BEACON HEIGHTS (MANAGEMENT) LTD. v. LEUNG PING HUNG, ANTONIO AND OTHERS

HEADNOTE

[The court will enforce against a defaulting owner provisions in a Deed of Mutual Covenant under which his undivided shares are expressed to "stand charged" with the arrears, notwithstanding that the defaulting owner has not himself signed any instrument of charge.]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

NO. MP 3570 OF 1991

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J U D G M E N T

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Godfrey, J.A:

1. I have before me an originating summons which raises a number of questions as to the construction of a Deed of Mutual Covenant dated 28 September 1985 which affects an estate known as Beacon Heights, Lung Ping Road, Kowloon.

2. A number of these questions have already been debated before me and I have already dealt with them; other questions remain which I shall deal with later in the course of the hearing. The purpose of this present judgment is to deal with one specific question, as to the true construction and effect of clause 27 of the Deed of Mutual Covenant, which is not an altogether easy question.

3. Clauses similar to this appear, I understand, in many other Deeds of Mutual Covenant and accordingly the question is one which is or may be of some general importance. Our clause 27 reads as follows:

"27. In the event of any Owner failing to pay any sum due and payable by him in accordance with the provisions of this Deed or any Sub-Deed of Mutual Covenant or failing to pay any damages awarded by any court for breach of any of the terms or conditions of this Deed or any Sub-Deed of Mutual Covenant within fourteen (14) days from the date on which the same become payable, the amount thereof together with interest and the collection charge at the rate and for the amount as specified in Clause 25 hereof together with all costs and expenses which may be incurred in recovering or attempting to recover the same including the legal expenses referred to in Clause 26 hereof and in registering the charge hereinafter referred to shall stand charged on the Undivided Share or Shares of the defaulting Owner and the Manager shall be entitled without prejudice to any other remedy hereunder to register a Memorial of such charge in the Land Office against the Undivided Share or Shares of the defaulting Owner. Such charge shall remain valid and enforceable as hereinafter mentioned notwithstanding that judgment has been obtained for the amount thereof unless and until such judgment has been satisfied."

4. The background is as follows.

5. Under these Deeds of Mutual Covenant, designed to provide a system of "local law" (as it has been called), regulating the rights of owners inter se and the rights of the manager appointed to manage the estate, it will occasionally happen that the owner of undivided shares in the land on which the estate is built, and to which have been allocated, by the Deed of Mutual Covenant, the right to the exclusive use and enjoyment of a particular unit, makes default in paying to the manager the sums which are due from him to the manager in respect of service charges and the like under the Deed of Mutual Covenant. That default can no doubt be remedied by ordinary action. If the manager succeeds in such an action, it will be able to obtain a charging order on the defaulting owner's undivided shares by way of execution of its judgment. The idea behind clause 27 and similar clauses is to short-circuit this. Can it be done?

6. The device adopted is to provide in the Deed of Mutual Covenant that unpaid management charges shall "stand charged" on the undivided shares of the defaulting owner, that charge being considered, so the draftsman hopes, an equitable charge which the manager can register at the Land Office. This of course, is intended to enable the manager to put pressure on a defaulting owner to remedy his default.

7. There seems to me in principle nothing inherently wrong with this. But objection may be taken and has, in the instant case, been taken to this device, on this ground, namely, that under s. 5 of the Conveyancing and Property Ordinance, Cap. 219, the instrument creating this sort of charge has to be signed by the person creating the charge if it is to have effect.

8. The section provides as follows:

"5(1) Subject to section 6 -

(a) no equitable interest in land can be created or disposed of except by writing signed by the person creating or disposing of the same, or by his agent thereunto lawfully authorised in writing, or by will, or by operation of law;

(b) a declaration of trust respecting land or any interest therein shall be manifested and proved in writing signed by the person who is able to declare such trust or by his will.

(2) This section does not affect the creation or operation of resulting, implied or constructive trusts."

