ZHANG XUESHUAI v. LAI CHAN WING

CACV 81/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 81 OF 2014

(ON APPEAL FROM DCMP 2400/2012)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  At the conclusion of the hearing, we dismissed with costs the defendant’s appeal from the judgment of District Judge Stephen Chow dated 25 November 2013 in a conveyancing dispute. We now give our reasons.

The facts

2.  Mr LMW, deceased (“the deceased”), was at all material times the registered owner of Flat 4, 6^th Floor, Block G, Yuk Po Court, No 10 Choi Yuen Road, Sheung Shui, New Territories (“the property”), a home ownership scheme flat purchased from the Hong Kong Housing Authority in 1982.  The deceased mortgaged the property to Wayfoong Finance Limited in 1983, and the mortgage was discharged in May 1999.

3.  In 2004 and again in 2006, there were two apparent attempts to sell the property which did not materialise – the first sale and purchase agreement, dated 5 March 2004, with a completion date of 5 April 2004 which could be postponed at the option of the vendor on payment of compensation fixed at a monthly rate, was eventually cancelled on 25 August 2006; whereas the second sale and purchase agreement dated 25 August 2006, with a completion date on 25 September 2006 which could, again, be postponed at the option of the vendor on similar terms, was cancelled on 8 May 2007.  Both purchasers wouldappear to be financial lending institutions sharing the same registered office, and they were both represented by the same firm of solicitors in the aborted transactions.

4.  In about September 2006, the deceased was diagnosed and confirmed to be mentally incapacitated.  On 20 March 2008, Fung J declared that Mr LMW was a mentally incapacitated person and appointed his brother, Mr Lai Chan Wing, the defendant, as the committee of his estate, under Part II of the Mental Health Ordinance, Cap 136 (HCMP 2294/2007).  By an order dated 1 September 2011, the judge authorised the committee to sell the property and execute all necessary documents for the sale, including the making of a statutory declaration in respect of missing title documents (see below).

5.  On 10 February 2012, the plaintiff as purchaser and the defendant as committee of the deceased’s estate entered into a formal agreement for the sale and purchase of the property at the price of $2.2 million. Clause 14(1) of the agreement required the vendor to prove his title to the property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap 219) (“Cap 219”); and to give title to the property in accordance with section 13A of the Ordinance.  Clause 14(2) provided that “[s]uch of the documents of title as are required for the purpose of giving title to the Property shall be delivered to the Purchaser”.  Clause 15 provided for the making of requisitions on title.  The agreement provided for completion on or before 12 April 2012, which was subsequently agreed to be postponed to on or before 19 April 2012. 

6.  The dispute which led to this litigation concerned one single requisition on title relating to missing title documents. It arose this way.  When the committee’s solicitors supplied the title documents to the plaintiff’s solicitors to prove title (by letters dated 20 February and 26 March 2012) all they could supply were certified true copies, rather than original title documents.  Although this was something permitted under section 13 of the Ordinance, it was a departure from standard local conveyancing practice which involves the supply of original documents where available even at the stage of showing/proving a good title.  This therefore led to the raising of a requisition by letter dated 23 February 2012 asking for the provision of a statutory declaration by the committee “in respect of the missing title deeds of the property”.

7.  Pausing here, it may be added that at the time, the standard conveyancing practice in case of missing title documents was to supply a statutory declaration to account for the non-production of the missing documents concerned, as per the decision of Yuen J (as she then was) in Yiu Ping Fong v Lam Lai Hing [1999] 1 HKLRD 793 and the subsequent cases which followed it, including the Court of Appeal’s decision in De Monsa Investments Ltd v Whole Win Management Fund Ltd [2011] 4 HKLRD 478 (23 August 2011) – see below.

8.  By letter dated 26 March 2012, the committee’s solicitors sent a draft statutory declaration to the plaintiff’s solicitors for perusal and approval.  This draft statutory declaration, to be made by the defendant as committee, stated that since the deceased’s hospitalisation in November 2006, the brother had enquired with him on more than one occasion regarding the whereabouts of the original title documents, but was unable to obtain a clear and rational answer; the defendant had caused an exhaustive search for the title documents at the property, but was unable to find them; and the defendant believed that the title documents had been misplaced and lost and could not be found. 

