XCHRX LI SZE FAT v. CHENG KA LEUNG TOMMY AND ANOTHER

HCA No.14280 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14280 OF 1998

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DECISION

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Yuen, J:

1. This is an appeal by both Defendants from the decision of a master in Order 86 proceedings. Before I deal with the issues, it may be helpful to set out some of the background.

2. The 1st Defendant is the son of the 2nd Defendant. I shall refer to them as "the son" and "the mother" respectively.

3. The son is the registered owner of a flat in Kowloon which was assigned to him in September 1985. It is common ground that the flat was acquired under the housing ownership scheme and that the provisions of the Housing Ordinance applied.

4. The property was charged to a bank at the time of purchase. In 1992, the legal charge was discharged.

Provisional Sale and Purchase Agreement

5. In February 1997, the son entered into a Provisional Sale and Purchase Agreement for the sale of the property to the Plaintiff ("the Purchaser"). An initial deposit of $50,000 was paid to the son.

6. It was agreed that the parties would enter into a Formal Sale and Purchase Agreement on 28 February 1997 and that completion would take place on 28 August 1997.

7. It was also agreed in the Provisional Sale and Purchase Agreement that on 31 May 1997, the son would deliver the keys to the property to the estate agent for forwarding to the Purchaser for decoration work to be commenced.

8. There was also an annexure to the Provisional Sale and Purchase Agreement which dealt with matters arising from the fact that the property was acquired under the Housing Ordinance.

9. It may be helpful at this juncture to set out the relevant provisions of the Housing Ordinance. Under paragraph 1 of the Schedule to the Ordinance, a person who has acquired property under the Ordinance ("the owner") is not permitted to alienate or enter into an agreement to alienate the property unless 10 years have elapsed from the date of acquisition and a premium (to be assessed by the Director under a statutory formula) has been paid to the Housing Authority. However, this is expressly subject to paragraph 4 of the Schedule.

10. Paragraph 4 of the Schedule provides that even though the owner has not paid the premium, he may enter into an agreement for sale of the property provided that it is a condition of such agreement that the premium be paid to the Authority prior to assignment and within 28 days of the date of the agreement or such period as may be otherwise stipulated by the Director. This latter provision caters for situations where payment could not be effected within 28 days of the agreement, for instance where the owner applies for assessment after that period, or where the assessment is not completed within that period. Thus, paragraph 5(b) of the Schedule provides that upon completing the assessment, the Director would give notice to the owner of, amongst other things, the amount of the premium and the date, not less than 28 days from the date of the notice, by which the premium is to be paid.

Formal Sale and Purchase Agreement

11. On 13 March 1997, a Formal Sale and Purchase Agreement was entered into between the son as vendor and the Plaintiff as purchaser. The son purported to contract in the capacity of beneficial owner.

12. Clause 27 of the Agreement provided that the Agreement set out the full agreement between the parties and superceded all previous agreements and contracts whether oral or in writing entered into by the parties thereto.

13. Clause 31 contained provisions regarding the payment of the premium. Although this clause is not well drafted, it contained the provisions set out in the Schedule to the Housing Ordinance, so that the Agreement was not in breach of the condition of inalienability. It is clear that the premium was to be paid by the vendor, but that the amount thereof could be paid (or "deducted") from the balance of the purchase price assuming that the premium was payable on completion date.

14. A further deposit of $116,800 was paid by the Purchaser to the son, so that the total of the deposits paid was $166,800, or 10% of the purchase price.

15. On 4 April 1997, the Formal Sale and Purchase Agreement was registered.

Matters subsequent to Formal Sale and Purchase Agreement

16. As events transpired, the son did not give the keys to the Purchaser for decoration purposes, but the Purchaser took no action on that.

17. On 4 July 1997, the Purchaser entered into a sub-sale agreement to sell the property to a limited company at a profit of about $280,000. Completion was to be on the same day as that under the sale and purchase between the son and the Purchaser.

18. It would appear that notwithstanding the son's obligation under Clause 31 of the Formal Sale and Purchase Agreement to apply within 30 days of the Agreement to the Housing Authority to assess the premium payable, he did not do so.

19. About one week before the completion date, the Purchaser's solicitors wrote to the son's solicitors pressing for the title deeds for investigation of title. No title deeds were forthcoming. Eventually, on 29 August 1997, the son's solicitors informed the Purchaser's solicitors that they has no further instructions to act in the transaction. Completion did not take place.

20. On 1 September 1997, the sub-purchaser terminated the sub-sale agreement. On 22 October 1997, a Cancellation Agreement was entered into between the Purchaser and the sub-purchaser, under which the Purchaser agreed to pay compensation of slightly less than $20,000 to the sub-purchaser, apart from returning the deposits paid.

