There is No Magic to a Statutory Declaration of Missing Title Deeds in Removing Risk of Encumbrance of a Property

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Introduction
In a property transaction, a vendor has the duty to show and give good title to the property. For the purpose of showing good title, the local conveyancing practice is for the vendor’s solicitors to produce the original of the title documents to the purchaser’s solicitors. In the case of missing title documents, it was previously thought that the provision of a statutory declaration, which provides satisfactory explanation as to why the originals cannot be produced, would be sufficient for showing and giving good title.  In Zhang Xueshuai v Lai Chan Wing CACV 81/2014, the Court of Appeal (“CA”) clarified that there is in fact no magic to a statutory declaration of missing original title documents for showing and giving good title.

Background
Mr. LMW (“Mr. Lai”) was at all material times the registered owner of a home ownership scheme (“HOS”) flat (the “Property”).

In September 2006, Mr. Lai was diagnosed to be mentally incapacitated. In March 2008, the Court declared that Mr. Lai was a mentally incapacitated person and appointed his brother Mr. Lai Chan Wing (the “Defendant”) as the committee of his estate (the “Committee”) under the Mental Health Ordinance (Cap. 136). The Court then authorized the Committee to sell the Property and execute all necessary documents for the sale of the Property.

On 10 February 2012, the Plaintiff as purchaser and the Defendant as the Committee entered into a formal agreement for the sale and purchase of the Property (the “Formal ASP”) with completion on or before 12 April 2012, which was subsequently agreed to be postponed to on or before 19 April 2012.

The dispute in the present case concerned one single requisition on title relating to missing title documents. The Committee’s solicitors supplied certified true copies (rather than original title documents) to the Plaintiff’s solicitors to prove title. Subsequently, the Plaintiff’s solicitors raised requisition asking for provision of a statutory declaration by the Committee in respect of the missing original title documents of the Property (the “Requisition”).[1]

The Committee’s solicitors sent a draft statutory declaration (the “Draft SD”), which was to be made by the Defendant as the Committee, to the Plaintiff’s solicitors purporting to answer the Requisition. The Draft SD stated that:-

1.         since Mr. Lai’s hospitalization in November 2006, the Defendant had enquired with him regarding the whereabouts of the original title documents, but was unable to obtain a clear and rational answer;

2.         the Defendant had caused an exhaustive search for the original title documents of the Property but was unable to find them; and

3.         the Defendant believed that the original title documents had been misplaced and lost.

The Plaintiff’s solicitors considered that the Draft SD did not provide adequate explanation for the missing original title documents. The Committee’s solicitors then supplied a revised draft statutory declaration (the “Revised Draft SD”), which added, among others, the following information:-

1.         there had been made against the Property two charging orders in favour of a judgment creditor, Easy Fortune Property Limited (“Easy Fortune”) in 2006 and 2007, which had been discharged by the Defendant as the Committee in May 2011;

2.         the Defendant had through solicitors enquired with Easy Fortune about the missing original title documents and had been informed that Mr. Lai had never pledged any title documents of the Property with Easy Fortune; and

3.         since the Defendant became Mr. Lai’s guardian in 2006, he had never received any notice from any financial institutions, banks or persons regarding further debts of Mr. Lai.

The Revised Draft SD did not satisfy the Plaintiff’s solicitors. No completion took place on 19 April 2012. The Plaintiff’s solicitors alleged that the Defendant had failed to give good title to the Property and that the Plaintiff was entitled to rescind the Formal ASP. The Plaintiff commenced legal action and sought a number of declarations including that (i) the Defendant had failed to answer the requisition on title; and (ii) the Defendant had failed to prove and give a good title; and for an order for the return of deposits and part payments paid under the Formal ASP.

Meanwhile, Mr. Lai passed away in June 2012 and the Committee was automatically discharged upon his death. Nonetheless, the Defendant was appointed the personal representative of Mr. Lai’s estate to defend the action.

District Court Decision
The District Court found in favour of the Plaintiff and held that the Defendant’s statutory declaration was “invalid” in that it did not satisfactorily account for the non-production of the missing title documents. As such, the Defendant had not fulfilled its obligation as a vendor and the Plaintiff was entitled not to complete the Formal ASP.