9.  The plaintiff’s solicitors were not satisfied with the draft statutory declaration.  By letter dated 28 March 2012, they commented:

“2(c) With due respect, we opine that your produced Statutory Declaration is not sufficient to act as an adequate explanation as to why the originals cannot be handed over (Yiu Ping Fong v Lam Lai Hing Lana HCMP 3617/98).

Firstly, please note that a purchaser of land is entitled as a matter of propriety right to possession of the original title deeds. Further it is important to have possession so that he can be sure that the property is not subject to an equitable mortgage and to avoid constructive notice of facts that would be disclosed as he would be placed on inquiry (Yiu Ping Fong).

Upon perusal of your produced Statutory Declaration, based on the above held down principle, we thus opine that the said Declaration cannot provide an adequate explanation because:

(1) The declarant, namely Lai Chan Wing, have never to have possession of the original title deeds and it is not correct that ‘he have not deposited the title deeds and documents of the Property or pledged the same by way of security’. With the same reason, he is not the proper person to [make] the required statutory declaration.

(2) Mr. Lai have only enquired with LMW regarding the whereabouts of the original of title deed, but was unable to obtain a clear and rational answer.  Again, it is clearly not an adequate explanation as to why the originals cannot be handed over.”

10.  In response, the defendant’s solicitors sought to rely on the order of Fung J which, among other things, authorised the defendant to make a statutory declaration in respect of the missing title documents, to say that the draft statutory declaration had received judicial blessing.  That, obviously, was a wrong answer, as the judge was only concerned with the mechanics of selling the deceased’s property via the committee, rather than whether the statutory declaration to be made would constitute sufficient conveyancing evidence to account for the missing title documents for the purposes of the authorised sale.

11.  In any event, the defendant’s solicitors supplied a revised draft statutory declaration by letter dated 10 April 2012. In the revised draft, besides mentioning that there had been made against the property two charging orders in favour of a judgment creditor, Easy Fortune Property Limited (a finance company), in DCCJ 5098/2006, that is, a charging order nisi in 2006 and a charging order absolute in 2007, that the two orders had been discharged in May 2011 by the defendant as committee, and that he had through solicitors enquired with Easy Fortune about the missing title documents and had been told that the deceased had never pledged any title documents of the property with Easy Fortune, the defendant also said that ever since he became the guardian of the deceased in 2006 and committee of his estate in 2008, he had never received any notice or the like from any financial institutions, banks or persons regarding the further debts of the deceased.  The rest of the revised draft was substantially the same as the first draft.

12.  The revised draft statutory declaration did not satisfy the plaintiff’s solicitors.  In their letter dated 10 April 2012, the solicitors wrote:

“2(c) With due respect again, we opine that your produced Statutory Declaration is still not sufficient, in particular to the following facts, besides the reasons as set out in our letters of 28^th March and 3^rd April, 2012:

(1) It is understood that in normal situation, after the release of previous Mortgage on 14^th May 1999, the whole title deeds and documents shall be re-delivered to the mortgagor, i.e. LMW, for his custody. Thus, we opine that Easy Fortune Property Limited is not the only reasonable party who may be in possession of the title deeds as stated under paragraph 9 of your draft Statutory Declaration.

(2) Pursuant to two Agreements for Sale and Purchase Memorial Nos. N559604 and 06091300700068, Mr. LMW had entered the said Agreements with two different finance companies on 5^th March 2004 and 25^th August 2006 respectively. Both Agreements (copy of relevant pages enclosed) were duly signed by him without any evidence to indicate the mental incapacity of Mr. LMW. Your attention is specially drawn to the later Agreement which was executed on 25^th August 2006, just few days before your client’s claim (under paragraph 3 of your draft Statutory Declaration) in that Mr. LMW was diagnosed and confirmed to be mentally incapacitated in or about September 2006.

(3) Within both Agreements, it was clearly indicated that there was no mortgage/legal charge was attached to the Property, i.e. no other person, except Mr. LMW, was in possession of the title deeds at that material time.

(4) Upon perusal of the mentioned Sealed Order in favour of Easy Fortune Property Limited, it is so clear that Mr. LMW have involved into several debts with finance company(ies) with amount of over HK$303,000.