21. It would appear that it was not until 24 December 1997 that the son applied to the Housing Authority for assessment of the premium. On 24 January 1998, the Housing Authority informed the son that the market value as assessed was $1,870,000 and that the premium was $431,276 payable on 24 March 1998.

22. However it would appear that the premium was not paid, and there is no evidence of any agreement for a new completion date (the completion date under the Formal Agreement having been 28 August the previous year) or any progress towards completion of the Agreement between the son and the Purchaser.

23. On 21 July 1998, the Purchaser terminated the Agreement by reason of the son's breach.

24. On 25 August 1998, the present action was commenced, with the Purchaser claiming the return of the deposits with interest, damages, costs, and a declaration that he is entitled to a lien on the property as security for amounts owed to him. The writ was registered as a lis pendens on 9 September 1998. Under s.5A of the Land Registration Ordinance cap.128, the lis pendens has priority from the commencement of the day following the date of registration.

The mother's claim

25. After the issue of the writ, but before its registration, the mother caused to be registered on 4 September 1998 a document written in Chinese dated 12 December 1988 and stamped on 30 October 1991, which she refers to as a "trust deed" although it was not under seal (referred to in this Decision as "the trust document"). A copy is attached to this Decision.(See at the end of this document.)

26. The mother has claimed to be the beneficial owner of the property under a constructive (presumably a resulting) trust arising from payments allegedly made by her for the acquisition of the property. She was accordingly joined as the 2nd Defendant. She has exhibited a number of documents showing that in the 7 years from the acquisition of the property in September 1985 to redemption in 1992, there were payments from her bank passbooks equivalent to the mortgage instalments -

from October to November 1986,
from March 1987 to December 1987,
from February 1988 to June 1988,
from April 1989 to April 1991 and
from September 1991 to redemption of the mortgage in 1992.

27. The final redemption amount came from an amount received by her from an insurance company.

28. However, it has not been alleged by either defendant that the Purchaser was or should have had notice of any interest that the mother had in the property. The mother has not alleged in any of her Affirmations that she occupied the property at the time when the agreement between the son and the Purchaser was made. Indeed, a document dated 11 November 1999 signed by her and annexed to her Affirmation made on 12 November 1999 states that she had used her savings to purchase the property as a residence for two of her sons. And, as recounted above, the trust document was not registered until 4 September 1998, nearly 10 years after the date appearing thereon.

The Master's order

29. On 11 October 1999, the Purchaser issued a summons for summary judgment under O.86.

30. As between the Purchaser and the son, Master Lau ordered and declared that the Agreement had been validly terminated by the Purchaser and he entered final judgment for the Purchaser against the son for the return of the deposits with interest. Interlocutory judgment was also entered against the son for damages to be assessed.

31. He also declared that the Purchaser was entitled from 13 March 1997 (being the date of the Formal Agreement) to a lien on 37.88% of the property for securing payment of the deposits, interest thereon and costs.

32. As between the Purchaser and the mother, the master gave the mother unconditional leave to defend as to the Purchaser's claim of lien on the balance of 62.12% of the beneficial interest of the property. He proceeded to give directions which are not relevant to this Decision.

33. As a master is not required to give reasons for his decision, it is not entirely clear how this figure of 62.12% is derived. Mr Yang, the Plaintiff's solicitor who attended the hearing before the master, suggests this was the master's own calculation of payments made by the mother after the date of the trust document, based upon a variation of certain figures that Mr Yang had supplied in his skeleton argument.

Working from those figures,

(1) the total purchase price was about $319,432.00 being

(a) down payment in September 1985 (including legal fees) of $34,963,

(b) mortgage instalments of $173,250 (about $2,250 per month for 77 months from October 1985 to March 1992), and

(c) redemption figure paid in April 1992 of $111,219.00;

(2) the down payment (including legal fees) together with the mortgage instalments for the 38 months from October 1985 to December 1988 (the date of the trust document) totalled $120,463.00;

(3) taking the $120,463 as a proportion of the $319,432, one arrives at 37.71%. The balance (i.e. payments made after the date of the trust document) is 62.29%.

34. Although there is a discrepancy of 0.17%, this is probably the explanation for the percentage figure in the Order. It is not necessary for this court to explore this any further since the appeal is by way of rehearing anyway.

35. Both defendants are appealing. Although no notice of cross-appeal would be required should the Plaintiff seek to overturn the master's order for unconditional leave, Mr Yang informed the Court that he was content with the Master's order.

The son's appeal

36. I deal first with the son's appeal. He appeared in person. It would appear from his Affirmations and his oral submissions that his primary argument was that the Purchaser did not pay the premium, and that the Purchaser was in breach of the Agreement in sub-selling the property to a limited company which would be in breach of the Housing Ordinance.

