HONG·KONG LANDIAW Sarah Nield CHINA& l;IQt.lG .KONG I.AW STUDIES :_1i1\1t,!~i,Jtt1lt1l1 •.J ~ LONGMAN Wl.:-k.. Published by Longman Asia Ltd 18/F, Cornwall House Tong Chong Street Quarry Bay Hong Kong and associated companies throughout the world © Longman Asia Ltd 1992 First published 1992 Second edition 1997 Conditions of Sale All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the Publishers. Produced by Longman Asia Ltd, Hong kong ISBN 962 00 2143 6 ,;,.. 0 UBLIC URSA,~ COUNCIL LIBRARIES Al:x-.No 1691660 Class 1<1-1,~ Author NIE l&PI< The publisher's policyisto use papermanufactured fromsustainable torests I PREFACE TO THE SECOND EDITION ( The pace ?f life in Hong Kong is fast and developments in land law are no exception. \over the past four years, since the first edition of this book was published, much has happened. ( There have been the usual developments in the law that one might expect in any jurisdiction, although many of these changes reflect influences peculiar to Hong Kong. The territory's imminent transition to a Special Administration Region of China is evident, particularly in relation to New Territories land.) Also, now that the Conveyancing and Property Ordinance has been well and truly assimilated into conveyancing practice, there can be detected an appreciation of its far reaching implications. ,.Law reformers have been busy considering whether Hong Kong should adopt a title registration system. The existing deeds registration system has served the territory well but perhaps it is now time for modernisation as we approach the 21st century i At the time of writing, a bill has been published and subject to extensive debate, but legislative time has been short and it has not yet been enacted. It is understood, however, that the new legislative session may well see the enactment of a revised bill. The management of multi-unit developments has also come under scrutiny. So many buildings in Hong Kong are dependent on effective legal structures to regulate both their ownership and management by more than one owner. Thus it is not surprising that this complex area of law has drawn both legislative and judicial attention. This new edition tries to reflect these developments. There are new chapters on the Land Titles Bill and Multi-UnitDevelopments. The legislativeuncertainty that has surrounded the progress of the Land Titles Bill has not made planning this new edition easy. It would have been ideal to have delayed publication until the new bill had been enacted, but as the timing, and even the possibility, of enactment, has been so uncertain it was decided to go ahead with publication with an overview of the existingproposals. Hopefully this new chapter will provide a useful introduction to the concept of title registration and the structure of the proposed Hong Kong version. The new chapter on multi-unit developments has been easier to compile: there is so much to relay in this area, both in terms of legislation and case law. The new edition incorporates new case law both in Hong Kong and overseas. As I have returned to live and work in England this updating has only been made possible with the help of those still in Hong Kong. Particular thanks on this score must go to both Judith Sihombing and Michael Wilkinson, who have been so helpful and generous with their time and resources. The updating process has also provided an opportunity for me to return to Hong Kong on several occasions but not since May 1996, thus the law is stated as at that date. Despite my return to England I remain captivated by Hong Kong itself and its unique laws governing land. I hope that this book will engender that same interest in others. SARAH NIELD OCTOBER 1996 PREFACE TO THE FIRST EDITION Students of Hong Kong law have had for many years to rely on textbooks from other jurisdictions. They have thus not only had to deal with understanding the law but also with translating the law from another jurisdiction into the Hong Kong position. Fortunately this problem is being addressed with the increasing number of textbooks being produced on Hong Kong law. This book is intended to help fill the gap in the area ofland law. There is little research available on land law in Hong Kong so a lot of the research that went into this book felt a little like treading in the dark. The temptation is to start with the English position and then chart the differences. Thus an attempt has been made to try and point out the differences between the law in Hong Kong and England and to make cross-reference to the equivalent English statutory provisions where relevant. This will help the student who wishes to use this book in conjunction with one of the standard English works. However, there are so many differences appearing between English land law and the law in Hong Kong that in some areas it is more useful to look at other common law jurisdictions. A concerted effort has therefore been made to look at the position in other common law jurisdictions where this seemed helpful. This book is intended for students and thus its aim has been simplicity. The format of the book is also intended to assist the student. So often it is helpful to illustrate a point by reference to a case so that the law can be seen in context. For this reason short extracts of the case have been incorporated into the text and reference made to the salient points of the judgment. These extracts are not intended as a substitute for reading the case report itself. However, where the case is unreported, as so many Hong Kong land law cases are, it is appreciated that the student may have difficulty in tracking down the full report. This book would never have seen the light of day without the help of many other people. There have been my colleagues, Robyn Martin who encouraged me to undertake the project, and Judith Sihombing who made so many helpful comments on the early drafts. Although I managed to type the text with my two fingers, the office staff at the Law Faculty at Hong Kong University have been very patient in printing the numerous drafts and the final manuscript. The editors at Longman have had a mammoth job in making sense of that final manuscript. But perhaps the biggest thank you must go to my family and in particular my children who had to put up with the trauma that goes into writing a book. Last but not least the law is stated as at March 1991. Unfortunately it has not been possible to incorporate all the changes in the law since that date. SARAH NIELD DECEMBER 1991 CONTENTS 1 't Preface to the Second Edition Preface io the First Edition Table of Cases Table of Legislation ~ ' 'I I ( 1. 1.1 1.2 1.3 1.4 1.5 1.6 INTRODUCTION What is Land Law? Classification of Property Sources of Hong Kong Land Law Physical Limits of Land Concept of Land Ownership Equitable Estates and Interests 2 2.1 2.2 2.3 2.4 2.5 PRIORITY: THE DOCTRINE OF NOTICE Introduction Doctrine of Notice Bona Fide Purchaser of Legal Estate for Value Without Notice Notice Deficiencies of the Doctrine of Notice 3 3.1 3.2 3.3 3.4 3.5 PRIORITY: LAND REGISTRATIONORDINANCE Introduction Concepts of Registration Mechanics of Registration What is Registrable? Effect of Registration 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 LAND TITLES BILL Introduction History of Title Registration Principles of Title Registration The Land Registry The Effect of Registration Overriding Interests Registrable Matters Dealings with and Transmissions of Registered Land Rectification and Indemnity i ~ ' ✓ -! ~. iii iv ix x:x:vi y 1 5 9 17 25 ,, 31 33 37 45 48 49 52 58 74 75 78 82 84 87 91 93 HONG KONG LAND LAW I vi 5 5.1 5.2 5.3 5.4 5.5 FORMALITIESAT LAW / Introduction Deeds - Section 4 Documents in Writing - Sections 3 and 5 Oral Agreements - Sections 4(2) and 6 The Conveyancing Perspective 6 6.1 6.2 6.3 6.4 6.5. FORMALITIES:TI-IEINTERVENTION OF EQUI1Y Introduction Part Performance The Rule in Walsh v Lonsdale Resulting and Constructive Trusts Proprietary Estoppel 110 7 7.1 7.2 7.3 7.4 7.5 ADVERSEPOSSESSION Introduction Possession and Title Limitation Periods Adverse Possession Leasehold Land 157 8 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 FUTURE INTERESTS Introduction Vested and Contingent Interests Reversions Remainders Executory Interests Rule Against Perpetuities Rules Against Inalienability Rule Against Accumulations 181 9 9.1 9.2 9.3 9.4 SETTLEMENTSAND TRUSTS FOR SALE Introduction Strict Settlements Trusts for Sale Chinese Customary Trusts 209 10 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 CO-OWNERSHIP Introduction Joint Tenancy and Tenancy in Common Contrasted The Four Unities Creation of Co-ownership Severance Termination of Co-ownership Tenancies by Entireties Coparcency 228 95 97 106 107 116 120 139 158 163 171 182 184 186 188 191 199 200 212 219 229 231 241 244 258 265 CONTENTS 11 11.1 11.2 11.3 11.4 11.5 11.6 LEASES Introduction Lease Essentials Types of Leases Relationship of Landlord and Tenant Remedies for Breach of Covenants Termination of Leases 266 12 302 12.1 12.2 12.3 GOVERNMENT LEASESAND SHORT TERM TENANCY AGREEMENTS Introduction Crown and Government Leases Short-term Tenancy Agreements 13 13.1 13.2 13.3 13.4 13.5 13.6 EASEMENTS Introduction Characteristics of Easements Acquisition of Easements Extent of Use Termination of Easements Easements and Similar Rights 318 14 14.1 14.2 14.3 14.4 LEASEHOLD COVENANTS Introduction The Original Parties Assignees Subtenants 344 15 15.1 15.2 15.3 15.4 15.5 LAND COVENANTS Introduction Covenant Terminology The Burden - Who Can Be Sued? The Benefit - Who Can Take Action? Modification and Extinguishment of Covenants 364 16 16.1 16.2 16.3 16.4 16.5 16.6 MULTI-UNIT DEVELOPMENTS Introduction Multi-ownership Structures Regulating Co-owners' Rights Enforcement of Deeds of Mutual Covenant Management of the Building Interrelationship of Management Structures 395 .,,, ) i 276 279 289 296 309 325 338 340 342 347 351 362 365 367 378 391 399 408 422 436 vii HONG KONG LAND LAW 17 17.1 17.2 17.3 17.4 17.5 MORTGAGES Introduction The Nature of Mortgages The Rights of the Mortgagor Mortgagee's Rights and Remedies Discharge of Mortgages 441 LICENCES Introduction Types of Licence Revocation of Contractual Licences Licences by Estoppel Personal or Proprietary Interests? 487 18.1 18.2 18.3 18.4 18.5 /18 Index 447 464 485 489 501 502 503 TABLE OF CASES A Ketley Ltd v Scott [1980) CCLR 37; [1980) 130 NLJ 749, 457 Abbey National Building Society v Cann [1990] 2 WLR 832; [1990] 2 WLR 145; [1990] 2 HKLR 84, 43-44, 45,47, 460 Abbey National Building Society v Maybeech [1985] Ch 190, 294 Abbey National Building Society v Moss [1993] NPC 153, 264 Active Keen Industries Ltd v Fok Chi Keong [1994] 1 HKLR 396, 405 A-G of Hong Kong v Humphrey's Estate (Queen's Garden) Ltd [1987] AC 114, 105, 145, 148 A-G v Melhado Investment Ltd [1983] HKLR 327; [1983] 2 HKC 211, 306 AG v Pon Yup Chong How Benevolent Association 0992) HCt MP No 1896 of 1991, 200 AG Securities v Vaughan [1988] 3 WLR 1205, 272 Aie Company Ltd v Kay Kam Yu (1994) HCt No A48 of 1991, 51 Alder v Blackman [1953] l QB 146, 276 Aldin v Latimer Clark Muirhead & Co [1894] 2 Ch 437, 281 Alpenstow Ltd v Regalian PLC [1985] 1 WLR 721, 105 American Cyanamid Co v Ethicon Ltd [1975] AC 396, 417 American Express International Banking Corp v Hurley [1985] 3 All ER 564, • 473,479 Ample Treasure Ltd v Eight Gain Investment Ltd [1992] 1 HKC 457, 70-71 Anchor Brewhouse Developments Ltd v Berkley House (Docklands) Development Ltd [1987] 2 EGLR 172, 16 Andrews v Partington (1791) 3 Bro CC 401, 194, 195 Annen v Rattee (1985) 273 Est Gaz 503, 240, 247 Ansalt Nybro v Hong Kong Resort Co Ltd [1980] HKLR 76, 58 Antoniades v Villiers [1988] 3 WLR 1205, 272 Arlesford Trading Co Ltd v Servansingh [1971] 1 WLR 1080, 351 Ashburn Ansalt Ltd v Arnold [1989] 1 Ch l; [1989] AC 1, 92, 129, 275, 499-500 Ashely Guarantee Plc v Zacaria [1993] 1 WLR 62, 465, 466 Austerberry v Corporation of Oldham (1885) 29 Ch D 750, 367 Avon Finance v Bridger [1985] 2 All ER 281, 458 Bailey v Barnes [1894] 1 Ch 25, 476 Baker v Baker 0993) 25 HLR 408, 152-153 Ballard's Conveyance, re [1937] Ch 473, 374, 386 Banco Exterior Internacional v Mann [1995] l All ER 936, 460-461 Bank of Baroda v Rayerel 0995) 27 HLR 387, 460 Bannister v Bannister [1948] 2 All ER 133, 129 Barclays Bank v O'Brien [1994] 1 AC 180, 47, 81, 127, 458, 459 Barclays Bank Plc v Hendricks 0995) CLY 2365, 264 Barrett v Lounova (1982) Ltd (1988) 57 P&CR 216, 283-284 Barton v Morris [1985] 1 WLR 1257, 252 Basham Dec'd, re [1986] 1 WLR 149B; [1986] Ch 1498; [1986] 1 WLR 1948; [1986] 1 WLR 1498, 144, 146, 149, 153 Battison v Hobson [1896] 2 Ch 403, 62 Baxter v Four Oaks Properties Ltd [1965] Ch 816, 383 BCCI v Ahoody [1990] 4 All ER 983, 458 Beacon Heights (Management) Ltd v Leung Ping Hung (1994) HCt MP No 3570 of 1991, 435 Beacon Hill Management Ltd v Leung Ping Hung 0994) HCt MP No 3570 of 1991, 424 •. HONG KONG LAND LAW Beatty v Guggenheim Exploration Co (1990) 225 NY 380, 126 Beautiglory Investment Ltd v Tang Yet Tai Tong & others 0993) HCt HC MP No 531 of 1989, 22, 223-224 Beesley v Hallwood Estates Ltd [1960) 1 WLR 549, 55 Benn v Hardinge 0992) 66 P&CR 246, 341 Berkley v Poulett [1976) 241 Est Gaz 911; [1976] 242 Est Gaz 39, 11 88 Berkley Road NW9, re [1971) Ch 648, 254 Bernard v Josephs [1982) Ch 391, 236, 244 Bernstein v Skyviews & General Ltd [1978) QB 479, 16 Best Sharp Development Ltd v Lucky Shoe Repairing & Key Duplication Centre [1988) HKC 286, 268 Beswick v Beswick [1968] AC 58, 390 Bewar v Goodman [1909) AC 72, 360 Biggs v Hodinott [1898) 2 Ch 307, 452, 453, 454 Billson v Residential Apartments Ltd [1992) 1 AC 494, 293, 294 Binions v Evans [1972) Ch 359, 92, 129, 499 Bird v Syme Thomson [1979) 1 WLR 440, 40 Blyth v Fladgate [1891) 1 Ch 337, 129 Bonsor v Musicians Union [1956) AC 104, 409 Borman v Griffith [1930) 1 Ch 493, 328, 333 Bovill v Endle [1895) 1 Ch 648, 485 Boyer v Warbey [1953) 1 QB 234, 354 Bradley v Carritt [1903) AC 253, 452 Breams Property Investment Co Ltd v Strongler [1948) 2 KBl, 360 Bretherton v Paton [1986) 1 EGLR 172, 269 Brew Brothers Ltd v Snax (Ross) Ltd [1970) 1 QB 612, 313 Brickwood v Young (1905) 2 CLR 387, 238, 239 Brilliant v Michaels [1945) 1 All ER 121, 273 Bristol & West Building Society v Henning [1985) l WLR 778, 47, 460 British Railways Board v Glass [1965) Ch 587, 340 Broomfield v Williams [1897) 1 Ch 602, 329 Broughton v Snook [1938) Ch 345, 116 Brown v Flower [1911) 1 Ch 219, 280 Brown v Gould [1972) Ch 53, 103 Brunner v Greenslade [1971) Ch 993, 385 Buchanan-Wollaston's Conveyance, re [1939) Ch 738, 264 Buckinghamshire County Council v Moran [1989) 3 WLR 152, 165, 170-171 Bull v Bull [1955) 1 QB 234, 218 Burgess v Rawnsley [1975) Ch 429, 251, 252, 253, 254 Burkes Case, re [1881) 9 LR Ir 24, 52 Burns v Burns [1984) Ch 317, 123, 124 Byrne, re (1906) 6 SR (NW) 532, 239 Cadell v Palmer (1833) 1 Cl and F372, 192 Caerphilly Concrete Products v Owen [1972] 1 WLR 372, 314 Caerns Motor Services Ltd v Texaco Ltd [1995) 1 All ER 247, 362 Campbell v Holyland (1877) 7 Ch D 166, 480, 481 Campbell v Sovereign Securities Holding Co Ltd (1958) 13 DLR (2d) 195, 265 Canada Life Assurance Co v Kennedy (1978) 89 DLR (3d) 397, 239 Carradine Properties v Aslam [1976) 1 WLR 442, 298 Castle City Ltd v Choi Yue Development Ltd [1995) 2 HKC 593, 159 Caunce v Caunce [1969) 1 WLR 286, 40, 41, 42, 45, 47 Cave v Cave (1880) 15 Ch D 639, 38 Cavendish Property Development Ltd v A-G [1988) HKC 480, 306 Celsteel Ltd v Alton House Holdings (No 2) [1987) 1 WLR 291, 350 Centaploy Ltd v Matlodge Ltd [1974) Ch 1, 277 X TABLE OF CASES Centrovincial Estates Pie v Bulk Storage Ltd (1983) 46 P&CR 393, 347 Chalmers v Pardoe [1963] 1 WLR 677, 151-152 Chamberlain v Scalley (1992) 26 HLR 26, 299 Chan Hung-kay v A-G [1981] HKLR 171, 308 Chan v Lau Wai-kwong (1984) HCt HCA No 5062 of 1982, 299, 301 Chan Shiu-yee Shirley v Chang Kia-Chung Peter (1987) HCt HCC No A5170 of 1986, 242 Chan Yat v Fung Keong Rubber Manufactory Ltd [1967] HKLR 365, 105 Chandler v Kerley [1978] 1 WLR 693, 496 Chaney v Maclow [1929] 1 Ch 461, 104 Cheam Theam Swee v Equiticorp Finance Group Ltd [1992] 1 AC 472, 484 Cheese v Thomas [1994) 1 WLR 129, 461 Cheong Pik Shan v Lee Bun & another (1994) HCt No A3113 of 1992, 119 Chester v Buckingham Travel Ltd [1981] 1 WLR 96, 288 Cheuk Chau Co Ltd v Chau Kwan-nam & others (1983) HCMP No 274 of 1982, 174, 175, 176 Cheung Yeung-kan v Lui-kwan [1973-1976) HKC 237, 287 Cheung Yuet v Incorporated Owners of Oriental Gardens [1979] HKLR 536; [1977-1979] HKC 168, 420 Chiap Hua Flashlights Ltd v Markfaith Investments Ltd [1990] 2 WLR 145; [1990] 2 WLR 1451; [1990) 2 HKLR 84, 45, 55, 59, 63, 68, 86 China South Seas Bank Ltd v George Tan [1990) 2 WLR 56; [1989] 1 HKC 155, 472, 473-474 Chinachem Investment Co Ltd v Chung Wah Weaving and Dyeing Factory Ltd [1978) HKLR 83, 295 Chiu Shu-Choi v Merrilong Dyeing Works Ltd [1990) 1 HKLR; [1984] HKC 535,403 Chokar v Chokar [1984] FLR 313, 236 Chow Chin-Tai v Chan Tak-Ming [1994) 1 HKLR 274, 56, 57 Chu Kit Yuk & another v Countryside Industrial Ltd [1995) 1 HKC 363, 34, 119 Chu Tak-hing v Chu Chan Cheung-kin [1968] HKLR 542, 220 Chu Yam-on v Li Tam Toi-hing (1954) 38 HKLR 114(CA); (1956) 40 HKLR 250(PC); [1946-1977] HKC 55, 52, 53 Chui Shui On v Tang Koon Yung & another [1992] 2 HKC 323, 176 Church of England Building Society v Piskor [1954] Ch 553, 279 CIBC v Pitt [1994) 1 AC 200, 127, 458-459 CIR v Yeung Cheung Foon, David (1989) CA Civ App Bo 142 of 1988, 122 Citibank NA v Lai Tat-chee [1986] 2 HKLR 885; [1986) HKC 155, 52, 54, 64, 149 Citiward Ltd .v Tai Ping Wing [1995) 2 HKC 181, 394 Citro, re 0990) The Times 7 June, 264 City of London Building Society v Flegg [1986) 1 All ER 989, 218 City of London Building Society v Flegg [1988) AC 54, 58 City of London Corporation v Fell [1993] 3 WLR 1164, 347, 351 Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166, 455, 464 Clore v Theatrical Properties Ltd [1936) 3 All ER 483, 497 Coatesworth v Johnson (1886) 54 LT s20; (1886) 55 LJQB 220, 111, 119 Cockerill, re [1929) Ch 131, 199 Cohen v Nessdale Ltd [1981] 3 All ER 118, 105 Colchester Borough Council v Smith [1991) Ch 421, 166 Coldunell v Gallon [1986) 2 WLR 466, 458 Commercial Bank of Hong Kong Ltd, The v Wellstead Textile Co Ltd & another (1993) HCt MP 3785 of 1991, 34 Commonwealth of Australia v Verwayen (1990) 170 CLR 394, 139 Consolidated Sales Ltd v Turner C Lynn [1970) HKLR 222, 61, 67-68 Cook v Shoesmith [1951] 1 KB 752, 313 xi HONG KONG LAND LAW Cooke v Head (1972] 1 WLR 518; [1972] 2 All ER 38, 128, 135 Coombe v Smith (1986] lWLR 808; [1987] 1 WLR 808, 145, 148 Cooper v Critchley [1955] Ch 431, 217 Copeland v Greenhalf (1952] Ch 488, 323 Coronation Street Industrial Properties Ltd v Ignall Industries Plc [1989] 1 WLR 304,361 Cornish v Midland Bank Plc [1986] 1 WLR 119, 462 Country Rich Development Ltd v Ma Chan Fuk Kiu (1994) HCt HCA No A5503 of 1993, 166 Cousins, re (1886) 31 Ch D 671, 38 Cowcher v Cowcher [1972] 1 WLR 425, 244 Cowell v Rosehill Racecourse Co Ltd (1937) 56 CLR 605, 490, 491 Cowley v Watts (1853) 17 Jur 172, 103 Crabb v Arnn District Council (1976] Ch 179; [1979] Ch 179, 143, 146, 148, 150, 153, 501 Crippen, in the estate of [1911] P108, 127 Crips, re (1906) 95 LT 865, 213 Crocodile Garments Ltd v The Prudential Enterprise Ltd [1989] 1 HKC 474, 362 Crofts v Middleton (1856) De GM and G 192, 184 Cromwell Investment Co Ltd v Fook Sun Enterprises Ltd (1975] HKLR 1; (1973-1976] HKC 335, 260 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, 470-471, 473 Cumberland Court (Brighton) Ltd v Taylor [1964] Ch 29, 485 D & F Estates Ltd v Church Commissioners [1989] AC 177, 285 Dalton v Angus & Co (1881) 6 App Cas 740, 337 Dandenong Estates Co Ltd v Yu Kai To & others [1989] 1 HKC 587, 420 Daniels v Trefusis (1914] 1 Ch 788, 104 Darlingford Estates Ltd & others v Incorporated Owners of Evelyn Towers (1987] 3 HKC 127, 427 David Wong v Li Suk-bing [1984] HKLR 65, 495 Davis v Symons [1934] Ch 442, 450 Dawson, re (1888) 39 Ch D 155, 194 D'Eyncourt v Gregory [1866] LR 3 Eq 283, 11 de Lasala v de Lasala (1979] 2 All ER 1146, 8 De Luxe Confectionery Ltd v Addington [1958] NZLR 272, 355 Dealmead Ltd v Chin (1987) 281 Est Gaz 531, 273 Dearle v Hall (1823) 3 Russ 1, 445 Demaiter and Link, re (1973) 36 DLR (3d) 164, 265 Dennis v McDonald [1982] Fam 63, 236 Dennis, re (1995] 3 WLR 367, 250 Department of the Environment v Thomas Bates and Sons Ltd (1989]1 All ER 1075, 285 Dexter & others v Petersham (1994) LT EMA No 1 of 1994, 436, 438, 439, 40 Dickinson v Burrow (1904] 2 Ch 339, 116 Dillwyn v Llewelyn (1862) 4 De GF&J 517, 140, 146, 149, 153 Discovery Bay Services Management Ltd v Buxhaum (1994) DCt DCCA No 4782 of 1991, 411, 412, 416, 430, 435 Dodsworth v Dodsworth 0973) 228 Est Gaz 1115, 152, 154 Doe d Gill v Pearson (1805) 6 East 173, 199 Doherty v Allman (1878) 3 App Cas 709, 287, 417 Dolling v Evans (1867) 36 LF Ch 474, 103 Dolphin's Conveyance, re [1970] Ch 654, 383 Downsview Nominees Ltd v First City Corporation Ltd [1993] 2 WLR 86, 472, 478 Dr Franklin Li & Others v Crocus Properties Inc [1981] HKC 367, 103-104, 400 Drake v Whipp (1995) Tbe Times 19 December, 120 xii TABLEOF CASES Drapers Conveyance, re [1969] 1 Ch 486, 250, 253, 254 Drewell v Towler 0832) 3B&AD735, 325 Drinkwater v Ratcliffe [1875] 20 LR Eq 528, 261 Dugdale, re 0888) 38 Ch D 176, 199 Duke of Norfolk's Case 0681) 2 Swanst 454, 192 Duke of Westminster v Guild [1985] QB 688, 284, 403 Duke v Robson [1973] 1 WLR 267, 475 Dumpor's Case 0603) 4 Co Rep 119b, 392 Easyknit Investment Co Ltd v Yetonce Ltd 0991) HCt MP No 1454 of 1991, 121 Ecclesiastical Commissioners for England's Conveyance, re (1936] Ch 430, 390,391 Elias v George Sahely & Co (Barbados) Ltd (1983] AC 646, 106 Elias v Mitchell (1972] Ch 652, 217 Ellenborough Park, re [1956] Ch 131, 318-319, 320, 322, 487 Elliston v Reached1908] 2 Ch 374, 382, 383, 384, 415 Emile Elias & Co Ltd v Pine Groves Ltd (1993] 1 WLR 305, 384 Enway Development Ltd v Light Ocean Investment Ltd (1994] 3 HKC 31, 226-227 Equity & Law Home Loans Ltd v Prestidge (1922] 1 WLR 137, 47 ER Ives Investment Ltd v High [1967] 2 QB 379, 155, 327, 368, 501, 502 Erewash Borough Council v Taylor [1979] CLY 1831, 465 Errington v Errington & Woods (1952] 1 KB 290, 498 Escalus Properties Ltd v Robinson (1995] 3 WLR 524, 293 Esso Petroleum Co Ltd v Alstonbridge Ltd (1975] 1 WLR 1474, 465 Esso Peroleum Co Ltd v Harper's Garage (Stockport) Ltd (1968] AC 269, 455 Evers Trust, re (1980] 1 WLR 1327, 264 Eves v Eves (1975] 1 LWR 1388; (1975] 1 WLR 1338, 131, 135, 136 Expert Clothing Service & Sales Ltd v Hillgate House Ltd [1986] Ch 340, 292 Facchini v Byson (1952] 1 TLR 1386, 270 Fairclough v Swan Brewery Co Ltd (1912] AC 565, 451, 454 Fairfax Ltd v AG (1995] 2 HKC 401 & 617, 394 Fairweather v St Marylebone; Property Co Ltd (1962] 2 WLR 1620, 174, 175 Fast Forward Ltd v Magicsound Co Ltd (1990] 2 HKC 494; (1991) Civ App Nos 180 of 1990 and 3 of 1991, 59-60, 61, 92, 500 Federated Homes Ltd v Mill Lodge Properties Ltd (1980] 1 WLR 594, 387, 388-389 Ferguson v Miller (1978] NZLR 819, 233 Field v Barkworth [1986] 1 WLR 137, 313 Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd (1985] HKLR 103, 53, 54, 61, 68, 81, 485 First Base Development Ltd v Or Lau Chun 0991) HCt MP No A2669 of 1990, 176 first National Securities Ltd v Hegarty (1985] QB 850, 248, 260 Flight v Bentley (1835) 7 Sim 149, 351 Foo Kam-shing v Local Printing Press (1953) 37 HKLR 208, 338 Ford Chung v Ho Wai-man (1959] HKLR 12, 276 Forda Investors Ltd v UOB Finance (HK) Ltd (1979] HKLR 382, 262 Formby v Barker [1903] 2 Ch 539, 373 Formking Development Ltd v Lee Kwok Hung, Robert (1993] 1 HKC 412, 121 Fortune Year Development Ltd v Mui Shu Huen 0993) HCA No A2951 of 1993, 176 Four Maids Ltd v Dudley Marshall (Properties) Ltd (1957] Ch 317, 465 Freeman v Laing (1899] 2 Ch 355, 483 •• Freize v Unger (1960] VR 230, 247 Frencher Ltd (in liquidation) v Bank of East Asia (1995] 2 HKC 263, 481 Frost, re (1889) 43 Ch D 246, 194 xiii HONG KONG LAND LAW Fu Lam Investment Co Ltd v Mok Cheong-che (1983) HCt No 1978 of 1983, 287 Fu Mei Ling Mary v Yeung Kong [1994) 2 HKC 1, 176 Fung Kam Cheung v Kwok Yiu Wing [1991] 1 HKC 321, 159 Fullerton v National Bank of Ireland [1903] AC 309, 53 Fulltrend Co Ltd v Longer Year Development Ltd & another [1990] 1 HKC 542, 121 Gaites Will Trust, re [1949) 1 AU ER 459, 194 Garner v Blaxill [1960) 1 WLR 752, 314 Garnet and McGoran, re (1980) 117 DLR (3d) 649, 260 George Wimpey Co Ltd v South [1967) Ch 487, 167 Giant River Ltd v Asia Marketing Ltd [1990] 1 HKLR 297, 404 Gissing v Gissing [1971] AC 886, 81, 123, 124, 127, 128, 130-134 passim, 139, 244 Goldberg v Edwards [1950] Ch 247; [1952) Ch 247, 325, 328, 330 Golden Bay Investment Ltd v Chou Hung & others [1994)2 HKC 197, 263 Golden City Theatre Ltd v Kwan Ching-tak (1956) 40 HKLR 198, 470 Gonin, re [1979) Ch 16, 115 Goodall's Settlement, re [1909) 1 Ch 440, 214 Goodman v Gallant [1986] Fam 106, 242 Goodman v J Eban Ltd [1954) 1 QB 550, 104 Goodtex Land Company Ltd v Lung Kwong Emporium Co Ltd [1993) 1 HKC 645,400,402 Gore and Snell v Carpenter (1990) P&CR 456, 252 Graham v Philcox [1984] QB 747, 330 Grand Junction Co Ltd v Bates [1954] 2 QB 160, 444 Grangeside Properties Ltd v Collingwood Securities Ltd [1964] 1 WLR 139, 446 Grant v Edwards [1986] Ch 638; 1 WLR 808, 134, 136, 139, 148, 156 Greasley v Cooke [1980) 1 WLR 1306, 146, 147, 149, 153, 501 Greenfield v Greenfield (1979) 38 P&CR 570, 252 Greenwich LBC v McGrady (1983) 46 P&CR 223, 240 Grenville House Ltd v Incorporated Owners of Grenville House [1978] HKLR 235, 425, 426 Griffies v Griffies (1863) 8 LT 758, 234 Griffiths v Williams 0917) 248 Est Gaz, 146 Grigsby v Melville [1972J1'WLR 1355, 323 GS Fashions Ltd v B&Q Pie & others [1995] 1 WLR, 290-291 , ! HA Warner Pty v Williams (1946) 73 CLR 421, 270 Hadjiloucas v Crean [1988] 1 WLR 1006, 271 Hall v Ewin (1887) 37 Ch D 74, 374 Halsall v Brizell [1957] Ch 169, 368-369, 410, 411 Hammersmith and Fulham London Borough Council v Monk [1992] 1 AC 478,240,241 Hampstead & Suburban Properties Ltd v Diomedous [1969] 1 Ch 248, 417 Hang Seng Bank v Mee Chong Developments Ltd [1970] HKLR 94, 480 Hang Tak Co Ltd v A-G (1986) HCt HCA No 2567 of 1983, 284 Hang Wah-chong Investment Co Ltd v A-G [1981) 1 WLR 1141, 306 Hansford v Jago [1921] 1 Ch 322, 333 Hardwick v Johnson [1978) 1 WLR 683, 494 Harmer v Jumil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200, 