(5) Based on the abovementioned, there is no doubt in that:

a) After May 1999, it is highly possible that Mr. LMW was in possession of the title deeds of the Property;

b) From March 2004 to August 2006, there was clear evidence to show that Mr. LMW have had intention to sell the Property and might aim to settle all his debts;

c) It is highly possible that, in order to settle his then debts, Mr. LMW has deposited the title deeds and documents of the Property or pledged the same by way of security in favour of any person or financial companies.

We thus opine that the draft Statutory Declaration is insufficient to explain the doubt regarding the whereabouts of the original of title deed.  We also opine that there is real and reasonable risk in that the Property is subject to an equitable mortgage which in the possession of the original title deeds (Yiu Ping Fong).”

13.  The defendant’s solicitors obviously disagreed. No further revision was made to the revised draft statutory declaration, which was made by the defendant on 12 April 2012, and supplied to the plaintiff’s solicitors by letter dated 16 April 2012. 

14.  By letter dated 18 April 2012, one day before the extended date of completion, the plaintiff’s solicitors commented that the statutory declaration was not sufficient to resolve “the defect found in the title to the Property, i.e. explain the doubt regarding the whereabouts of the original of title deed[s] and there is no real and reasonable risk … that the Property is … subject to an equitable mortgage”.

15.  On the same day, the defendant’s solicitors sent to the plaintiff’s solicitors a copy letter from Mayer Brown JSM (solicitors for the mortgagee Wayfoong Finance Limited back in 1999) dated 16 April 2012, which confirmed that the solicitors had not retained any title documents in respect of the property.

16.  In their third letter dated 18 April 2012, the plaintiff’s solicitors commented that the copy letter from JSM did not assist the defendant in resolving the doubt on title – the letter only emphasised the fact that the original title documents had been returned to the deceased in 1999 following the discharge of the mortgage, but did not explain the whereabouts of the original documents thereafter, or help dispel the doubt regarding the risk of an equitable mortgage. 

17.  No completion took place on 19 April 2012.  By letter of the same date, the plaintiff’s solicitors alleged that the defendant had failed “to give a good title to the Property pursuant to Clause 14(a) as stipulated under the Agreement, and Sections 13 and 13A of Conyenancing and Property Ordinance (Cap 219)” and that “[the defendant’s] failure in giving a good title entitles [the plaintiff] to rescind the Agreement”.

18.  The transaction thus fell through, resulting in, after further correspondence, the plaintiff’s commencing the action below for a number of declarations, including a declaration that the defendant had failed to answer the requisition on title, a declaration that he had failed to prove and show a good title and a further declaration that he had failed to give a good title, and for an order for the return of the deposits and part payments paid in the total sum of $220,000.

19.  In the meantime, the deceased passed away on 1 June 2012, and the committee was automatically discharged upon his death pursuant to section 27(4) of the Mental Health Ordinance.  The defendant, nonetheless, was appointed the personal representative of the estate of the deceased to defend the action.

The judgment below

20.  The judge found for the plaintiff.  He found that the statutory declaration was “invalid” in that it did not satisfactorily account for the non-production of the missing title documents.  Relying on Yiu Ping Fong, the judge held that:

“The defendant has only provided an invalid statutory declaration because he is unable to produce the original title documents. Therefore, the loss of the title document is lack of supportive explanation. It is a fundamental blot on the title to the Property. He cannot fulfil his obligation as a vendor. Hence the plaintiff is entitled not to complete the Agreement.” (para 21)

The arguments on appeal

21.  Aggrieved by the judge’s decision, the defendant appealed.  Mr Matthew Chong, for the defendant, essentially took three points.  First, he contended that the statutory declaration made by the defendant constituted “clear and cogent evidence” to account for the missing title documents.  He submitted that the defendant was the proper person to make the statutory declaration, that the defendant had been managing and administering the property and affairs of the deceased since 2008 and he could of his own knowledge explain the circumstances of the loss of the missing documents, and that the defendant did spend proper efforts to locate the missing title documents, including enquiring with the solicitors who acted for the purchasers in the two aborted transactions for the sale and purchase of the property (who did not reply to the enquiry) about the missing documents. 

