Ho King-yim v. Lau King-mo

CACV000040/1979

Land Registration - charging order registered after Agreement for sale and purchase but before Assignment - doctrine of merger - registration of charging order does not affect interest of purchaser acquired under registered Agreement Obiter: purchaser nevertheless under obligation to account to chargee for any balance of purchase price if he has actual notice of charge.

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Coram: Huggins, J .A., Cons and Yang, JJ.

Date of Judgment: 22 January 1980

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JUDGMENT

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Huggins, J .A.:

1. This appeal is brought against the decision of Zimmern, J. dismissing an action for an order vacating entries in the land register relating to charging orders nisi and absolute and for a declaration as to the priority, under the Land Registration Ordinance, of the competing interests of the parties. The defendant Respondent obtained a judgment against Chan Han in the sum of $22,200 with costs on 7th June 1978. On 27th June 1978, before any step had been taken to execute the judgment against the land, Chan Han entered into a sale and purchase agreement with the plaintiff Appellant. The land had been mortgaged to a bank in respect of an overdraft facility in the sum of $80,000 and it was common ground that the mortgage had priority over the interests of both the present parties. The purchase price was $110,000, of which $10,000 was paid by way of deposit, leaving $100,000 to be paid on completion. The Agreement was duly registered on 30th June 1978. Then on 17th July 1978 the Respondent obtained a charging order nisi against the land and had it registered on 18th July. Under s. 5A that registration took effect from 19th July. The sale from Chan Han to the Appellant was completed by an Assignment dated 24th August, which was registered on 25th August. The Respondent's charging order was made absolute on 30th September and the order absolute was registered on 4th October 1978.

2. The judge held that, although the Appellant's purchase agreement had priority over the charging order, the agreement merged into the assignment and that, since the charging order was registered before the assignment, the Appellant became a "subsequent" purchaser. He described the result as follows:

In the event the Appellant paid the whole purchase price to Chan Han and nothing at all to the Respondent, whereas the conclusion of the learned judge was that the Appellant was required to pay not only the balance of the purchase price but the entire judgment debt, if he was to acquire the land free of the charge.

3. Three questions have been canvassed:

4. It is not in dispute that an order charging the land with a judgment debt can operate against only such interest as the judgment debtor has. At the date at which the charging order was made in this case the judgment debtor (Chan Han) had already concluded a binding contract for the sale of the land to the Appellant. Chan Han therefore held the legal estate as trustee for the Appellant and the substantial beneficial interest was in the Appellant. Nevertheless Chan Han did retain a limited beneficial interest: she was

"a trustee having a personal and substantial interest in the property, a right to protect that interest, and an active right to assert that interest if anything should be done in derogation of it. The relation, therefore, of trustee and cestui que trust subsisted, but subsisted subject to the paramount right of the vendor and trustee to protect [her] own interest as vendor of the property". (Per Lord Cairns in Shaw v Foster 1872 L.R. 5 English and Irish Appeal Cases 321, 338.)

Her rights were, I think, rights which could be the subject matter of a charging order. In addition the vendor acquired a beneficial interest in the purchase money. When payment was made, the vendor ceased to have any beneficial interest at all in the land and the full relation of trustee and cestui que trust related back to the formation of the contract: see 34 Halsbury (3rd edition) 292 (485). Such relation back inevitably destroyed the basis of any charging order on the vendor's interest, since that order was made subsequently to the agreement of sale and purchase. The result is that, although the charging order was not totally ineffective, it was of very limited effect as an incumbrance on the land and would cease to have even that limited effect upon completion.

5. It is contended on behalf of the Respondent that, because the charging order was registered before the assignment, the Respondent has priority over the Appellant in spite of the fact that the Agreement for sale and purchase which led to the assignment was registered before the charging order. The basis of this contention is that the agreement merged into the assignment. No authority for this proposition has been cited to us, but before the judge reliance was placed upon Knight Sugar Co. Ltd. v Alberta Railway and Irrigation Co. 1938 1 All E.R. 266. The effect of that decision is summed up in the words of Lord Russell of Killowen at p. 269E: "the real completed contract is to be found in the deed". That learned judge recognized, however, that there could be "provisions of the contract which, from their nature, or from the terms of the contract, survive after completion" (Idem). Quite apart from that I do not think that the fact that there was an agreement can properly be ignored. It was the agreement which in the first place transferred the substantial beneficial interest and that transfer was merely confirmed by the assignment. Such beneficial interest in the land as the vendor continued to enjoy pending completion was essentially temporary in character and could not exist in any one after completion. The registration of the charging order could not destroy the effect of the prior, registered Agreement and thus affect the purchaser's beneficial interest which the agreement had transferred.

6. It would follow from the Respondent's contention that the very existence of a subsequent incumbrance on the land would depend upon whether or not the purchaser had notice of the purported incumbrance. That cannot be right. Where both a contract for the sale and purchase of land and an assignment pursuant to that contract have been registered, it seems to me that no charge created after the date of the contract can rank prior to the interest of the purchaser or, a fortiori, to the interest of the purchaser's successors in title.