281 Harris v Flower (1905) 74 LJ Ch 127, 339 Harris v Goddard [1983) 3 All ER 242, 254 Harvey v Harvey [1982) Fam 83, 236 Harvey v Pratt [1965) 1 WLR 1025, 273 Hawkesley v May [1956] 1 QB 304, 253 Hayim v Citibank NA [1987] AC 730, 472 xiv TABLE OF CASES Haywood v Brunswick Permanent Benefit Building Society (1881) 8 QBD 403, 371 Haywood v Chaloner [1968] 1 QB 107, 172 Health First Technology Ltd v Chan Chi-cheung [1993] 2 HKLR 473, 57 Henderson v Eason (1851) 17 QB 701, 234 Herbert Duncan Ltd v Cluttons [1993] 3 WLR 1164, 347 Heslop v Burns [1974] 1 WLR 1241, 271, 278 Hetherington dec'd, in re [1989] 2 WLR 1094, 200 Hill v Hickin [1897] 2 Ch 579, 234 Hill v Hill [1947] Ch 231, 104 Hill v Tupper (1863) 2 H&C 121, 321, 322 Hilten, re [1890] 2 Ch 548, 213 Hindcastle Ltd v Barbara Attenborough Associates Ltd [1994] 4 All ER 129, 349 Ho Hang-wan v Ma Ting-cheung (1989) CA Civ App No 42 of 1989, 169 Ho Nga Sheung v Ma Fook Leung (1993) 2 HKC 647, 122, 242, 250, 254 Ho Sei-shing v Wan Ying-him [1959] HKLR 483, 57 Ho Wai-fong v Tang Mei-lin [1987] 3 HKC 458, 286 Ho Yee Ming Theresa v Chung Loi Toi [1994] 1 HKC 618, 176 Hodgson v Marks [1971] Ch 892, 40 Holland v Hodgson [1872] LR 7CP 328, 11 Holliday, re [1981] Ch 405, 264 Holmes, re (1885) 29 Ch D 786, 446 Home Restaurant Ltd, The v A-G [1987] HKLR 237, 22, 308 Hon Hing Enterprises Ltd v Honolulu Land Investment Co Ltd 0992) HCt HCA No A3557 of 1991, 418, 420 Hon Po Sun v Lau Ngai [1995] 1 HKC 556, 127 Hong Kong Housing Authority, The v Hung Pui [1987] 3 HKC 495, 105 Hong Kong Land Co Ltd v Cheung Chiu-moon (1976) CA Civ App No 214 of 1976, 420 Hongkong and Shanghai Banking Corporation, re (1993) MP No 4049 of 1992, 57 Hong Kong Ferry (Holdings) Co Ltd v Chan Kwan & others [1995] 1 HKC 542, 177 Hong Kong Ping Jeng Lau Co Ltd v Incorporated Owners of United Centre [1990] 1 HKC 178, 414 Hong Yip Service Company Ltd v Ng Wai Man (1988) CA Civ App No 159 of 1988, 419 Hop Woo-cheung Enterprises Ltd v Intergroup Industries Ltd [1982] HKC 436,301 Hopkinson v Rolt (1861) 9 HCL 514, 483 Horne's Settled Estate, re (1888) 39 Ch D 84, 213 Horracks v Forray [1976] 1 WLR 230, 495 Hotchkys, re (1886) 32 Ch D 408, 213, 215 Hounslow LBC v Twickenham Garden Developments Ltd [1971] Ch 233, 488,491,492 Hoyle, re [1893] 1 Ch 84, 105 Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] AC 99, 360-361, 368 Hughes v Cork (1994) EGCS 25, 168 Hui Kay-cheong v Chi Wo Properties Ltd [1992] HKD CLR 51, 434 Hulme v Brightman [1943] KB 152, 11 Hunt v Luck [1902] 1 Ch 428, 39 Huntingdon v Hobbs (1992) 24 HLR 652, 242, 250 Hurst v Picture Theatres Ltd [1914] 1 KB 1; [1915] 1 KB 1, 488, 490, 491 Hussein v Mehlman [1992] 32 Est Gaz 59, 301 xv HONG KONG LAND LAW Incorporated Owners of Chungking Mansions, The v Shamdasani [1991] 2 HKC 342,405 Incorporated Owners of Dragon View v Nalpak Ltd [1989] 1 HKC 549, 419 Incorporated Owners of Golden Crown Court, The v Chow Shun Yung (1987) HCt HCA No 4322 of 1986, 406, 420 Incorporated Owners of Hoi Luen Industrial Centre, The v Goodwell Property Management Ltd (1994) HCt HCA No A5450 of 1993, 419 Incorporated Owners of Hoi Luen Industrial Centre v Ohashi Chemical Industries (HK) Ltd [1995) 2 HKC 11, 420 Incorporated Owners of Mai On Industrial Building v Hedit Ltd (1987) HCT HCA No A6529 of 1987, 417 Incorporated Owners of South Seas Centre, The v Great Treasure Development Ltd [1994] 1 HKC 197, 418 Incorporated Owners of South Seas Centre v South Seas Centre Management Ltd [1986] HKLR 457, 429, 431 Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd [1977] QB 580, 279 International Tea Stores Co v Hobbs [1903] 2 Ch 165, 328 Inwards v Baker [1965] 2 QB 29, 151, 501 Ip Cheung Kwok v Ip Siu Bun [1988] HKC 437, 200, 221 Irani Finance Co Ltd v Singh [1971] Ch 59, 217 Irene Loong v Pun Tsun-hang [1959] DCLR 192, 11-12 Irvin v Blake (1993) 67 P&CT 263, 136 J Sainsbury Plc v Enfield LBC [1989] 1 WLR 590, 389 Jackson v Horizon Holidays [1975) 1 WLR 1468, 490 Jacobs v Seaward (1872) LR 5 HL 464, 231, 232, 247, 406 James S Lee & Co (Kowloon) Ltd v Kapok Garments Ltd [1985] 2 HKC 383, 301 Jarvis v Swan Tours [1973] 2 QB 233, 490 Jelbert v Davies [1968] 1 WLR 589, 339 JLW Management Services Ltd & another v Charter Dragon Development Ltd [1995] 2 HKC 501, 401, 406 John So & another v Lau Hon Man [1993] 2 HKC 356, 407, 416 John Trenberth Ltd v National Westminster Bank Ltd [1979] 39 P&CR 104, 16 Johnson, re [1915] 1 Ch 435, 213 Johnstone, re [1973] Qd R 347, 254 Jones, in re [1893] 2 Ch 461, 239 Jones v Challenger [1961] 1 QB 176, 264 Jones v Lavington [1903] 1 KB 253, 281 Jones v Price [1965] 2 QB 618, 323 Kai Sun Investments Ltd v Dah Sing Bank Ltd [1983] 2 HKC 554, 67 Kan Fat-tat v Kan Yin-tat [1987] HKLR 516, 8, 220, 221, 224 Karak Rubber Co Ltd v Burden [1972] 1 All ER 1210, 130 Keech v Sandford (1776) Se! Cab King, 130 Keefe v Amor [1965] 1 QB 334, 338 Kelsin v Imperial Tobacco Co (of Great Britain and Ireland) Ltd [1957] 2 QB 334, 16 Kemp v Public Curator of Queensland [1969] Qd R 145, 255 Kenny v Preen [1963] 1 QB 499, 280 Kenten Investment Ltd v Hui Lap Ping Sam HCt MP No 3447 of 1991, 119 King, re [1963] Ch 459, 350 King v David Allen & Sons Bill Posting Ltd [1916] 2 AC 54, 497 King's Motors (Oxford) Ltd v Lax [1970] 1 WLR 426, 103 Kingsmill v Millard (1855) 11 Exch 313, 180 Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783, 41-42, 43, 45, 46 xvi TABLE Or'-- Kingsnorth Trust Ltd v Bell [1986] 1 WLR 119, 46, 460 Kingswood Estate Co Ltd v Anderson [1963] 2 QB 169, 113, 114, 115 Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441, 450 Kok Chong Ho v Double Value Developments Ltd [1993] 2 HKLR 423, 404, 405 Koo Cheuk Son v Tang Wai Chun [1973] HKLR 891, 407 Koy Investment Co Ltd, in re [1983] HKLR 28, 309 Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25, 454, 455 Kumar v Dunning [1989] QB 193, 361 Kun Wai-ying v A-G [1975] HKLR 1, 308 Kung Wai-ying v A-G [1974) HKLR 1; [1975] HKLR 1, 292 Kung Wong Sau Hin v Jung Kwok-sun [1985] 2 HKC 547, 249 Kwok v Kwok and Smith (1910) 5 HKLR 247, 57 Kwok Siu-lau v Kan Yang-chee (1919) 8 HKLR 52, 61-62, 64 Kwong Ka Hung & another v Lai Wah Development Co Ltd 0996) HCt No A10566 of 1994, 401-402 Kwong Kai Hing & another v Chan Lik 0995) HCt MP No 1529 of 1995, 121 Kwong Suk-chun v Wong Fung-ming 0989) HCt MP No 66 of 1989, 211, 212, 215 Lace v Chantler [1944] KB 368, 274 Lady de Soysa v De Pless Pol [1912] AC 194, 289 Lai Chi Kok Amusements Park (No 2) v Tsang Tin-sum [1966) HKLR 124, 226 Lai Moon Hung v Lam Island Development Co Ltd [1994] HKC 11, 176-177 Lai Wing Ho v Chan Siu Fong 0992) HCt MP No 2835 of 1992, 401 Lam Kee On v Lam Hing [1992] 2 HKC 317, 176 Lam Kwok-leung v A-G [1979] HKLR 145, 281 Lam Man-yuen v Lucky Apartment [1964] HKLR 689, 269 Lampet's Case (1612) 10 Co Rep 466, 190 Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265, 35-36 Lau Leung Shiv Lau Po Tsun (1911) 6 HKLR 149, 200 Lavender v Betts [1942] 2 All ER 72, 280 Law Ping-wong v Ho Chi-na 0987) HCt HCA NO A1652 OF 1986, 242 Law v Jones [1974) Ch 112, 104, 105 Law Shi Ying v Law Kam Tai [1994] 1 HKC 378, 262, 263 Le Neve v Le Neve (1748) 2 W&T 175, 62 Leake v Bruzzi [1974] 1 WLR 1528, 236 Lee Parker v Izzet [1979] 1 WLR 1688, 296 Lee Siu Man v Chu Chi Wing [1992] 1 HKC 266, 71 Lee Tak Chun v East Weal International Ltd & another [1994] 1 HKC 722, 400 Lee Tak Kwong v Choi Pui Kei Stephen [1991] 2 HKC 1091, 119 Lee v The Showman's Guild of Great Britain [1952] 2 QB 329, 409 Leek and Moorlands Building Society v Clark [1952] 2 QB 788, 240 Leeman v Stocks [1951] Ch 941, 104 Leigh v Dickenson (1885) 15 QED 60, 237, 238, 239 Leigh v Jack (1879) 5 Ex D 264, 164, 171 Leigh v Taylor [1902] AC 157, 11 Leigh's Settled Estates, re [1926] Ch 852, 214 Lemmon v Webb [1895] AC 1, 16 Leung Chung-ting v Tin Yat Co [1963] HKLR 58, 298 Leung Kwok-kau v Tam So-wa [1968] HKLR 673, 10 Lewis v Baker [1905] 1 Ch 46, 274 Lewis v Frank Love Ltd [1961] 1 WLR 261, 449-450 Lewis v Stephenson (1989) 78 LJ QB 296, 314 Lewvest Ltd v Scottia Towers Ltd [1982) 126 DLR 9 (3d) 239, 16 Li Ming On v Lucky Apple Ltd & another [1994] 2 HKLR 111, 400 Li Tang-shiv Li Wai-kwong [1969] HKLR 367, 220, 226 Li Wing-sum v Wu Man [1978] HKLR 575, 279 xvii HONG KONG LAND LAW Lily Cheung v CED (1987] 3 HKC 307, 122 Lim Teng Huan v Ang Swee Chuan [1992] 1 WLR 113, 148-149 Lionwill Investment Ltd v Triple Will Ltd [1992] 2 HKC 430, 121 Liu Kwok-wah v Chung Hang-fai Nancy [1989] 2 HKC 259, 242 Liu Ying-wah v Great Mace Trading Co Ltd [1987] 1 HKC 167, 295 Liverpool City Council v Irwin [1977] AC 239, 282, 283, 284, 403 Lloyds Bank v Bundy [1975] QB 326, 458 Lloyds Bank Pie v Rosset [1989] Ch 350; [1990] 2 WLR 867; 43, 45, 128, 134, 135, 136 Lloyds v Banks (1868) 3 Ch App 488, 445 Lo Shun Cheung v Fung Siu Kam [1984] HKC 107, 279 Lo Yu ~hu v Kam Fu Lai Development Ltd [1994] 3 HKC 18, 418, 421 Loi Po Investment Co L~dv Real Reach Co Ltd (1985) HCt MP 1430 of 1984, 306 Lok On Co Ltd v A-G (1982) HCt MP 561 of 1982, 309 London & Blenheim Estates Ltd v Ladbrooke Retail Parks Ltd [1994] 1 WLR 31; [1993] 1 All ER 307, 319, 322, 323 London and South Western Railway Cd v Gomm (1882) 20 Ch D 562, 376 London County Council v Allen [1914] 3 KB 642, 373 London & Country (A&D) Ltd v Wilfred Sportsman Ltd [1971] Ch 764, 351 Long v Gowlett [1923] 2 Ch 177, 329, 330 Lord Hastings v Sadler (1898) 79 LT 355, 180 Lord Waring v London and Manchester Assurance Co Ltd [1935] Ch 310, 476 Lui Kam Lau & another v Leung Ming Fai [1994] 3 HKC 477, 120, 131, 137 Lyons v Lyons [1967] VR 169, 248 Lysaght v Edwards (1876) 2 Ch D 499, 118 Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044, 92, 128, 129, 475, 499 McCormick v McCormick (1921) 40 NZLR 384, 234 McCrea! v Wake (1986) 269 Est Gaz 1254, 286 MacDonald v MacDonald (1976) 73 DLR (3d) 341, 263 McDowell v Hirschfield, Lipson & Rumney [1992] FLR 126, 252 McGrath v Willis [1995] 2 FLR 114, 123 McHardy and Sons (a firm) v Warren [1994] 2 FLR 338, 138 McMahon v Burchell (1846) 2 Ph 127, 235 McMahon v The Public Curator of Queensland [1952] St R Qd 197, 237-238, 239 McManus v Cooke (1887) 35 Ch D 681, 327 Maddison v Alderson (1883) 8 App Cas 467, 111, 112, 113, 115 Maharaj v Chand [1986] 3 All ER 107, 144, 148, 149-150 Mak Him v Chan Hung-pak [1965] HKLR 87, 62 Mak Woon Shui (dec'd), re [1992] 2 HKC 144, 122 Malayan Credit Ltd v Jack Chia MPH Ltd [1986] AC 549, 244 Man Kam-tong v Man Lin-tai (1984) MCA No 5478 of 1981; [1984] HKLR 181; [1985] 2 HKC 299, 167, 304 Manchester Brewery Co v Coombs [1901] 2 Ch 608, 358 Manjang v Drammeh (1990) 61 P&CR 194, 334 Marchant v Charters [1977] 1 WLR 1181, 268 Marketing Ltd v Cheerifat Investment Ltd (1995) HCt MP No 2727 of 1995, 399 Markou v Da Silvaesa (1986) 52 P&CR 204, 273 Marquess of Zetland v Driver [1939] 1 Ch 1, 374, 386 Marriott v Anchor Reversionary Co (1861) 3 De GF&J 177, 467 Marten v Flight Refuelling Ltd [1962] Ch 115, 381, 384, 387 Massey v Midland Bank Pie [1995] 1 All ER 929, 460 Matharu v Matharu (1994) 68 P&CR 93, 142, 146 Matthew Manning's Case (1609) 8 Co Rep 946, 190 Matthews v Goodday Ltd (1861) 31 LJ Ch 282, 447 Matthews v Smallwood [1910] 1 Ch 777, 295 xviii TABLE OF CASES May King Development Co v Young Ching-huo Ltd [1981] HKLR 280, 270 Mayfield Holdings Ltd v Moana Reef Ltd [1973] NZLR 309, 492 Mayho v Buckhurst (1617) CroJac 438,360 Mayluck Investment Ltd v Lee Yih Ping & others 0996) HCt MP No 1537 of 1995, 400 Melvin v Melvin (1975) 58 DLR (3d) 98, 263 Mexx Consolidated (Far East) Ltd V A-G [1987] HKLR 1210, 306 Midland Bank Ltd v Farmpride Hatcheries [1980] 260 Est Gaz 493, 499 Midland Bank Pie v Cooke [1995] 4 All ER 562, 128, 138 Midland Bank Pie v Dobson [1986] 1 FLR 171, 135 Midland Bank Pie v Serter (1995) 1 FLR 1034, 460 Midland Bank Trust Co Ltd v Green [1981] AC 513, 33, 49, 62-63 Mileover Ltd v Brady [1983] 3 All ER 618, 273 Miles v Easter [1933] 1 Ch 611, 382 Miller v Ecmer Products Ltd [1956] Ch 304, 325 Mobil Oil Co Ltd v Rawlinson (1981) 43 P&CR 221, 465 Monnickendam v Leanse [1923] 29 TLR 445, 101 Moody v Steggles (1879) LR 12 Ch 261, 321, 325 Moore v Rawson (1824) 3 B&C 332, 341 Morris v Redland Brick Ltd [1970] AC 652, 419 MRA Engineering Ltd v Trimster Co Ltd (1987) The Times 22 October, 330 Mulahy v Curramore PEY Ltd [1974] 2 NSW LR 464, 165 Multiservice Bookbinding Ltd v Marden [1978] Ch 84, 456 Mumford v Bank of Scotland 0995) The Times 29 September, 457 Murphy v Brentwood District Council [1990] 2 WLR 944, 285 Mutual Life Assurance Society v Langley (1886) 32 Ch D 460, 446 National Carriers Ltd v Panalpine (Northern) Ltd [1981] AC 675, 300 National Provincial Bank v Ainsworth [1965] AC 1175, 39, 496 National Westminster Bank Pie v Morgan [1985] AC 686; [1985] 2 WLR 588, 46,458,459 National Westminster Bank Pie v Skelton [1993] 1 WLR 72, 465, 466 Navigation Co v Lamberg Bleaching Dyeing & Furnishing Co Ltd [1927] AC 226,340 NC Chan v Chung Lee Construction Co [1964] HKLR 254, 492 New Hart Builders v Brindley [1975] Ch 342, 116 Newbould, re (1913) 110 LT 6, 213 Newton Abbott Co-operative Society Ltd v Williamson & Treadgold Ltd [1952] Ch 286, 380-381 Ng Fung Property Investment Ltd v Lam Ting Sin 0993) HCMP No 2446 of 1993, 176 Ng Kam-ha v Vincent Sina Traders (HK) Ltd [1987] 2 HKC 517, 68 Ngai Hong Cycle (Electric) Ltd v China Harmonious Ltd 0994) HCt MP No 4343 of 1993, 122 Ngan Chor Ying Ann v Yeat Trend Development [1995] HKC 605, 420, 437 Niceboard Development Ltd v China Light & Power Co Ltd 0993) LT MP No 14 of 1991, 306 Nickerson v Barraclough [1981] Ch 426, 334 Nielson-Jones v Fedden [1975] Ch 222, 251-252, 253, 254 Nisbett and Potts' Contract, re [1906] 1 Ch 386, 376-377 Noak v Noak [1959] YR 137, 239 Noakes v Rice [1902] AC 24, 453, 454 North v Loomes [1919] 1 Ch 378, 104 Oates v Oates [1949] SASR 37, 232, 247 Oceania Manufacturing Co v Pang Kwong-hon [1979] HKLR 445, 7 xix HONG KONG LAND LAW Olivesburg Ltd v Volstead Travel Service Co Ltd [1994] 2 HKC 507, 293 One Queen Co Ltd v.Chan Siu-Lan [1989] 1 HKC 146, 273 Orient Leasing (Hong Kong) Ltd v NP Etches [1985] HKLR 292, 13 Osachuk v Osachuk (1971) 18 DLR (3d) 413, 235 Owen v Gadd [1956] 2 QB 99, 280 O'Brien v Robinson [1973] AC 912, 285, 286 P & A Swift Investments v Combined English Stores Group Plc [1989] AC 632; [1989] AC 633, 361, 362, 374, 414 Palmer, re [1993] Ch 72, 250 Pang Kwan-lung v Ma Choi-hop [1989] 2 HKC 449, 337 Parkash v Irani Finance Ltd [1970] Ch 101, 485 Parker Tweedale v Dunbar Bank Plc [1990] 2 All ER 577, 471-472, 478 Parker v British Airways Board [1982] QB 1004, 17 Parker v Taswell (1858) 2 De G&J 559, 118 Parker's Settled Estates [1928] Ch 247; 214 Parsons v Parsons [1983] 1 WLR 1390, 240 Pascoe v Turner [1979] 1 WLR 431, 153-154 Patten, re (1883) 52 LJ Ch 787, 217 Pearce v Gardner [1897] 1 QB 688, 106 Pearl Island Hotel Ltd v Incorporated Owners of Pearl Island Villas (1988) HCt HCA No A1528 & 7777-8 of 1987, 414, 429, 431 Pearl Island Hotel Ltd v Li Ka Yu [1988] HKC 512, 411, 439 Peffer v Rigg [1977] 1 WLR 285, 92 Penta Continental Land Investment Co Ltd v Chung Kwok Restaurants Ltd [1967] DCLR 22, 12 Perera v Vandiyar [1953] 1 WLR 672, 280 Perkins v Perkins, re (1972) 31 DLR (3d) 694, 263 Peter and Angeli Wong Co Ltd v Silverera Ltd [1995] 3 HKC 411, 393 Petrie, re [1962] Ch 355, 213 Petrol Filing Station, re (1969) 20 P&CR 1, 450 Pettitt v Pettitt [1970] AC 777; [1969] 2 All ER 385, 127, 130 Phillips v Mobil Oil Co Ltd [1990] 1 WLR 276, 55 · Phillips' Trusts, re [1903] 1 Ch 183, 446 Phipps v Pears [1965] 1 QB 76, 324, 329 Pilcher v Rawlins (1872) Ch App 259, 32, 33 Pinewood Estate, re (1958) Ch 280, 380 Pitt v Jones (1880) 5 App Cas 651, 261 Plimmer v Wellington Corporation (1884) 9 App Cas 699, 141, 149, 150, 501 .potter v Duffield (1874) LR 18 Eq 14, 103 Powell v Mcfarlane (1979) 38 P&CR 452, 165, 168, 169, 170, 171 Predeth v Castle Williams Finance Co Ltd (1986) 279 Est Gaz 1355, 473 Propert v Parker (1832) 3 My & K 280, 289 Prudential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386, 275, 277 Prudential Enterprises.Ltd, The v PH Shek Ltd (1988) HCt HCA No A4911 of 1987, 291,295 Public Trustee of Manitoba and Le Clerc, re (1982) 123 DLR (3d) 694, 256 Pulteney v Warren (1801) 6 Yes 73, 234 PunJong-sau v Pong Wing-kong [1980] HKLR 662; [1977-1979] HKC 210, 262 Purchase v Lichfield Brewery Co [1915] 1 KB 184, 354, 355 Pyer v Carter (1887) 1 H&N 916, 333 Quennel v Maltby [1979] 1 WLR 318, 465 R v Ng Kam-chuen [1986] HKLR 1202, 17 R v Secretary of State for the Envionrnent (1990) P&CR 487, 166 xx TABLE OF CASES Ramsden v Dyson (1866) LR 1 HL 129, 140, 141 Rance v Elvin (1985) P&CR 65, 323 Rasmanis v Jurewitsch 0969) 90 WN (NSW) 154, 255 Rawlinson v Ames (1925] Ch 339, 116 Red House Farms (Thorndon) Ltd v Catchpole (1977) Est Gaz 798, 167 Reebok Trading (Far East) Ltd v Pok Fu Lam Management Ltd (1994] 3 HKC 1, 434 Reeve v Lisle (1902] AC 461, 449 Reeves v Pope (1914] 2 KB 284, 37 Regent Oil Co Ltd v JA Gregory (Hatch End) Ltd (1966] Ch 402, 374 Regis Property Ltd v Dudley [1959] AC 370, 288, 313 Registrar-General of New South Wales, The v Wood (1826) 39 CLR 46, 265 Reid v Bickerstaff (1909] 2 Ch 305, 382 Renals v Cowlishaw (1878) 9 Ch D 125, 380, 382, 386 Rhone v Stephens [1994] 2 All ER at 73, 369 Rhone v Stephens (1994] 2 WLR 429, 411 Rhone v Stevens (1994] 2 AC 310, 371 Rice v Rice (1884) 2 Dres 73 VC, 35 Richards v Morgans (1753) 4 Y&C Ex 570, 468 Richardson v Feary (1888) 39 Ch D 45, 262 Risch v Mcfee (1991) 61 P&CR 42, 244 Riseway Investment Ltd v Wong Kwok Chiang & another (1995] 2 HKC 25, 259 Robson v Hallett (1967] 2 QB 939, 488 Rogers v Hosegood [1900] 2 Ch 388, 374, 380, 385, 387 Rose Spicer, Rose v Hyman [1912] AC 623, 293 Rosher, re (1884) 26 Ch D 801, 199 Rossiter v Miller (1878) 3 App Cas 1124, 103 Royal Victoria Pavilion Ramsgate, re (1961] Ch 581, 376 Rugby School (Governors) v Tannahill [1935] 1 KB 87, 292 Ruptash and Lumsden v Zawick [1956] 2 DLR (2d) 145, 239 Rye v Rye (1962] AC 496, 328 Rylands v Fletcher (1868) LR 3 HL 330, 56, 285 Salt v Marquess of Northampton [1892] AC 1, 450 Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan County Council [1980] 41 P&CR 179, 105 Samuel v Jarrah Timber and Wood Paving Co Ltd (1904] AC 323, 449 Sanderson v Berwick-Upon-Tweed Corporation (1884) 13 QBD 547, 281 Sandon v Hopper (1843) 6 Beav 246, 468 Santley v Wilde [1899] 2 Ch 474, 451, 453 Satanita, The [1985] P 249; [1897] AC 59, 409 Saunders v Vautier (1841) 4 Beav 115, 27, 208 Scala House & District Properties Ltd v Forbes (1974] QB 575, 292 Schwaan v Cotton (1916] 2 Ch 120 & 459, 333, 336 Score International Enterprises Ltd v Continental Cement & Gypsum Co Ltd 0995) CA Civ App No 228 of 1994, 103 Security Trust Co v Royal Bank of Canada (1976] AC 503, 63 Selous Street Properties Ltd v Orone! Fabrics Ltd (1984) 270 Est Gaz 643, 347 Selwyn v Garfitt (1888) 38 Ch D 273, 476 Seton v Slade (1802) 7 Yes Jun 265, 447 Shamji v Johnson Matthey [1991] BCLC 36, 478 Sharpe, re [1980] 1 WLR 219, 152 Sheepnip Industries Ltd v Champion Billion Development Ltd 0995) HCt MP 1390 of 1995, 400 Shephard v Jones (1882) 21 Ch D 469, 468 Shields v Chan [1972] HKLR 121, 312 Shiloh Spinner's Ltd v Harding (1973] AC 691, 292, 294 xxi HONG KONG LAND LAW Shun Shing-hing Investment Co Ltd v A-G [1983) 2 HKC 314, 309 Sik Tak Sheung & others v Sik Miu Wai 0993) HCt MP No 2797 of 1993, 216 Silver Source Development Ltd v Time Century Ltd [1992] 1 HKC 366, 299 Simmons v Dobson [1991] 1 WLR 720, 337 Siu Chun-wah Alice v Malahon Credit Co Ltd [1987] 2 HKC 79, 242, 249 Smith and Snipes Hall Farm Ltd and others v River Douglas Catchment Board [1949) 2 KB 500, 378, 379 Smith Bird v Blower [1939] 2 All ER 406, 105 Smith v City Petroleum Co Ltd [1940) 1 All ER 260, 14 Smith v Marrable 0843) 11 M&W 5, 282 Snell & Prideaux Ltd v Dutton Mirrors Ltd [1994] EGCS 78, 342 So Amy & Others v Au Leslie [1995) 2 HKC 113, 104 Somma v Hazelhurst [1978] 1 WLR 1041, 268, 272 Song Ling Investment Ltd v Kin Hing Godown Ltd 0994) CA Civ App 4 of 1994, 423 Southern Centre of Theosophy Inc v State of South Australia [1982) AC 706, 15 Sovmots Investments Ltd v Secretary of State for the Environment [1979) AC 144,330 Spencer's Case 0583) 5 Co Rep 16a, 353-357 passim, 362, 363, 376 Spicer v Martin (1888) 14 App Cas 12, 382 Springette v Defoe [1992) 2 FLR 388, 139 Spyer v Phillipson [1931) 2 Ch 183, 14 Squire v Rogers (1979) 27 ALR 330, 234, 235 Squarey v Harris-Smith (1981) 42 P&CR 118, 332 St Edmundsbury & Ipswich Diocesan Board of Finance v Clarke (No 2) [1975) 1 WLR 468,326,338 Stacey v Hill [1901) 1 KB 660, 349 Stafford v Lee 0992) 65 P&CR 172, 334 Standard Chartered Bank v Walker [1982) 1 WLR 1410, 471, 472, 473 Steadman v Steadman [1976] AC 536, 113-114, 116 Stedman v Smith (1857) SE and Bl, 232 Stokes v Anderson [1991) 1 FLR 391, 244 Street v Mountford [1985] AC 809, 267, 269, 270-271 Strelly v Winson (1684) 1 Vern 297, 234 Sudbrooke Trading Estate v Eggleton [1983) 1 AC 444, 103 Sun Hing Co Ltd v Brilliant Investment Co Ltd [1966) HKLR 310, 290 Sunface International Ltd v Meco Engineering Ltd [1990) 1 HKC 434, 285 Supreme Honour Development Ltd v Lamaya Ltd [1991) 1 HKC 198, 370, 374, 409, 414 Suttill v Graham [1977] 1 WLR 819, 236 Sweet & Maxwell Ltd v Universal News Services Ltd [1964) 2 QB 699, 313 Take Harvest Ltd v Lui [1992) 2 WLR 785, 298, 299 Tam Mo Yin & another v AG & others (1995) HCt MP No 1868 of 1994, 167, 177, 180 Tang Bik-ching v Wong Yuet-ying [1987) DCLR 30, 286 Tang Chi Ho v Wong Yuk Ho & others (1996) CA Civ App No 198 of 1995, 157 Tang Kai-chung v Tang Chik-shang [1970) HKLR 276, 9, 219, 223 Tang Kun Nin v Tang Chun Chak 0992) HCt MP No 761 of 1991, 159 Tang Mei-lin v Tsui Lin [1967) DCLR 33, 298 Tang Ping-hoi v A-G [1987) HKLR 324, 22, 308 Tang Shu Tin v Tang Kin Kwok [1994] 2 HKC 727, 177 Tang Tin-fat v Chan Fok-kei [1993] 2 HKLR 373, 336, 337 Tang Yau Yi Tong v Tang Mou Shau Tso [1995] 2 HKC 245, 221-222 Tang Yin Ling v Wong Sai 0994) HCt MP No 2527 of 1992, 232, 235 xxii TABLE OF CASES Tang Ying Ki & another v Maxtime Transportation Ltd 0996) HCt MP No 407 of 1996, 474, 476 Tanner v Tanner [1975] 1 WLR 1346, 494 Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133, 144, 147 Taylor v Ellis [1960] Ch 368, 463 Thames Guaranty v Campbell [1985] QB 210, 248 Thellusson v Wood 0799) 4 Ves 227, 207 Thians Plastics Co Ltd v Tins Chemicals Co Ltd (No 2) [1971] HKLR 249, 57 Thirkell v Cambi [1919] 2 KB 590, 104 Thomas v Hayward 0869) LR 4 Ex 311, 360 Thompson v Park (1944] KB 408, 491 Thornley v Thornley [1893] 2 Ch 229, 265 Thrift v Thrift 0976) 10 ALR 332, 235 Thursby's Settlement, re [1910] 2 Ch 181, 215 Tichbourne v Weir 0892) 67 LT 735, 178 Tickner v Buzzacott (1965] Ch 426, 179 Timmins v Moreland Street Property Co Ltd [1958] Ch 110, 105-106 Tinsley v Milligan [1993] 3 WLR 126, 124 Tito v Wadell (No 2) [1977] Ch 106, 368, 369 Tiverton Estates Ltd v Wearwell [1975] 1 Ch 146, 104, 105, 106 Tophams Ltd v Earl of Sefton (1967] 1 AC 50, 376, 389 Torrens v Walker [1906] 2 Ch 166, 286 Total Oil Great Britain v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318, 301 Treloar v Nute [1976] 1 WLR 1295, 165, 167-168 Tribe v Tribe (1995] 3 WLR 912, 125 TRW Steering Systems Ltd v North Cape & others 0993) 69 P&CR 265, 368, 410 TS Cheng & Sons Ltd v A-G 0986) HCt MP 8595 of 1986, 306 Tsang Chuen v Li Po-kwai (1932] AC 715, 52 Tsang Wing-lun v Tsang Lun (1993] 2 HKLR 23, 222-223 TSB Bank Plc v Camfield [1995] 1 WLR 430, 462 Tse Kwong-lam v Wong Chit-sen [1983] 1 WLR 1349, 472-473, 474, 476 Tulk v Moxhay 0848) 2 Ph 774, 179, 370, 371, 382, 410, 411 Turner v Morgan 0808) ~ Ves Jun 143, 234 Twentieth Century Bank Corp Ltd v Wilkinson [1977] Ch 99, 479 Union Assurance Society of Canton v The Hong Kong Land Co Ltd [1977] HKLR 597; 0978) 8 HKLJ 230, 280 United Bank of Kuwait v Sahib (1995] 2 All ER 973, 447 United Dominions Trust Ltd v Shell Point Trustees Ltd [1993] 3 All ER 310, 293 Vane v Lord Barnard 0716) 2 Vern 738, 287 Vaudeville Electronic Cinema Ltd v Muriset (1923] 2 Ch 74, 13 Villar, re [1929] 1 Ch 243, 193 Viscount Hill v Bullock [1897] 2 Ch 482, 11 Voice v Bell 0993) 68 P&CR 441, 319, 322 Voyce v Voyce 0991) 62 P&CR 290, 148 Wagstaff Settled Estates, re [1909] 2 Ch 201, 214 Wah Ying Properties Ltd v Sound Cash Ltd (1994] 1 HKC 786, 71 Wakeham, re'[1945] Ch 177, 215 Wakeham v Mackenzie [1968] 1 WLR 1175, 113 Wallis's Cayton Bay Holiday Camp Ltd v Shell Mex & BP Ltd (1975] QB 94, 165, 166-167, 171 Walsh v Lonsdale [1882] 21 Ch D 9, 29, 91, 116, 117, 119, 120, 276, 303, 310, 327,329,354 Ward v Duncombe (1893] AC 369, 446 xxiii HONG KONG LAND LAW Ward v Kirkland [1967) Ch 194, 332, 333 Warmington v Miller [1973) QB 887, 119 Warren v Kean [1954) 1 QB 15, 287, 288 Waverley Borough Council v Fletcher [1995) 3 WLR 772, 16 Wayfoong Credit Ltd v Li Chi Kin (1985) HCt HCA No A1865, 465 Webb's Lease, re [1951) 1 Ch 808, 335 Wedd v Porter [1916] 2 KB 91, 288 Wellmake Investments Limited v Chan Yiu Tong 0996) CA Civ App No 246 of 1995, 55, 63-64, 92, 500 Welltech Investment Ltd v Easy Fair Industries Ltd 0996) HCt No A5853 of 1994, 405 West v Williams [1899] 1 Ch 132, 484 Western Bank Ltd v Schindler [1977] Ch 1, 465 Wettern Electric Ltd v Welsh Development Agency [1983] 2 WLR 897; [1983) QB 796, 284, 489 Whaley, re [1908) 1 Ch 615, 11 Wheeldon v Burrows (1878) 12 Ch D 31; 0879) 12 Ch D 31, 85, 330, 331, 332,333,336,397,403 Whitby v Mitchell 0890) 44 Ch D 85, 195 White Rose Cottage, re [1965) Ch 940, 469 White v Bijou Mansions Ltd [1938] Ch 351, 390, 391 White v City of London Brewery Co (1889) 42 Ch D 237, 468 White v Grand Hotel Eastbourne Ltd [1913] 1 Ch 113, 339 White's Settlement, re [1930] 1 Ch 179, 213 Wilford's Estate, in re 0879) 11 Ch D 267, 252 Wilkes, in re [1891] 3 Ch 59, 250 Wilkes v Spooner [1911] 2 KB 473, 36-37 Wilkinson v Haygarth 0847) 12 QB 837, 232 William Brothers Direct Supply Ltd v Raftery [1958) 1 QB 159, 164-165, 168 William & Glyn's Bank Ltd v Boland [1981) AC 487; [1980] 3 WLR 138, 41, 43, 4~ 81, 21~ 218 Williams v Bensman (1861) 1 J & H 546, 245 Williams v Staite [1979] Ch 291, 154-155, 502 Willis v Stradling O 797) 3 res 378, 115 Wilmott v Barber 0880) 15 Ch 96, 142 Winbase Industrial Ltd v Mightyton Property Management Ltd (1994) HCt HCA No A10232, 437 Winfield Investment Co Ltd v Henry Fok Estates Ltd [1966] HKLR 399, 306, 339 Wing Ming Garment Factory Ltd v The Incorporated Owners of Wing Ming Industrial Centre [1994] 2 HKC 748, 407 Winster Development Co Ltd v Pang Yin