CREATOR (HK) LTD v. KWONG WING FOOD INDUSTRIES STAINLESS STEEL ENGINEERING LTD

cacv 284/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 284 of 2007

(on appeal from HCA NO. 2821 of 2006)

______________________

______________________

______________________

J U D G M E N T

______________________

Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from an order of Yam J dismissing the appeal of the third party and affirming the decision of Master Lung given on 21 May 2007 granting interlocutory judgment to the defendant against the third party with damages to be assessed.  At the conclusion of the appeal hearing, judgment was reserved which we now give.

Background

3.  The third party was the owner and landlord of the building at 312-314 Shanghai St.  It entered into two tenancy agreements with the defendant tenant.  The first, which was undated, was in respect of the ground floor and cockloft of the building (“the first tenancy agreement”).  This, the judge held, ran from 12 January 2003 to 11 December 2011.  The second tenancy agreement dated 1 May 2005 was in respect of the first floor and was for a term of five years from 1 June 2005 to 1 June 2010.  The tenancy agreements were not registered under the Land Registration Ordinance (“the Ordinance”).

4.  Subsequent to the two tenancy agreements, on 6 June 2006, the third party as vendor entered into a provisional sale and purchase agreement with the plaintiff as purchaser whereby the third party agreed to sell the whole building to the plaintiff subject to existing tenancies.  Copies of the two tenancy agreements had been given to the estate agent who acted for both parties and who had prepared the provisional sale and purchase agreement (“the provisional agreement”).  Under clause 4, the plaintiff agreed to purchase the property “subject to the existing tenancy”.  Annexed to the provisional agreement were two schedules providing details of the rent and rent period of tenancies affecting 312 and 314 Shanghai St respectively.  In every case the rent period was stated to be “monthly”.  The plaintiff caused the provisional agreement to be registered on 5 July 2006.

5.  The plaintiff and the third party proceeded to completion on 28 September 2006 without entering into any formal sale and purchase agreement.  The assignment of the property was expressed to be “subject to and with the benefit of the existing lettings and tenancies” but such lettings and tenancies were not particularised in the assignment.

6.  In October 2006 the plaintiff gave the defendant notices to quit the property on or before 4 December 2006 on the basis that it was a monthly tenant.  The defendant refused to deliver up possession.  The plaintiff issued a writ against the defendant on 21 December 2006 seeking vacant possession and mesne profits and subsequently issued summonses for summary judgment against the defendant.  The defendant issued a third party notice followed by a summons for summary judgment against the third party.  At the hearing before Master Lung on 21 May 2007, the Master granted the defendant unconditional leave to defend and entered interlocutory judgment in favour of the defendant against the third party.  On appeal, Yam J affirmed the interlocutory judgment leading to the present appeal by the third party.

7.  It should be mentioned that the plaintiff served new notices to quit on the defendant in May 2007 which culminated in an agreement between the plaintiff and the defendant that the defendant would deliver vacant possession by 30 September 2007.

The judgment below

8.  Yam J decided the case on the basis of the decision of this court in Wellmake Investments Ltd v Chan Yiu Tong [1996] 2 HKLRD 44.  In that case, the landlord who had granted a tenancy to the tenant in 1992 for a term of three years with an option to renew for a further two years subsequently sold the reversion to the purchaser.  The property was sold subject to the tenancy and the option.  The purchaser registered the agreement of sale and purchase before the tenant registered the tenancy agreement.  The purchaser obtained an order for vacant possession and the tenant appealed.  The issue on appeal was whether the option was binding on the purchaser.  It was held that the option was, as against the purchaser, absolutely null and void under section 3(2) of the Ordinance for want of registration prior to the registration of the agreement for sale.

9.  Godfrey JA, distinguishing the case of Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044, made the following observations (at 47D-F):

“

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 protect himself against such a claim: see Wright v. Dean [1948] Ch 686 and Hollington Bros. Ltd. v. Rhodes [1951] 2 TLR 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.”

10.  At § 11 of the judgment, the judge recorded that both the third party and the defendant accepted that there was no constructive trust on the new landlord i.e. the plaintiff.  On that basis, he held that the third party as landlord was in breach of the tenancy agreements by failing to register the tenancy agreements before selling the reversion to the purchaser.

This appeal

11.  Mr Aiken SC who appeared for the third party submitted that it was procedurally premature to enter judgment against the third party because it had arguable issues which should have been allowed to go to trial.

The assignment

12.  Mr Aiken SC relied on the fact that the assignment was expressed to be “subject to and with the benefit of the existing lettings and tenancies”.  It was said that what was actually assigned to the plaintiff was a matter of construction and that it was arguable that the existing tenancies were binding on the plaintiff because they had been carved out of the assignment.  If so, the defendant would have suffered no loss and it would follow that the third party would have no liability.

