Land Titles Bill - Comments on Revisions to Conversion Mechanism & Rectification Provisions

Hong Kong Bar Association

Re: Land Titles Bill

Comments on Revisions to Conversion Mechanism & Rectification Provisions

1. We refer to the letter of 9th February 2004 from the
Land Registrar inviting the Bar to give its views on the proposed changes
to the Conversion Mechanism and the Rectification Provisions of the Bill.

Daylight Conversion

2. The most distinctive feature of the "Daylight
Conversion" mechanism is that no claim arising through "unwritten"
equitable interest in land created after the commencement date of the
Bill can affect purchasers for value unless notice of the claim is registered.

3. The above proposal has far-reaching consequences for
the equitable doctrines of resulting and constructive trusts, as well
as a variety of "personal equities", which are indispensable
devices used by the Courts to solve a host of problems which typically
arise under informal family arrangements (e.g., the pious son who purchases
a home for his parents and has it conveyed into the parents' name without
intending to make a gift of it, the aged parent who contributes to the
purchase price of a child's home in return for a promise that she would
be allowed to live there, the spouse who has made "contributions"
towards the acquisition of the matrimonial homes, etc…). The "beneficiaries"
of such "unwritten" equitable interests are typically not aware
of the existence of their rights until after a dispute has arisen or alternatively,
would never have contemplated that there is any need for negotiation of
anything. This doctrine of unwritten equities is not limited to domestic
relationship. In commercial context, there is also the problem of the
right of subrogation which plays an important role in cases of refinancing.
In the circumstances, we have reservations as to whether the requirement
of "registration" of their claim is realistic.

4. Under the existing deeds registration system, only
"instruments in writing" are required to be registered. Non-registration
renders the interests created by the instrument unenforceable against
subsequent purchasers for value. However, "unwritten" equitable
interests are by definition incapable of registration and whether or not
they can be enforced against subsequent purchasers for value would depend
on the operation of the doctrine of notice.

5. In principle, we see no reason why a purchaser who
has actual notice of an "unwritten" equity should not take subject
to it.

6. We note that in England, "unwritten" equitable
interests are protected as overriding interests to the extent they are
rights of "persons in actual occupation". This remains the case
notwithstanding successive legislative reforms over the years which have
progressively reduced the categories of overriding interests.

7. Whilst it may be argued that "unwritten"
equitable interests feature much less prominently in the context of Hong
Kong given that traditional Chinese society places far greater emphasis
on the importance of the name appearing on the title deeds, major changes
to the enforceability of "unwritten" equitable interests would
still have wide social ramifications. We would therefore urge the Administration
to give serious consideration to conferring the status of overriding interests
on at least some of the "unwritten" equitable interests even
though that would to some extent introduce greater uncertainties into
the system of registered titles.

8. Another potential problem may arise in respect of "priorities"
of registration. Under the existing deeds registration system, priority
is accorded to registered instruments according to their dates of execution
provided they are registered within one month. In the case of "unwritten"
equitable interests, are they supposed to be accorded priority by reference
to the date of their creation or the date of their registration as a claim?

9. As the law stands, where the equities are equal, the
first in time prevails. This means that an equitable interest (whether
by instrument or otherwise) created prior in time to the agreement for
sale and purchase would bind a purchaser for value if he has notice of
it before completion even if he had no notice at the date of agreement.
Applying this principle, logically any claim in respect of "unwritten
equities" which is registered should likewise bind a purchaser for
value provided it is created before the date of the agreement. However,
it is unclear whether in order for an "unwritten" equitable
interest to bind a "purchaser for value", the claim has to be
registered before any specifically enforceable agreement for sale and
purchase is concluded or the claim can be registered at any time before
the date of the conveyance.

10. Yet a further problem may arise in respect of competing
priorities between "unwritten" equitable interests which came
into existence prior to the commencement date of the Bill and those interests
which only came into existence after the commencement date. According
to our understanding, during the 12 years interim period, the position
of pre-commencement date "unwritten" equitable interests should
continue to be governed by equitable principles and would remain enforceable
against all except a purchaser for value without notice. An unregistered
pre-commencement date "unwritten" equitable interest would enjoy
priority over a registered post-commencement date "unwritten"
equitable interest, irrespective of whether the later interest is given
priority in accordance with the date of creation of the interest or the
date of its registration as a claim. What would happen if the pre-commencement
date "unwritten" equitable interest is subsequently registered
as a "caveat"? Would it retain its original priority or lose
priority to a post-commencement date "unwritten" equitable interest
which has been registered as a claim at an earlier point in time? The
provisions of the Bill would need to make the position clear so as to
leave no room for doubt.

Rectification in Cases of Forgery

11. We welcome the Administration's belated recognition
that an innocent former owner should not suffer a loss which is not fully
compensated where a change of ownership has been procured by forgery.
However, we have reservations as to the wisdom of the proposed wide discretion
given to the Court for rectification in cases of fraud.

12. A right of rectification is by definition an inroad
into the integrity of the register of titles. The existence of the possibility
(albeit rare) of rectification in the case of fraud casts a serious doubt
over the reliability of the register and this is exacerbated by the existence
of the upper limit to the amount of compensation payable to the registered
owner against whom rectification is ordered. This is especially where
there appears to be a wide and unguided discretion given to the Court
to order rectification for fraud.

13. In the interest of certainty, we believe that the
criteria for ordering rectification in non-forgery cases should be clearly
defined and we repeat our previous submissions in this regard.

14. Although automatic rectification in cases of forgery
will preserve the nemo dat rule in favour of the original rightful owner
and hence the upper limit to the amount of compensation is no longer an
issue as far as he is concerned, the absence of full compensation can
still work injustice on the innocent registered owner against whom rectification
is ordered. The absence of full compensation for the innocent registered
owner may also have potentially serious impact on the liability of conveyancing
solicitors. We will therefore once again urge to Administration to consider
removing the upper limit on indemnity.

15. Further consideration would also need to be given
to how the automatic right to seek rectification in cases of forgery will
work in practice. The party seeking rectification faces a considerable
evidential burden which would often be impossible in the absence of the
original of the forged document. This would mean that notwithstanding
the establishment of a register of titles, a system should be put in place
for preserving the instruments of transfers.

Hong Kong Bar Association

2nd March, 2004