THE CHINA & SOUTH SEA BANK, LTD. v. MA KOON AH AND ANOTHER

HCMP 3000/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3000 OF 1994

____________

_______________

J U D G M E N T

_______________

1. These proceedings concern a small residential flat on the 11th floor of Wah Tao Building in Tai Po Road, ("the flat") which has been the home of the 2nd Defendant Madam So Chun Ho for many years.

2. These proceedings commenced when the Plaintiff Bank instituted an application under O.88 of the Rules of the High Court against the 1st Defendant, the registered owner of the flat, for outstanding payments under a mortgage agreement executed by him on 7 December 1990 and possession of the flat.

3. This claim by the bank came as a considerable surprise to the 2nd Defendant. She claims she had no knowledge of any mortgage executed by the 1st Defendant on 7 December 1990. She had not seen the 1st Defendant since November 1977 when he had left her ostensibly to go to Paris on business and from where he had gone on to the United States of America. She had fully paid off the previous mortgage with Ranier Bank which was existing on the property at the time the 1st Defendant had left her. This mortgage was paid off in June 1980.

4. As a result, she issued a counter notice to the Plaintiff's originating summons. She seeks a declaration that she is beneficially entitled to the flat and an order that the Plaintiff vacate the legal charge registered against the property. Alternatively she asks the Court to determine the extent of her beneficial interest in the property and a declaration that the Plaintiff's legal charge is restricted to the 1st Defendant's share in the property.

5. The Plaintiff's proceedings against the 1st Defendant have concluded. On 22 May 2000, Master Jones gave judgment for the Plaintiff against him without prejudice to the claim of the 2nd Defendant and refused his application to be joined in the proceedings against the 2nd Defendant.

6. This now leaves the claim of the 2nd Defendant to be determined.

7. There has been nothing to contradict the 2nd Defendant's evidence as to her financial contributions to the purchase of the flat.

8. Miss Po for the Plaintiff has stated that the Plaintiff does not dispute the 2nd Defendant's claim to an interest in the flat. She did not seek to cross examine the 2nd Defendant on her evidence or make submissions regarding the 2nd Defendant's interest in the property. She has told the Court that having obtained judgment against the 1st Defendant, the Plaintiff is prepared as a matter of fact to vacate the legal charge on the flat but cannot do so until the Court has ruled on the 2nd Defendant's claim to title.

9. She argues however that as a matter of law, even if the 2nd Defendant does establish a beneficial interest to the flat, it would not affect the Plaintiff's legal rights as the 2nd Defendant has failed to show that the Plaintiff had actual or constructive notice of her rights. The relevance of this argument is as to costs.

The 2nd Defendant's interest in the flat

10. The 2nd Defendant's evidence was that she first met the 1st Defendant when she was living in Nauru with her husband in 1974. After her husband went missing early the following year she returned to Hong Kong. Shortly afterwords, the 1st Defendant returned to Hong Kong and they started cohabiting. Before the flat which is the subject to these proceedings was purchased, they lived in rented flats in Tokawan and Sai Ying Choi Street, the rent of which was paid by the 2nd Defendant as the 1st Defendant had said that he was putting all his money into his business.

11. In April 1976, she and the 1st Defendant bought the flat. The purchase price was $77,900.00. This sum was payable by way of a deposit of $22,000.00 and the balance of $55,000.00 payable to the developer by 60 instalments of $1,223.00 per month (which represented an interest rate of about 12% p.a.). Taking into account legal expenses and stamp duty, it is reasonable to assume that the overall price of acquiring the property was around $80,000.00.

12. She contributed $32,000.00 towards the initial expenses of the property in April 1976 from her savings by way of a cheque of $22,000.00 and a cash sum of $10,000.00. In 1975 she had lent $20,000.00 to the 1st Defendant's cousin and after he had repaid this sum in around April 1976 she agreed with the 1st Defendant that the 1st Defendant should keep this sum to be used towards mortgage instalments.

13. She originally believed that the flat would be registered in joint names but she acceded to the 1st Defendant's request that it be registered solely in his name so as to facilitate him raising loans for his business.

14. From June 1976 until about January 1980, the 1st Defendant was the one who had the responsibility of paying the mortgage instalments. In order to minimise the monthly repayments, the 1st Defendant had mortgaged the property to Ranier International Bank on an 8 year loan. The agreement between the 1st Defendant and the 2nd Defendant was that she would pay the household expenses if he paid the mortgage instalments. He however left the premises to go to Paris and went from there to the U.S.A. in November 1977. In January 1980, the 1st Defendant telephoned her saying that he could not afford to keep up the mortgage instalments and he was in arrears. She then paid $10,000.00 which she borrowed from her employer to Ranier Bank in April 1980 as part repayment and to pay off the arrears. In June 1980, she fully redeemed the mortgage by paying the sum of $27,542.87 to Ranier Bank. She was able to do this by means of a further loan from her employer and by using her savings and selling her jewellery.