7. In my view once the Appellant, as purchaser, has established his right to take the land unencumbered, that is an end of the present appeal. It is argued that the Appellant was nevertheless bound to pay off the charge to the extent of the balance of the purchase price remaining unpaid at the date he was given notice of the charging order. The argument is based upon Rayne v Baker (1859) 1 Gif. 241 and upon the analogy of the law relating to mortgages. For reasons which will be elaborated by Cons, J. in his judgment, a copy of which I have read in draft, I think that this argument is correct. As I have said, the vendor acquired a beneficial interest in the purchase money and I would agree with the learned trial judge that upon receipt of actual notice of the charge the purchaser became liable to account to the Respondent for the purchase money - but only to the extent of the charge. However, in the absence of any relevant claim it is not necessary to decide this point.

22nd January 1980.

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Coram: Huggins, J.A., Cons and Yang, JJ.

Date of Judgment: 22 January 1980

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JUDGMENT

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Cons, J.:

8. In June 1978 the Appellant in these proceedings agreed to purchase a flat. I shall call him hereafter "the purchaser". The total purchase price was to be $110,000. Of this $10,000 was to be paid immediately by way of deposit and part payment. The rest was due on completion. When that time came, $80,000 - I speak in rough figures - was paid to a bank to which the vendor had mortgaged the flat to secure an overdraft. The balance of $20,000 was paid to the vendor.

9. However, between the signing of the agreement and the actual assignment the Respondent to these proceedings had obtained a charging order nisi against the flat to enforce an earlier judgment debt which he had obtained against the vendor. I shall call the Respondent hereafter "the chargee". The charging order nisi was not made absolute until after the assignment, but it is accepted that it then related back so that the effective date is that of the order nisi.

10. All these instruments were duly registered in the Land Registry in the order in which they were executed, that is the agreement for sale, the charging order and the assignment. Counsel for the chargee called it "a sandwich situation". It raises two interrelated questions: what in these circumstances is the effect of the transactions and what is the priority between the purchaser and the chargee?

11. Counsel for the purchaser argues that since the charging order was made subsequently to the agreement the charging order has no effect. He says that at the time at which the charging order was made the vendor had retained no interest in the land on which the order could fasten because the beneficial ownership had already passed to the purchaser, and that all that remained in the vendor was the legal estate which was held on trust for the purchaser. The charging order could not fasten onto that. The vendor could not give to the chargee an interest greater than that he held himself. He referred us to several passages in Halsbury's Laws of England, 3rd edition, Vol. 34, to the Annual Practice and to the case of Re Bell⁽¹⁾.

12. However, although it is clear that the vendor cannot give to the chargee more than he himself has, it is equally clear that he himself has something more than a bare legal estate. The authority for this is to be found in Shaw v Foster⁽²⁾:

"Under these circumstances I apprehend there cannot be the slightest doubt of the relation subsisting in the eye of a Court of Equity between the vendor and the purchaser. The vendor was a trustee of the property for the purchaser; the purchaser was the real beneficial owner in the eye of a Court of Equity of the property, subject only to this observation, that the vendor, whom I have called the trustee, was not a mere dormant trustee, he was a trustee having a personal and substantial interest in the property, a right to protect that interest, and an active right to assert that interest if anything should be done in derogation of it."

13. As I see it the interest of the vendor, although of a very particular character, is an interest in land and is capable of being charged. It is another matter, however, whether the charge can be enforced against the land itself unless, of course, the sale falls through and the agreement is removed from the register.

14. Counsel for the purchaser drew our attention to a further passage in Halsbury at para. 485:

"In the second place the vendor is not a bare trustee. Until payment he retains a personal and substantial interest in the property, a right to protect that interest, and an active right to assert it if anything in derogation of it should be done, and the relation of trustee and cestui que trust is subject to the paramount right of the trustee to protect his own interest as vendor of the property. There is, in fact, only a qualified trusteeship until the price is paid and nothing remains to be done by either party except the execution of the deed of conveyance; when, however, that stage has been reached, the full relation of trustee and cestui que trust thereby established relates back to the formation of the contract."

15. With every respect to the learned editors of Halsbury, as I read the cases cited in the footnote to that paragraph, only the first clearly supports the proposition. And I note that that is a dissenting judgment. The proposition did not find favour with the other two Lords Justices. And there is another difficulty. As will be seen later, one of the arguments of the chargee is that by reason of his having notice of the charge the purchaser ought to have satisfied the charge, at least so far as he was able, out of the purchase monies. If that be so it would be difficult to accept that by paying $20,000 to the vendor the purchaser had, in fact and in equity, made full and proper payment.