Chang [1993] 1 HKC 95, 359 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173, 490-491 Wong Bei-nie v A-G [1973) HKLR 582, 306 Wong Chim-ying v Cheng Kam-wing [1990] 2 HKLR 111; [1990] 1 HKC 418, 42 Wong Kam Lam v Well Win Investment Ltd [1995] 3 HKC 381, 394, 400 Wong Kam-wing v Cyril Murkin (HK) Ltd [1989) 2 HKC 603, 51, 67, 69 Wong Kam-ying v Man Chi-tai [1967] HKLR 201, 9 Wong Kau v Wong Hsien-chau [1964] HKLR 422, 273 Wong Kwok-chiang & another v Longo Construction Ltd & another [1986] HKC 362; [1987] 3 HKC 34, 58 Wong Lai Fun v Le Ha [1992] HKLR 125, 119 Wong Lai Ha v Chung Sau Wah [1994] HKC 646, 105 Wong Lai Suk Chun v Wong Chin Ming [1993) 1 HKC 522, 34 Wong Lai-ying v Chinachem Investments Co Ltd (1979) PC PApp No 9 of 1979, 300 xxiv TABLE OF CASES Wong v Beaumont Property Trust Ltd [1965] 1 QB 173, 334-335 Wong Wai-fong v Chung Ho [1960] DCLR 218, 279 Woo Turban & another v Taiwan Fuji Trading (HK) Ltd [1995] 2 HKC 481, 399-400 Woodhouse & Co Ltd v Kirkland (Derby) Ltd [1970] 1 WLR 1185, 339 World Realty Ltd, The v Ngar Yin [1986] HKC 508; [1987] 3 HKC 148, 280, 299 Wright v Gibbons (1949) 78 CLR 313, 246 Wright v Macadam [1949] 2 KB 744, 323, 328 Wrotham Park Estates Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, 375, 387 Wu Koon Tai and another v Wu Yan Loi [1995] 2 HKC 732, 102 Yale v MacMaster (1974) 46 DLR (3d) 167, 263 Yangtsekiang Garment Manufacturing Co Ltd v JM Ronald Denault & Scott Ltd [1977] HKLR 320, 105 Yau Fook Hong Co Ltd & another v Ng Kwan On & another (1995] HKD CLR 51,438 Yau Fook-hong Co Ltd v A-G [1986] HKC 502; [1988] HKLR 196, 304 Yau Fook-hong Co Ltd v Man Cheung Construction Company [1981] HKLR 60,493 Yeap Cheap Neo v Ong Cheung Neo (1875) LR 6 PC 381, 200 Yeung Kit Lam & another v Lau Yin Shing (1995) HCt MP No 3392 of 1994, 121 Yeung Siu Hong v Chan Siu Mee Sandie [1992] 2 HKC 559, 108 Yeung Wah v Alfa Sea Ltd [1993] l HKC 440, 280 Young v Young [1984] FLR 375, 244 Yu Jing-jeun v Wong Pe-wun (1986) HCt No P2 of 1986, 57 XXV TABLE OF LEGISIATION Acts 31 and 32 of Henry VIII, 259 Age of Majority (Related) Provisions Ordinance No 32 of 1990 ss 8 and 21, 207 Antiquities and Monuments Ordinance, 17 Application of English Law Ordinance, 5-8, 190, 233, 234, 337 s 3(1), 7 s 3(2), 7 s 4, 6 Item 31, Sched, 297 Item 33 Sched, 298 Banking Ordinance, 484 Bankruptcy Ordinance, 33, 83 s 47(1), 84 s 49(1), 84 s 59, 300 Basic Law of the Hong Kong Special Administrative Region, 304 Articles 120-123, 23 Building Management Ordinance, 403, 408, 424, 429-433, 436-440 s 2, 407 s 3A, 424 s 4, 424 ss 5-6, 424 s 14(1), 425 s 14(2)-(3), 425 s 15, 438 s 15(2), 438 s 16, 425, 430 s 18, 426 s 18(2)c, 430 s 18(4), 440 s 19, 428, 435 s 20(2)-(4), 426 s 20(3) and (5), 427 ss 20-22, 430 ss 20-23, 427 s 20A(l), 426 s 21, 427 s 21(1A)(2)-(3), 428 s 21(5), 440 s 22, 427 s 23, 438 s 24, 428, 438 s 27, 427 s 27(2), 439 s 27(5), 440 s 28(1), 439 s 29, 428 xxvi ss 30-31, 428 s 33, 428 s 34C(2), 440 s 34E, 430, 431, 438, 440 s 34E(2)(b), 431 s 34F, 422, 440 sub-s 34F(2), 423 s 34G, 435 s 34H, 404 s 341, 405 s 34], 440 s 34K, 424 s 341, 440 s 40, 404 s 45, 436, 437, 439 s 45(3), 438 s 45(4)(j), 439 Second Sched, 424 5th Sched, 427 Paras 1-6 7th Sched, 433 Para 7 7th Sched, 431 Para 7(5) 7th Sched, 431 Para 7(6) 7th Sched, 431 Para 8 7th Sched, 432 Eighth Sched, 422 Tenth Sched, 436 Para 1 10th Sched, 437 Para 2 10th Sched, 437 Para 3 10th Sched, 437 Para 4 10th Sched, 437 Para 5 10th Sched, 437 Para 6 10th Sched, 437 Para 7 10th Sched, 437 Para 8 10th Sched, 437, 439 Para 9 10th Sched, 437 Para 4(a) Tenth Sched, 437 Para 4(b)-(c) Tenth Sched, 437 Para 4(d) Tenth Sched, 437, 439 Buildings Ordinance, 70, 71, 86, 307, 404,405,429 s 26, 285 s 27, 285 s 33, 71 s 33(9), 83, 84, 469 Church of England Trust Ordinance, 302 Civil Aviation Act 1949 and the (Overseas Territories) Order 1969, 16 Companies Ordinance, 428 s 268, 300 Part V, 83, 84 TABLE OF LEGISLATION Control of Exemption Clauses Ordinance, 434 Convention of Peking 1860, 22, 23 Convention of Peking 1898, Second, 22 Conveyancing and Law of Property Act 1881 s 58(1), 389 Conveyancing and Property Ordinance, 4, 8, 242, 303, 442, 443; 444,445,447,467,469 s 2, 96, 99, 328, 441, 443 s 3, 95, 97, 101, 118, 217, 298, 446 s 3(1), 100, 108 s 3(2), 110 s 4, 95, 98, 258, 298, 327, 341, 423 s 4(1), 95 s 4(2), 96, 106 s 4(2)(d), 107 ss 4-5, 485 s 5, 95, 97, 127, 298 s 5(1), 120 s 5(l)(a), 99 s 5(l)(b), 97, 98 s 5(2), 120 s 6, 95, 106 s 6(1), 106 s 6(2), 107 s 7, 95, 110 s 8, 253, 257 s 9, 243 s 9(3), 230 s 10, 230 s 10(3), 243 s 11, 230 s 13. 38, 158 s 14, 303, 304, 307, 445 s 14A, 392 s 16, 120, 328, 332, 333-334 s 16(1), 327 s 19, 96 s 24, 326 s 25(2), 241 s 26, 390, 412 s 29, 295, 393 s 30, 359 s 31, 350, 356, 357, 467 ss 31-32, 359 s 32, 356, 467 s 35(l)a, 348, 354, 368, 410 s 39, 353, 378, 388 s 40, 375, 389, 415 s 40(2), 353 s 41, 85, 179, 348, 355, 370, 377, 387,410, 411-415, 429,435,467, 468 s 41(2), 423 s 41(8), 348, 349, 368, 410 sub-s 41(l)a, 412-413 sub-s 41(l)b, 375 sub-s 41(l)c, 372, 413 sub-s 41(2), 348, 370, 371, 377, 388,411,414 sub-s 41(2)a, 372 sub-s 41(2)c, 372, 374, 388 sub-s 41(3), 370, 377, 387, 388, 411 sub-s 41(4), 372, 416 sub-s 41(5), 372, 412 sub-s 41(7), 374, 413 sub-s 41(8), 377 sub-s 41(9), 377, 415 s 44, 248 s 44(1), 443 s 44(3), 444 sub-s 44(2), 444 sub-s 44(3), 465 sub-s 44(4)a, 469 s 45, 482, 484 sub-s 455(3), 483 s 46, 445 s 47, 463, 469 s 48, 244 s 49, 462 s 50, 477 s 50(2), 477 s 50(6), 477 s 51, 465, 466, 467, 469, 477 s 51(3), 469 s 51(4), 465, 470 sub-s 53(1), 475 sub-s 53(2), 479 s 54, 467, 476, 477 s 55, 476 s 56, 464, 485 s 56A, 56 s 58, 291, 308, 444 s 58(2), 293, 294 s 58(4), 293 s 62, 253, 254, 297, 298, 470 s 62(2), 297 s 63, 216 Part I First Sched, 348, 354, 368, 410 Cl(c) Part C Second Sched, 464 Cl(f) Part C Second Sched, 463 Form 1 Third Sched, 109, 415 Form 3 Third Sched, 109, 445 Forms 4-5 Third Sched, 443, 464, 469 Form 5 Third Sched, 483 Form 6 Third Sched, 485 Fourth Sched, 477, 479 Para 2 Fourth Sched, 465, 466 Para 4 Fourth Sched, 467 xxvii HONG KONG LAND LAW Para 8 Fourth Sched, 469, 470, 475 Para 11 Fourth Sched, 470, 479 Crown Lands Ordinance, 279 Crown Lands Resumption Ordinance, 86,221,309 s 2(d), 309 Crown Lease Resumption Ordinance, 309 Crown Leases Ordinance, 175, 305, 307 s 5(2), 308 s 8, 290 s 15, 340, 391 Crown Rent and Premium (Apportionment) Ordinance, 354 Crown Rights Re-entry and Vesting (Remedies) Ordinance, 308 s 3, 308 s 6, 295 s 8, 308 Defective Premises Act 1972, 285 Demolished Buildings (Redevelopment of Sites) Ordinance, 307 Distress for the Rent Act 1737 s 18, 298 District Court Ordinance s 69, 292 s 69(2), 291 Electricity Network (Satutory Easements) Ordinance, 343 English Land Registration Act 1925 s 70(1)g, 80, 85 English Partition Act 1868, 262 Estate Duty Ordinance s 3Cl)c, 70 s 5, 70 s 18, 70 s 18(1), 70, 86 Foreshore and Sea-bed (Reclamations) Ordinance, 15 Grantees of Reversions Act 1540, 356 Inland Revenue Ordinance s 5, 469 Interpretation and General Clauses Ordinance s 2, 5 s 3, 4, 5 Intestates' Estates Ordinance, 4, 33, 265 Judicature Acts 1873 and 1875, 26 xxviii Land Acquisition (Possessory Title) Ordinance, 309 Land Charges Act 1972, 6, 48, 49, 6263 s 2(1), 496 s 2(7), 496 Land Development Corporation Ordinance s 15, 309 Land Registration Act 1925, 6, 40, 41, 48, 74, 84 Land Registration Ordinance, 8, 34, 48-71, 79, 80, 82, 83, 84, 85, 86, 119, 257, 377 s lA, 56 s 2, 52 s 2A, 56 s 2A(2), 56 s 3(1), 65, 66-70, 377, 482 s 3(2), 54, 58, 59, 60, 61, 62, 6470, 71, 377, 415 s 4, 61, 64 s 5, 65, 51 s SA, 51 s 14, 50 s 16, 57 ss 19-21, 57 Land Registration Regulations, 49 Land Transfer Acts 1862, 1875 and 1897, 74 Landlord and Tenant Act 1730, 297 Landlord and Tenant Act 1927 s 19(1)a, 313 Landlord and Tenant Act 1985 s 11(1), 282 Landlord and Tenant (Consolidation) Ordinance, 4, 267,298,314 s 52(3), 290 s 93, 296 s 126, 290 Part I, 298, 311, 316 Part I-II, 295, 315 Part II, 280, 286, 298, 311, 316317 Part III, 295 Part IV, 295, 297, 314, 315, 316, 317,347 Part IV-V, 297 Part V, 316, 317 Landlord and Tenant (Covenants) Act 1995, 347 s 2, 360 s 3, 353, 355, 356, 357 s 5, 348 ss 6-8, 350 Lands Tribunal Ordinance s 8(9), 292 TABLE OF LEGISLATION Law Amendment and Reform (Consolidation) Ordinance s 13A, 111 Law of Property Act 1925, 5, 8, 20, 217,259,260 s 1(1), 185, 186, 191 s 1(3), 185, 186, 191 s 1(6), 102, 228 s 2(1)(ii), 217, 218 s 4(2), 184 s 23, 217 s 25(1), 213 s 25(2), 216 s 25(4), 213 ss 26(1)-(2), 216 s 26(3), 218 s 28(1), 215 s 28(3), 259 s 30, 259 s 32(1), 215 s 34, 228 s 34(2), 229 s 35, 229 s 36(1), 229 s 36(4), 253 s 38, 389 s 39, 389 s 53(1)(c), 100 s 54, 107 s 56, 390 s 62, 327, 328, 329, 332 s 78, 378, 379, 389 s 79, 375, 389 sub-s 84(1), 392 ss 85-87, 248 s 93, 482 s 99, 463 s 137, 445 s 139, 359 s 141, 350, 357, 362 s 142, 356 s 143, 393 s 145, 275 s 146(2), 294 ss 149(1)-(2), 274 s 149(3), 274 s 149(6), 275 s 154, 358 s 185, 300 s 199, 37 s 199(1)ii, 37 s 205(1) (xix), 185 Law of Property (Enforcement of Covenants) Ordinance, 370, 411 Law of Property Miscellaneous Provisions Act 1989 s 2, 101, 111 Law Reform and Amendment (Consolidated) Ordinance s 9, 430 Limitation Act 1874, 159 Limitation Act 1980 s 4, 167 Limitation (Amendment) Ordinance 1991, 159, 160, 173 Limitation Ordinance, 83, 86, 87, 157, 158, 165, 167, 176, 177, 222, 485 s 4, 159 s 4(3), 159 s 7, 158 s 8(1), 160 s 9, 161 s 9(1), 178 s 10, 158 s 12, 172, 173 s 13, 158, 160 s 14, 160 s 18, 173 s 19, 159 s 20, 162 s 22, 162 s 26, 163 Marine Fish Culture Ordinance s 12, 15 Married Persons Status Ordinance, 130,236, 265 s 4(2), 200 s 6, 253, 264 s 9, 133, 134 Married Woman's Property Act 1882, 265 s 17, 130 Matrimonial Homes Act 1983, 496 s 2(8), 496 Matrimonial Property and Proceedings Ordinance, 236, 264 Mining Ordinance s 3, 14 Money Lenders Ordinance, 448, 457 ss 24-25, 457 s 25(3), 457 MTR (Land Resumption and Related Provisions) Ordinance, 309 Multi-storey Buildings (Owner's Incorporation) Ordinance, 436 s 18(l)c, 421 New South Wales Strata Titles Act 1973, 397 New Territories Leases (Extension) Ordinance, 22, 175, 308 s 7, 9, 290, 340, 391 New Territories Ordinance s 8, 22 xxix HONG KONG LAND LAW s 13, 9, 219, 220, 343 s 15, 225, 226 Part II, 85 New Territories (Renewable Crown Leases) Ordinance, 175, 176, 177, 180, 336 s 4(4)c, 176, 177 New Zealand Illegal Contracts Act 1970 ss 6-7, 125 Partition Act 1868, 259, 263 Partition Ordinance, 122, 223, 232, 259,260,263,264 s 2(c), s 3, 259 ss 4-5, 261 s 4(2), 261 sub-s 4(3), 260 s 6(1), 261 s 6(3), 261 s 6(4), 263 s 15, 260 Perpetuities and Accumulqtions Act 1964, 191 Perpetuities and Accumulations Ordinance, 8, 191, 196 s 1, 195 s 6, 196 s 7, 197 ss 8(1)-(3), 196 ss 8( 4)-(5), 196 s 9, 197 s 10, 198 s 11, 199 s 17, 207 s 18, 208 Powers of Attorney Ordinance s 2, 424 Prescription Act 1832, 337, 338 s 2, 338 s 3, 338 Probate and Administration Ordinance s 62, 212 Public Health and Municipal Services Ordinance, 285 ss 12-15, 285 s 47, 285 s 127, 285 Public Order Ordinance, 342 s 23, 290, 466 Rating Ordinance s 21, 468 Real Property Act 1845, 95 Rent and Premium (Apportionment) Ordinance, 305 XXX Road (Works Use and Compensation) Ordinance, 309 Sale of Goods Ordinance, 282 Settled Land Act 1925, 5, 153, 210, 211, 214, 215 ss 38-39, 211 ss 41-42, 211 s 71, 211 Singapore Land Titles (Strata) Act No 2 of 1976, 397 Singapore Land Titles (Strata) Act No 23 of 1982, 397 Statute of Anne, 234 Statute of Frauds 1677, 95, 100, 110, 113 Statute of Quia Emptores 1290, 20 Statute of Uses 1525, 188, 189, 190 Statute of Uses 1535, 27, 28 Statute of Westminster II 1285, 233 Statute of Wills 1530, 190 Supreme Court Ordinance ss 21F-21H, 292 s 21G, 291 Tenures Abolition Act 1660, 20 Treaty of Nanking, 21, 23 Trustee Ordinance, 214 s 2, 212 s 4, 215 s 4(1)b, 215 s 13, 214 s 15(2), 216 s 33, 200 s 34, 207 s 56, 211, 215 Trusts of Land and Appointment of Trustees Act 1996, 210, 217 ss 5-6, 215 s 11, 218 Waterworks Ordinance, 14 ss 23-29, 14 Wills Act 1530, 184 Wills Act 1540, 20 Wills Act 1837, 184, 190 Wills Ordinance, 4 s 3, 184, 190 Introduction 1.1 What is Land Law? Land law is concerned with the relationship of people to land. In Hong Kong, a number of people may have an interest in a particular piece of land. There is the owner of the land; there may be persons, or more commonly a bank, who have provided the money for the owner to buy the land; there is the person actually occupying the land, who may not be the owner of the land; and there will be people who come onto the land at the request of the owner or occupier. An owner of neighbouring land may also have an interest, in the form of rights over part of the land. He may also be able to prevent the owner from using the land in certain ways for the benefit of his adjoining land. All these people have some connection with the land- they all have some interest in it. It is these relationships of the involved people to the land and to each other that we will be concerned with in this book. Studying land law is similar to putting together a jigsaw puzzle: it is not easy to find a place to start. It is often not until a good portion of the picture has taken shape that the relationships among the pieces are understood and appreciated. The traditional approach is to look first at the historical development of interests in land, through the doctrine of tenure and estates and the development of basic concepts inherent in ownership interests in land. The problem with this approach is that it can be a little tedious and off-putting to the new student. What, after all, does the ownership of a flat in Hong Kong have to do with the ownership of a castle in medieval England? The answer is quite a lot, but it is not necessary to appreciate this fact at the start of one's study. This introductory chapter looks at traditional concepts of tenure and estates and the development of equity, as well as other fundamental areas, namely the classification and definition of land and the sources of our law governing land. The new student should, initially, skim through this matfrial and use it as a reference point, returning to it for a greater appreciation of the subject as his or her knowledge develops. 1.2 Classification of Property Land is not the only type of property. The average person will own or have some interest in a whole variety of things: a flat to live in, personal possessions such as clothes, furniture, and perhaps a car; cash and perhaps some investments such as shares in a company and/or an insurance policy, or an interest in a provident fund or retirement scheme. All these things come within the concept of property. They have common features but they differ in a number of ways too. The law, in regulating the relationship between people and property, identifies these similarities and differences, and thus property is classified in a number of ways. 1 HONG KONG LAND LAW Property in E_nglishcommon law is traditionally classified into three categories: • • • real property, personal property, and chattels real. l.2.1 Real Property In early common law, only certain legal actions were available to force a defendant to return property to its rightful owner. These actions were known as 'real actions' (in Latin, an action in rem). Real actions were only initially available in respect of freehold land, which was therefore classified as real property. The owner of freehold land who had been dispossessed by another thus could go to court to demand the eviction of a squatter. 1.2.2 Personal Property The owner of property other than freehold land could not always recover the property should he for some reason lose possession or control. This meant that real actions were not available to him. The best the court could do for him was to require the defendant either to return the property or pay the owner the value of the property. As the court order was directed to the defendant personally the action became known as the 'personal action' (in Latin, an action in personam). Thus the expression 'personal property' is used to classify all property falling outside the realm of real property. 1.2.3 Chattels Real Although freehold property enjoyed the benefit of real actions, it suffered from a number of disadvantages that encouraged the creation of an interest in land which fell outside the freehold system. This was the lease. Initially,the common law regarded the lease as no more than a personal contract between the parties by which the owner of land permitted someone else to occupy the land. The occupier or lessee might recover possession of the land from the owner or his heirs who had breached their agreement to lease, but could not recover possession from a third party. Only personal actions were available to the lessee. Thus leases were initiallyregarded purely as personal property. The common law gradually developed actions that enabled the lessee under a lease to recover possession of the land against a wider circle of defendants and, by the end of the 15th century, with the writ of ejectment a lessee was able to recover possession against anyone who might dispossess him. Although the lessee now had a real action, leases were not admitted to the realm of real property. However, it was clear that the position of leases as personalty was anomalous. Some distinction had to be made, and thus a separate category of property on the borders of real and personal property was created to accommodate the lease. Leases came to be classified as chattels real to mark their hybrid nature. Within the traditional classifications of realty and personalty, property is divided into tangible and intangible categories. 2 INTRODUCTION 1.2.4 Corporeal and Incorporeal Hereditaments At common law, the word 'hereditament' denoted property that descended to an heir on intestacy, ie realty as opposed to personalty. Traditionally hereditaments are classified as either corporeal or incorporeal. Corporeal hereditaments relate to the physical characteristics of the land over which rights may be exercised and include the land itself; buildings erected on the land; minerals under the surface of the land; and crops, trees, or other vegetation growing on the land. Incorporeal hereditaments encompass rights that are exercisable over the land, the most important of which are easements (see Chapter 13). 1.2.5 Choses in Possession and Choses in Action Personalty is also classified into things that are tangible and things that are intangible. Choses in possession are those moveable objects such as books, cars, clothes, and jewellery that can be physically possessed. Choses in action are a little more difficult to define. They encompass intangible rights in personal property, such as copyrights, patents, and company shares. They also include the fruits of rights that can only be claimed by taking action (as opposed to physical possession). The most common example of a chose in action is a debt. A traditional property classification can thus be summarised diagrammatically as follows: Fig 1.1 Property Classification Real Property Personal Property Chattels Real Incorporeal Heriditaments 1.2.6 Corporeal Heriditaments Choses In Possession Choses In Action New Classifications of Property? The traditional classification of property is important because it is within these categories that the law has evolved. Many of the developments in land law depend upon these traditional distinctions, and the traditional terminology persists. But these categories are no longer very useful in identifying the distinct characteristics of property rights today. Personal property may now be recovered by action. The devolution of property on death, which used to mark one of the· major distinctions between personal and real property, 3 HONG KONG LAND I.AW is now governed by common rules which in Hong Kong are to be found in the Wills Ordinance 1 and the Intestates Estates Ordinance. 2 Also the term 'hereditament' has lost much of its significance now that there is no difference between the devolution of real and personal property on death, and is not often used. The enforceability and transmissibility of different interests in property is more helpful in identifying the vital distinctions between proprietary and personal rights. 3 For instance, one important current issue is the status of licences over land. These have traditionally been classified as personal rights, but because they have in certain circumstances bound third parties, the question arises whether they should now be regarded as proprietary in nature. But even the tests of enforceability and transmissibility are under challenge with the emergence of new rights which, though enjoyed only by the original grantee, are nevertheless valuable assets: for instance a provident fund entitlement or a tenancy that is protected under the Landlord and Tenant (Consolidation) Ordinance. 4 The fact is that our rapidly changing world calls for changing perceptions of our concepts of property. 1.2.7 The Hong Kong Perspective It may come as a surprise to many that when studying land law in Hong Kong we are not concerned with real property. We may call builders 'real estate developers' and land sales agents 'real estate agents', but they do not develop or sell real estate. They should more correctly be called 'chattel real developers' and 'chattel real agents', for almost all land in Hong Kong is leasehold. But the expression 'chattels real' is a mouthful and it is tempting to use familiar terms. However, it is important for the student or lawyer negotiating the intricacies of property law to remember that land in Hong Kong does not fall within the traditional classification of real property. It is the distinction between personal property and chattels real, rather than real and personal property, that is of importance in Hong Kong. The terms 'moveable' and 'immoveable property' are adopted in most ordinances, 5 although the ordinance with which we will be most concerned, the Conveyancing and Property Ordinance, 6 prefers the term 'land'. The difference is merely a matter of terminology for the statutory definitions of 'land' and 'immovable property' are almost identical: land includes: (a) land covered by water; (b) any estate, right, interest or easement in or over land; (bb) the whole or part of an undivided share in land and any estate, right, interest, or easement in or over the whole or part of an undivided share in land; and Cap 30 Cap 73 See Lawson: Principles of Property Law, Oxford, Clarendon Press (1958), Chapter 2. Cap 7 See s 3 Interpretation and General Clauses Ordinance Cap 1. See s 2 Cap 219. 4 INTRODUCTION (c) things attached to the land or permanently fastened to anything attached to the land. 7 The definitions include both the tangible and intangible aspects of property rights in land. Paragraphs (a) and (c) identify the physical state of the land, while paragraphs (b) and (bb) look to the intangible rights that can exist in or over land. Moveable property is simply defined to include all property other than land. 8 All these definitions are useful for illustrating the nature ofland but it must be remembered that they provide only a legislative definition not a legal classification. The purpose of these definitions is solely to clarify the meaning of a legislative provision when the term 'land' or 'immoveable property' is used. 1.3 Sources of Hong Kong Land Law It is impossible to embark on the study of a subject without an idea of its sources. A detailed study of the sources of Hong Kong law is certainly outside the scope of this book, but a brief review is useful. There are three main sources of land law in Hong Kong: • English law; • local legislation and case law; and • Chinese customary law. 1.3.1 Application of English Law 1.3.1.1 English Legislation 9 The application of English legislation in Hong Kong changed dramatically in 1966 with the enactment of the Application of English Law Ordinance. 10 It is important, however, to be aware of the application of English legislation before this change. (a) Pre-1966 position Hong Kong is a ceded colony. At the date of its cession, which is normally taken to be 5 April 1843, the laws of England then in force were applied so far as suitable to the circumstances of Hong Kong and its inhabitants. This meant that statutes that were in force in England on that day were incorporated into Hong Kong law unless they were unsuited to Hong Kong or its inhabitants. Statutes passed in England after that date were not incorporated into Hong Kong law unless they necessarily applied because 7 8 9 10 Sees 2 Cap 219. The definition in the Interpretation and General Clauses Ordinance does µot include para (bb). See s 3 Interpretation and General Clauses Ordinance Cap 1. A detailed examination of the reception of English law is found in Professor Wesley Smith's article 'The Reception of English Law in Hong Kong' (1988) 18 HKLJ 183. Cap 88 5 l HONG KONG LAND LAW of their terms, or were specifically applied by prerogative legislation or by the enactment of a local ordinance. (b) Post-1966 The difficulty of establishing the extent and content of pre-1843 legislation led to the enactment in 1966 of the Application of English Law Ordinance. Section 4 of that ordinance applies such English statutes as are set out in the schedule to the ordinance (subject to such modification as local circumstances may require) or which are applied to Hong Kong by Order in Council, by local ordinance, or by the enactment itself either expressly or by necessary implication. The full text of pre-1843 legislation which is applied expressly by the ordinance is found in Appendix IIA to the Laws of Hong Kong, and there is a comparative table of English legislation that has been incorporated into Hong Kong law by local ordinances in Appendix IIB. Hong Kong law has not embraced many of the more recent legislative changes introduced in England, and only some of the far-reaching property reforms of the 1925 property legislation have been incorporated. 