WELLMAKE INVESTMENTS LTD v. CHAN YIU TONG

IN THE COURT OF APPEAL

1995, No. 247
(Civil)

----------------------

J U D G M E N T

----------------------

Godfrey, J.A. (giving the court's reasons for judgment) :

1. On 9 January 1996 this court dismissed with costs this expedited appeal of Chan Yiu Tong ("the tenant") from an order of Waung, J. made on 27 October 1995. We said that we would give our reasons later, and this we now do.

2. By the order of 27 October 1995, the tenant was required to deliver up possession of business premises at 609 Tai Nam West Street, Kowloon, of which he had been the tenant. The tenancy was created by an agreement in writing dated 3 October 1992. It was for a term of three years from 29 September 1992 (expiring accordingly on 28 September 1995) at a rent of $45,000 per month. The tenancy agreement contained an option to renew for a further term of two years at the increased rent of $56,250 per month.

3. On 7 February 1994 the original landlord, Kwok Kow ("the vendor") agreed to sell his reversionary interest in the premises to a nominee for Wellmake Investments Ltd ("the purchaser"), and it is to the purchaser that the tenant has been ordered to deliver up possession.

4. The agreement for sale of the reversion contained a provision (clause 8) by which the property was expressed to be sold subject to the tenancy, of which particulars were given in part VIII of the schedule to the agreement for sale, including particulars of the option to renew. The agreement for sale was registered at the Land Registry on 16 February 1994. The tenancy agreement itself was not registered until 4 August 1994. (It seems to us impossible to argue, although counsel for the tenant attempted to do so, that the registration of the agreement for sale, containing as it did particulars of the option to renew, should itself be treated as registration of the option.) The reversion was eventually assigned to the purchaser on 8 August 1994.

5. The purchaser, relying on s.3(2) of the Land Registration Ordinance, Cap.128, and on the decision of the Privy Council (on appeal from this court) in Markfaith Investment Ltd v. Chiap Hua Flashlights Ltd [1991] 2 AC 43, claims that, for want of registration at the Land Registry before 16 February 1994 (the date of the registration of the agreement for sale to the purchaser) the tenant's option to renew is, as against the purchaser, "absolutely null and void to all intents and purposes", as s.3(2) puts it.

6. The tenant claims that the want of registration of the option before 16 February 1994 is immaterial; for, says the tenant, the agreement for sale between the vendor and the purchaser falls to be construed as containing a positive stipulation to the effect that the purchaser will recognise and be bound by the tenant's option. If that is correct, then, says the tenant, the court will treat the purchaser's interest as subject to a constructive trust in favour of the tenant to give effect to the option; in this connection, the tenant relies on the decision of Dillon, J. in Lyus v. Prowsa Developments Ltd [1982] 1 WLR 1044.

7. The facts in that case were as follows. By a contract dated 30 January 1978, the plaintiffs contracted to purchase a plot of registered land, plot 29, which was part of a building estate being developed by the vendor. The plot was to be transferred to the plaintiffs when a house had been built on it. The plaintiffs paid a deposit to solicitors acting for the vendor, but the vendor became insolvent before the house was completed, and on 15 May 1978, the vendor was ordered to be wound up compulsorily. The vendor's bank held a legal charge, prior in date to the plaintiffs' contract, over the building estate. The bank was under no liability to complete the plaintiffs' contract. Nevertheless, it elected, as mortgagee, to sell land which included the plaintiffs' land to the first defendant by a contract dated 18 October 1979, clause 11 of which provided that the plaintiffs' plot was sold "subject to and with the benefit of" the plaintiffs' contract (emphasis added). On 13 December 1979, the first defendant contracted to sell on to the second defendant land which included the plot. A special condition of that contract provided that the plot was sold subject to the plaintiffs' contract so far, if at all, as it might be enforceable as against the first defendant. The sale by the first defendant to the second defendant was duly completed by a transfer which contained no reference to the plaintiffs' contract. On the plaintiffs' claim for a declaration that the original agreement between the vendor and the plaintiffs was binding upon the defendants, and an order for specific performance, it was held that the first defendant, having accepted the land under the agreement with the bank of 18 October 1979, and the consequent transfer, held the plot upon a constructive trust in favour of the plaintiffs; that a similar constructive trust was imposed on the second defendant by virtue of the special condition contained in the contract of 13 December 1979 between the second defendant and the first defendant; that it would be a fraud on the part of the first defendant to renege on the stipulation in favour of the plaintiffs, and on the part of the second defendant to rely upon the transfer of the land to the second defendant as conferring upon the second defendant an absolute title freed from that stipulation; that, since the statutory provisions relating to registration of interests in land could not be used as an instrument of fraud, the defendants could not rely on those statutory provisions; and that accordingly the plaintiffs were entitled as against the second defendants to an order for specific performance of the contract of 30 January 1978.

8. The judge, bearing in mind that there was no basis on which it could be suggested that the bank could be under any obligation to the plaintiffs to complete the house on plot 29 for them, concluded that it was a stipulation of the bargain between the bank and the first defendant that the first defendant would give effect, in relation to plot 29, to the contract which had been made between the vendor and the plaintiffs. He said that, if that was correct, it would follow that the first defendant, having accepted the land under the agreement of 18 October 1979, and the consequent transfer, held plot 29 on a constructive trust in favour of the plaintiffs to give effect to the plaintiffs' contract and that the trust was also imposed on the second defendant by virtue of the second defendant's agreement with the first defendant.