15. Even if one ignores any contribution which the 2nd Defendant made by virtue of the agreement that she should pay the household expenses while the 1st Defendant paid the mortgage instalments, her contribution towards the purchase and setting up of the flat was $89,542.00.

16. It is impossible precisely to calculate the exact amount of the 2nd Defendant's contribution which specifically related to the purchase of the flat and to distinguish it from money spent on expenses such as decoration, furnishing and appliances which almost inevitably accompany a move to a new flat. I consider it reasonable to assume that of the $52,000.00 which she entrusted to the 1st Defendant for the purposes of the flat in around April 1976 $5,000 would have been spent on these incidental expenses.

17. This would mean that her initial contribution to the purchase of the flat was $47,000.00 and that her total contribution was $84,542.00. Assuming an acquisition price of $80,000.00, this would mean that the balance of the purchase price needing to be found after April 1976 would have been $33,000.00 (i.e. $80,000.00 - $47,000.00). The interest payable on that sum over the ensuing 4 years (from 1976 to 1980) assuming the interest rate remained unchanged at around 12% and no mortgage instalments had been paid would have been around $3,960.00 per month (or $15,840.00 over 4 years).

18. The total amount therefore which would have been payable for the purchase of the flat over the 4 years from the time of its purchase in 1976 until the time the mortgage was redeemed by the 2nd Defendant in 1980 would have been approximately $95,840.00 (i.e. $80,000.00 + $15,840.00) of which the 2nd Defendant directly contributed $84,542.00 leaving a balance of $11,298.00. Her direct contribution would therefore have amounted to 88% of the purchase price.

19. Taking into account her indirect contributions before the 1st Defendant left to go to Paris by paying for the household expenses while the 1st Defendant paid the mortgage instalments and, mindful of the inevitable inexactitude of this calculation, I consider that the percentage contribution to the purchase price of this property by the 2nd Defendant was 90%.

20. I find that in this case there is no presumption of advancement from the 2nd Defendant to the 1st Defendant. I find that they intended that the house would be jointly owned notwithstanding the fact that it was conveyed into the 1st Defendant's name for purposes connected with his business finances.

21. The principles relating to the presumed resulting trust arising from the purchase of property with another's money are clear. As the learned editors of Megarry and Wade "The Law of Real Property" (6th edition) state at para. 10-016 "when land is conveyed to one person but the purchase-money is provided by another as purchaser there is presumed to be a resulting trust in favour of the person providing the purchase-money. If V conveys land to P, A being the real purchaser and as such providing the purchase-money prima facie P holds on a resulting trust for A. Similarly if A provides part of the purchase-money he acquires a proportionate share in equity."

22. In this case there being nothing to rebut that presumption, I find that the 2nd Defendant holds a 90% beneficial interest in the property and the 1st Defendant a 10% beneficial interest.

23. I accordingly, made a declaration that the 2nd Defendant is beneficially entitled to a 90% share in the property.

24. The question I must go on to decide is whether I make a further order that the legal charge dated 7 December 1990 be restricted to the 1st Defendant's share in the property.

25. It is the Plaintiff's contention that I should not because despite the evidence that the 2nd Defendant was in occupation of the flat at the time the legal charge was executed the 2nd Defendant has not shown that the Plaintiff had actual or constructive notice of her interest.

Constructive notice

26. There is no suggestion that the Plaintiff ever had actual notice of the 2nd Defendant's interest. The issue between the parties is whether occupation by itself amounts to constructive notice to a third party (whether purchaser or mortgagee) that the occupier may have an interest in the property.

27. Miss Po has argued that it does not. She says that it is only when there is notice of actual occupation that a third party is fixed with notice of the occupier's interest. She contends that there is no general duty on a third party to make inspection as to actual occupation. The duty to make enquiries or inspection only arises when there are circumstances which suggest these enquiries ought reasonably to have been made and the burden is on the person asserting the interest to show that such circumstances exist.