11 Hong Kong law governing priorities, co-ownership, and settlements are examples of areas which now differ significantly from current English law. Particular care, therefore, is required in reading English cases and land law materials, and it is often the older cases and materials that provide a more accurate guide to the Hong Kong position. It is necessary always to check first whether or not a certain statute has been incorporated into Hong Kong law by reference to the Appendices to the Laws of Hong Kong. (c) Applicable pre-1843 English legislation The schedule to the Application of English Ordinance appears simple: if the e'nactment is not listed in the schedule it should have no application to Hong Kong. Unfortunately, the matter is not so simple. What, for instance, is the position where a pre-1843 statute was applicable to the circumstances of Hong Kong and had, prior to 1966, been part of Hong Kong law but does not appear in the schedule? Prima facie it does not apply and the law has been changed at a stroke of the legislative pen. Unfortunately that stroke may have the effect of turning the clock back to the common law that was in force many years ago when quite different social, economic, and political conditions prevailed. Furthermore, the background to the development of the law in a particular area may be altered by the removal of an influential enactment. It can then be difficult to make sense of the altered scene. Given the long history of the common law relating to land we will encounter several areas where this problem arises. The problem may be overcome where the omitted statute abolished a common law or equitable rule, for it is an accepted rule that the repeal of 11 6 The Land Registration Act 1925, the Land Charges Act 1972, and the Settled Land Act 1925 do not apply to Hong Kong, and only some of the Law of Property Act 1925 provisions apply. INTRODUCTION a statute cannot revive the rule it abolished. 12 Thus, if a statute allowed the exercise of a right that the common law had removed, the Application of English Law Ordinance has not resurrected the limitation that the repealed statute removed. But this rule is no comfort where the discarded statute created a right or obligation not recognised at common law. 13 1.3.1.2 Common Law and Equity Section 3(1) of the Application of English Law Ordinance provides that the common law and rules of equity shall be in force in Hong Kong so far as they apply to the circumstances of Hong Kong and its inhabitants, and subject to such modification as circumstances require or as may be amended by any legislation applicable in Hong Kong. The application of the common law is not limited in time. Developments in the common law also apply to Hong Kong, subject only to their applicability to the local scene. Thus it is not the common law as at 1843 that is applicable to Hong Kong but the common law in its current state of development. The common law and rules of equity applicable to Hong Kong are not affected by any legislative amendment that there may have been or may be made by statute in England unless the statute is itself incorporated into Hong Kong law. 14 This provision presents the difficulty of establishing exactly what the common law was before a statute, which does not apply to Hong Kong, was passed. That may be easy where the statute is recent but where it was passed many years ago the task is difficult and the result could be bizarre. Was it really intended that we should turn back the clocks in some areas to the 15th or 16th century? Land law is unfortunately one of the areas where ancient statutes still operate and where this question is particularly pertinent. Some assistance is derived from the rule, already noted, that the repeal of a statute does not revive anything that the statute abolished, but problems persist where the statute created a right or obligation that did not exist at common law. 15 The rules of common law and equity applicable in Hong Kong may be affected by decisions of the English courts provided that the decision does not turn upon a statutory provision that is enforced in England and not in Hong Kong. There is some difference of opinion as to whether all decisions of the Privy Council, as the highest court in Hong Kong, are binding on the Hong Kong courts. Certainly decisions of the Privy Council on appeals from Hong Kong are binding, but the applicability of decisions from other jurisdictions may be limited to cases where the law at issue in the case is the same or very similar. The creation of a final court of appeal for Hong Kong should remove these uncertainties; Privy Council decisions will become merely persuasive. 12 13 14 l5 Oceania Manufacturing Co v Pang Kwong-hon [1979] HKLR 445 See Wesley Smith: 'The Effect of Pre-1843 Acts of Parliament in Hong Kong' 0984) 14 HKLJ 142. See s 3(2) Cap 88. See Wesley Smith (1984) 15. 'The Effect of Pre-1843 Acts of Parliament in Hong Kong' 14 HKLJ 142. 7 HONG KONG LAND LAW The decisions of the House of Lords are not binding in Hong Kong but are of very strong persuasive authority, given the similar membership of the House of Lords and the Privy Council. The decisions of the English Court of Appeal and High Courts are only persuasive, with, needless to say, the decisions of the higher court given more weight. 16 Decisions of the courts in other common law jurisdictions are also of persuasive authority, and indeed prove particularly useful in areas of land law where the position in the relevant jurisdiction is closer to that of Hong Kong than the prevailing English position. The English common law and equity can only be applied as appropriate to the circumstances of Hong Kong. The courts have adopted a strict test: only if the rule will cause hardship or oppression will it not apply in Hong Kong.17 1.3.2 Hong Kong Ordinances and Case Law 1.3.2.1 Hong Kong Ordinances England had its property revolution in 1925, but Hong Kong waited until 1984 to follow suit with the Conveyancing and Property Ordinance. 18 Even then the full breadth of the 1925 property reforms was not enacted simply because they are not applicable to the differing circumstances of Hong Kong in the late 20th century. Only selected provisions of the Law of Property Act 1925 have been enacted, and in some cases the provisions have been amended and updated. The Conveyancing and Property Ordinance goes further than merely enacting selected provisions of the Law of Property Act 1925. It also introduces reforms unique to Hong Kong, and consolidates existing provisions relating to property that were scattered through a number of ordinances. There are, of course, a range of other ordinances, some of which duplicate current English legislation. An example is the Petpetuities and Accumulations Ordinance. 19 Others are derived from earlier English or colonial legislation, which have been repealed in their country of origin. An example is the Land Registration Ordinance. 20 1.3.2.2 Hong Kong Decisions There is a growing body of Hong Kong case law in the property area. As far as possible reference will be made to Hong Kong decisions, but inevitably decisions from other jurisdictions are relied on extensively. 16 17 18 19 2 8 ° de Lasala v de Lasala [1979] 2 All ER 1146 for instance, Kan Fat-tat v Kan Yin-tat [1987] HKLR 516. See, Cap Cap Cap 219 257 128 INTRODUCTION 1.3.3 Chinese Customary Law Chinese customary law continues to operate in the New Territories. The New Territories Ordinance 21 recognises the continued force of Chinese customary law in relation to land in the New Territories, and where customary law is applicable the courts are obliged to give effect to it.22 Not all land in the New Territories falls within the operation of s 13 of the New Territories Ordinance, however. There is power under s 7 to exclude grants of land from the operation of the ordinance. Grants of land in New Kowloon are exempted and a few grants in the rest of the New Territories have been exempted on a case by case basis, but the vast majority of the land in the New Territories falls within the operation of the ordinance and is subject to Chinese customary law. There is perhaps a need for more widespread exemption of land from Chinese customary law, given the widespread urbanisation of the New Territories. Where customary law does operate, it primarily affects family matters including marriage, adoption, divorce, and succession (all of which are outside the scope of this book). But customary law does continue to play a role in the holding of tong and tso land, which we will consider in Chapter 9. Chinese law and custom is to be found in the Codes of the Qing dynasty as supplemented by customary rules. Chinese customary law is not fixed. Unlike the English law concept of customary law, it does not need to have existed from time immemorial. It may vary from locality to locality or even from one clan or family group to another. It may also adapt to changing circumstances by evolution ratherthan any procedural process of amendment. At one time it was thought that Chinese customary law should be frozen in the 1840s but it is now accepted that it may develop with changing circumstances in Hong Kong. 23 It is not easy to find out exactly what the customary law is, and when a case comes to court much reliance is placed upon the evidence of recognised experts on the subject. 1.4 Physical limits of Land At common law the principle is that the ownership of a piece of land includes everything above the land and everything beneath the land. However, there are now so many limitations on this general principle that we must look a little more carefully at exactly what the ownership of a piece of land includes. 1.4.1 Buildings Land includes any buildings that are erected on the land. In Ho~g_I<.g_11_g__ most buildings comprise many storeys, anc:l_<!ldmugh-.the-r--Gcifofa.huikli11_g__may ----~---·---------· ---- 21 Section 13 of Cap 97 22 Tang Kai-chung v Tang Chik-shang [1970] HKLR 276 Wong Kam-ying v Man Chi-tai [1967] HKLR 201 23 9 HONG KONG I.AND IA W ~ be a long way from the ground it is considered part of the land. Many people r wish to own a part of a multi-storey building_:_ indeed there are few people in Hong Kong who can afford to purchase a whole building! The horizontal -\7~~.?h~J?of a piece of airspace or underground terrain is possible, but is fraught withprc561ems: that ownership~nron~_JBJPPOrt of the ownership of the airspace Q~nathe protection of the airspace orsoila56ve: ________ _ In Hong Kong th"<:~!l~rshi~1~nits it:ha__mclti::Storey ~ng is achieved though th~~ o~ co-~~~ (see Chapter 10).ijngland has also been reluctant to deve~~p_the_Jmrizontal..ow:ne~--4-a--pieee of airs.pace. Although 'flyingfweholds', as they are known, do exist, the o~nership structure a ~uiti-si:;rei building in England is usually achieved tbrough.the-use.J).fleases. Othe;}urisdictions, including Australia, New Zealand, Malaysia, and Singapore have developed systems to overcome the problems of the horizontal ownership of airspace through the adoption of the concept of strata titles. 24 The vertical division of the ownership of a piece of land into a number of smaller lots causes few problems other than one of degree. There can come a point where it is impossible to. divigejt piece o£.laoo-imc,sm:atter parts, simply because oflhe difficulty of acc~ratelyidentify.ing.theoY.J:JJia-Fies of that land. tr instance·,--i~--Hong-Kong ii°has been decided that it is 5 .T1inp6ssibleto own the bare.surface ofa wan as 012posed.to-the.w..a1Litsel£} . Jx~_)} o:r 1.4.2 Fixtures A chattel, when it becomes attached to the land or a building which forms part of the land, may also become part of the land. When a chattel beco_rnes part_9f.th~ land by attachm~ it is kno~_a--'-fmure'; Whether or not a chattel becomes a fixture will depend uponthe intention with which .the chattel was brought onto the land. If it was brought onto the land with the intention of its forming part of the land it will become a fixture. There are two tests to be applied to ascertain the owner's intention: first, the degree of annexation, and second, the purpose of annexation. 1.4.3 Degree of Annexation Prima facie the affixing of a c:h~!teLt2!he)~_I2<1-Will point to an intention that it is to be incorporated into the· land. It is for the party claiming that the chattel has remained as such to ~fixrnre... On the other hand, if the chattel is not annexed to the land as such but merery tests on the land by its own-weight.,. the12re.§_l!m2tion,Js. that-it-remaifis-.a-e:hattel.In this case, a party claiming that it is a fixture must bear the burden of proof. One of the justifications for the degree of annexation test was the fact that a ~!b3.t~as firmly affix~ciwasJikely-tohe.mgre cljfficultto remove without damaging-the-Ian~-o~- the chattel itself. Advance~ in-technology 24 2 ,, J 10 England is contemplating introducing a strata title system known as 'Commonhold'. s Leung Kwok-kau v Tam So-wa [1968) HKLR 673 INTRODUCTION make it much easier to affix and r-_em_ove ch_attel~wjthouulamagingtheland, so this consideration ha;b~~omel~~s.i111Qgrt::m,L.;1nd the degree.of annexat1011isno long~r the ~edsive test. 1.4.4 • Purpose of Annexation The decisive test to establish whether there is sufficient intention for a chattel to become a fixture is to consider the purpose of annexation. Even if a chattel is attached quite firmly to the land it will not qualify as a fixture if the reason it was so attached was for the better enjoyment of the chattel rather than the better enjoyment of the land(Thµs, for instance,. a machine whi<;=_~.!.~~a~ed on ~h: ~r()und so thatit, can be betteroperated,will re~aj;i a chatt~J.¢ but where a machine is fixed to the ground not just to assist in its oper..a.f·i···o· n· ..···b.utwith th~. u·····l··t·im .. ate.. 1.·n···•t·e•.•n··t•.io. >IyGffimproving the value of the property, the machine will become a fixtur~ikewise tapestries, pictures, or other works of art that are fixed firmly to}the wall may remain chattels where it can be established that the reason they were attached was to be better enjoyed as works of art. 28 On t9:;;:gth,er hand, statues that rest by their own weight on the ground may be pl::iced there as part of the overall architectural design of the property, pointing to an intention that they should become fixtures in sµife of their lack of attachment to the land. 29 Although the purpose of annexation is now considered the decisive guide to the party's intention, it is a test still fraught with difficulty. The test can become somewhat circular, for the purpose of attaching most arti~les to the land is to improve the enjoymenfofthe land in some way. Various factors may, however, help to pinp~int whether the ultimate object of annexation was for the better enjoyment of the chattel or the land. For instance, if the article is only pla~ed on the land temporarily it is likely that it was not intended to become part of the land since its removal is anticipated. If an article cannot be enjoyed on its own as a chattel but only as part of the land, then the inference is likely to be that article has become a fixture, since its only purpose can be to improve enjoyment of the land. The tests are easy to state but their application is often far from easy. The difficulties are neatly illustrated by a number of cases in Hong Kong which consider whether or not various types of air-conditioners are fixtures. FACTS The defendant rented property from the plaintiff where he ran a ballroom. He hired four 'window type' air-conditioners, which were installed by the 29 Hulme v Brightman [1943] KB 152 Holland v Hodgson [1872] LR 7CP 328 Leigh v Taylor [1902] AC 157; Berkley v Poulett [1976] 241 Estates Gaz 911 and 242 Estates Gaz 39; and Viscount Hill v Bullock [1897] 2 Ch 482 D'Eyncourt v Gregory [1866] LR 3 Eq 283 and Re Whaley [1908] 1 Ch 615 11 HONG KONG LAND LAW use of brackets into windows of the ballroom but could easily be removed. The defendant fell into arrears with the rent and the plaintiff took out a distress warrant which entitled the bailiff to seize moveable goods on the premises in order to meet the arrears of rental. The bailiff seized the air-conditioners. The hirers of the air-conditions complained, claiming that the air-conditioners had become fixtures and could not be the subject of distress, which is exercisable only against moveable property. JUDGMENT ____ The air-conditioners were(fixtu[es'. 1 ''-,:-_:;,:;;:."~ r-Although the air-conditioners could be easily removed without injury to /the windows or the building, it was the purpose of annexation which Ipersuaded the court that the air-conditioners were fixtures. Huggins J,as he / then was, commented that: l f An air-conditioner cannot be enjoyed separately from a room or building. Clearly the purpose of installing these particular machines was to improve the premises by rendering the atmosphere inside more conducive to the practice and enjoyment of the art of dancing and not for the better enjoyment of the machines as chattels. . Furthermore he rejected arguments that the air-conditioners had been ~fixed only temporarily. Penta Continental Land Investment Co Ltd v Chung Kwok Restaurant Ltd [1967] DCLR 22 FACTS The defendant rented restaurant premises from the plaintiff but he fell behind in payment of his rent and the plaintiff took out a distress warrant. Three air-conditioning machines were seized by the bailiff but the defendant claimed they were fixtures. The machines were bolted to frames which rested by their own weight on a roof adjacent to the premises. Electricity was supplied to the machines by wires, and the cold air produced by the machines was fed into the building by ducts, which the court accepted were fixtures. i JUDGMENT ,, I The air-conditioning plants h;:id"tiot become fixtures. / 12 -.~,,,,,,_~.,. INTRODUCTION r The court was almost solely concerned with the degree of annexation, ivhich they concluded was not sufficient to rob the machines of their status 4s chattels. The purpose of annexation was hardly considered except to i/i_otethat, although the machines were of little use if not connected to the ~uilding, they were complete units in themselves. l. Leasing v NP. Etches [1985] HKLR 292 FACTS The plaintiff supplied a number of I?~~-5~(~-S:~~~al,:ir-conditioning system to a developer for installation into a'building he was consfruc:ting. A dispute arose between the plaintiff and the developer's mortgagee as to whether the parts were fixturt;s and subject to the defendant's mortgage. JUDGMENT The parts were ~fi~~s. Although the degree of attachment of some of the parts was slign('the clear intention was that they should all become an integralpart ofihe building'. - --_,__. - "-· -, ,~, I • These three different decisions may be reconciled on the basis that they all related to ciifferent parts of air-co11ditioning systems, but the reasoning uporiwhich distinctions were dra~~ i~ less easy"fo reconcile. Perhaps the simple answer is that in applying the tests there is ample room for the exercise of judicial discretion, so that although a particular chattel may qualify as a fixture in the circumstances of one case it may not do so in another. 1.4.5 Removal of Fixtures If a chattel becomes a fixture, its ownership will vest in the owner of the land and will change with the ownership of the land. A vendor is thus not entitled to remove fixtures when he sells his land unless he has agreed specifically with his purchaser that he can do so. The same general rule applies to mortgages and leases but with some slight variation. 1.4.5.1 Mortgagor/Mortgagee Fixtures whether affixed before or during the life of the mortgage will become subject to the mortgage and can only be removed with the consent of the mortgagee. 30 30 Vaudeville Electronic Cinema Ltd v Muriset [1923] 2 Ch 74 13 HONG KONG LAND LAW 1.4.5.2 Landlord/Tenant Not all fixtures will return with the land to the ownership of the landlord at the end of a lease. A tenant has a right to remove trade fixtures 31 or ornamental and domestic fixtures 32 during his tenancy or within a reasonable period after its expiry, and provided he can do so without substantial or irreparable damage to the land. I ! 1.4.6 Vegetation and Minerals Plants, trees, and crops growing on the land form part of the land, although crops do not automatically pass on the sale of land since they are the product of the owner's labour as well as the soil. Minerals found beneath the ground belong to the Crown. It is a standard provision in Crown leases in Hong Kong to reserve minerals to the Crown, but in any event they are deemed to belong to the Crown by legislation. 33 l.4.7 Water The fact that land is covered by water does not prevent it from qualifying as land. Thus lakes, streams, or fish ponds that are situated within the boundaries of a piece of land form part of that land. Where the land abuts a non-tidal river or stream, the owner of the land is deemed to own up to the mid-point of the river bed, but he may not be free to use the water as he wishes for he does not own the water as such. Where an owner's land abuts the sea or a tidal watercourse, he has no rights over the foreshore which is owned by the Crown. At common law an owner can draw on water from a well or other percolating source. His right to take water from a stream or river, however, is limited to such water as is reasonable for the ordinary enjoyment of the land unless the water is restored to the water course in substantially the same volume and condition. The supply of water, which is a scarce commodity in Hong Kong, is within the control of the Water Authority under the Watenuorks Ordinance. 34 It is an offence to unlawfully take water from waterworks under the control of the Water Authority. Waterworks include not only reservoirs but also catchment areas in which privately owned land may lie. However, the Water Authority, in mapping out catchment areas,is required to take into account traditional rights to water for agricultural and domestic purposes. 35 I j, !'; I 31 32 33 31 35 14 Smith v City Petroleum Co Ltd [1940] 1 All ER 260 Spyer v Phillipson [1931] 2 Ch 183 Section 3 Mining Ordinance Cap 285 Cap 102 Sections 23 and 29 INTRODUCTION 1.4.8 Accretion and Erosion to the Land Land may be lost or added to by forces of nature: for instance, the action of water and wind may erode or increase land that abuts water. The common law recognises that the ownership of a piece of land may be either extended or eroded by the forces of nature provided that, in the case of the addition of land, the accretion must be gradual and imperceptible over a period of time. The question has been considered by the Privy Council in: -~-~-~IELLUD== ■ =-'■· Southern Centre of Theosophy Inc v State of South Australia [1982] AC 706 FACTS A plot of land in Southern Australia bordered a lake. Over a period of 65 years, approximately 20 acres were added to the land where it bordered the lake as a result of the deposit of sand and soil by the retreat of water from the lake, and sand blown by the wind from nearby sand dunes. JUDGMENT The additional 20 acres formed part of the plot as a result of the doctrine of accretion. Although it was possible to ascertain the original boundaries from the Crown lease under which the land was held, the doctrine still applied. 1.4.9 Reclamation Reclamation of land in Hong Kong has considerably extended the land available for development since the territory was first established. All reclamation is now controlled by the Government under the Foreshore and Sea-bed (Reclamations) Ordinance, 36 and the ownership of the reclaimed land vests in the Crown as owners of the sea-bed. 1.4.10 Animals and Fish A wild animal does not belong to the owner of land on which it lives, although if the owner kills the animal it becomes his property. An owner also has a right to fish in the river, stream, lake, or pond upon his land or upon which his land abuts. The public has a right to fish in tidal waters except in those areas which the Government has designated fish culture zones.37 36 Cap 127 37 Section 12 Marine Fish Culture Ordinance Cap 353 [uuAN ·cou.ic·u.··,uiiic .Lm;msJ 1s HONG KONG I.ANDIA W 1.4.11 Airspace It is clearly impractical in this age of air and space travel for the owner of land to be able to control the use of the airspace above his land. Indeed it has been doubted that anyone can own airspace beyond the height of the atmosphere. Even in the lower atmosphere an owner's rights are restricted. For instance, the Civil Aviation Act 1949 and the (Overseas Territories) Order 1969 prevents an owner bringing any action in trespass or nuisance in respect of aircraft that fly over his land at a reasonable height, or when landing or taking off from an airport. 38 An owner can bring an action for infringements of that portion of the airspace over his land which is necessary for the reasonable enjoyment of his land. 39 Overhanging trees, 40 advertising signs, 41 and cranes 42 have all been the subject of successful trespass actions. 1.4.12 Lost and Hidden Objects Chattels under the ground will prima fade belong to the owner of the land. Waverley Borough Council v Fletcher [1995] 3 WLR 772 FACTS The plaintiff council owned a park to which members of the public had free access. The defendant as a member of the public had gone into the park with his metal detector and had found a medieval gold brooch buried about nine inches under the ground. He dug the brooch out and reported the find. The brooch was returned to him but the plaintiff claimed it was their property having been found on their land. JUDGMENT The council were entitled to the brooch. Where a chattel was found in or attached to the land the owner of the land had the better title to the chattel than the finder. Articles found on the ground or in a building erected on the land will only belong to the owner of the land instead of the finder of the article if the owner has clearly shown his control over the building or the land and the things that are in the building or upon the land. For instance, if the article 38 39 40 41 42 16 See Sections 40 and 41 Berstein v Skyviews & General Ltd [1978] QB 479 Lemmon v Webb [1895] AC 1 Kelsin v Imperial Tobacco Co (of Great Britain and Ireland) Ltd [1957] 2 QB 334 Lewvest Ltd v Scottia Towers Ltd [1982] 126 DLR 93d) 239; John Trenberth Ltd v National Westminster Bank Ltd [1979] 39 P&CR 104; and Anchor Brewhouse Developments Ltd v Berkley House (Docklands) Development Ltd [1987] 2 EGLR 172 1.Y~J...,,i ~, , .,:.~§"f.c: '.,1•·'.