TRUMP WELL INTERNATIONAL LTD. v. SIU FUNG KNITTING FACTORY CO. LTD.

1998 M.P. No. 2408

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. This is a vendor and purchaser summons. The property to which the summons relates is a flat in Shatin. By an agreement dated 6th December 1997, the Plaintiff, Trump Well International Limited ("the purchaser"), agreed to purchase the flat from the Defendant, Siu Fung Knitting Factory Co. Ltd. ("the vendor"), for the sum of $10.65m. The sale was to be completed by 5.00 p.m. on 12th May 1998. The agreement contained the usual provision requiring the vendor to prove its title to the flat in accordance with section 13 of the Conveyancing and Property Ordinance (Cap. 219). Documents sent to the purchaser's solicitors after 5.00 p.m. on 12th May 1998 purported to show that there was no encumbrance on the vendor's title, but the question is whether the vendor had proved its title by 5.00 p.m. on that date.

The facts

2. The relevant facts can be shortly stated. The flat is in a block of flats which was not ready for occupation until December 1996. However, the flat had been purchased by the vendor's predecessor-in-title the previous May. He had funded that purchase with a bank loan. That loan had been secured by a mortgage over the flat ("the first mortgage"), which was an equitable mortgage in view of the fact that the construction of the block of flats had not been completed. In due course, a legal mortgage over the flat was entered into ("the second mortgage"). The second mortgage was in identical terms to a draft which had been annexed to the first mortgage. The second mortgage was intended to be executed, and was in fact executed, once the block of flats including the flat in question had been built.

3. In due course, a deed of release was executed by the bank. Unfortunately, that deed of release only referred to the first mortgage, not the second mortgage. In other words, by the deed of release the bank acknowledged that the flat was no longer subject to the first mortgage. The deed of release did not expressly state that the bank was acknowledging that the flat was no longer subject to the second mortgage. Eventually, the deed of release was purportedly rectified, so as to state that the bank acknowledged that the flat was no longer subject to the second mortgage either. But a copy of the rectified deed of release did not arrive at the purchaser's solicitors' office until 5.07 p.m. on 12th May 1998, i.e. after the 5.00 p.m. deadline had passed. In any event, the purported rectification of the deed of release was made by the solicitor who had verified the signature of the bank's attorney on the original deed of release, and there is nothing to show that the solicitor was authorised to confirm on behalf of the bank that the second mortgage had been discharged.

The requisition

4. The requisition which the purchaser's solicitors say was not satisfactorily answered was raised on 11th February 1998. They pointed out that the deed of release had not discharged the second mortgage, and they asked to be provided with a deed of release which acknowledged that the second mortgage had been discharged. The vendor's solicitors made no attempt to answer that requisition until 3 months later on 11th May - which was the day before the sale had to be completed by. Even then, they simply informed the purchaser's solicitors that they would send them the deed of release duly rectified. They did not say when, and if a duly rectified deed of release had not been received by the purchaser's solicitors by 5.00 p.m. on the following day, the purchaser's solicitors would not have had the confirmation they wanted that the second mortgage had been discharged. Accordingly, they insisted on a deed of release which acknowledged that the second mortgage had been discharged. The vendor's solicitors' response was that the second mortgage was supplemental to the first mortgage, and that the discharge of the first mortgage meant that the second mortgage had been discharged as well.

5. I do not agree with the vendor's solicitors. I can see how the first mortgage would have been discharged when the second mortgage was executed. After all, the second mortgage was intended to replace, and did replace, the first mortgage when the flat had been built, and therefore became available as security for the loan made to the mortgagor. But I simply do not see how the discharge of the first mortgage automatically resulted in the discharge of the second mortgage. The circumstance which would have given rise to the discharge of the first mortgage, namely the execution of the second mortgage, was different from the circumstance which would have given rise to discharge of the second mortgage, namely the repayment of the loans secured by that mortgage. It may be that if the discharge of the first mortgage had been overlooked, the discharge of the second mortgage would have had the effect of discharging the first mortgage, but I see no basis whatever for saying that the second mortgage could have been discharged simply by the discharge of the first mortgage.

6. Mr. Lee Tung Ming for the vendor with his usual succinctness reminded me in his skeleton argument that when an equitable mortgage is followed by a formal mortgage, the equitable mortgage is extinguished and the formal mortgage stands as the security for the loan secured by the equitable mortgage. Since the second mortgage had extinguished the first mortgage, and since the deed of release was executed after the execution of the second mortgage, the deed of release should be construed as having discharged the only mortgage then in existence, namely the second mortgage.

7. I see the force of that argument, but in my view it suffers from two vices. First, the argument is inconsistent with the express language of the deed of release, which, by referring to the first mortgage only, did not assert that the first mortgage had been extinguished when the second mortgage was executed. Secondly, the argument is inconsistent with the argument being advanced by the vendor's solicitors to the purchaser's solicitors at the relevant time. Their argument was that the discharge of the first mortgage meant that the second mortgage had been discharged as well. Mr. Lee's argument is predicated on the fact that the first mortgage had already been extinguished when it merged with the second mortgage. Whereas the solicitors had been arguing that the second mortgage had been discharged as a result of the discharge of the first mortgage, Mr. Lee is arguing that the second mortgage was discharged, not as a result of the discharge of the first mortgage, but because the second mortgage had merged with the first mortgage.

8. Finally, I have not overlooked Mr. Lee's point that the obligations of the vendor's predecessor-in-title were the same under both mortgages. Therefore, argues Mr. Lee, if the first mortgage was discharged on the basis that the sum secured by that mortgage had been repaid, the sum secured by the second mortgage had also been repaid. That may be so, but the first mortgage may have been discharged, not on the basis that the sum secured by the first mortgage had been repaid, but on the basis that it had simply been replaced by the second mortgage. The purchaser's solicitors were not to know that that is said not to have been the position, because the vendor's solicitors never told them that.

Conclusion

9. For these reasons, I have come to the conclusion that the requisition was not properly answered, and that the vendor had therefore not proved its title to the flat in accordance with section 13. In these circumstances, I grant the purchaser the relief sought in paras. 1, 2, 3, 5 and 8 of the summons. Mr. Lee did not contend that any of that relief was inappropriate. I also order the vendor to return to the purchaser the deposits totalling $1,957,500.00. It is common ground that the relief sought in para. 6 of the summons would only have arisen in the event of my concluding that the requisition had been satisfactorily answered, and Mr. Louie Mui for the purchaser does not press for the relief sought in paras. 7 and 9 of the summons.