28. In support of her proposition that occupation by itself does not amount to constructive notice of the occupier's interest, Miss Po relies upon the judgment of Ribeiro J (as he then was) in Wing Hang Bank v. Tsang Sze Yin and others HCMP 1689/98. That case arose from an application by an occupier to set aside the judgment for possession given to a mortgagee bank against the registered owners of the property. The matter before the Court (sitting on an appeal from a Master) was a preliminary point as to whether the order for possession should be set aside as a prelude to the occupier's application for her beneficial interest in the property to be determined. Ribeiro J determined the appeal on the question of whether the order for possession should be set aside on the basis of what counsel had accepted "at least arguably" to be the legal position namely that "she (the occupier) must be able to establish that when the legal charge was executed, the bank either knew that the premises were occupied by someone who may have an interest in the premises inconsistent with the right asserted to by the Defendants as mortgagees or that despite having reason to make enquiry, the bank deliberately closed its eyes to the possibility of such a person being in occupation of the premises". Whilst it is true that Ribeiro J proceeded to determine the application on the basis that this proposition was right, it must be borne in mind that he had not heard argument as to whether that represented the true legal position. He expressly stated that, even insofar as counsel was concerned, the test proposed was simply at least arguable. This case is therefore of very limited value to the Plaintiff.

29. In my view, occupation by itself is sufficient to put a purchaser or mortgagee on an enquiry and will amount to constructive notice of an occupier's right.

30. If the law were otherwise a registered owner could defeat the rights of his co-owner or tenant who occupied the premises by failing either to disclose the existence of such co-owner or tenant or circumstances that would give rise to enquiry on the part of the purchaser or lender that there was such a co-owner or tenant. In such circumstances the law would reward purchasers or lenders who failed to make diligent enquiry.

31. Although on the facts of that case, the purchaser had been given notice of the occupation of the premises by the non-registered owner claiming an interest, Clough JA in Wong Chim Ying v. Cheng Kam Wing [1991] 2 HKLR 253 did not restrict the principle of constructive notice by reference to knowledge or matters which might alert the purchaser as to occupation by a co-owner. He said this (see p.273):

"No authority since Boland has been cited to the contrary and we respectfully agree with the statement of the law by the editor of Snell at p.54 where it is asserted that:

"Despite earlier rulings to the contrary (Caunce v. Caunce; Bird v. Syme-Thomson), and subject to the statutory provisions about overreaching (City of London B.S. v. Flegg), it is now settled that if the land is occupied by a person jointly with the vendor, usually his wife or other relative, this occupation will be constructive notice of any rights stemming from a contribution to the purchase price (Kingsnorth Finance Co. Ltd. v. Tizard, applying Williiams and Glyn's Bank Ltd. v. Boland ...., Hodgson v. Marks."

32. This statement of the law is in accordance with the views of the learned editors of Megarry and Wade "The Law of Real Property" 6th ed. at p.146 as to the state of the law based on modern authority:

"A purchaser is expected to inspect the land and make inquiry as to anything which appears inconsistent with the title offered by the vendor.

It is an ancient rule that the fact of possession constitutes notice of the rights of the possessor. Two reasons have been given for this. First, occupation of the premises by a person whose presence is inconsistent with the vendor's title places any purchaser on inquiry as to the occupier's rights. Secondly, and in the alternative, it is said that as possession is prima facie evidence of title, a purchaser is deemed to have notice of the rights of any person in possession. There is an important distinction between these two explanations. If the latter is correct, a purchaser will have notice of the rights of the possessor, even though his possession is not immediately apparent. Modern authority tends to confirm the latter view. A purchaser should therefore -

(i) ascertain whether there is anybody in possession or occupation of the land apart from the vendor, at least if there are any circumstances from which a reasonable person might infer this; and

(ii) make inquiry of any such person.

The mere fact that there is on the land a person, such as a spouse, whose presence is not inconsistent with that of the vendor does not obviate the need for the purchaser to make inquiry of them. The old view to the contrary has now been discredited. If, for example, a husband is sole legal owner of land, but his wife has an equitable interest in the property by reason of some contribution to the cost of its acquisition, any purchaser will be bound by her interest unless it was not disclosed after proper inquiry by her. There may of course be circumstances in which a person in possession of land is estopped from asserting any interest in it ......... ........ ......

Notice resulting from occupation extends in general to all equitable rights which the occupier may have in the land."

33. On the facts of this case, the 2nd Defendant has established not only her interest in the flat but that she was the occupier of the premises when the legal charge in favour of the Plaintiff was created. Her occupation amounted to prima facie constructive notice to the Plaintiff of her interest. If the Plaintiff seeks to establish that it was a bona fide purchaser of the value without notice of the 2nd Defendant's interest, it must satisfy the Court that constructive notice should not be pinned on it. It has not done so.

34. Accordingly, I make a declaration that the legal charge dated 7 December 1990 be restricted to the 1st Defendant's share in the property.