37. As to the first argument, the Formal Sale and Purchase Agreement is clear that it is for the vendor (the son) to pay the premium [Clause 31(b)], although he could, prior to the assignment, pay it from the balance of the purchase price payable on completion date. There was no obligation on the part of the Purchaser to pay the premium at any time before completion date. At no time was there any allegation made in correspondence from the son's solicitors that the Purchaser had been in breach of any agreement to pay the premium prior to completion date.

38. The original completion was aborted not through any fault of the Purchaser. The completion date had come and gone without the son even asking the Authority for an assessment of the premium. It is clear from the correspondence from the son's solicitors that there was no intention on his part to complete the Agreement. At no point were title deeds delivered to the Purchaser's solicitors for investigation of title.

39. Although the son did ask for an assessment of premium in December 1997 after the original completion date, there is no evidence before me to show that the parties had agreed any subsequent completion date. There was no evidence that the vendor had ever informed the Purchaser of the assessment or had ever asked the Purchaser to pay the same before or at any postponed completion date; and if so, what the response from the Purchaser was..

40. As to the son's further argument that the Purchaser was in breach in sub-selling the property to a limited company which he said was in contravention of the Housing Ordinance, the sub-sale and purchase agreement also contained the provisions stipulated in the Schedule to the Ordinance, and the assignment to the sub-purchaser would only take effect after the payment of the premium, thus removing the inalienability imposed under the Ordinance. The son did not seek to argue that sale to a limited company was not permitted even after payment of the premium. In so far as he might have suggested that a sub-sale in itself was in breach of the Agreement made by the Purchaser, it is clear from the terms of the Agreement that a sub-sale was not prohibited.

41. As a matter of completeness, I would deal with the son's argument that if the Purchaser had truly intended to purchase the property, he (the Purchaser) would have sued him (the son) in May 1997 when the keys to the property were not given to the estate agent for decoration as provided under the provisional sale and purchaser agreement. In my judgment, that is neither here nor there. Since the Agreement did not prohibit sub-sale, the Purchaser would have been at liberty to deal with the property as he pleased, whether for his own use or for sub-sale. He could certainly waive his right to enter for decoration.

42. It is clear from the above that the son has no defence and the Master was right. Accordingly, I would dismiss his appeal and I would make an order nisi that the costs of the appeal be to the Plaintiff.

The mother's appeal

43. The mother's appeal is based on her claim to the entire beneficial title of the property which she claims defeats the Purchaser's lien on the property. In effect, it is a contest between the Purchaser's lien and the mother's claim to beneficial ownership under a trust.

44. In the determination of this contest, it is important to analyse how and when these respective rights have arisen. Are they registrable? If they are registrable, were the documents registered? And if so, from what dates do these documents have priority?

The purchaser's lien

45. I shall first consider the Purchaser's claim to a lien. It is well-established law that a purchaser acquires a lien on property at the time he pays the purchase price (or any part of it). The lien is a security on the property which is enforced when the Vendor fails to complete the assignment, but the lien had arisen at the earlier stage when the purchase price (or any part of it) was paid.

46. In Rose v Watson (1864) 10 H.L.C. 672, Lord Cranworth held (at 683):-

"There can be no doubt, I apprehend, that when a purchaser has paid his purchase money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is, in equity, considered as the owner of the estate. When instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary, that, to the extent to which he has paid his purchase-money, to that extent the vendor is a trustee for him; in other words, that he acquires a lien, exactly in the same way as if upon the payment of part of the purchase-money the vendor has executed a mortgage to him of the estate to that extent". [emphasis added].

47. In Whitbread & Co Ltd v Watt [1901] 1 Ch 911 at 915, Farwell, J further expounded on that principle when he held (in a judgment that was upheld in the Court of Appeal as being "extremely clear and extremely forcible" [1902] 1 Ch 835, at 839):-

"The lien is created by the contract under which the money is paid as part of the purchase-money, ... and not by the default of the Vendor. The default gives rise to the necessity for enforcing the lien, but the lien arises from the contract."

48. The vendor's receipt of part of the purchase price (which gives rise to the lien) is acknowledged in the Agreement for Sale and Purchase. The Agreement is thus clearly registrable as an instrument in writing by which the property was affected (s.2 Land Registration Ordinance).

49. The Agreement was in fact registered on 4 April 1997. As it was registered within 1 month after its execution, by virtue of s.5 of the Land Registration Ordinance, it is entitled to priority and takes effect by relation to the date of execution, i.e. 13 March 1997.

50. Having thus established that the Purchaser's lien was registrable, was registered and took effect from 13 March 1997, I shall now turn to examine the mother's interest.