$ INTRODUCTION is found in a private flat over which the owner has exclusive rights of control, the owner may well have a superior claim to the finder. But the test is not easy to satisfy as is illustrated by the following case. Airways Board FACTS A gold bracelet was found by a passenger on the floor of the executive lounge at Heathrow Airport. The passenger claimed ownership of the bracelet. JUDGMENT The bracelet belonged to the passenger rather than the airport authority. Although access to the lounge was restricted to a certain class of traveller, that was insufficient to demonstrate an intention to control all things that might be found in the lounge. Interestingly, the Hong Kong courts have adopted the same test to govern the entitlement to a valuable article found in an aircraft. 43 The rights of a land owner to a chattel that is found by someone else on his land are not absolute. The owner of the chattel has a prior claim, and the land owner is obligated to take all reasonable steps to locate the true owner and to look after the chattel in the meantime. At common law, 'treasure trove', which is confined to gold and silver articles, belongs to the Crown. In Hong Kong, however, the Antiquities and Monuments Ordinance 44 now governs the ownership of articles found on land that are of interest by reason of their age. Fossils or articles that were made or otherwise created by human agency before 1800 are termed 'relics' and automatically belong to the Government. The Government may, if they wish, disclaim such ownership, in which case the article becomes the property of the owner of the land or the finder according to the common law rules discussed above. 45 1.5 Concept of Land Ownership English common law does not recognise the concept of absolute ownership of land. All land is owned by the Crown, which then grants the right to use the land to an individual. What the individual therefore 'owns' is a bundle of rights and obligations which will subsist for a certain period of time. This leads to two fundamental concepts: 43 See R v Ng Kam-chuen 44 Cap 53 45 See 1.4.12. [1986] HKLR 1202. 17 HONG KONG I.AND I.AW • tenure: describes the nature of rights and obligations enjoyed by the individual; and • estate: describes the period of time for which a given tenure subsists. 1.5.1 Doctrine of Tenure In order to appreciate the development of the different tenures recognised by the common law and how they have been applied in Hong Kong it is necessary to embark on a journey back in time. 1.5.1.1 The 'Feudal Fairy Tale' Once upon a time England was conquered by the French king, William the Conqueror. To bring his newly conquered lands under his control, William introduced a system of land holding from Europe called the 'feudal system'. Under this system all land was owned by the king, who granted the right to possess and use the land to his faithful lords in return for the performance of certain services. These lords in turn would grant the use of the land to others in return for services. This system of granting land in return for services was repeated to build up a chain of ownership (see diagram below). Fig 1.2 Feudal Chain of Ownership The King I I I Tenant in Chief (to whom the King granted the land) I I Lords I I Tenants in Demesne (the tenant in actual possession) The process of adding another link to the chain was known as 'subinfeudation' since the interest of each person in the chain was known as a 'fee'. The various forms of service that could be required from a tenant by his lord initially were numerous. Land was in effect used as a form of exchange, but as time went on these services became standardised. The type of services that were required dictated the relationship or tenure between the tenant and his lord. The main tenures can be summarised as: 18 INTRODUCTION • Military Tenure, which required the provision of military assistance to the lord. This took the form of, for instance, the provision of knights, known as 'knight service', or the provision of services of a more personal nature, known as 'grand serjeanty'. • Spiritual Tenure, which as the saying of prayers services were known depending on whether • required the provision of religious benefits, such or the conducting of religious ceremonies. These as either 'divine service' or 'frankalmoign', the type of benefit was specified. Socage Tenure, which covered a whole range of services, often of an agricultural nature, such as so many days of ploughing or harvesting. Socage became the residual tenure into which land was classified if the sevices did not fall into the other tenures. • Villein or Copyhold Tenure, which also required the prov1s1on of agricultural work. In contrast to socage, the nature of the work that the lord could require his tenant to perform was not specified: for instance, a number of days' labour was simply required. The tenures were divided into free and unfree tenures. Military, spiritual, and socage tenures were classified as free tenures. Villein tenure was classified as unfree because the tenant was uncertain as to what he would have to do to perform his obligations to his lord. He might have to plough a field or harvest a crop. It ,was up to his lord to decide. Military services, although prestigious, carried additional burdens known as 'incidents' which for the most part were due when the tenant died. For instance, if the tenant died leaving an heir of full age, the lord could demand a type of tax known as relief; if the tenant died leaving an infant heir, the lord was entitled to take over the land during the heir's minority subject to an obligation to look after the heir. This latter right was known as 'wardship' and also permitted the lord, as the heir's guardian, to arrange his marriage. If the tenant died leaving no heir at all, the land reverted to his lord, an occurrence known as 'escheat'. As the years passed the value of the services diminished. Money become a more important form of exchange, and the services were transformed into money payments. The distinction between the different types of services thus disappeared, and with them the imp01tance of the different tenures. The money equivalent of the services in tum declined in importance as the value of money fell, so that they became hardly worth collecting. But the incidents remained important, in fact more important, because they were to some extent inflation-proof: their value was tied to the production value of the land. The process of subinfeudation seriously affected a lord's right to incidents. He could easily lose track of his direct tenant, where that tenant had allowed another to take possession of the land, and thus he did not know when he was entitled to claim his valuable incidents. Also wardship could turn out not to be so valuable if the services that the ward required 19 HONG KONG LANDLAW of his tenant were of little or no worth. As a result the process of subinfeudation was abolished by the Statute of Quia Emptores 1290. If a lord wished to dispose of his land, the new lord had to take his place in the chain rather than add another link. This process was called 'substitution'. The combined effect of escheat and the Statute of Quia Emptores 1290 was thus to shorten the feudal chain so that more land became held directly from the Crown, and as a result its revenue from incidents grew. This source of revenue was very convenient for the Crown because it was not dependent on the sanction of Parliament. It is thus not surprising that in the 17th century, when the king and his Parliament were locked in a bitter battle for constitutional change, that Parliament struck at the Crown's revenues raised from incidents by passing the Tenures Abolition Act 1660. This act abolished incidents and effectively reduced the tenures to two: socage, more commonly known as freehold; and copyhold tenure. The Law of Property Act 1925finally abolished copyhold, leaving freehold as the only remaining feudal tenure. Fig 1.3 The Development of Tenure Tenure Free Spiritual Tenures Unfree Military Tenures (effectively abolished by the Tenures Abolition Act 1660) VilleinorCopyholdTenures (abolished by LPA 1925) Socage or Freehold The feudal system of tenures was, of course, not introduced to Hong Kong as its importance had long since disappeared by the 19th century.It has nevertheless left an indelible mark. 1.5.2 The 'Leasehold Paradox' Feudal tenures were creatures of their time, and although they did adapt to social and political pressures they continued to be hedged with more disadvantages than other forms of property. The military tenures suffered from the disadvantage of incidents. The feudal tenures were also not freely alienable. The Statute of Quia Emptores 1290 permitted the substitution of land from one tenant to another without the consent of the lord, but it was not until the Wills Act 1540 that a tenant could leave any of his land by will. Even then his right to leave land held in knight service was restricted. These 20 INTRODUCT/Ol'v disadvantages encouraged landowners, or rather their lawyers, to try and think up schemes to avoid them in much the same way that many lawyers now are employed to reduce the tax burden of their clients or find ways around some other unpopular legislation. The lease provided a suitable alternative vehicle to confer upon someone the right to use land without suffering the disadvantages of feudal tenures. The exclusion of leases from the realm of real property and feudal tenures was thus not a handicap but an advantage. Initially the lease was developed as a security interest to circumvent the canon law's prohibition on charging interest on loans. The lender instead of interest could claim the income generated from the land. Leases then became popular as a method by which land could be granted to tenants for agricultural purposes. Leases initially were considered merely as personal contracts that reflected their essentially commercial nature. As such, the real actions were unavailable to a lessee so that he could not recover the land from anyone who might dispossess him. The development of the writ of ejectment in 1499, however, provided the lessee with the remedy he required and from that time he was able to protect his possession of the land. Although leases fell outside the system of feudal tenures and were never recognised as real property, leases did come to be recognised as a new type of tenure. A further distinction between freehold and leasehold tenure was that freeholders enjoyed seisin but leaseholders did not. Seisin denoted a particular type of possession of the land which has no significance today but was of vital significance during the evolution of our land law. The right to seisin carried with it, on the one hand, the right to a real action to recover the land and, on the other, an obligation to meet the feudal services. It was thus to the freeholder and not to the leaseholder, who was in physical possession of the land, that a lord looked for the payment of services. Inevitably, perhaps, leasehold tenure reflects many features of feudal tenures. We find similar characteristics in the payment of rent as in the payment of services, the right to take back or forfeit the lease and the right to exercise distress or seize goods if the rent is not paid. The terminology is also similar. Thus we have 'landlords', 'tenants', and 'rent service', now more commonly called 'rent'. It is somewhat paradoxical that leasehold tenure, which originally was not recognised as a tenure at all, is now the only tenure of any practical importance. 1.5.3 Crown Leases in Hong Kong When the Colony of Hong Kong was established by the Treaty of Nanking 1842, the Crown instructed the Governor that freehold land was not to be granted, although it had originally been hoped by the early settlers that freehold grants would be given. Instead the Crown only sanctioned the grant ofleases for initial terms of75 years for building land and 21 years for other land. The only exception, St John's Cathedral, was granted in perpetuity but subject to the condition that the land continues to be used 21 HONG KONG LAND LAW as a church. The early settlers were disappointed by the short length of the leases they were granted, and in 1848 the Crown authorised th.e extension of existing leases to 999 years. A similar policy was adopted when Kowloon peninsula was ceded by the Convention of Peking 1860 although, like the early settlers, 999-year leases were granted to Chinese owners who previously had been in possession of the land. Towards the turn of the century, grants of 75 years with a right of renewal for a further 75 years for land in both Hong Kong and Kowloon became the norm. The lease of the New Territories from China, endorsed by the Second Convention of Peking in 1898, presented different problems. Clearly the Crown could only grant leases since that was all that it enjoyed, the terms of the Crown leases being for three days less than the 99-year term granted by the Chinese Emperor. Unlike Hong Kong and Kowloon, the New Territories was already widely populated. The indigenous owners held the land from the Emperor in return for the payment of land taxes - a system similar to the English feudal tenures. The Crown conducted a survey to ascertain the extent of this ownership, and established a Land Court to deal with disputed land claims. Their task was daunting, but at the turn of the century existing ownership rights were extinguished 46 and replaced by Crown leases granted for the same term as other Crown leases in the New Territories, ie 99 years less the last three days from 1 July 1898. These Crown leases granted to existing indigenous owners became know as 'Block Crown leases' for, instead of granting leases to each existing owner, one Crown lease for an area or block of land covering a number of properties in different ownership was granted. 47 The return of Hong Kong to Chinese rule in 1997 heralds a new phase in Hong Kong's history, but the intention is for its system of land holding to remain largely unchanged. The Joint Declaration between the British Government and the Government of the People's Republic of China on the future of Hong Kong as a Special Administrative Region of China sets out in Annexure III that: i) all Crown leases including rights of renewal extending beyond 1997 will continue to be recognised. ii) all Crown leases expiring before 30 June 1997, which includes all New Territories leases, may be renewed without the payment of premium but at an increased rental. The New Territories Leases (Extension) Ordinance 48 now provides that Crown leases in the New Territories, subject to a number of exceptions, are extended to 30 June 2047. Other leases expiring before 30 June 1997 in Hong Kong Island and Kowloon may be extended by agreement with the Crown but there is no right for the lessee to demand an extension. 49 46 47 48 49 22 Sees 8 New Territories Ordinance Cap 97. See generally for integration of New Territories land Sihombing, 'The Torrens System in the New Territories' (1984) HKLJ 291 and Beautiglory Investment Ltd v Tang Yet Tai Tong & others 0993) HCt HC MP No 531 of 1989. Cap 150 The Home Restaurant Ltd v A-G [1987] HKLR 237 and Tang Ping-hoi v A-G [1987] HKLR 324 INTRODUCTION iii) the Crown will only grant leases to expire on or before 30 June 2047 and their right to grant such leases is limited to 50 hectares a year, excluding land granted for public housing to the Housing Authority. A Land Commission has been set up to oversee the implementation of the terms of the Joint Declaration. The Basic Law of the Hong Kong Special Administrative Region, which was promulgated in April 1990, provides in Articles 120-123 for the continued recognition of Crown leases extending beyond 1997 in the manner agreed in the Joint Declaration. Thus in Hong Kong it is leasehold tenure that has triumphed (see Chapters 11 and 12). 1.5.4 Doctrine of Estates The feudal system of tenures and subinfeudation led to several people holding tenure in a piece of land at the same time. They clearly could not all own the land as such, and thus the common law developed the notion that each person interested in the land held an estate in the land. Estates in land differ according to how long they are to last. Estates are divided into two categories: estates of uncertain duration, which are known as 'freehold estates'; and estates of certain duration, known as 'estates less than freeholds' or, more commonly, 'leasehold estates'. l.5.5 Freehold Estates Freehold estates owe their name to the free tenures which were all held for an uncertain duration. There are three types of freehold estate. • Fee Simple. The fee simple estate is the largest estate. It lasts for the lifetimes of the tenant and his heirs. It can therefore continue indefinitely provided heirs of the tenant remain alive. For instance, the wording of the Treaty of Nanking and the Convention of Peking indicate the ceding of Hong Kong Island and the Kowloon peninsula in fee simple. • Fee Tail. The fee tail estate lasts for the lifetimes of the tenant and his lineal descendants. It too can last indefinitely, but the chances are less in view of the more restricted class of descendants to whom the estate can pass. • Life Estate. The life estate lasts only for the life of the tenant. When it is termed an 'estate per autre vie, it lasts for the lifetime of another person. It is thus bound to end, but no one can say exactly when. l.5.6 Leasehold Estates There are two types of leasehold estate, plus two borderline claimants. • Fixed Term. The fixed term lasts for a specified number of years or for a period of less than a year. It is possible to say with certainty that a fixed 23 HONG KONG LAND LAW term will not exceed a given duration, but it is impossible to say that it always will. The term may be brought to a premature end before it has expired, for instance if the landlord agrees that the tenant may surrender or give up the lease. • Periodic Term. The periodic term continues for a renewable period until terminated by a notice served by either the landlord or tenant, for instance from month to month. The fact that it is not certain when a periodic tenancy will end until notice is served does not prevent its classification as a leasehold estate. The time when the lease will end may be uncertain, but either party can make it certain by serving a notice. • Tenancy at Will. A tenancy at will continues until terminated by either the landlord or tenant. Although there is the relationship of landlord and tenant or tenure between the parties, it is doubtful that the duration of that relationship is sufficiently certain to qualify as a true estate. • Tenancy at Sufferance. A tenancy at sufferance arises where a tenant continues in possession after his original term comes to an end. He is not a trespasser because he entered into possession with consent, but it is doubtful that he enjoys either tenure or an estate. The classification of estates can thus be summarised as follows: Fig 1.4 Classification of Estates Estates Freehold Fee Simple Leasehold Fee Tail Life Estate Fixed Term Periodic Term Tenant at Will Tenant at Sufferance Life of Tenant 1.5.7 Per Autre Vie Tbe Hong Kong Perspective In Hong Kong we are only concerned with leasehold estates. Leaseholds only came to be regarded as estates in land with their recognition as a distinct species of chattel that shared both the characteristics of tenure and estates with real property. Nevertheless they were always considered inferior to freehold estates, so it is impossible at common law to carve a freehold estate out of a leasehold term. It is thus not possible at common 24 INTRODUCTION law to create a life estate or a lease for life out of a Crown lease in Hong Kong, for both a life interest and a lease for life are classified as freehold estates. However, it is possible for such estates to exist in leasehold property in equity (see Chapter 9). 1.5.8 Future Interests The doctrine of estates allows the creation of successive interests in property. A fee simple owner may grant a life interest to his wife and then a life interest to his unmarried daughter and finally provide that his property should go to his eldest son. His wife, unmarried daughter, and eldest son all have a present interest in the property although only one of them will have a right to actual enjoyment of the property at any one time. During the wife's lifetime that is the wife. She is said to hold her interest in possession while her unmarried daughter and eldest son are said to hold interests in expectancy, or future interests, since during their mother's lifetime their right to enjoyment is in the future. There are three types of future interest: remainders, reversions, and executory interests (see Chapter 8). 1.5.9 Other Interests in Land The common law has also recognised a number of interests in land that fall short of full ownership. These include the right to use the land of another for a specified purposes ~ the easement - and the right to look to the debtor's land for the repayment of a debt- the mortgage. We will look at these interests in detail in later chapters. 1.6 Equitable Estates and Interests Estates and interests in land may be recognised at law or in equity. The reason for this distinction is again historical. 1.6.l Development of Equity In medieval England,. as in many early societies, the king's authority was derived not only from force, but also from a respect supported by an intricate web of formalities and ceremonies often beyond the comprehension of the ordinary man. So, too, with the enforcement of that ruler's authority - the law. Jhecommon lay'f~gurts would only pr2,yic:_l~n::~d!~ssto the litigant who was able to brigg his com12laintbefore them in the form of aHmited number ;f recognised. writs. The assistance that the common law courts could· provide was th~~li~t;c( and bas~d more()~ form than justice. If ·a litigant's ~~;se1..h9.~~y~~j~~S-~!th:.<:r..9id~ot~-;-~~-~ithu:;:the fo~ (?f~r~s:gg9}sed ·writ_ orwasngt dosely analogous to an existing writ, he was left without redress. It was possible, however, to petition the king directly (and faterfos most important administrative officer, the Chancellor), to prevent injustice. While these petitions were initially on a case by case basis, the Chancellor and his 25 HONG KONG LAND LAW office, the Chancery, gradually established themselves as an independent judicial institution. By the end of the 15th century, the Courts of Chancery were recognised as separate and distinct from the common law courts and the king. The Courts of Chancery also developed a separate and distinct system of rules that reflected their independent status. The Courts of Chancery did not look to compliance with an existing writ system but rather to the justice or equity of the case before them. They were concerned with_substance and not form. Initially that justice depended on the individual conscience of the Chancellor, who was often a prominent member of the church. However, the Courts of Chancery, under the influence of a number of chancellors who were lawyers rather than churchmen, moved towards a mote systematic application of principles. By the early 19th century the principles of equity were as well regulated and settled as the principles of the common law. AD element of conscience does survive in the discretionary nature of equitable remc'.di~~-~-~K~ unlike redress before the c;;mmonI1:;-courts, cannot be de111~11c:l~sL~~-~ right. There were thus two systems of redress: the Courts ~aw and theCoUJ:1~ QfC]:1anceryor Equity. Not surprisingly, from these two systems a distinction evolved between interests recognised and enforced by th~ <::ourts?(!,,a~, ie_!egalinterests, and those recognised and enforced by thes:;ourts ofEquity, ~9_1:1Jtal:ile interests. But the presence of two parallel but separate systems for the administration of justice was undesirable because it encouraged a multiplicity of actions. Thus, in England in the mid-19th century, the two systems merged so that the rules and remedies of both systems were operated in and available from a unified supreme court. 50 In Hong Kong, however, the procedural problems of separate courts of common law and equity never arose because, from the establishment of the colony, there was only ~ unified court systerr1_that operated both the common la~ and equital:lle rul~s. Although the administration of justice has been unified, the separation of legal _a11_c:l_~quitable intei;-ec51:§_ __t:~1_!1~in5-~'1_i!al feature of proprietary interests. 1.6.2 Development of the Trust Equity's most important product had been the trust. Trusts have a very long history which is tied up closely with the doctrine of tenure. 1.6.2.1 Medieval 'Use' Trusts have their origins in the medieval 'use', which enabled an owner of property to pass the use of his property to someone who was legally unable to hold the property directly himself. For instance, if A owned land from which he wanted his son to benefit while he was away at war, he could agree with his good friends Tl and T2 that they would look after his property for the benefit of his son and he would transfer the property to them to enable them to do so. 26 50 Judicature Acts 1873 and 1875 INTRODUCTION Medieval Use of Trusts Fig 1.5 A t------------1 T 1 T2 (feofees to uses) to the use of A's son (cestique use) If Tl and T2 defaulted in performance of these obligations of trust, the common law courts provided A's son with no remedy. In law, Tl and T2 were the legal owners of the property and entitled to do what they liked with it. Equity would, however, provide redress - for instance, by requiring Tl and T2 to transfer the property to A's son when he attained majority. 