22.  Secondly, Mr Chong took the point that following the Court of Final Appeal’s decision in De Monsa ((2013) 16 HKCFAR 419), which reversed the Court of Appeal’s decision below, the real point about missing documents and the need for the production of a statutory declaration to account for the missing title documents was to show that there was no real risk of a successful assertion of an encumbrance on title.  Counsel argued that on the facts of the present case, there was no real, as opposed to fanciful risk of an equitable mortgage arising from the deceased’s deposit of the (missing) title documents as security with a lender to raise a loan.  Mr Chong also drew the court’s attention to the fact that any alienation of right or interest in the property is subject to stringent restrictions under the Housing Ordinance (Cap 283).  In particular, section 17B renders any unauthorised purported mortgage or charge (or other alienation), together with any agreement to do so, “void”.  There was, therefore, no real risk of a successful assertion of an equitable mortgage by a lender against the property.

23.  Thirdly, Mr Chong argued, for the sake of completeness, that the judge was wrong to say that the four missing documents identified in paragraph 3 of his judgment (which, apparently, the judge thought were the only missing title documents involved) were title documents which section 13A of Cap 219 required the defendant to deliver upon completion.  Mr Chong accepted, however, that this point did not really matter as there were other missing title documents involved which were caught by section 13A.

24.  Mr Valentine Yim, for the plaintiff, disputed all these points.  In addition, he took the point that even assuming (for the sake of arugment) there was no real risk of a successful assertion of an equitable mortgage on the facts of the case, section 13A of Cap 219 would still require the defendant, as vendor, to deliver the original title documents to the plaintiff upon completion in order to give/make a good title, in the absence of a satisfactory statutory declaration to account for the missing title documents.  He contended that the Court of Final Appeal’s decision in De Monsa which decided that the common law position is different does not affect the statutory position under section 13A, which was enacted after the conveyancing dispute arose in De Monsa in early 2008.

The law

25.  One starts off with this basic proposition, that is, there is, first, a duty on the part of the vendor to show/prove a good title to the property contracted to be sold before completion.  The time for doing that is either governed by contractual provisions or, in an open contract situation, a matter of implied term, that is, within a reasonable time before completion.  Under that duty to show/prove a good title, the vendor has the duty to satisfactorily answer requisitions on title properly raised.  A failure to do so would mean a failure to show/prove a good title, and would entitle the purchaser not to complete, even though, as a matter of law or fact, the vendor does have a good title.  Active Keen Industries Limited v Fok Chi Keong [1994] 1 HKLR 396. In this regard, section 13 of Cap 219 is concerned with the mechanics of showing/proving a good title.  As mentioned, although section 13 permits the supply of certified copies of title documents, the local conveyancing practice is to supply the original of the title documents even at the stage of showing/proving a good title.

26.  Secondly, a vendor has the duty to give/make a good title upon completion.  That is done by, among other things, the delivery to the purchaser upon completion of a duly executed assignment of the property sold together with all original title documents relating exclusively to the property.  The position used to be governed by common law only (subject to contrary contractual provisions) but is now also governed by section 13A of Cap 219 enacted in 2008.

27.  What if one or some of the original title documents are missing?  How does it impact on the duty to show/prove a good title, and/or the duty to give/make a good title?

28.  For a number of years, it was thought by conveyancing lawyers that Yiu Ping Fong and the subsequent cases that followed it, decided that in case of missing title documents, the legal position, absent any express contractual provisions to the contrary, was thus: upon completion, the vendor was contractually bound to deliver to the purchaser all original title documents relating exclusively to the property sold and, for any missing title documents, a statutory declaration which, among other things, provided a satisfactory explanation as to why the originals could not be handed over, failing which the purchaser would be entitled not to complete if he did not want to.  Indeed the statutory declaration had to be supplied (or at least, a draft had to be produced) before completion in order to show/prove that the vendor had a good title to the property, failing which the purchaser was entitled not to complete.  It was thought that this was so regardless of whether the missing documents and the absence of a satisfactory explanation led, on the facts of the particular case, to a real risk of a successful assertion of an encumbrance against the property after completion.  This position was further thought to be applicable not only to post-intermediate root of title documents, but also to pre-intermediate root of title documents, as the Court of Appeal decided in De Monsa itself.

