Wong Kam Fung and Another v. Smart Profit Enterprises Ltd

HCMP 346/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 346 OF 2014

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BETWEEN

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J U D G M E N T

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1.These proceedings concern a property known as Portion 3 of Shop C on Ground Floor, Nos. 146 and 148 Lockhart Road and No. 2A O’Brien Road, Hong Kong (“Property”), and two provisional sale and purchase agreements both relating to the Property.

2.By an Originating Summons dated 13 February 2014, the Plaintiffs (“Ps”) apply for:

(a) A declaration that the provisional sale and purchase agreement dated 1 November 2013 in relation to the Property between Ps and the Defendant (“D”) (“2^ndPSPA”) has been terminated, and has ceased to have effect on the Property; and

(b) An order that D shall forthwith cause or procure the vacating of registration of the 2^nd PSPA against the Property at the Land Registry on 6 November 2013.

Background

3.The 1^st Plaintiff (“P1”) is the wife of the 2^nd Plaintiff (“P2”).  As joint tenants, they own the Property.  They were aged 71 and 65 at the material times. 

4.By a provisional sale and purchase agreement dated 31 October 2013 and registered against the Property at the Land Registry also on 6 November 2013, Ps agreed to sell and Fancy Terrace Ltd (“FTL”) agreed to purchase the Property (“1^st PSPA”) at HK$17 million. P1 signed the 1^st PSPA twice, once for herself and a second time for and on behalf of her husband.

5.According to Ps, on 31 October 2013, upon P2’s return to Hong Kong, he refused to sign a letter of authorisation to authorise his wife to sign the 1^st PSPA on his behalf. 

6.Subsequently, by the 2^nd PSPA signed on the next day, Ps agreed to sell and D agreed to purchase the Property for the consideration of HK$18.8 million.

7.Pursuant to the 2^nd PSPA, by a cheque dated 1 November 2013 D paid HK$500,000 as initial deposit upon the signing of the same.  The cheque was made out to Ps’ then solicitors, Messrs Wong, Fung & Co (“WF”) acting as stakeholders. 

8.By a letter dated 11 November 2013, D’s solicitors, Messrs Kok & Ha (“KH”), wrote to WF and requested the title deeds and documents of the Property.

9.WF replied by a letter of the same date by which, inter alia, D was invited to consider agreeing to cancel the 2^nd PSPA.

10.By a letter dated 15 November 2013 from KH to WF, it was stated that Ps could not proceed with the sale of the Property to D by reason of the registration of the 1^st PSPA against the same.  Ps had thereby repudiated the 2^nd PSPA, which was accepted by D.

11.By a letter dated 16 November 2013, WF wrote to KH complaining that D had jumped the gun in that completion of the sale was to take place on 20 January 2014 and that Ps were only required to pass good title to the Property upon completion.  Further, it was said that D had repudiated the 2^nd PSPA in failing to pay a further deposit of HK$1,380,000 to Ps on or before 15 November 2013 in accordance with cl. 2(b) thereof, which was accepted.  By that same letter the initial deposit of HK$500,000 was said to be forfeited by Ps.

Ps’ case on the 1^st PSPA

12.Ps say that they had been misled by their property agent, Midland Realty (Shops) Ltd (“Midland”), into selling the Property twice.  Their story may be summarised as follows. 

13.In September 2013, Fred Hui (an agent from Midland) approached P1 for a potential sale of the Property.  Subsequently, Jamie Leung (another agent from Midland) informed Ps that she was able to find a purchaser for the Property.  However, nothing materialised from such initial efforts.

14.In October 2013, Jamie Leung kept contacting P1 to set up a sale.  On 31 October 2013, Jamie Leung informed P1 that she had found a purchaser offering HK$18 million for the Property.  They met for lunch to discuss the matter, during which P1 was told that the offer was only HK$17 million.  P2 was not in Hong Kong at that time.  P1 called her husband to discuss the offer but no conclusion was reached.  P1 then told Jamie Leung to wait for P2 to come back at 7pm that day to further discuss the matter.  Jamie Leung then represented to P1 that she could sign on the 1^st PSPA both on her own behalf and on P2’s behalf.  P2 could sign a letter of authorisation in her favour after he returned to Hong Kong.