51 Thus while at law Tl and 'f2 were the owners of the property in equity, A's son was the owner, known as the 'equitable' or 'beneficial' owner. Uses came to be employed in many ways. For instance, although freehold land could not be left by will prior to the mid-16th century, a landowner could effectively leave his land to whom he liked by transferring his land to trustees - or 'feoffees to uses' as they were then termed - to the use of his preferred beneficiary, or 'cestique use'. The use could also be employed to avoid the onerous feudal incidents by a well-timed transfer to trustees for the use of his heir or preferred beneficiary. In the context of leasehold land, the use could be employed to create life estates and future estates in land which could not be created at common law. 1.6.2.2 Statute of Uses Whilst the use was a favourite with landowners, it was not so with their lord particularly, the king, who owned large tracts of land and was thus the most powerful lord. Thus in 1535 the Statute of Useswas enacted to execute the use so that the ben,eficiary, or cestique use, took a legal estate and could not avoid the obligations imposed on that estate. However, the Statute of Uses 1535 did not apply to all interests in land. In particular it did not execute the use in respect of leasehold land nor 'the use upon a use'. Thus in Hong Kong, where all land is leasehold, the Statute of Uses 1535 has no application and the trust is simply the modern equivalent of the medieval use. The difference is one of terminology. In order to distinguish the unexecuted use of leasehold property from executed uses of freehold property, the term 'trust' was employed for uses of leasehold property. In England the use was too convenient a vehicle to be struck down completely by the Statute of Uses 1535. In the latter half of the 17th century, 'the use upon the use' was recognised as achieving, once more, a separation 51 Saunders vVautier(l841) 4 Beav 115 27 HONG KONG LAND LAW of the legal and equitable ownership in land. Again the term 'trust' was adopted, no doubt also to distinguish 'the use upon a use' from the use executed by the Statute of Uses 1535. 1.6.2.3 Nature of the Trust The essence of a trust thus lies in the separation of the title and the beneficial enjoyment of the trust property between the trustee and the beneficiary. The trustee legal or equitable, -~ holds the p~er title to the Jlli)~rJ:y, which may• be .. ....-:and it is he who is responsible for the administration or 'inanagement of the property. The beneficiary holds an equitable inter~J)11_1he.pi:9perty and is entitled to the enjoy111~11Loftlie·propertyTnduding the inc:<:>_111~~-or·other benefits frrriay piod~ce. The trustee is the owner in ria~~ only. It is the beneficiary who is the real oroeneficial owner:· • -- • -~,--- Fig 1.6 The Modern Trust A f-----------------, T 1 T2 (trustees) on trust for (beneficiary) 1.6.2.4 Purpose of Trusts Trusts are created for many reasons. A person may have personal reasons for wishing to create a trust. He may wish to provide for a person who is underage or suffers from some disability; or to provide for a number of people by the grant of interests in succession: for instance, to provide for his wife during her life and then for his children; or he may wish to keep secret the fact that he owns property by transferring the title of the property to trustees to hold for his benefit. Trusts also play an important role in commercial life. Many tax-saving schemes use the trust, and it plays a prominent function in the operation of unit trusts and provident funds. 1.6.2.5 Classification .of Trusts Trusts can be classified as either express or implied. Implied trusts include resulting and constructive trusts, while express trusts can be divided into settlements and trusts for sale. 28 INTRODUCTION Fig 1. 7 Classification of Trusts Trusts Express Trusts Settlements Trusts for Sale Implied Trusts Resulting Constructive A detailed examination of the law relating to trusts is outside the scope of this book. However, it is important to appreciate the proprietary concepts inherent in the structure of a trust relating to property in Hong Kong: see Chapters 8 and 9. l.6.3 Other Equitable Interests The trust is not the only product of equity. There are a number of others in land law. 1.6.3.1 Informal Transactions The common law has always been more concerned with form than substance. Although the old writ system is long gone, the love of the common law for form lives on in the strict formal requirements that are necessary for dealing with legal interests in land. 52 The principles of conscience upon which equity is based dictate a concern with substance rather than form. Equity looks on as done that which ought to be done. Equity is thus prepared, in certain circumstances, to give effect to transactions that fall short of the strict legal requirements. For instance, an equitable interest arises where equity is prepared specifically to enforce an agreement to create a legal estate or interest even though at law an agreement is insufficient to create the intended estate or interest (see Chapter 6). 53 1.6.3.2 Covenants A contract will not usually bind third parties, but equity is prepared to recognise that a covenant relating to land may form an exception to the strict principles of privity of contract. Where a covenant restricts an owner's use of his land - if, for instance, it stops him using the land as a factory, equity will not allow a subsequent owner to disregard this restriction if he was well 52 53 See Chapter 5. Walsh v Lonsdale[1882] 21 CH D 9 29 HONG KONG LAND LAW aware of it when he bought the land and if the restriction benefits adjoining or other land. Equity's recognition of the enforcement of land covenants has given rise to an important property right (see Chapter 15). 1.6.3.3 Equity of Redemption At common law a mortgagor must repay his debt in strict accordance with the terms of his loan. If he fails to do so, the lender can retain the property taken as security. In many cases this rigid adherence to the terms of the borrower's bargain could lead to hardship and injustice that equity is not prepared to tolerate. Equity allows a borrower to redeem the mortgage and recover his property even after the date for repayment has passed. This right to demand redemption in equity means that the borrower retains an important interest in the property despite what appeared from the mortgage deed to be an outright transfer of the property to the lender. In the light of equity's protection of the borrower's interests, a mortgage is an interest in property granted by way of security and nothing more. This development is central to the law of mortgages (see Chapter 17). 1.6.4 I I Difference between Legal and Equitable Interests The essential difference between legal and equitable interests lies in their enforcement. At first, equity enforced a trust only against the trustees. The right of the beneficiary was thus a personal right or, to use the Latin expression, a right in personam against the trustees. But of course the trustees might die or give or sell the property to someone else, in which case a personal action against the trustee was of little use. Gradually the courts of equity extended the persons against whom they would order enforcement of the trust. Anyone who took with notice of the trust was bound, then anyone who inherited the trust property, then anyone who was given the trust property. Finally, equity would compel the enforcement of the trust against all persons who acquired the property except a bona fid~ e~£c:.J:1:a~~f_O_i!h_e legal estatei-;~·;alue wilb:°-l!.t_g.9tice of the trust~Equity sa,y no reason why a volunteer who had giymng_yc1l11.~Jortb. __ ~__ gr_g_g~_rfy __ s_l)9uld t~l<.__~_tlle_pr()p_etty:_f~tctcfrom the J2fi()r interest of the benefj_c!:iry, nor did_ ~quity feel tlla_t__.<!:___person who kn.~-Y.,2.r ~li°-l!.l<:l:liay~ Jsn.9.~n__ g.f_t_li~_!_r:.i:!_St should be able toignore that trust even if he had giyE:11yal11_e.But equity drew the line at a·purchaserwhohad given value and had no notice of the trust., Legal interests, on the other hand, __<:()uld be enforced against_~veryone because they were rights in the property itself or, in the Latin expression, . rights inrem:·fhe fa~i. that equitable intere~tsmay be enforced against such a wide circle of people means that they have effectively lost their personal character. They are rights in the property itself. We now turn to a closer examination of the purchaser for value without notice doctrine that distinguishes legal and equitable interests. I i 30 Priority: the Doctrine of Notice 2.1 Introduction The multiplicity of interests that can e_xistin a lot of land gives rise to the question of their relationship to each other. One of the most important elements of that relationship is the extent to which one interest is subject to or is bound by another. For instance, if A, the owner of a lot of land, first leases that land to B and then mortgages the land to C, does C's mortgage take subject to B's lease or can C claim that his interest is not bound by the lease? Clearly the answer is very important to both parties. B's continued possession of the land will depend on whether C is bound by his lease, and the value of C's security will depend on whether he has a mortgage over property subject to a lease or with vacant possession. It is these questions of the priority of one interest in land over another to which we now turn. 2.2 Doctrine of Notice Under the general law, the priority of an interest will depend primarily upon whether the interest is legal or equitable. The rules may be simply stated as follows. • Legal estates and interests bind the whole world.· • Equitable estates and interests bind everybody except the bona fide purchaser for value of the legal estate without notice of the equitable estate or interest. For instance, if A grants a legal lease of his flat to B and then mortgages his flat to C, C is bound by the lease in favour of B. Fig 2.1 A Legal Mortgage Legal Lease B C C is bound by B's lease 31 HONG KONG I.AND I.AW BUT if A creates only an equitable lease of his flat to B, then C is only bound by the lease if he has notice of it. Fig2.2 A Equitable Lease Legal Mortgage B C C only bound by B's lease if he has notice of it A legal interest is an interest in property that is r~cognised bo_!!!J!,Liawand in equity, and will thus bind anyone who acquires a subsequent interest in that property regardless of notice, An eg:t!,itiJ>J~jnterestis,not recogni~~d at law and will not bind everyone who subsequently acquires an interest in the land. However, equity will not allow a purchaser even of the le al estate to ignore a prior e has knowledge, for to: ..o .~'2~<:?~.,-... _t::~S~};!a.,~e;gµ,i!X;s underlyigg noti2p.s P..•.~~~i}d conscience. \ Furthermore, a volunteer will not be allowed to benefit at the ~pense'of a prior equitable interest because he has given no value for his interest, nor will equity allow a later equitable interest to override an earlier equitable interest. The only person whom equity will allow to take free of a prior equitable interest is a bona fide purchaser of the legal estate for value without notice. Such a person is accordingly sometimes known as 'equity's darling'. An example of this rule is found in the case of: Pilcher v Rawlins (1872) Ch App 259 FACTS Rawlins mortgaged his property to a trust. Pilcher, the surviving trustee of the trust, acting in collusion with Rawlins, discharged the mortgage and reconveyed the property to Rawlins although Rawlins had only repaid part of the loan. Rawlins was then able, by concealing the first mortgage and reconveyance, to raise more money by mortgaging the property again. The money raised was then spent by Pilcher and Rawlins. The beneficiaries of the trust found out what had happened and claimed priority over the subsequent mortgage. JUDGMENT The subsequent mortgagees were bona fide purchasers of the legal estate for value without notice of the beneficiaries' interests, and therefore took the property free of them. 32 PRIORITY: THE DOCTRINE OF NOTICE Both the beneficiaries and the subsequent mortgagees in Pilcher v Rawlins were innocent parties, one of whom had to suffer for the fraud of Rawlins and Pilcher. As the interests of the beneficiaries were only equitable, it was they who were the unlucky ones. They had a claim against Pilcher as their trustee but success in this claim would merely result in a claim for damages, which was of little value if Pilcher was insolvent. 2.3 Bona Fide Purchaser of Legal Estate for Value Without Notice The cmcial question in determining the priority of an equitable interest is: WflO will qualify as a bqna fid~urchaser forvahie of the legal estate withilllt 11,otic~] 2.3.l Bona Fide 'Bona fide' has traditionally been associated with an absence of notice, but the rule contains a separate requirement of lack-ofnotice.Does bona fide thus mean anything more in this context? The expression is said to require more than just a lack of notice 1 and to insist that the lack of notice is honest. But the development of the concept of constructive notice 2 would appear to have largely superseded a separate requirement that a purchaser be bona fide. After all, a purchaser's good faith or honesty is unlikely to be affected __t,y_3cgjntt:_re1,tof_~hi_s:hheknows 11otlJJng,_ Nevertheless, bona fide does continue to be recognised as a element of the doctrine of notice. As such it reflects egu(ty's underlying concern not to <!1>§i_s_t tpps~ taipt~Q i;)yfraud, :c;lishoJ1t,esty, _Qr g_tl1gLfilQr.ally_reprehensibleb~l;i:ciyiQlJf. 2.3.2 Purchaser for Value The term 'purchaser' is not limited to the colloquial expression of someone who buys property. It refers to any person who receives an interest in property other than by operation of law, such as a mortgagee or lessee. By contrast, a trustee in bankruptcy receives a bankrupt's property as a result of the operation of the Bankruptcy Ordinance, 3 and a deceased's next of kin is entitled to the deceased's estate by operation of the Intestates' Estates Ordinance. 4 Thus neither qualifies as a purchaser. A purchaser, to defeat a prior equitable interest, must give value for the property he acquires, whether that be money or some other property; but he does not have to give full consideration, for the court will not enquire into the adequacy of the consideration. 5 A volunteer, although he is a purchaser, will thus not qualify. See Midland Bank Trust Co Ltd v Green (1981] AC 513. See Chapter 2.4. Cap 6 Cap 73 Midland Bank Trust Co Ltd v Green (1981] AC 513 33 HONG KONG LAND LAW 2.3.3 Tbe Legal Estate The purchaser must take a legal estate in order to defeat a prior equitable interest, although it does not have to be the same legal estate as the vendor. For instance, if A, the lessee under a Crown lease, creates an equitable mortgage in favour of B and then sells his legal estate in that Crown lease to C, C is clearly a purchaser of the legal estate. C would also be a purchaser of the legal estate if A instead granted a legal sublease or legal mortgage to C. Fig2.3 A Equitable Mortgage B Assignment or Legal Lease or Legal Mortgage C In each case, C would take free of B's mortgage provided the other requirements of the rule were satisfied. If A failed to create a legal lease or mortgage in favour of C and only created an equitable lease or mortgage, C would be bound by B's equitable mortgage. 2.3.4 Equitable Interests It is convenient at this point to look at the rule where the legal estate is lacking and the competition for priority is between two or more equitable interests. This rule is: • Where th<:.__eguities are equal, the first in time prevails. As between the holders of equitable interests, priority is given to the earlier interest if all other relevant factors are equal. Factors that may affect the relative merits of an equitable interest include the nature of the equitable interests, the circumstances an:d manner of their acquisition, and the conduct of the parties. For instance, if the holder of the prior equity has been fraudulent or negligent in the protection of his interest, he may lose the priority that he might otherwise have enjoyed. An example is found in:6 6 34 See also The Commercial Bank of Hong Kong Ltd v Wellstead Textile Co Ltd & another (1993) HCt MP 3785 of 1991 and Wong Lai Suk Chun v Wong Chiu Ming [19931 1 HKC 522 and Chu Kit Yuk & another v Countrywide Industrial Ltd [19951 1 HKC 363. Although it is difficult to understand why the last case was not decided on the principles laid down in the Land Registration Ordinance as the instruments in question, i.e. sale and purchase agreements, were clearly registrable. PRIORITY: THE DOCTRINE OF NOTICE - - Rice v Rice (1884) 2 Drew 73 V.C. FACTS The defendant purchased some property from several vendors but he only paid one of the vendors his share of the purchase price. The assignment to the defendant, however, contained a receipt for the whole purchase price. The defendant equitably mortgaged the property and then disappeared without paying the balance of the purchase price or the mortgage. JUDGMENT The subsequent equitable mortgagee had priority over the unpaid vendors' equitable liens, for he had the better equity. Although the nature of the equities were equal, the unpaid vendors, by releasing the title deeds and agreeing to the receipt on the assignment, had been negligent, leading the subsequent mortgagee to think he was the first mortgagee. 2.3.5 Mere Equities The first in time rule may also be displaced where the natures of the equities are not equal. For instance, if a person has a right to go to court to seek an equitable remedy he is said to hold a mere equity. His interest is potential, for it has not crystallised until the grant of the equitable remedy. A right to set aside or rectify a conveyance for fraud, mistake, or undue influence are examples of mere equities. The precise dividing line between mere equities and equitable interests is unclear. For instance, a purchaser who has entered into a contract for the sale of an interest in land is said to hold an equitable interest and not a mere equity in the land, even though his interest springs from his right to go to court to seek the equitable remedy of specific performance of the contract. It has been suggested that the difference lies in the fact that mere equities are essentially ancillary rights that are dependent upon some interest in land.7 In a competition for priority with a prior mere equity, an equitable interest will succeed where the holder of the equitable interest has no knowledge of the mere equity. A case which considered the priority of mere equities is: Latec Investments Ltd v Hotel Terrigal Pty Ltd 0965) 113 CLR 265 FACTS Laree, in exercise of their power of sale as mortgagees, sold the mortgaged land to a subsidiary company for an undervalue. The mortgagor was thus Megarry & Wade 5th ed London, Stevens and Sons Ltd (1984) p 146 35 HONG KONG LAND LAW entitled to have the sale set aside. However, the property was mortgaged by way of equitable mortgage before the mortgagor acted to set aside the sale. JUDGMENT The sale would not be set aside. The mortgagor was guilty of delay in commencing proceedings, but even if he had not been, the equitable mortgagee was not bound by his mere equity of which he had no notice. 2.3.6 Without Notice Even when a purchaser takes a legal estate and has given consideration, equity will not allow him to take free of a prior equitable interest if he has noticeofthat interest. A bona fid~p~rchaser of the legal estate must take without notice in order to t~ke fre~ ofapriore9u'itaSI~~!.~re~-~- For instance, ifA grarits an equitable mortgage over his property to B and then sells the property to C, C will only take free of B's mortgage ifhe has no notice. Once Chas defeated B's prior equitable estate, he holds and is able to deal with the property free from B's interest. B's interest, although it still binds A, does not bind C or anyone else to whom C may transfer his interest. Thus, if C later sells the property to D, D will also take the property free from B's mortgage even if D has notice of B's interest. ~~~- • II. • Fig 2.4 A Equitable Mortgage Legal estate not bound where no notice B C not bound regardless of notice Legal estate D The following case illustrates how a subsequent advantage of his vendor's lack of notice. purchaser can take FACTS Spooner was a tenant of different landlords of two shops. The lease of the first shop prohibited any use except that of a pork butcher, whilst at the second 36 ... PRIORITY: THE DOCTRINE OF NOTICE shop he carried on business as a general butcher. Spooner transferred his lease of the second shop to Wilkes, and he agreed with Wilkes not to carry on business as a general butcher at the first shop. Spooner surrendered his lease of the first shop to his landlord, who had no notice of the agreement he had made with Wilkes not to carry on business as a general butcher. Spooner then obtained a new lease of the first shop and set up business as a general butcher. Wilkes sought an injunction against Spooner based upon the agreement they had made when the second shop was transferred. JUDGMENT Spooner was not bound by the covenant he had made with Wilkes. His landlord was a bona fide purchaser of the legal estate in the first shop and had no notice of the covenant. He was entitled to grant the new lease to Spooner free from the equitable interest created by covenant. 2.4 Notice Notice in this context means knowledge. T~ purchaser will oajy_take free olaprior eguTia1Jle"lfit'erestlflie'has·no knowledge of that interest. Notice in England is now defined by statute, 8 but in Hong Kong notice continues to be governed by the general law, which identifies three kinds of notice: actual, imputed, and constructive. 0 2.4.1 Actual Notice Notice may be acquired through the actual knowledge of the purchaser, which may be obtained from any source, although not from vague rumours. 9 2.4.2 Imputed Notice Most purchasers will employ agents to assist them in the often complex task of purchasing property. A purchaser of a flat will usually seek the help of a sales agent to find a suitable property, and will then employ a solicitor to deal with completion of the legal formalities. Likewise, a bank lending money on security of a mortgage will usually employ a valuer to make sure that the value of the property is sufficient to repay the loan, and a solicitor to draw up and complete the mortgage. In the course of their work these agents may acquired information concerning the property which will be imputed to the purchaser as their principal. In contrast to the law in England, 10 it appears that notice imputed from an agent may extend to knowledge acquired by the agent in a previous transaction as well as that 9 10 See s 199 of the Law of Property Act 1925, Reeves v Pope [1914] 2 KB 284 See s 199Cl)ii of the Law of Property Act 1925, which is not enacted in Hong Kong. 37 HONG KONG LAND LAW acquired in the course of the purchaser's transaction. 11 If an agent acts for both parties, the agent's knowledge will be imputed to both the parties unless the agent has conspired with one party to conceal something from the other, in which case the other party may claim he has no notice. 12 2.4.3 Constructive Notice The knowledge of the purchaser may be implied. A purchaser and his agents are deemed to have knowledge of those interests they would have discovered if they had carrEd out such enquiries as a reasonably prudent pun;:haser would ~A purchaser thus cannot avoid notice either by shutting his eyes and failing to make enquiries or by making inadequate enquiries. The difficulty in ascertaining what falls within the ambit of constructive notice is to determine what enquiries a reasonable prudent purchaser would make. 2.4.3.1 Inspection of the Title Documents In most cases a deed or written instrument is required in order to create, transfer, or dispose of an interest in land. 13 An inspection of these deeds and documents should thus reveal almost all interests that may affect the land. A vendor will prove his title by allowing the purchaser to inspect the title documents relating to the land. As a result, a purchaser will have constructive notice of all interests and matters he would have discovered from an inspection of the title deeds. In Hong Kong, a purchaser can only require a vendor to produce all his title deeds for the statutory title period, which is not less than 15 years. 14 However, it is not clear whether a purchaser will have notice of those interests which are only evident from documents he cannot require the vendor to provide, but are nevertheless available for inspection at the Land Office. 15 Possession of the title deeds is an important incident of ownership. Failure to be able to produce the title deeds will in itself give rise to suspicion which no prudent purchaser would accept without a satisfactory explanation. 2.4.3.2 Inspection of Land There are exceptions to the need for writing to create an interest in land, and thus the title documents may not tell the whole story. For instance, a lease of not more than three years may be created orally; an interest may be created by part performance; and there are circumstances where equity will impose a constructive or resulting trust. 16 A purchaser is thus also g£~c:ted to ha:'.e inspected the land. Ifhe finds someone in occupa~~o 11 12 13 14 15 16 38 Re Cousins (1886) 31 Ch D 671 Cave v Cave (1880) 15 Ch D 639 See Chapter 5. Sees 13 of the Conveyancing and Property Ordinance Cap 219. See further Nield, Tbe Hong Kong Conveyancing & Property Ordinance Singapore. Butterworth (1988) at p 40. See Chapter 6.4. PRIORITY: THE DOCTRINE OF NOTICE is.not the legal owner and whose presence is inconsisJ~n.t.wn~.the..ti,tl@,Bf t~legal .<5W!Ier,. rlren-fre~lt'fusLc:nqui~eby ~i.gJ}t~J:i~~ Pt:'.Esori)stli_e_re. 'if he fails-to make an inspection or make reasonable enquiries of such persons, he is deemed to have constructive notice of their rights. 2.4.3.3 Tenants A purchaser will have constructive notice of the rights of a tenant who is in occupation of the land even though the tenant may be holding under an oral tenancy. Hunt v Luck [1902] 1 Ch 428 FACTS Dr Hunt was persuaded by the use of fraud to transfer to his agent some of his properties that were tenanted. The agent then mortgaged the properties for his own benefit. After Dr Hunt's death, his wife, as his personal representative, sought to recover the properties by setting the transfer aside. She claimed that the mortgagees, who were opposed to her application, had constructive notice of Dr Hunt's interest for they should have made enquiries of the tenants to confirm they paid their rental to the owner of the properties. JUDGMENT Enquiries should be made to ascertain why the tenants were in occupation of the land, but it was unreasonable to expect a purchaser to make the enquiries as to their landlord's title or rights. The mortgagees thus did not have constructive notice of the right of Dr Hunt's estate to have the transfer set aside. 