29.  This was the legal background against which the solicitors in the present case exchanged views on the adequacy of the statutory declaration made by the defendant to answer the requisition raised by the plaintiff regarding the missing title documents. 

30.  But the true legal position has since been clarified by the Court of Final Appeal in De Monsa.  Although separate judgments were delivered, it is plain that all members of the Court of Final Appeal agreed that the position regarding missing title documents described above does not represent the law.  The real significance of missing title documents, assuming that contents and due execution are not in issue, only lies in the fact that it may, depending on the facts of each case, give rise to a real risk of a successful assertion of an encumbrance against the property after completion, thereby rendering the title of the vendor defective or doubtful.  A typical doubt in this regard is the possibility of the creation of an equitable mortgage by the deposit of the (missing) title documents by the vendor or his predecessor with a third party lender as security to raise a loan, and thus the inability to produce and deliver the title documents to the purchaser.  In that situation, normal conveyancing principles apply and an unwilling purchaser cannot be forced to complete the sale and purchase.  He is entitled to rescind and get back his deposits and part payments.  However, where no such real risk arises, the non-delivery of the title documents, even in the absence of any satisfactory explanation as to why the title documents are missing, is no ground for the purchaser not completing the sale and purchase on completion date (absent any contractual stipulations to the contrary).  Any failure to do so would result in the forfeiture of his deposits subject to conveyancing law. 

31.  A statutory declaration to explain why the relevant title documents are missing is only relevant in the above context if and when it is required to remove a doubt which would otherwise arise by reason of the missing title documents.  In other words, if, without the statutory declaration, there would be a real doubt arising, a statutory declaration would be required.  But, in such a case, a statutory declaration, although a most common means relied on, is not the only possible means that can be resorted to. Depending on the facts, if there are other evidences which can remove the doubt and render the risk fanciful or even non-existent, they can be relied on, either in addition to or in lieu of the statutory declaration.  There is no magic to a statutory declaration as such.  What is required is satisfactory conveyancing evidence to remove the doubt and render the risk unreal or nonexistent altogether.

32.  However, as the Court of Final Appeal decided in De Monsa, where there is no real risk arising, there is no place for a statutory declaration or any other conveyancing evidence.  It is not required for the showing/proving of a good title.

33.  Thus far, I have been focusing on the showing/proving of a good title, which is a prior and separate step to the subsequent step of giving/making a good title upon completion.  As mentioned, the former has to be done before completion, whereas the latter has to be performed upon completion.  So far as the latter is concerned, the Court of Final Appeal decided in De Monsa that barring any specific contractual provisions requiring otherwise, the inability to deliver upon completion all original title documents does not, by that mere fact alone, entitle the purchaser not to complete, absent a real risk regarding a future challenge to title, regardless of whether there is any satisfactory statutory declaration or other conveyancing evidence to explain the missing title documents, and even if the failure to deliver is wilful and deliberate.

34.  Two further points arising from De Monsa are worth mentioning.  First, missing documents, in the above discussion, are only restricted to post-intermediate root of title documents, but not pre‑intermediate root of title documents.  Secondly, De Monsa was only concerned with the common law position on the vendor’s obligation to deliver original title documents upon completion.  It did not deal with what the position is under section 13A of Cap 219 which was enacted too late to cover the situation in De Monsa.  Litton NPJ, in paragraph 128 of his judgment, considered that the position under section 13A is the same – “[i]f an original in the chain of title is missing, and such loss gives rise to no risk that the title to be passed to the purchaser might be blemished, then the vendor would have fulfilled his obligation of giving good title under s. 13A(1)”, even in the absence of any satisfactory statutory declaration or conveyancing evidence to explain why the document is missing.  But, the other members of the court did not express a view on the matter.  For the reasons I give later, we do not need to decide this point and it is not desirable to do so in the present appeal.