15.P1 did as advised.  However, she told Jamie Leung that she was not authorised by P2 to sign the 1^st PSPA, and the document would only be effective after P2 returned to Hong Kong and signed the letter of authorisation.

16.P2 came back to Hong Kong in the evening of 31 October 2013.  He told Jamie Leung of his refusal to sell the Property for HK$17 million.  He also refused to sign the letter of authorisation.

17.Ps’ case is that the 1^st PSPA is not an effective document.  But unknown to them, Jamie Leung represented to FTL that they had agreed to sell the Property at HK$17 million.

18.With the belief that the 1^st PSPA was ineffective, P2 called Fred Hui and was told that there was an offer for the Property at HK$19 million.

19.On the next day, 1 November 2013, Fred Hui, Kitty Yau, Ray Fung, all agents from Midland, went to Ps’ office to have them sign the 2^nd PSPA.  Before he signed the document, P2 asked the agents how to deal with the ineffective 1^st PSPA.  Ps were told that D was owned by a senior person in the management of Midland (Tony Lo), and that he would take care of the situation.  They were told to sign the 2^nd PSPA and not to worry.

20.As events unfolded, FTL is seeking to enforce the 1^st PSPA.  On 18 November 2013, it commenced an action, HCA 2222/2013, against Ps for, inter alia, specific performance of the 1^st PSPA and damages. 

21.In the Defence and Counterclaim filed by Ps in HCA 2222/2013, it was pleaded, inter alia, that P1 had no authority to sign the 1^st PSPA on behalf of P2, and that the document had never become binding upon them. 

22.However, by a letter dated 25 January 2014, Messrs Leung & Associates (“LA”), Ps’ new solicitors, informed FTL’s solicitors, Messrs Alex Ho & Co (“AH”), that Ps would (on a without admission of liability basis) sell the Property to FTL.  Further, the title deeds and documents in respect of the Property were sent to AH under cover of a letter from LA dated 6 February 2014.  It has been said by Ps that selling the Property to FTL under the 1^st PSPA is a practical step taken pursuant to legal advice and in the hope that their claims (see below) can be pursued in a costs effective manner. 

23.The completion of the sale to FTL requires the vacation of the registration of the 2^nd PSPA against the Property, and hence this application. 

HCA 2458/2013

24.Ps have commenced an action on 17 December 2013, HCA 2455/2013, against Midland, all the agents mentioned above including Tony Lo and D to seek damages and/or to rescind the 2^nd PSPA based on breach of real estate agent’s duties, misrepresentation and conspiracy to injure.

25.In summary, D’s response in HCA 2455/2013 is as follows :

(a) When D entered into the 2^nd PSPA, the 1^st PSPA was not registered and it was unaware of its existence. 

(b) Tony Lo was not the supervisor or boss or team leader of the agents who are being sued in that action.  Tony Lo was part of the management of Midland and did not usually work directly with sales teams.

(c) D counterclaims for, inter alia :

(i) Repayment of the deposit and part payment under the 2^nd PSPA in the sum of HK$500,000 (“Deposit”);

(ii) Damages for breach of the 2^nd PSPA;

(iii) A lien on the Property for the return of the Deposit, all damages and/or other sums of money, interest and costs awarded in favour of D in those proceedings; and

(iv) Costs.

26.It is common ground that the Defence and Counterclaim of D has not been registered as a lis pendens against the Property.

Deposit

27.It is not disputed that the cheque for the Deposit has been kept by Ps’ solicitors.  More importantly, it has never been presented for payment.  Under the banking practice in Hong Kong, which is not disputed, the cheque (dated 1 November 2013) is over 6 months old and can no longer be presented for payment.

Issues

28.This application raises, primarily, two legal issues, namely (a) whether D is entitled to a lien over the Property and (b) whether the registration of the 2^nd PSPA can be maintained on the basis of the alleged lien. 

29.Before addressing those issues, it should be mentioned that there is no dispute that the 2^nd PSPA was properly registered against the Property on 6 November 2013 as an instrument in writing affecting the same pursuant to s 2(1) of the Land Registration Ordinance, Cap 128 (“Ordinance”). 