9. The defaulting owner, although he will have taken his undivided shares subject to and with the benefit of the provisions of the Deed of Mutual Covenant, will not himself have been called upon to sign that instrument or any other instrument other than the assignment by which he acquired his interest from his immediate predecessor in title. Accordingly, so it is argued, the manager cannot point to any writing signed by the person who is said to have created the charge, that is to say, the defaulting owner. It is not good enough that the charge is given in writing (in the Deed of Mutual Covenant). It must be signed by the defaulting owner.

10. There is some force in this. But since, as I have already said, I see no objection in principle to what is sought to be done, I think the right approach is for me to see whether there can be found some means of escape from the conclusion that, because the defaulting owner has not signed any instrument of charge, it must follow that the manager is not entitled to treat his undivided shares as charged to secure payment of arrears in accordance with the terms of the Deed of Mutual Covenant.

11. Mr. Michael Thomas, Q.C., for the manager here, has suggested two possible means of escape from this conclusion. Mr. Thomas points to s. 41 of the same Ordinance and asserts (as is the case) that under that section a positive covenant will bind successors in title to undivided shares in the land. Accordingly it will bind a defaulting owner even if it be a positive covenant to expend money (see sub-section (6)); and clause 27 is to be construed as containing such a positive covenant. Alternatively, he says, as I understood his argument, the clause is to be construed as an agreement to create a future charge, binding from the beginning upon the first owner (who does sign the Deed of Mutual Covenant); and any successor in title of the first owner, says Mr. Thomas, takes with notice of this agreement and is accordingly bound by its provisions.

12. I do not find either of these arguments greatly attractive or compelling but nevertheless I have decided that I ought to yield to them. That was the approach adopted by the court in In re Holt's Settlement [1969] 1 Ch. 100, which in my judgment illustrates the approach to be adopted by the court when this sort of objection, based on the absence of writing, is taken in a case where justice and convenience require the absence of writing to be overlooked and some legitimate ground for doing so can be found.

13. In the case cited, the court was faced with an argument that an arrangement purporting to vary the trusts of a settlement, prepared by counsel and submitted to the court for its approval on behalf of infant beneficiaries, for the purpose of obtaining an order under the Variation of Trusts Act, 1958, was effective for its purpose although not signed in writing by the adult beneficiaries whose consent to the arrangement was required by the Act of 1958. The judge, describing the point as "technical" (see p. 115), found a way to "escape" from the provisions of section 53(1)(c) of the Trustee Act 1925, which requires all dispositions of equitable interests to be in writing "signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing, or by will" (the same formula as that used in section 5(1)(a) of Cap. 219).

14. I would adopt the same approach here.

15. I am quite prepared to construe clause 27 as imposing on the first owner (which did sign the Deed of Mutual Covenant) an obligation, akin to that of a positive covenant, to give a charge, when called on to do so, to secure payment of arrears due by the first owner, and to hold that this obligation binds successors in title of the first owner. Successors in title of the first owner take their interests as purchasers for value with notice of the terms of the Deed of Mutual Covenant. Accordingly, it does not lie in the mouth of a successor in title of the first owner to say that the covenant to give the charge should not be taken as enforceable against him, simply because he has not signed anything in writing; it is enough that the obligation is in writing signed by the first owner through whom he claims.

16. On that construction it will not be necessary for the manager to call on the defaulter to sign an equitable charge to secure payment of the arrears. That would be to require unnecessary circuity of action. Equity will not demand that such a step to be taken. It is unnecessary, because the express words of the obligation are that the interest shall "stand charged". Equity will treat as done that which ought to be done. Accordingly, I am prepared to hold, as I do, that the provisions of clause 27 of the Deed of Mutual Covenant are enforceable in accordance with their terms against both the first owner and successors in title of the first owner, even though the successors in title have not themselves signed any instrument of charge. Accordingly, I will decide this question in the sense urged on me by Mr. Michael Thomas, Q.C. and will make a declaration, in a form to be considered later, to give effect to this judgment.