9. The judge accepted that, as had been pointed out by Lord Wilberforce in Midland Bank Trust Co. Ltd v. Green [1981] AC 513, at p.531, it was not fraud to rely on legal rights conferred by statute. But, he said, the fraud on the part of the defendants in the case before him lay, not just in relying on legal rights conferred by statute, but in the first defendant reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the first defendant acquired the land. That, he held, was tantamount to an attempt to use the statute as an instrument of fraud, for it was fraud for a person to whom land is agreed to be conveyed as trustee for another to deny the trust and, relying on the terms of the statute, to claim the land for himself. Accordingly, he rejected the defendants' arguments to the effect that the statutory provisions as to registration overrode the trust.

10. The decision in Lyus v. Prowsa Developments Ltd (above) was controversial, and has been subject to some academic and other criticism : see, for example, [1983] 42 Cambridge Law Journal 54 (per Charles Harpum); [1983] 46 Modern Law Review 96 (per Phillip H. Kenny); [1983] Conveyancer and Property Lawyer 64 (per P. Jackson); [1985] 44 Cambridge Law Journal 280 (per M.P. Thompson); and Oakley, Constructive Trusts, 2nd Edition (1987) at pp. 34 to 36. However, the decision was approved by the Court of Appeal in Ashburn Anstalt v. Arnold [1989] 1 Ch. 1 (unaffected on this point by the decision of the House of Lords in Prudential Assurance Co. Ltd v. London Residuary Body [1992] 2 AC 306, overruling Ashburn Anstalt v. Arnold, above). We should, in my judgment, accept the decision as correct. But, equally, we 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.

11. Lyus v. Prowsa Developments Ltd (above) cannot be used to justify the bald proposition that, when a reversion is expressed to be sold subject to an option to renew the lease, the purchaser will ipso facto take the reversion subject to a constructive trust to give effect to the option. Lyus v. Prowsa Developments Ltd (above) was an exceptional case, in that the judge held, on the facts, that the provision that plot 29 was sold subject to and with the benefit of the plaintiff's contract had been inserted in the contract between the vendor and the purchaser with the express object of conferring new rights on the plaintiffs which they would not otherwise have enjoyed.

12. The purchaser in that case, therefore, could not escape from its contractual obligation so created by invoking the statutory provisions as to registration; for to do so would be to allow the purchaser to use those statutory provisions as an instrument of fraud.

13. It follows that the vendor of a reversion would be well-advised to check, before he agrees to sell the reversion, whether any option to renew the lease has been registered or not. If it has been registered, he can content himself with selling the reversion subject to the option, without more; for then the tenant will be able to enforce the option against the purchaser and will have in any event no claim for damages against the vendor. But if the option has not been registered, the vendor will be well-advised to procure the entry by the purchaser into an express stipulation to give effect to the option, if he is to protect himself against such a claim : see Wright v. Dean [1948] Ch. 686 and Hollington Bros. Ltd v. Rhodes [1951] 2TLR 691. He would be unwise to assume that he will be sufficiently protected against a claim by the tenant (as distinct from a claim by the purchaser) simply by selling the reversion subject to the option, without more. There must be something more before the court will impose on the purchaser a constructive trust to give effect to the tenant's option. What might be sufficient will depend on the facts of the particular case.

14. Where, as here, the vendor has clearly not procured the purchaser to enter into an express stipulation to give effect to the option (pace the argument of counsel for tenant to the contrary) there is, in my judgment, no room for the application of the principle relied by the judge for his decision in Lyus v. Prowsa Developments Ltd (above), i.e. that the court will not allow statutory provisions as to registration to be used as an instrument of fraud. In such a case as ours, where there is no such express stipulation, and the interest in question is required, if it is to bind a purchaser, to be protected by registration, a purchaser who takes advantage of his statutory rights by relying on the necessary registration is not to be regarded as using the relevant statutory provisions as an instrument of fraud : see Midland Bank Trust Co. v. Green (above), also a case (like Markfaith Investments Ltd v. Chiap Hua Flashlights Ltd, above) in which an option was held to be defeated for want of registration (a fact which disposes of a subsidiary argument for the tenant based on Security Trust Co. v. Royal Bank of Canada [1976] AC 503).

15. This court, accordingly, felt bound to dismiss this appeal. But it did so with some reluctance. If the case had fallen to be decided simply on general equitable principles, the purchaser here, who took the reversion with actual notice of the tenant's option to renew, would have been held bound by the option. But the statutory requirements as to the necessity of registration for the protection of such interests were intended to, and do, supplant such general equitable principles. It is quite clearly not fraud for a purchaser to rely on his statutory rights except in the special case where, as in Lyus v. Prowsa Developments Ltd (above) he has engaged himself to give effect to the rights which, but for that engagement, he would have been entitled to assert were rights not binding on him. The principles of equity cannot be used to defeat the statutory provisions; they can be used only to prevent those provisions from being misused as an instrument of fraud, which is not here the case.