30.However, on 15 November 2013, when D accepted the repudiation of the 2^nd PSPA by Ps (see para 10 above) it must follow that the 2^nd PSPA ceased to be an instrument affecting land and ceased to be registrable under the Ordinance : see Anstalt Nybro v Hong Kong Resort Co Ltd [1980] HKLR 76.  Ms Lau, who appeared for D, does not quarrel with the above proposition. 

31.However, Ms Lau argues that the registration of the 2^nd PSPA should be maintained by reason of D’s entitlement to a lien.  To that I now turn.

Lien

32.Firstly, Ms Lau accepts that D’s claim of a lien is based solely upon the payment of the Deposit as part of the purchase price for the Property[1]. One immediately sees a problem with this claim because the Deposit was never “paid” (see para 27 above)[2].

33.A good summary of the law on purchaser’s liens can be found in Snell’s Equity, 32^nd edn, para 44-041 :

“A purchaser occupies a position somewhat analogous to that of the vendor. The purchaser of land who has paid to the vendor a deposit (or other money towards the purchase price) has a common law lien in respect of title deeds that he may have in his possession. However, as a common law lien, this is again dependent on the purchaser having possession of such documentation. Furthermore, the prevalence of registered conveyancing for land means that this common law lien is of relatively less practical value than it was previously. However, as with the vendor, the purchaser also has an equitable lien over the land itself in the hands of the vendor for any deposit or instalment of this purchase-money which the purchaser has paid to the vendor (and not merely to a stakeholder) without obtaining a conveyance. The lien arises even if the time for completion has not yet arisen, for example because the contract is conditional on planning permission being obtained. The purchaser has this lien not only when the contract goes off for want of title, but also where he rescinds the contract under a condition enabling him to do so, or the vendor repudiates the contract; but if the contract goes off through the purchaser’s default, the lien is gone. The lien extends not only to the purchase-money actually paid, but also to interest thereon, and to money paid as interest on the unpaid purchase-money, and to the costs properly incurred by the purchaser.

As with the vendor’s equitable lien, the purchaser’s equitable lien is of a proprietary nature, capable of binding third parties.”

34.I agree with Mr Hui, who appeared for Ps, that there are 2 requirements to be satisfied before a purchaser can claim an equitable lien over the vendor’s property, namely, (a) money has been paid on account of the purchase price and (b) the money has been paid to the vendor. 

35.In respect of the second requirement, I have been referred to the case of Combe v Swaythling [1947] 1 Ch 625, which is the authority for the proposition that a deposit paid to a stakeholder cannot give rise to a purchaser’s lien.  The ratio is that since the deposit was paid to the vendor’s solicitors the purchaser could not have sued the vendor for the return of the same and therefore was not entitled to a lien over the property – see pp 628-629 :

“… That does not mean, however, that, by his act in paying that sum to the vendor’s solicitors, he paid it to the vendor. The purchaser could not have brought any proceedings against the vendor to obtain payment by the vendor to him of that sum. …

The basis of the undoubted right of a purchaser, who has paid adeposit to a vendor, to a lien for his deposit if the contract goes off otherwise than through the purchaser’s default is, in my judgment, that the purchaser is to be regarded, in respect of that deposit, as a secured creditor. …

It follows, therefore, in my judgment, that the purchaser in the present case – who could not, on his counterclaim, have sued for return of the deposit and for a declaration of lien in respect of it – is not entitled to a lien for his costs of this action.”

36.I should also refer to the case of Whitbread & Co Ltd v Watt [1902] 1 Ch 835 where the English Court of Appeal said that a purchaser’s lien is a right invented by the court to do justice – see Vaughan Williams LJ at p 838 and Stirling LJ at p 840.

37.The parties have expended a good deal of energy wrestling with the argument that the Deposit was paid to Ps’ solicitors as stakeholders and therefore, based on Combe, there can be no lien over the Property.  Ms Lau seeks to counter the argument with the proposition that once the Deposit was forfeited by Ps (see para 11 above) they were claiming entitlement to the same and it was no longer stakeheld by WF. 