16. The first argument of counsel for the chargee is that upon the execution of the assignment the contract ceased to have independent existence. It merged instead into the deed thereby losing the priority that it had held over the charging order. As counsel put it, the top slice of the sandwich was removed leaving the filling in command. The authority for this that was put to the learned trial judge was Knight Sugar Co., Ltd. v The Alberta Railway & Irrigation Co.⁽³⁾:

"But it is well settled that, where parties enter into an executory agreement which is to be carried out by a deed afterwards to be executed, the real completed contract is to be found in the deed. The contract is merged in the deed: Leggott v Barrett 43 L.T. 641. The most common instance, perhaps, of this merger is a contract for sale of land followed by conveyance on completion. All the provisions of the contract which the parties intend should be performed by the conveyance are merged in the conveyance, and all the rights of the purchaser in relation thereto are thereby satisfied."

17. No further authority was put to us.

18. I am willing to accept that technically speaking the contractual obligations merged in the deed. The contract is therefore no longer necessary. I am not prepared to go further and say that for all purposes whatsoever the contract must be taken never to have existed. For that is in effect what counsel asks. The contract did exist. It had a life of its own. And it had an effect on the land. It passed a beneficial interest in that land to the purchaser. All that the subsequent assignment did in this respect, if anything at all, was to confirm the passing of that interest. I find it impossible to accept that something which is necessary to perfect the rights of the purchaser should at the same time be held as taking some of those rights away retrospectively.

19. Counsel submits that priority has relation to instruments alone and that the contract having merged in the deed, there is nothing left to be accorded priority. I think that is too narrow a view. Priority affects the time or order in which instruments take effect. In my view there can be no doubt. The agreement has priority over the charging order.

20. It is conceded by the purchaser that at the time of the assignment he did in fact have actual notice of the chargee's claim. By reason of that concession counsel for the chargee puts forward - as his second argument - a dual proposition: either the charge remains an incumbrance upon the land to the extent of the balance of the purchase monies or, alternatively, that the purchaser was under an equitable duty to pay the balance of the purchase monies direct to the chargee.

21. However, counsel concedes that if the purchaser had not had notice of the charge then he would have taken free from the charge completely. To my mind this concession by the chargee illustrates the weakness of his first proposition. Notice alone has no effect. For example, a subsequent purchaser would take free from the charge even though he himself had notice of it: Barrow's Case⁽⁴⁾.

22. I think it therefore wrong to say that the charge continues as an incumbrance or partial incumbrance upon the land. The interest on which the charge originally fastened was an equitable interest peculiar to the vendor. That interest did not pass to the purchaser. He had no need of it. By the time the assignment was completed that interest had already served its purpose and must, I think, have gone out of existence.

23. For his second proposition counsel relies upon the case of Rayne v Baker⁽⁵⁾, and by analogy upon the rule that a mortgagee who sells mortgaged property must pay any surplus monies realized by the sale, not to the mortgagor, but to a subsequent mortgagee of whom he has notice. The facts of Rayne v Baker are not easy to follow. For the purposes of this case they may be put thus.

24. There was an agreement for the sale of land with immediate possession. As security for the purchase price, which was not to be paid in full until some ten years thence, the purchaser mortgaged the land back to the vendor by the deposit of the title deeds. During the course of those ten years the vendor borrowed money from a third party against further deposit of the same deeds. Later the vendor became bankrupt. In an action by the third party against the purchaser and against the assignees in bankruptcy (who did not appear) the purchaser attempted to show that by various dealings between himself and the vendor the whole of the purchase money had been satisfied before he had notice of the third party's claim. However, it was found as a fact that this was not so and it was therefore held that the purchaser was liable to the third party to the extent of the unpaid purchase monies.

25. I appreciate that in Rayne's Case the vendor was at the same time both vendor and mortgagee and that, perhaps, strictly speaking, the judgment should have referred to "mortgage repayments" rather than "purchase money" as remaining unpaid. But I do not think this makes any difference in principle. A contracted vendor and a mortgagee are each in the same position as regards the land. It is security for their monies, nothing more. In my view the present case is on all fours with Rayne's Case. It follows that the purchaser should have paid the balance of the purchase price to the chargee. I do not derive any assistance from the rule relating to mortgages. That is just another example of the possibility that a person holding an interest in land may, in particular circumstances, acquire obligations to the holder of another interest which is created subsequently to his own.

26. In these proceedings the Respondent makes no attempt to claim what is due to him. It is only the Appellant who seeks a remedy. He asks for declarations that his agreement for sale and purchase has priority over the Respondent's charging order and that his title is no longer encumbered thereby. The learned trial judge said he was not entitled to those declarations. With respect I think the judge came to the wrong conclusion on that particular matter and I would, accordingly, allow the appeal.

Representation:

Martin Lee, Q.C. and B. de Souza (Woo & Woo) for the Appellant.

Patrick Chan (Ng & Yung) for the Respondent.

(1) (1886) 54 L.T. 470

(2) 5 L.R.H.L. 321 at 338

(3) 1938 1 All E.R. 266 at 269

(4) 1880 14 Ch. 432

(5) 65 E.R. 903