13.  Mr Chain who appeared for the defendant referred to the Privy Council decision in Markfaith Investment Ltd v Chiap Hua Flashlights Ltd [1991] 2 AC 43 where the vendors agreed to sell to the purchasers a registered Crown lease subject to tenancy agreements each of which was less than three years’ duration (which were within the proviso exempting them from registration) but some of which contained options to renew of two years.  These tenancy agreements were unregistered when the purchasers registered the sale agreement.  The purchasers refused to complete, objecting to an assignment of the vendors’ lease expressed to be “subject to the existing lettings and tenancies thereon”.  It was held that the vendors were entitled to forfeit the deposit.

14.  Lord Templeman rejected the submission of counsel for the purchasers to the effect that in some mysterious way, the tenancy agreements, having been rendered null and void against the purchasers in April 1988 to the extent of the options for renewal, would be given a new lease of life against the purchasers by virtue of an assignment in June 1988 expressed to be subject to the tenancy agreements.  Lord Templeman elaborated on the reasons (at 63D-F):

“

… section 3(2) of the Ordinance is a special provision of legislation which rendered the options to renew contained in the unregistered tenancy agreements void against the purchasers as soon as the purchasers registered their sale agreement on 18 April 1988.  The assignment was not apt to create new obligations by the purchasers to the tenants.  As a general rule section 3(2) of the Ordinance renders void a registrable and unregistered tenancy agreement against a bona fide purchaser of a head lease who registers and completes his contract for assignment.  The terms of the assignment agreed between vendor and purchaser are irrelevant.  The assignment may be drafted so that it does not mention the tenancy agreement.  Alternatively, the assignment may be expressed to be subject to the tenancy agreement.  Whatever the form of the assignment, the term granted by the head lease vests in the purchaser by force of the assignment subject to the tenancy agreement so far as that tenancy agreement is subsisting and capable of being enforced against the purchaser.  In the present case the tenancy agreements are enforceable against the purchaser in respect of the original term but not in respect of the options to renew.”

In view of that decision, it is clear beyond peradventure that the provision in the assignment to which Mr Aiken attached so much importance is irrelevant and can be of no assistance to the third party.

Constructive trust

15.  The next issue identified by Mr Aiken was that in the present case there was something that constituted “something more” contemplated by Godfrey JA in the Wellmake case which would impose on the purchaser a constructive trust to give effect to the tenancies.  It was said that the same agent had acted for both parties, that he had prepared the provisional sale agreement and had been given copies of the tenancy agreements for that purpose.  Quite apart from what is recorded in § 11 of the judgment referred to in § 10above, it is clear from the terms of section 4 of the Ordinance that notice of the unregistered instrument is irrelevant and cannot affect the priority of a duly registered instrument.  Thus, in Markfaith, notice of the options at the time the purchase agreement was registered had no effect on the purchasers’ priority.  I do not see that actual knowledge on the part of the plaintiff of the particular leases before entering into the provisional agreement has any relevance to the question of priority or could constitute the “something more” contemplated by Godfrey JA in Wellmake.

16.  Mr Aiken then sought to rely on the Lyus case (which Godfrey JA had distinguished in Wellmake) in support of his contention that it was arguable that a constructive trust did arise in favour of the defendant.  The facts of that case are summarised in the judgment of Godfrey JA at 45J-46I to which reference should be made.  In brief, the plaintiffs in that case contracted to purchase a plot of land upon which the vendor company was to build a house.  A deposit was paid but before the house was completed the company went liquidation.  The bank had a legal charge over the building estate predating the plaintiffs’ contract.  Although it was under no liability to complete the plaintiffs’ contract, when the bank contracted as mortgagee to sell land including the plaintiff’s plot to first defendant in October 1979, clause 11 provided that the plaintiffs’ plot was sold “subject to with the benefit of” the plaintiffs’ contract.  In December 1979 the first defendant contracted to sell the plot to the second defendant with a special condition which provided that the plot was sold subject to the plaintiffs’ contract so far as it might be enforceable against the first defendant.  There were special features in Lyus: first, the bank was under no obligation to complete the house for the plaintiffs; second, prior to the first defendant entering into the agreement with the bank, its solicitors had given “an assurance that their clients would take all reasonable steps in its power to make sure that the interests of contractual purchasers were dealt with quickly and to their satisfaction”.  See Lyus at 1048D and 1053E respectively.  On those unusual facts, the judge held that the provision that the plot was sold subject to and with the benefit of the plaintiff’s contract had been inserted in the contract between the vendor and purchaser with the express object of conferring new rights on the plaintiffs which they would not otherwise have enjoyed and that the purchaser therefore took the property subject to a constructive trust in favour of the plaintiffs.  Lyus was considered to be an “exceptional” case.  See Wellmake at 47C.

17.  For my part, Lyus is a decision on its very special facts.  There are no special features in the present case.  Having regard to the decisions in Markfaith and Wellmake, the similarity in the wording in clause 11 of the contract with the first defendant in Lyus and the assignment is irrelevant and I can see no basis on which the third party could contend that it is within the Lyus exception.

18.  I would dismiss this appeal.  I would also propose that there be an order nisi of costs in favour of the defendant.

Hon Rogers VP:

19.  There will therefore be an order in terms of paragraph 18 above.