38.I was referred by Ms Lau to the authorities of Dynasty Target Development Ltd v Aibo Investment (China) Ltd, DCCJ 462/2005, 4 November 2005, §30 and New Champion (HK) Ltd v Treble & Triple Ltd, HCA 2691/2008, 21 July 2010, §37 on the effect of forfeiture of a deposit.  With respect, I do not find the first authority to be of assistance because of the absence of analysis.  As regards the second, the point was discussed in the context of the operation of what has become a standard term in provisional agreements for the sale and purchase of real estate governing the consequence of the purchaser’s failure to complete the transaction.  It was said by Fok J (as he then was) :

“Hitherto the sum would have been held by the plaintiff’s solicitors as stakeholder pending the completion of the sale. Upon the forfeiture of the initial deposit, the plaintiff would have been at liberty to call on its solicitors to pay over that sum to it absolutely and without any condition.”

39.However, I do not believe that New Champion (HK) Ltd is of assistance in resolving the issue here either.  Indeed, I am of the view that the point about forfeiture is a red herring.  The undisputed fact is that the money had never left D’s account or gone into the hands of Ps.  It is simply against common sense to suggest that D has a lien over the Property for the repayment of the Deposit. 

40.If it is necessary to test the proposition against the ratio of Combe, it is obvious that D is not in a position to sue Ps for the return of the Deposit. 

41.Further, I cannot begin to see how in these circumstances it can be equitable or just to impose a lien in favour of D for a sum of money which it had never “paid”. 

42.For completeness, I should say that the purported forfeiture of the Deposit by Ps is highly questionable in terms of its legal basis.  It appears to me that it was a poor attempt by Ps to get out of the 2^nd PSPA when they realised that FTL was not going to give up on the 1^st PSPA. 

43.Ms Lau submitted that funds had been made available by D to honour the cheque for the Deposit, and that means financial cost to D notwithstanding that there was no presentation of the cheque.  I am not attracted by the argument because (a) there is no evidence as to any financial cost and (b) such cost is unlikely to be substantial in light of the fact that the 2^nd PSPA was terminated by D 15 days after it was signed. 

44.In the premises, I reject D’s claim of a lien over the Property. 

45.It is unnecessary for this court to proceed to determine the second legal issue – whether the registration of the 2^nd PSPA can be maintained on the basis of the alleged lien.  Mr Hui’s argument is that D may be entitled to protect such a claim by way of registering a lis pendens (the Defence and Counterclaim in HCA 2458/2013 (see para 25 above) but not by maintaining a registration of the 2^nd PSPA when it had been terminated.

46.It is an interesting point and one which, according to both counsel, is not covered by any authority.  I am tempted to proceed to rule on it.  However, on further reflection, this court has not been assisted on the implication of the arguments on the issue of priority under the Ordinance (This is not a reflection of the quality of the assistance which has been rendered to this court by both counsel).  I therefore resist this temptation. 

47.Finally, out of deference to counsel, I should say that had the lien claim been upheld I would not have hesitated to vacate the registration of 2^nd PSPA upon the payment of an appropriate amount to secure D’s claim. 

48.There is no dispute that a purchaser’s lien may cover the deposit, damages and costs – see Smart Max Enterprise Ltd v Speedy Way Ltd [2011] 1 HKLRD 796, § 40.  Also, there is no dispute that the court may take a board brush approach on this issue. 

49.At the beginning of this hearing, I disallowed any reliance by D to a skeleton bill of costs because it had not been properly adduced as evidence and the lateness of its introduction.  I therefore need not be concerned about securing D’s costs.

50.In respect of damages, I prefer the expert evidence produced by Ps, ie, they should be in the region of HK$200,000.

51.For the above reasons, I grant the order sought in para 2 of the Originating Summons dated 13 February 2014 with an order nisi that the costs of and occasioned by this application be to Ps. 

52.It does not appear that it is necessary to make a declaration sought in para 1 of the Originating Summons.  Further, the parties have not addressed the court on whether such a declaration may impact upon HCA 2458/2013.  I give liberty to apply in the event that any of the parties take a contrary view over the necessity of the declaration.

53.Last but not least, I am grateful to both counsel for their assistance in these matters.

Mr John Hui, instructed by Leung & Associates, for the 1^st and 2^nd plaintiffs

Ms Queenie Lau, instructed by Kok & Ha, for the defendant

Please refer to CACV139/2014 for the relevant appeal(s) to the Court of Appeal.