Defendant’s Appeal
The Defendant appealed to the CA and raised, among others, the following arguments:-

1.         The Defendant’s statutory declaration constituted “clear and cogent evidence” to account for the missing original title documents. The Defendant was the proper person to make the statutory declaration as he had been managing and administering the Property and the affairs of Mr. Lai since 2008 and could explain the circumstances of the loss of the missing original title documents. (the “Defendant’s 1st Argument”)

2.         The Defendant relied upon the Court of Final Appeal (“CFA”) decision in De Monsa (2013) 16 HKCFAR 419 as the authority for the proposition that the real point about missing title documents and the need for the production of a statutory declaration to account for the missing title documents was to show that there was no real risk of a successful assertion of an encumbrance on title. The Defendant argued that there was no real risk of an equitable mortgage arising from Mr. Lai’s deposit of the (missing) title documents as security for a loan because the Property was a HOS flat; therefore, pursuant to s.17B of the Housing Ordinance (Cap. 283) (“HO”), any unauthorized purported mortgage or charge (or other alienation), together with any agreement to do so would be void. (the “Defendant’s 2nd Argument”)

CA Decision

De Monsa Revisited
The CA acknowledged the legal principles laid down in the CFA decision in De Monsa concerning missing title documents as mentioned above. A typical doubt is the possibility of the creation of an equitable mortgage by the deposit of the (missing) title documents by the vendor or his predecessor with a third party lender as security for a loan, and thus the inability to produce and deliver the title documents to the purchaser.

The CA explained that a statutory declaration to account for the missing title documents is only relevant if and when it is required to remove a doubt which would otherwise arise by reason of the missing title documents. In such circumstances, a statutory declaration is not the only possible means that can be resorted to; other evidences which can remove the doubt can be relied on. What is required is satisfactory conveyancing evidence to remove the doubt and render the risk of successful assertion of an encumbrance on the title of a property unreal or non-existent.

The Defendant’s 1st Argument
The CA considered that the missing of all original title documents, as opposed to only one single title document, did raise the possibility of their having been deposited by the Property owner with a lender as security to borrow money, thereby giving rise to an equitable mortgage.  The Requisition was therefore held to be properly made.

However, the Defendant’s statutory declaration was insufficient for the purpose of answering the Requisition for, among others, the following reasons:-

1.         the Defendant could only speak for the period after he had actual or legal control over the assets and affairs of Mr. Lai; and

2.         due to his mental condition, Mr. Lai was unable to provide the Defendant with any useful information.

The Defendant’s 2nd Argument
The Defendant’s 2nd Argument was also rejected by the CA on the following bases:-

1.         the Defendant’s reliance on s.17B of the HO only appeared for the first time at the hearing of the appeal. It was not raised at the District Court trial nor relied upon by the Defendant’s solicitors to answer the Requisition; and

2.         under s.17B of the HO, whether an equitable mortgage would be void depends on whether the creation of the mortgage was approved by the Director of Housing. The Defendant had not supplied any conveyancing evidence to the Plaintiff in this regard.

Conclusion
The CA therefore concluded that the Requisition was properly raised and was not satisfactorily answered. The Plaintiff, being unwilling to proceed, could not be forced to complete the sale and purchase and was entitled to rescind and ask for the return of deposits and part payments. This case illustrates that a statutory declaration contains no magic to cure the situation of missing original title documents. While statutory declaration is the most common means relied upon by vendors in fulfilling their duties of showing and giving title, it should be borne in mind that the primary duty of the vendor is to produce satisfactory conveyancing evidence to remove doubt on title and render risk of successful assertion of an encumbrance on title unreal or non-existent.

 



[1]     At the time, the standard conveyancing practice in the case of missing title documents was to supply a statutory declaration to account for its non-production (Yiu Ping Fong v Lam Lai Hing [1999] 1 HKLRD 793).
 
IMPORTANT:
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
 
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Published by ONC Lawyers © 2015