2.4.3.4 Spouses Greater difficulties arise in determining whether a purchaser will have constructive notice of a person who is in occupation of the property with the legal owner, in particular where the occupier is the spouse of the legal owner. A wife's right of occupation of the matrimonial home is generally regarded as a personal right, as are the rights of occupation of the other family members, and will therefore not bind third parties.17 But where the wife or other members of the family have made a contribution to the purchase price of the home, they may have an equitable interest in the home arising under the principles of resulting or constructive trusts. 18 Does a 17 18 National Provincial Bank v Ainsworth [1965] AC 1175 See Chapter 6.4. 39 HONG KONG LAND LAW purchaser have notice of a spouse's equitable interest arising by virtue of their financial contributions to the acquisition of the home? This is a question that has occupied the English courts and has arisen in Hong Kong. The traditional view has been that the occupation by a spouse was consistent with the title of the legal owner. The presumption was that spouses were living in the property not because they might hold an interest in the property but because they were married to the legal owner. Thus a purchaser was not bou~d to enquire into their rights. 19 c"'a"unce·v Gaunce [1969i' 1WLR 286 FACTS The Caunces acquired their home using some of Mrs Caunce's money and funds raised by a mortgage from a building society. Despite an agreement between them that the house should be in their joint names, Mr Caunce had the house transferred to his sole name. Without the knowledge of his wife, Mr Caunce entered into a second mortgage in favour of a bank to secure three further loans. Mr Caunce paid the mortgage instalments on the building society mortgage until he went bankrupt, but thereafter they were paid by his wife. Mrs Caunce claimed the bank had constructive notice of her equitable interest in the home. JUDGMENT The bank did not have constructive notice of Mrs Caunce's interest and took free of her interest as a bona fide purchaser for value of the legal estate without notice. In Gaunce v Gaunce, Stamp J was reluctant to extend the doctrine of constructive notice and was not persuaded by arguments that the wife's occupation was independent of that of her husband. Stamp J's views have been strongly disapproved of in England. The first attacks came in the context ofland registered under the Land Registration Act 1925, which does not apply to Hong Kong. 20 Under this Act a purchaser will take subject to the proprietary rights of persons in occupation. Such occupants hold what is known as an overriding interest. The enquiry in the context of registered land is thus slightly different from that under the doctrine of notice, but nevertheless in considering who qualifies as an occupier the courts have had to consider whether or not a spouse who is in occupation of the property with the legal owner is capable of separate occupation. The House of Lords considered this question in: !9 20 40 See also Bird v Syme Thomson [1979] 1 WLR 440. Hodgson v Marks [1971] Ch 892 ............... PRIORITY: THE DOCTRINE OF NOTICE William & Glyn's Bank Ltd v Boland [1981] AC 487 FACTS Mr and Mrs Boland acquired a home which was registered under the Land Registration Act 1925 in Mr Boland's sole name, .although his wife made substantial contributions to the purchase price and thus held an equitable interest in the property under a resulting trust. Mr Boland subsequently raised loans from the plaintiff bank, which were secured by a mortgage over the property. He defaulted in repayment of these loans and the bank sought possession of the home. JUDGMENT The plaintiff bank took subject to Mrs Boland's interest as she held an overriding interest by virtue of her occupation. Lord Wilberforce disapproved of the view suggested in Gaunce v Gaunce 21 that occupation by the legal owner excluded the possibility of occupation by others. 22 He also disapproved of Stamp J's suggestion that a wife's occupation was fully explained by her relationship with her husband, and the characterisation of a wife's occupation as a mere shadow of her husband's he described as 'heavily obsolete'. 23 A wife's occupation could equally be explained by the fact that she held an equitable interest in the property and he did not see why, just because she was the spouse of the legal owner, she should be denied the protection that occupation would have afforded another equitable owner. Lord Wilberforce's comments have received endorsement in the context of land in England, which is not subject to the Land Registration Act 1925, where priority continues to be governed in part by the doctrine of notice. ----------- Kingsnorlh Finance Co Ltd v Tizard [1986] 1 WLR 783 FACTS Mrs Tizard made substantial contributions to the acquisition of the Tizards' home, which was legally held in her husband's sole name. The marriage broke down and the Tizards agreed that the matrimonial home should be sold and the proceeds shared equally. It was thus clear that the Tizards owned the property equally in equity. In the meantime, Mrs Tizard spent a part of each day at the house in order to look after the children but did 21 22 23 [1969] 1 WLR 286 [1981] AC 487 at 504 [1981] AC 487 at 505G 41 HONG KONG LAND LAW not normally sleep there. Mr Tizard mortgaged the home to the plaintiff before leaving the country without repaying the loan. In his mortgage application MrTizard had described himself as single although,the plaintiffs inspection of the property revealed the fact he had ~Q~ children. The plaintiff's agent had inspected the house on a Sunday morning at a time prearranged with Mr Tizard when it appeared Mrs Tizard was not at home and Mr Tizard had made efforts to conceal his wife's presence. The plaintiffs sought possession. JUDGMENT In the circumstances, Mrs Tizard was in separate occupation of the property. The plaintiff and their agents had failed to make reasonable enquiries which would have established her interest and thus they took subject to it. The plaintiffs suspicions should have been aroused by the fact that their inspection had clearly revealed that Mr Tizard had children although in his mortgage application he had described himself as single. This discrepancy should have prompted further enquiries. The Hong Kong courts have also considered the question of whether a purchaser is bound to enquire into the interests of the legal owner's spouse who is in occupation of the property, and have followed the Boland line rather than Gaunce v Gaunce. 24 -■ ■ - -- - -■ Wong Chim-ying v Cheng Kam-wing [1990] 2 HKLR 111 FACTS Mr Cheng was a minibus driver who worked long hours. When he and his wife decided to buy a flat to live in, Mr Cheng provided the money but left his wife to deal with the purchase, with the result that the flat was purchased in her sole name. Without the knowledge of Mr Cheng, his wife arranged to sell the flat to the plaintiff, who inspected the flat and was aware that Mr Cheng was living there. When the sale was completed the plaintiff paid the purchase price to Mrs Cheng. She left Hong Kong with the money but without telling her husband, who remai11ed jn, occupation, much to the disappointment of the plaintiff who sought possession. JUDGMENT The plaintiff took subject to Mr Cheng's equitable interest of which she l:tad constructive notice by reason of his occupation. 24 42 The Court of Appeal has approved this decision. See (1991) Civ App No 75 of 1990. PRIORITY: THEDOCTRINE OF NOTICE 2.4.3.5 Other Occupiers All these cases have concerned notice of a spouse's rights. Interestingly, in Hong Kong it was the husband's rights rather than the wife's! The same principles can be applied to the rights of other occupiers who have contributed to the acquisition of the property and may thus enjoy an equitable interest, for instance other relatives or unmarried couples. This possibility did not escape the House of Lords in William and Glynn's Bank Ltd v Boland. 25 In Hong Kong, the extended family is still very much alive: it is not uncommon for grandparents to live with their children or adult children to live with their parents, and for such relatives to contribute to the acquisition of the family flat. Thus enquiries should not only be confined to spouses but extended to any occupiers who may have contributed to the acquisition of the property. 2.4.3.6 Occupation What amounts to occupation can cause difficulties. Essentially, occupation is a matter of fact, which may depend on the nature of the property and the purpose for which it is claimed to be occupied. What constitutes occupation of a flat differs from occupation of a shop or a garage. In the case of residential occupation, it appears that occupation is wider than residence in its usual sense. We have already seen in Kingsnorth that Mrs Tizard did not sleep at the property and her presence there during the day was by no means continuous. In the case· of Lloyds Bank PLC v Rasset,26 the English Court of Appeal was prepared to accept that a wife was in occupation of a semi-derelict house that was being renovated. Her occupation stemmed both from the presence of the builders that she and her husband had employed and allowed into the property to carry out the renovation work, and her own presence at the property during the day to supervise the builders' work. The question of what constitutes occupation has also been considered by the House of Lords in: Abbey National Building Society v Cann [1990] 2 WLR 832 FACTS The defendant was in financial difficulties. In an attempt to overcome these difficulties he arranged to sell a house, which he and his mother beneficially owned and in which his mother lived, and to buy a smaller house for his mother. In fact, the net proceeds of sale of the old house were not sufficient to fund the total purchase price of the new house, and thus the defendant raised a mortgage from the plaintiffs. On the day of completion of the purchase the defendant, helped by his mother's husband, assisted in • moving his mother's possessions into the new house at about 11.45 am. His 25 26 [1981] AC 487 at 508F [1989] Ch 350 43 HONG KONG LAND LAW mother was away on holiday. The legal formalities for the purchase and the plaintiffs mortgage were not completed until a little later, at 12.20 pm. Subsequently the defendant failed to repay the mortgage and the plaintiffs sought possession of the house. JUDGMENT The defendant's mother was not in occupation of the house at the time the mortgage was completed and thus any equitable interest she might hold did not bind the plaintiffs. The House of Lords accepted that occupation did not necessarily require personal occupation but could be claimed through an agent, such as a caretaker, but they did feel that occupation required 'some degree of permanence and continuity which would rule out mere fleeting presence'. 27 The period that the defendant had spent moving in his mother's possessions did not qualify, as it was merely preparatory in character. 2.4.3.7 Time of Occupation T~~~!-9~~.?+,!£.~.~-~~ta~J.~J!:i!~~~~S.~~.:t -~~ ~~~~:~£,:t,tf~~:1SS~!:?1~~;;;YJlyn that",C?.!JlPJ::ti.rrg,JJJJ;,t::u;~J;.J.S.~dIn a1f tne cases cited here where the occupier has succeeded in claiming priority, the mortgage or other competing interest was entered into some time after the property was acquired and the prior equitable interest arose. But in the common situation where a purchaser is acquiring property with the aid of a mortgage, rather than raising a mortgage on property that he already owns, it is unlikely that his spouse or other person intending to occupy will be able to claim that any equitable interest they enjoy takes in priority to the mortgage, simply because they will not be in occupation when the mortgage is created. The mortgage will be completed and the funds released to enable the purchaser to pay the purchase price and obtain possession. In Hong Kong, completion of a purchase or a mortgage is usually effected by undertaking, whereby the purchaser will forward the purchase price to the vendor upon the vendor's immediate release of the keys and their undertaking to return the title deeds and the deed transferring ownership to the buyer within a certain time period. This procedure may lead to a gap between the purchaser obtaining occupation and the finalisation of the legal formalities including the dating and registration of the transfer deed and any mortgage created to secure money lent to fund the purchase. A time gap is more likely where the property is a new development when there is also a need to await the completion and registration of the deed of mutual covenant. Where the purchaser, his spouse, or another occupier take up occupation with the agreement of the vendor before the completion of the purchase with 27 44 [1990] 2 WLR 832 PRIORITY: THE DOCTRINE OF NOTICE the aid of a mortgage, the position is rather more complicated. It will depend essentially upon the time that the spouse or other occupier's equitable interest arises. In Lloyds Bank Ltd v Rosset,28 the Court of Appeal suggested that the wife's interest in this situation arose before completion and was protected when she took up occupation, so that her interest was capable of taking in priority to the mortgage effected on completion. However, in Abbey National Building Society v Cann 29 the House of Lords disagreed. They decided that an occupier could not claim an equitable interest in the property until after the property had been acquired. Their interest was dependent upon that of the legal owner, which was only acquired with the assistance of and subject to the mortgage. Occupation before the completion of the legal transfer of title will thus not avail a beneficial owner. 2.4.3.8 Circumstances of the Transaction It would be a mistake to assume that purchasers need only inspect the title deeds and the property. The transaction must be considered as a whole and purchasers will be deemed to have constructive notice of any matters which from the circumstances surrounding the transaction suggest an adverse prior equity may exist. For instance, in Kingsnorth Finance Co Ltd v Tizard 30 the mortgagee should have been put on enquiry by Mr Tizard's statement in his application form that he was single although an inspection of the property revealed he had children. These circumstances should have suggested the existence of a wife or partner. However, in Gaunce v Gaunce 31 the court did not feel that the bank needed to extend their enquiries to the bank account that the wife kept at their branch, an inspection of which would have revealed comparatively large withdrawals at the time of the purchase. The wife had maintained that these withdrawals should have put the bank on enquiry that she had contributed to the cost of the house purchase. 2.5 Deficiencies of the Doctrine of Notice Occupiers· and their rights illustrate very clearly the deficiencies of the doctrine of notice, both from the point of view of the holder of an equitable interest and that of the purchaser of the legal estate. 2.5.1 Problems of the Equitable Owner The problem for the equitable owner is how to protect his equitable interest when that interest is not evident from the title deeds. His interest will be 28 29 3o 31 [1989] Ch 350 [1990] 2 WLR 832 approved in Chiap Hua Flashlights Ltd. v Marlefaith Investments Ltd [1990] 2 WLR 145 and [1990] 2 HKLR 84 [1986] 1 WLR 783 [1969] 1 WLR 286 45 HONG KONG LAND LAW protected if he is in occupation provided that, in the circumstances of the case, his occupation is inconsistent with that of the legal owner. The owner of an unwrittenequity who is not in occupation has no means of protecting his interest unless he happens to know of the proposed dealing with the property and can bring his interest to the notice of the purchaser. Even an owner of an unwritten equity who is in occupation may have difficulties in bringing his occupation to the attention of the purchaser. As we have seen, occupation is very much a question of fact. In Kingsnorth, for instance, Mrs Tizard was only in occupation of the property for part of the day and there was evidence that her husband had attempted to ensure that her presence was not obvious to the inspecting mortgagee. Indeed, it was the fact that Mr Tizard had described himself as single in his mortgage application form, but was clearly a father from an inspection of the house, that the court felt should have alerted the mortgagee to the interest of his wife. 2.5.2 Problems for the Purchaser The extent of the doctrine of constructive notice depends on what enquiries are deemed reasonable. What may be reasonable may vary from case to case. Much has been made in all the cases of the difficulty for the purchaser, or rather his conveyancing lawyer, in making enquiries of all persons occupying the property. It is time-consuming to find out who is in occupation, and as Kingsnorth has shown, an inspection of the property can be inconclusive. It may be all too easy for the legal owner to conceal fraudulently the equitable owner's occupation. Even if an inspection or other enquiries do reveal occupiers other than the legal owner, it may be difficult to establish whether or not they enjoy an equitable interest in the property. The occupiers themselves may be unaware that they may claim a right in the property, or even if they feel they have such a claim, they may be unable to articulate its nature. The occupiers may also find enquiries into their relationship with the legal owner and their financial arrangements an invasion of privacy and be reluctant to assist. It is often easier to take the cautious view and assume that all occupiers who may have contributed to the acquisition of the property enjoy some sort of proprietory interest. Where occupiers who have a potential equitable interest are found to exist, then one way a subsequent purchaser or mortgagee can ensure that he takes free of their interest is to ask them to become a party to the sale. Alternatively, they may be asked to consent to the transaction. Clearly it is prudent for a purchaser or mortgagee to obtain the express consent of any occupier from whom he expects to take free, but he will have to take care that any consents obtained are freely given and not subject to attack by virtue of duress, undue influence, 32 misrepresentation, 33 or even non est factum. The problem of obtaining an untainted consent which is not at risk of being 32 33 46 National Westminster Bank PLC v Morgan (1985] AC 686 Kingsnorth Trust Ltd v Bell [1986] 1 WLR 119 PRIORITY: THE DOCTRINE OF NOTICE set aside has recently been highlighted by a number of English decisions. 34 In Gaunce v Gaunce, Stamp J considered the enquiries a purchaser would have to make in respect of occupiers 'unworkable and undesirable' ,35 but more recently the House of Lords have not shrunk from imposing on purchasers and in particular commercial lenders a duty to make enquiries both of occupiers and the freedom with which they are called upon to participate in transactions. In William & Glyns Bank v Boland 36 Lord Wilberforce indicated that such precautions were the price to be paid for the development of shared interest of ownership, while Lord Browne Wilkinson in Barclays Bank v O'Brien 37 placed heavy emphasis on the policy considerations that arose from the balance that must be established between the use of the matrimonial home as a source of business finance and residential security for the family. There has developed, however, a willingness by the courts to define narrowly the circumstances under which an occupier will be protected, particularly when the occupier has derived some benefit or advantage from the mortgage. For instance, even if express consent is not obtained, an equitable owner may be estopped from setting up his equitable interest against a subsequent purchaser where he knew, or from the circumstances of the transaction must have known, of the legal owner's intention to mortgage or otherwise deal with the property. For instance, in Abbey National Building Society v Cann 38 the House of Lords were of the opinion that Mrs Cann authorised her son to mortgage the property, since she was aware of her son's financial difficulties and thus must have known he required a mortgage to complete the purchase. 39 The problems that surround the doctrine of notice have led to statutory intervention in most common law jurisdictions in order to govern priorities which take the form of some type of registration. Hong Kong is no exception in this respect, and it is to the Hong Kong system of registration that we now turn. 34 35 36 37 38 39 See Chapter 17.3.4. [19691 1 WLR 286 at 294 C [19811 AC 487 at 508G [19931 1 AC 180 [19901 2 WLR 832 See also Bristol & West Building Society v Henning [19851 1 WLR 778, and Equity & Law Home Loans Ltd v Prestidge [199211 WLR 137. 47 Priority: Land Registration Ordinance 3.1 Introduction Tl~e_LandRegis_trationOrdinance I was originally enacted in 1844, soon after the establishment of the colony, and has survived with only relatively minor amendment. It is called a 'Land Registration' ordinance, but it is more accurately a 'Documents Registration' ordinance for it establishes a system of registration of documents affecting land. This system contrasts with-the title registration systems established in England under the Land Registration Act 1925 and the 'Torrens system' in Australia, which have found favour in many other common law jurisdictions. It also differs from the registration of charges that operates in England under the Land Charges Act 1972. Although the Land Registration Ordinance 2 differs from the current English system, it has its origins in the deeds registration system that existed in England under the Middlesex and Yorkshire Deeds Registries, which was also transported to many other overseas dependencies. The ordinance owes its immediate models to the legislation that established deed registries in Van Diemen's Land (now Tasmania), Western Australia, and Ireland. 3 Many of the deeds registries in other countries have been replaced by title registration and Hong Kong plans to follow suit. A Land Titles Bill has been published and has been the subject of extensive discussion and debate but it has not yet reached the statute book. We will be looking at the main features of the proposed Land Titles Bill in Chapter 4. 3.2 Concepts of Registration 3.2.1 Title Registration The effect of title registration is to provide a record of the holders of estates and interests subsisting in a lot of land, the accuracy of which is supported by a goverriment guarantee. The intention is for the register to reveal all es_tatesand interests affecting tne land rather than relying on notice gleaned from an inspection of the title documents and the Ianµ. A purchaser of a lot of land should thus merely have to examine the register to discover the interests in the land to which he will take subject. A further important feature of title registration is that it is the act of registration of the instrument that vests title in the purchaser, and not the instrument itself. Once the title of the purchaser is registered, the intention is that his ownership cannot be challenged except in a number of very limited circumstances: it is said to be absolute or indefeasible. Cap 128, reference to sections in this chapter are to sections in the Land Registration Ordinance. Ibid. See Thomson 'The Land Registration Ordinance of Hong Kong: Historical and Legal Aspects' (1974) 4 HKLJ 242. 48 PRIORITY: LAND REGISTRATION ORDINANCE 3.2.2 Charges Registration Registration of charges under the Land Charges Act 1972 operates in England where the land is not subject to registration of title. It provides a record of certain encumbrances affecting an owner of a lot of land, whether those encumbrances have been created by instrument or some other means. Interests that require registration as land charges are mostly equitable in character and thus will only affect a purchaser of the legal estate if the purchaser has notice. This registration of an interest as a land charge supersedes constructive notice, for registration is deemed to provide actual notice. Conversely, a failure to register renders the interest void against a purchaser, even if that purchaser has notice of the interest. 4 Thus, while a purchaser must still inspect the vendor's title deeds and the land, he can rely upon the land charges register to provide details of those interests affecting both the vendor and any previous.owner and which require registration. A disadvantage for the purchaser lies in the fact that interests are registered against the name of the owner of the land and not the land itself. Thus a purchaser must search against the names of all previous owners of the land. By the same token, the holder of an interest that qualifies as a land charge must register his interest in order to be able to enforce it against a subsequent purchaser. The commercial nature of most land charges should mean that it is more likely that the holder will be aware of the need to protect their interest by registration. As we shall see when we come on to consider formalities, it is often in the family situation, where interest can arise informally, that ignorance of registration requirements abounds. 3.2.3 Deeds Registration A registration of deeds system merely provides a record of the instruments affecting a particular lot of land. Registration alone does not provide evidence of the vendor's title. It is still necessary for a purchaser to examine the documents that make up evidence of the vendor's title to the land. R~gistration does not confer title either. It does not endorse or guarantee the validity of an instrument, nor does lack of registration deprive an instrument of its validity between the parties. A failure to register, however, may affect the priority of the instrument against third parties. Thus the only comfort that a purchaser can gain from the register is that he should not be affected by any interests created by an unregistered instrument. 3.3 Mechanics of Registration 3.3.1 Tbe Registration Process 5 In Hong Kong, a document that is submitted for registration must be accompanied by a memorial, which is verified, usually by a solicitor. A Midland Bank Trust Company Ltd v Green [1981] AC 513 See Land Registration Regulations Cap 128. 