The mother's interest

51. The mother's interest arises from her payment of all or part of the funds with which the property had been purchased. For the purposes of this Decision, it is not necessary to consider whether she had paid all or part of the funds, and I shall assume that she had in fact paid all the funds.

52. If all that had happened was that the mother had paid the purchase price, (then absent any presumption of advancement from a mother to a child), her interest would arise from a resulting trust, which is an unwritten equity, and therefore unregistrable. The Land Registration Ordinance simply would not apply and the parties would then be thrown back to their positions vis-a-vis each other in equity.

53. However, in the present case, there was the trust document which was purportedly executed in 1988 but which was not registered until 4 September 1998, after the registration of the Agreement for Sale and Purchase acknowledging the receipt of the purchase price and the creation of the lien.

54. It is therefore essential to consider the effect of the trust document, which was executed when only part of the mortgage instalments had been paid.

55. It first contains an acknowledgment by the son that the mother had paid the down payment, legal fees, stamp duty, decoration expenses and mortgage instalments for the property (impliedly, up to the date of the document) and that he had not paid any.

56. The son then states his willingness to give the mother all the rights and benefits in the property for her disposition and enjoyment. It goes on to say that in due course, he must in accordance with proper legal procedures transfer the title back to the mother or to any person she designates.

57. In my view, that document is an express declaration of trust. It transforms what was an unwritten equity into a trust which was expressly declared in writing.

58. Once that was done, the unwritten equity has been subsumed. There is no other interest which is not contained in the express declaration and which might have survived extraneously of the written document. The position in law has been thus expressed in the Full Court's decision in Chu Yam Om and Cheung Lan Chau v Li Tam Hoi Hing [1956] 40 HKLR 114, at 116-7:-

" The question that now arises is: does the said declaration of trust in writing remove and replace any resulting trust that may have existed prior to the said declaration by reasons of the assignment of the land in question to the appellants and the fact that the land in question was bought by other people's money?

     We would say that it does. In our view, the declaration of trust has been clearly and sufficiently expressed; and, that being so, no resulting or implied trust can, in our view, possibly co-exist with it; for by its nature a resulting or implied trust can only arise in the absence of a sufficiently express declaration. Furthermore the whole purpose of registration under the Land Registration Ordinance would be defeated if a person could at will substitute a resulting or implied trust for an express written declaration of trust whenever that written declaration happened to be unregistered".

59. In the present case, what the mother is seeking to do is to substitute the unwritten equity for the express written declaration of trust, because the written declaration happened to be registered later than the Purchaser's registered interest.

60. When Chu Yam Om went on appeal to the Privy Council, it was held ([1946-72] HKC 55, at 61G-H) :-

"The appellants had a further submission in order to avoid the consequences of the non-registration of the declaration of trust. There was a two days interval between the conveyance and the declaration. In those two days the appellants would, it is submitted, have been bound by an oral resulting trust to hold the property for the school. It is then suggested that this oral trust survived the reduction of its terms into writing for the purpose of defeating the provisions of the Land Registration Ordinance. This would appear to have been the main point argued on appeal. It was rightly rejected by the full court. There is no suggestion that the declaration of trust was inconsistent with the prior position. As from its date, the trust was contained in the document and in the document alone."

61. The mother cannot have the best of both worlds. An unwritten equity such as a resulting trust is unregistrable and thus not subject to the Land Registration Ordinance, but there may be difficulties with proof and it would be defeasible by "equity's darling"- the bona fide purchaser of the legal estate for value without notice.

62. Having traded those insecurities attending an unwritten equity for a written declaration of trust - a registrable instrument, she subjected herself to the regime of the Land Registration Ordinance. As she did not register the trust document until after the Purchaser's registration of the Agreement, the Purchaser's lien takes priority.

63. I do not see how the decision of Hunter J in Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd [1985] HKLR 103 (relied upon by Mr Walker Sham, counsel for the mother) affects that position. In that case, the plaintiffs had an unwritten equity by virtue of payment off of Banker 1. That unwritten equity was as an equitable assignee of Banker 1's mortgage (with the terms and conditions particular to that mortgage). That is a different interest to that which the plaintiffs got later from their own mortgage as first legal mortgagees. That is why the judge said the unwritten equity "survived inconsistent agreement and documentation" (at 110 H-I).

64. The mother's appeal must therefore be dismissed, the Plaintiff being content with the Master's order in respect of the percentage stated in the Order. I would also record that it was not part of the mother's case that costs could not be properly included in a purchaser's lien. On the contrary, her case was that costs could be included - Mr Sham using that as an argument for his proposition that a lien does not arise until the time of its enforcement, an argument I have dealt with above.

Order

65. I would therefore order that both appeals be dismissed with an order nisi that the defendants (appellants) pay the costs of the appeal.

A diagram is put in here