The present case

35.  Turning to the facts of the present case, the first thing to note is that the original of all title documents have gone missing.  Unlike the situation where, for instance, only one single title document is missing, the missing of all original documents does raise the possibility of their having been deposited by the property owner with a lender as security to borrow money, thereby giving rise to an equitable mortgage.  By the time of the agreement (2012), not that many years had lapsed since the deceased was first diagnosed as being mentally incapacitated (in 2006).  Secondly, the two supposed agreements for sale and purchase which were subsequently cancelled also raise questions of their own.  As mentioned, the two purchasers were respectively Currency Fortune (銀富物業按揭有限公司) and Currency United (銀聯物業投資有限公司) , both apparently financial lending institutions sharing the same registered office. Both agreements provided for the postponement of the completion date at the option of the vendor on payment of compensation fixed at a monthly rate, and both provided that the vendor could cancel the agreement subject to the return of deposits and payment of compensation.  As a matter of fact, both were cancelled, the first one after about 2½ years and the second one after 9 months. Furthermore, the first one was cancelled on 25 August 2006, the very day the second one was entered into.  Both “purchasers” employed the same firm of solicitors.  Putting it at the lowest, there was a real suspicion that the two agreements were actually disguises for lending transactions between the deceased and the two so-called purchasers.

36.  On top of that, there was also Easy Fortune, the judgment creditor of the deceased which obtained the charging orders mentioned above against the property in the District Court under a judgment dated 13 December 2006 for outstanding debts.  

37.  On those facts, the possibility that the deceased had made use of his title documents for borrowing purposes could not be excluded, in the absence of satisfactory conveyancing evidence to explain otherwise.  This was particularly so when the property was a home ownership scheme flat in relation to which there were and are stringent restrictions regarding alienation or conveyance, a matter which I would return to shortly.

38.  In my view, given these facts, plainly the requisition on the missing documents and the requirement for satisfactory conveyancing evidence whether by way of a statutory declaration or otherwise to account for the missing documents were most properly made.  Secondly, the statutory declaration of the defendant was insufficient for the purposes of answering the requisition.  The defendant could only speak for the period after he had actual or legal control over the assets and affairs of the deceased.  He did not claim to have any knowledge of what had happened before.  The deceased, because of his mental condition, was unable to provide the defendant with any useful information.  It is quite irrelevant whether the defendant had tried his best to obtain information to account for the missing documents.  That is not the question to answer.  The real question to answer is whether objectively speaking, there was sufficient conveyancing evidence to remove the risk that the deceased had made use of the title documents as security to raise a loan from a third party, thereby creating an equitable mortgage over the property which could be asserted against the property after completion.  In my view, plainly, on the facts, the conveyancing evidence supplied by the defendant’s solicitors at the time fell short of that task.

39.  I have mentioned that the property is a home ownership scheme flat subject to the provisions of the Housing Ordinance, and put in a simplified way, section 17B of the Ordinance renders void any unapproved mortgage or charge of the property: Konew Finance Ltd v Wong Kai Ming [2001] 3 HKC 90; see also Bank of China (HK) Ltd v Personal Representative of Fu Kit Keung [2009] 5 HKLRD 713, paras 31 to 37.  Indeed, Mr Chong relied on this to say that regardless of the sufficiency of the conveyancing evidence supplied by the solicitors of the defendant to answer the requisition at the time, as a matter of law any equitable mortgage that might have arisen by a deposit of title documents by the deceased with a lender would have been void and of no effect vis-à-vis the plaintiff after completion – in other words, his title to the property would not be at risk of challenge.

40.  In my view, this does not assist the defendant.  It is true that the focus in the present context is whether there is a real risk of an encumbrance in the form of an equitable mortgage which may be successfully asserted against the purchaser after completion.  This isa matter which Litton NPJ considered at some length in De Monsa.  The learned judge first dealt with the position of an equitable mortgage arising from the deposit of title documents, accompanied by a written memorandum, which, ex hypothesi, was not registered.  In that event, section 3(2) of the Land Registration Ordinance (Cap 128) would render that unregistered equitable mortgage null and void to all intents and purposes as against a subsequent bona fide purchaser for valuable consideration.  In other words, “once the assignment to the purchaser is registered the purchaser takes priority over an unregistered chargee”: De Monsa (CFA), para 112; see also paras 111 – 117.  (Quaere: whether this analysis is only true where the written memorandum actually created the equitable mortgage, but does not apply where the memorandum only evidenced its creation by the deposit of title documents, as section 3(2) only renders null and void a registrable, but unregistered instrument, but not the underlying transaction insofar as it can survive without the instrument.)

