payment to fund the discharge of a mortgage was held to create an unwritten equity in its favour which takes priority over a subsequent charging order nisi.  Hunter J (as he then was) held that the plaintiff's equity was unwritten and unregistrable since it arose solely from the application of equitable principles to the fact of payment.  Mr Li further submits that the option as contained in the tenancy agreement and the written notice are documents which constitute a binding agreement and that those documents are registrable under the Ordinance.  He relies on Fullerton v Provincial Bank of Ireland [1903] AC 309 at 316, Chu Yam On & Another v Li Tam Hoi Hing [1956] HKLR 250 at 258, Citibank NA v Lai Tat Cheung [1968] HKC 155 and Li Sze Fat v Cheng Ka Leung Tommy [2000] 3 HKC 224 as illustrations of the principle that where an equitable interest arises from or is subsumed into documents, the documents are registrable and priority is governed by the sequence of registration.

20.  I see considerable force in Mr Li's argument on the second point, but do not find it necessary to express any definite view on the question.  This is because I do not find the question of whether the defendant's right to a new 3-year lease falls within the proviso to be susceptible of summary determination under Order 14 or Order 14A.  As Lord Simon of Glaisdale pointed out in United Scientific Holdings Ltd. v Burnley B.C., the exercise of an option creates a new legal relationship.  The proviso to section 3(2) of the Land Registration Ordinance exempts bona fide leases from the effect of the Ordinance.  It is at least open to argument that the proviso should not be narrowly construed and can apply to an agreement for a lease (which may be regarded as an equitable lease) for a term of not more than 3 years.  Had Top Horn entered into an agreement to grant a 3-year lease at market rent before entering into a provisional agreement to sell, it is at least arguable that the proviso applies and the purchaser may be bound by the agreement. 

21.  For these reasons, I am not satisfied that the plaintiff is entitled to summary judgment and would dismiss the appeal.

22.  I make an order nisi that the plaintiff do pay the costs of this summons, to be taxed if not agreed.  Any application to vary or set aside the order nisi must be made within 14 days from the date of this judgment.