41.  Secondly, in relation to “a loan by parol, without a scrap of paper evidencing the loan and its terms” (De Monsa, para 118), save that the title documents were deposited with the lender as security, Litton NPJ said:

“119. As Mr Mcdonnell QC, counsel for the Appellant said at the hearing (and not contradicted by Mr Edward Chan SC) there is simply not one instance in the reports going back to the earliest days in Hong Kong of equitable mortgagees by deposit of title deeds having defeated the title of purchasers.

120. It is difficult to imagine a situation where a person would lend a substantial sum of money with nothing more than an oral commitment and a deposit of title deeds, when he could have safeguarded his security by requiring a memorandum of deposit and having it registered.  One is not dealing here simply with the transaction between the lender and the borrower, against whom there is a personal right of action to recover the loan.  One is dealing with the lender’s rights against a third party, the owner of the land.  If it is security for the loan which the lender wants, why does he not secure it by having a written instrument and having that registered against the property?”

42.  In the context of the present case where the subject property is subject to alienation restrictions set out in section 17B of the Housing Ordinance, one need not dwell on the question of whether the apprehended deposit of title documents was accompanied by a written memorandum, or the nature of the memorandum.  Either way, the resulting equitable mortgage would be “void”, unless it had obtained the approval of the Director of Housing (or a premium had been paid – which was most unlikely).

43.  This being the case, Mr Chong’s argument must be rejected for two reasons.  First, his reliance on section 17B only appeared for the first time at the hearing of the appeal.  Not only was it not raised before the judge, more importantly, it never featured in the solicitors’ correspondence and was never relied on by the defendant’s solicitors to answer the plaintiff’s requisition on the missing documents.  Mr Chong vaguely argued that since this was a matter of law, and both sides knew that they were dealing with a home ownership scheme flat, there was no need for the vendor’s solicitors to mention specifically section 17B in answer to the requisition raised. 

44.  It is true, as Litton JA explained in Active Keen, at page 407, that:

“A requisition as to title is not an occasion for the parties’ solicitors to bandy propositions of law: each party must decide for himself, ultimately, what the legal position is, based upon the facts known to himself: although, obviously, if one party can persuade the other to his own point of view on the law, so much the better.”

45.  But it does not follow that whenever a requisition turns on a question of law, a vendor need not answer the requisition but can sit back and simply leave it to the purchaser to figure out what the true legal position is.  Not bandying legal propositions is one thing, not even mentioning a legal provision or an authority which one relies on to prove a good title is quite another.  In a conveyancing transaction where both sides are expected to display goodwill and cooperate with each other to bring about the completion of the transaction if possible, that is not the attitude expected of a vendor by the law.  The touchstone is reasonableness.  Each case must depend on its own facts.  On the facts of the present case, in my view, it was incumbent upon the vendor’s solicitors to raise and rely on section 17B to answer the plaintiff’s properly raised requisition about the missing title documents and the risk of an equitable mortgage.

46.  Moreover, and this brings me to my second point for rejecting Mr Chong’s argument, the matter was not purely one of law.  As mentioned, whether section 17B would have rendered whatever equitable mortgage arising from a deposit of title documents void would depend on whether the creation of the mortgage was approved by the Director, as to which there was no conveyancing evidence supplied to the purchaser at all.  In fact, even up to now, we still do not know the answer.

Conclusion

47.  For these reasons, in the present case, I take the view that the requisition was properly raised and it was not satisfactorily answered.  The plaintiff, being unwilling to proceed, was therefore entitled to rescind and ask for the return of deposits and part payments.

48.  Given that conclusion, the further question of whether section 13A nonetheless required the defendant to deliver all original title documents upon completion by way of giving/making title, in the absence of a satisfactory statutory declaration or other conveyancing evidence to account for the missing documents, does not arise.  This point would only have arisen if we had come to the conclusion that there was no real risk of a defect in title and the requisition had been satisfactorily answered.  As mentioned, De Monsa was a pre-section 13A case.  Given the conclusion that I have reached on the earlier issues, and given the very limited arguments we have heard on the section 13A point, I do not think this is an appropriate occasion for the court to decide the point or express any views on it.

49.  For all these reasons, the appeal was dismissed with costs to the plaintiff.

Hon Chu JA:

50.  I agree.

Hon Derek Pang J:

51.  I agree with the judgment of Hon Cheung CJHC.