49 HONG KONG LAND LAW memorial in the early days of registration was a summary of the document that was prepared specifically for registration, but now a copy of the document is merely attached to the memorial to provide details of the instrument. In the Central Land Office a microfilm copy of the doi;:ument is taken by the Land Office during the registration process. In the District Land Offices the applicant must supply the copy of the document to be attached to the memorial. When a memorial of a document is submitted for registration, it is given a memorial number and entered initially in the memorial day book, which records brief details of all instruments submitted for registration on any given day. The memorial and instrument are then checked. If an error is found, the memorial and instrument are returned to the applicant for correction. Details of the memorial and instrument are then entered in the register relating to the lot of land affected. On the completion of the registration process, the original instrument is returned to the purchaser or other party entitled to retain it,·while a copy with the memorial is retained at the Land Office. There are three types of registers. The Crown lease register records instruments affecting the whole of a Crown lease lot. If the Crown lease has not been issued and the lot is still held under .conditions that have not yet been complied with, the register is known as the 'temporary register'. Where the Crown lease lot has been divided up into smaller sections of land, section registers are opened to record instruments dealing with each section of the lot. Finally, where the land has been split into undivided shares, a subdivision register will record all instruments affecting those shares. Each register is divided into two parts to provide, first, details of the 'registered owner' and the land; and, second, the encumbrances affecting the lot, section, or undivided share. The use of the expression 'registered owner' is somewhat misleading since the title of the registered owner is not in any way guaranteed or underwritten by the government. His title continues to depend on an examination of the title documents and an inspection of the land in the traditional manner. 3.3.2 Time of Registration Before applying the rules of the ordinance to determine the priority of an instrument, it is necessary to know the dates of registration of the relevant instruments. The time of registration differs for charging orders and pending court actions, known as 'lis pendens', and all other instruments. 3.3.3 Charging Orders and Lis Pendens A creditor who has obtained a judgment for a debt owed to him may enforce that judgment by application to court for a charging order over the debtor's land. A charging order will secure repayment of the judgment debt on the debtor's interest in land, and will entitle the chargee to realise the charge by obtaining a court order for the sale of the land. The grant of a charging order is made in two stages. First, an order nisi is made, whichis then made absolute if the debtor fails to establish reasons for its discharge. It is clear 50 PRIORITY: LAND REGISTRATION ORDINANCE that it is the date of registration of the order nisi that is important for the purposes of determining priority. 6 Either party to court proceedings which affect land may register a !is pendens to warn potential purchasers of a dispute affecting the land. The date of the registration of a charging order and a !is pendens is governed by s SA, which provides that the date of registration •for the purposes of the ordinance is the day after the order or !is pendens is submitted for registration. 3.3.4 Other Instruments The date of registration of other instruments is governed by s 5, which provides: All deeds, conveyances, and other instruments in writing ... which are registered within one month after the time of execution thereof respectively, ... shall severally be in like manner entitled to priority, and shall take effect respectively by relation to the date thereof only in same manner as if this Ordinance had not been passed. An instrument that is submitted for registration within one calendar month of its date of execution is deemed registered as at its date of execution. If the instrument is submitted for registration after one month, then its date of registration is the determining date. For instance, if A grants a mortgage of his property to B on 1 January, then B has until 1 February to register the mortgage in order to have priority assured from 1 January. If he registers any later his priority will date from the date of registration and not the date of the instrument. This b_:ick-dating mechanism is very convenient for the purchaser, mortgagee, or other person taking the benefit of the instrument. They have a month in which to submit their instrument for registration without affecting their priority. It is less convenient for those wishing to search the register to ascertain their priority position, for it is impossible for the register to give an accurate up-to-date picture. There is always the possibility that an instrument may be submitted for registration, which can claim priority up to one month before the date of the search. 7 This situation represents one of the major defects of the ordinance, although the consequences, in practice, are less disastrous than they might at first appear because possession and inspection of the title deeds still play a vital role in the proof of title. A purchaser is unlikely to enter into any transaction without first inspecting the original title deeds, which are usually kept within the firm control of the vendor. Thus it is unlikely that an instrument will be registered without the knowledge of the vendor. Charging orders and !is pen dens are notable exceptions, but these instruments are governed by different rules. Wong Kam-wing v Cyril Murkin (HK) Ltd (1989) HCT MP No 1722 of 1988 See for example Aie Company Ltd v Kay Kam Yu (1994) HCt No A48 of 1991. 51 HONG KONG LAND LAW Nevertheless, the situation could be resolved by instituting a priority notice system similar to that found in England, whereby a person intending to register can take out a priority notice that enables him to maintain his priority to the date of the transaction, provided he registers within the priority period specified by the notice. The priority notice is immediately entered on the register, giving notice to subsequent searchers that the registration of an instrument able to take in priority is imminent. 3.4 What is Registrable? Section 2 provides that: The Land Office shall be a public office for the registration of deeds, conveyances, and other instruments in writing, and wills and judgments; and all deeds, conveyances, and other instruments in writing, and wills and all judgments, by which deeds, conveyances, and other instruments in writing, and wills and judgments, any parcels of ground, tenements or premises in Hong Kong may be affected, may be entered and registered in the said office in the prescribed manner. 3.4.l 'All Deeds, Conveyances, and Other Instruments in Writing' Only instruments may be registered. Any interest in land which can be created or transferred otherwise than by instrument falls outside the ambit of the ordinance. For the formalities required to grant or deal with an interest in land, see Chapters 5 and 6. Generally some form of writing is required, but there are exceptions. 3.4.2 Unwritten Equities Unwritten equities cannot be registered under the ordinance. The most ~~on unwritten equities include equitable interests arising under a resulting or constructive trust, 8 or created by part performance or proprietary estoppel.9 An unwritten equitable mortgage may also be created by the mere deposit of the title deeds to the property with the lender. 10 Where an unwritten equity arises its priority continues to be governed by the doctrine· of notice.11 10 Tsang Chuen v Li Po-kwai (1932] AC 715 and Chu Yam-on v Li Tam Toi-bing (1954) 38 HKLR 114 (CA) and 0956) 40 HKLR 250 (PC) Citibank NA v Lai Tat-chee (1986] 2 HKLR 885 Re Burkes Case (1881] 9 LR Ir 24 11 See Chapter 2. 8 9 52 ------------ PRIORITY: LAND REGISTRATION ORDINANCE Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd [1985] HKLR 103 ('the FISA case') FACTS A company owned property that was mortgaged to a bank. The plaintiff, with a view to becoming first mortgagee, advanced money to the company on 23 February 1982 to enable it to redeem the mortgage to the bank. The reassignment of the bank's mortgage and the plaintiff's mortgage were completed on 13 March 1982, and registered on 17 March 1982 and 8 April 1982 respectively. In the meantime, on 2 March 1982 the defendant registered a charging order against the property to secure a judgment debt obtained against the company. JUDGMENT By advancing money to discharge the bank's existing mortgage, the plaintiff was entitled in equity to a transfer of that mortgage. This equitable transfer was unwritten and unregistrable. The ordinance did not apply and priority should be governed by the doctrine of notice. The defendant was not a purchaser for valuable consideration and therefore could not take free of the plaintiffs prior equity. The court avoided deciding the case on the basis of the order of registration of the charging order, reassignment, and mortgage by relying instead upon the unwritten equitable transfer of an existing registered mortgage. This existing mortgage, which was transferred to the plaintiff, was not extinguished by merger with the subsequent mortgage that the plaintiff had intended to take, because this subsequent mortgage was ineffective to give the priority the parties had intended. What happens where an equity that has arisen by conduct is later reduced to writing, or there is written evidence of its grant? It now seems clear that an unwritten equity will be superseded if subsequently it. is recorded in a writing. The unwritten equity does not continue to have an independent existence. Its priority will instead be determined according to the registration of the instrument in which it is recorded. In Chu Yamon v Li Tam Tai-bing 12 both the Court of Appeal and the Privy Council rejected arguments that a resulting trust survived the reduction of its terms to writing. A deposit of title deeds is more than likely to be accompanied by some form of documentary evidence which can be registered. For instance, in Fullerton v National Bank oflreland 13 it was decided that letters evidencing an agreement by a borrower to deposit the title deeds of his property as security for a loan were registrable. The point has been considered in Hong Kong in: 12 13 [1954] 38 HKLR 114 and [1956] 40 HKLR 250 [1903] AC 309 53 HONG KONG LAND LAW Citibank N.A. v Lai Tat-chee [1986] 2 HKLR 885 ('the Citibank case') FACTS The first defendant allowed the second defendant to build a house on his land upon the promise that the second defendant would be entitled to live in the house he built for 50 years. Several months afterwards the two parties entered into an undated document incorporating the terms of their agreement. This document was not registered. Three years later the first defendant mortgaged that land and house to the plaintiff. He defaulted under the mortgage and the plaintiff claimed possession. JUDGMENT The plaintiff took in priority to the second defendant's unregistered lease which superseded rather than merely provided evidence of his equity by estoppel. It seems, however, that following the reasoning in the Pisa case 14 merger of the unwritten equity with its subsequent written form may not take place where a registered instrument intervenes between the unwritten equity and its written form. The unwritten equity in these circumstances may survive to preserve the priority that the parties originally intended. 3.4.3 Leases Not Exceeding Tbree Year.s Leases not exceeding three years may escape a need for registration under two heads. First, a lease for under three years may be created orally if it takes effect in possession and is granted simply for a market rental. 15 An oral lease will escape a need for registration because it is not created by instrument. Its priority instead is governed by the doctrine of notice and, as a legal interest, it will bind the whole world. Second, a lease for a term not exceeding three years which is created by instrument need not be registered under the ordinance, for s 3(2) provides that: ' ... nothing herein contained shall extend to bona fide leases at a rack rent for a term not exceeding three years'. It is not entirely clear, but the implication appears to be that the priority of leases not exceeding three years is to continue to be governed by the doctrine of notice. Accordingly, provided the lease takes effect in possession and is for a market rental without any premium being paid, the lease will qualify as a legal estate and bind all subsequent interests. 54 14 [1985] HKLR 103 15 See Chapter 5.4 PRIORITY: LAND REGISTRATION ORDINANCE 3.4.4 Other Interests Created in Leases Under Three Years Care must be taken to protect by registration other interests that may be created within a lease of under three years but which do not fall within the exemption. Both in England 16 and now in Hong Kong the issue has been raised in the context of a covenant contained in the lease which grants an option for the tenant to renew the leasehold term. Chiap Hua Flashlights Ltd v Marlefaith Investments Ltd [1990] 2 WLR 1451 [1990] 2 HKLR 84 ('the Markfaith case') FACTS The defendant agreed to purchase certain premises from the plaintiff. The premises were to be sold subject to tenancies, details of which had been disclosed by the plaintiff. The defendant alleged that the plaintiff had not adequately disclosed details of certain options to renew that the tenants enjoyed, and refused to complete the purchase on the terms agreed. The plaintiff claimed he was entitled to terminate the agreement. JUDGMENT The plaintiff was entitled to terminate the agreement. He was under no obligation to disclose the options since the tenants had failed to register their options, which were thus void against the defendant. The fact that the options were contained in leases which did not have to be registered was irrelevant. . An option is an interest which may exist independently of the lease and thus must be registered separatelyfo bind a purchaser. It is irrelevant that a purchaser may have agreed to take the property subject to the lease including the option. The purchaser is entitled to take advantage of their legal rights under the ordinance unless it is clear that they agreed to be bound regardless of the fact that option was unregistered. 17 But what about the other covenants contained in the lease? They too may qualify as distinct interests in the land and as such may be enforced against those who are not parties to the lease .18 But as distinct interests do they also need to be registered separately? At first sight it is difficult to distinguish a covenant granting an option from any other covenants that may be found in a lease to control, for instance, use, repair or disposal,as all fall within the scope of privity of estate. 19 A vital distinction does, however, exist. The 16 17 18 19 Beesly v Hallwood Estates Ltd [1960] 1 WLR 549; Phillips v Mobil Oil Co Ltd [1990] 1 WLR 276 Wellmake Investments Ltd v Chan Yiu Tong 0996) CA Civ App No 247 of 1995. See further Chapter 3.5.4. See Chapter 15.3. See Chapter 14.3. 55 HONG KONG LAND LAW performance of the option will give rise to a new term. It is, in effect, an irrevocable offer to lease by the landlord which cannot be withdrawn, pending acceptance by the tenant's exercise of the option. The remaining covenants, by contrast, are inextricably bound up with the lease. They are taken to govern the existing leasehold relationship, and will cease upon the expiry of the term upon which they are dependent. Accordingly, they should be protected by the registration of the lease itself and need not be separately registered. 3.4.5 Floating Charges Floating charges, prior to crystallisation, have been excluded from registration under the ordinance. 20 They have also been excluded from classification as an interest in land prior to crystallisation. 21 Upon crystallisation, a floating charge becomes a fixed charge upon the assets of the company to which the charge relates. If those assets include land, the instrument creating the charge becomes registrable from the date of the certificate affecting crystallisation.22 3.4.6 Judgments and Lis Pendens Judgments affecting land may be registered in the same way as any other instrument affecting land. Also bys 14 of the ordinance, an action affecting land which is pending in court, known as a lis pendens, can also be registered in the same way as a judgment. A lis pendens is defined in s lA of the ordinance as 'any action or proceeding in a court or tribunal that relates to land or any interest in or charge on land'. The meaning of this definition was considered by the High Court in: ' ,. ••• 11!11 Chow Chiu-Tai v Chan Tak-Ming [1994] 1 HKLR 274 FACTS The plaintiff had brought an action against the defendant in nuisance with alternative claims based on Rylands v Fletcher, negligence and breach of deed of mutual covenant. The defendant gave an undertaking to cease the nuisance and the action proceeded in respect of the plaintiffs damages alone. The action was registered as a lis pendens of which the defendant sought the vacation when he tried to sell his premises. JUDGMENT The registration should be vacated as it did not relate to the defendant's land. 20 21 22 56 See s 2A of the Land Registration Ordinance Cap 128. See s 56A of the Conveyancing and Property Ordinance Cap 219. Section 2A(2) of the Land Registration Ordinance Cap 128 PRIORITY: LAND REGISTRATION ORDINANCE Not every action which relates to land can be registered; it must affect the land as such. So that if the action is not protected by registration, it may lose priority to some other interest in land which is duly registered. Clearly an action which makes a claim to a proprietary interest in the land, eg an easement, will be registrable. But where the action will not, whatever the outcome, affect a subsequent purchaser of the land then the action is not registrable. The vital question to ask is thus, will a subsequent purchaser take free of the action if it is not registered? 23 For instance, a lis pendens relating to an action for a nuisance emanating from land is not registrable 24 nor is a lis pendens relating to a share in a corporate registered owner of land. 25 The registration of a lis pendens will warn a subsequent purchaser that there is a claim affecting the land that may affect their title. Generally, a purchaser will thus take subject to the judgment that results. 26 A failure to register a lis pendens will, under s 16 of the ordinance, enable a purchaser or mortgagee to take free of the action and the resulting judgment unless the purchaser or mortgagee has actual notice of the proceedings. 27 The court has power to order the vacation of a lis pendens either if it has been improperly registered 28 or if some bona fide or other good cause is shown during the course of the proceedings or on their determination. 29 3.4.7 Wills The ordinance provides that wills are registrable, but as the will itself cannot pass title to the deceased's property, it is difficult to see why a will should be registered. Indeed, in practice wills are not registered. It is the grant of representation that passes the title of the deceased's property to his personal representatives, and any subsequent assent to the beneficiary entitled, that should be registered. 3.4.8 'Any parcel of ground . .. in Hong Kong may be affected' The instrument must be capable of affecting land. Instruments creating, transferring, or disposing of the interests in land clearly qualify, eg leases, easements, covenants, and mortgages. In Re Hongkong and Shanghai Banking C01poration 30 the assignment of the proceeds of sale of land was 23 24 25 26 27 28 29 3o See Thians Plastics Co Ltd v Tins Chemical Co Ltd (No 2) [1971] HKLR 249; and Yu Jing-Jenn v Wong Pe-wun (1986) HCt No P2 of 1986. Chow Chiu-tai v Chan Tak Ming [1994] 1 HKLR 274 Health First Technology Ltd v Chan Chi-cheung [19931 2 HKLR 473 But exceptions may arise. See for instance Kwok v Kwok and Smith (1910) 5 HKLR 247. Ho Sei-shing v Wan Ying-him [19591 HKLR 483; although this decision has been criticised, see Bramwell: Conveyancing in Hong Kong London, Butterworth (1981) at 220. Thians Plastics Co Ltd v Tins Chemical Co Ltd (No 2) [1971] HKLR 249 See ss 19-21 of the Land Registration Ordinance Cap 128. (1993) MP No 4049 of 1992 57 HONG KONG LAND LAW not registrable, the proceeds were affected but not the land itself.31There are, needless to say, a number of less clear-cut cases, such as a licence the exact nature of which lies on the border between personal rights and interests· in land. The courts have looked for guidance in deciding whether or not an interest may affect land by looking to the remedies available to the parties, If breach of the instrument would give rise only to a right to damages it does not qualify. Redress against the land itself must be available. 32 & anou.1er v Longo Construction [1986] HKC 362; [1987] 3 HKC34 FACTS The plaintiff had a right to use a septic tank on the second defendant's land by virtue of a deed of grant. It had been decided. in related litigation that the deed of grant only gave rise to aright to damages. The defendant applied to have its registration and that of subsequent documents related to associated litigation vacated. JUDGMENT The registration of the deed of grant and related documents should be vacated as their terms gave no right to any action against the land. The test of whether redress may be available against the land must be applied at the time the instrument is submitted for registration. It is thus difficult to see the justification in a deeds registration system of sanctioning, as the court did, the vacation· of an instrument which clearly did affect the land when it was first registered, but which has subsequently ceased to be enforceable against the land. 3.5 Effect of Registration 3.5.l Purchases Section 3(2) of the ordinance states: 'All such deeds, conveyances, and other instruments in writing . . . which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements or premises, be absolutely null and void to all intents and purposes.' 31 58 32 See also City of London Building Society v Flegg [1988] AC 54 where the interests of co-owners under a trust for sale were held to exist only in the proceeds sale and not with reference to the land and thus were not capable of protection at the Land Registry once the trust had been exercised by payment of capital monies to the. two trustees. • See also Ansalt Nybro v Hong Kong Resort Co Ltd [1980] HKLR 76. W PRIORITY: LAND REGISTRATION ORDINANCE •An unregistered instrument is void and of no effect against a bona fide purchaser or mortgagee for valuable consideration. Although the ordinance does not operate to pass or to certify title !J:may, as a result of s 3(2), ~ff.ect the nature of a purchaser's .ownership. For instance, if A transfers to C his lanct,wnichiss~b}ect to an unregisi:~red lease of over three years .in favour of B, C will take free of B's lease. Fig3.1 A Unregistered lease for more than . three years Sale ot Mortgage B C C takes free of B's-lease This•results even though A is, strictly speaking, unable to transfer any more than he holds, ie his reversion in the land subject to B's lease. The ordinance does not operate to transfer ownership of A's property to C: the assignment instrument between A and C does that, but it does stop B from enforcing his interest against C. Therefore B no longer holds an interest that is enforceable against the land. His only remedy is against A, which is a merely personal right. In this negative fashion C has acquired a greater title to the land than A was capable of transferring to him. He holds the land free of B's lease, rather than merely A's interest in the land which was subject to B's lease. The Privy Council have upheld this operation of the ordinance in Mark/ aith Investments Ltd v Chiap Hua Flashlights,33 where they rejected arguments that the vendor was only capable of assigning to the purchaser the Crown head lease, subject to the tenancy. agreement including the option. In the words of Lord Templeman: 'the term granted by the head lease vests in the purchaser by force of the assignment subject to the tenancy agreement so far as the tenancy agreement is subsisting and capable of being enforced against the purchaser.' 34 The reasoning of Lord Templeman has been applied by the High Court in the case of: Fast v 1nc,unc~:,vun:u Co [1990) 2 HKC 494 and (1991) Civ App Nos 180 of 1990 and 3 of 1991 FACTS The defendant bought several floors in an industrial building together with the exclusive right to use the 'surface of the main roof'. Their assignment 33 34 [1990] 2 WLR 1451 at 1458, [1990] 2 HKLR 84 at 91 Ibid. 59 HONG KONG LANDLAW was registered at the Land Office, but as the memorial accompanying the assignment did not specifically refer to the defendant's rights over the roof, nothing was recorded on the register for the main roof. Subsequently the plaintiff also bought the main roof from the vendor, but his assignment was recorded in the register for the main roof. The question then arose as to who was entitled to the main roof. JUDGMENT The plaintiff was entitled to the main roof. The defendant's assignment was of no effect against the plaintiff by the operation of s 3(2). It was 11ot registered against the main roof. The fact that the vendor did not have an unfettered right to deal with the main roof was irrelevant to the rights of the plaintiff, although the defendant was entitled to seek damages against the vendor. 3.5.2 Purchasers or Mortgagees OQly purchasers or mortgagees for valuable consideration may claim that an unregistered deed does not bind them under s 3(2). Purchasers, defined as including anyone who acquires property other than by operation of law, have been examined here in the context of the doctrine of notice. 35 The reference to mortgagees is puzzling. Strictly speaking it is superfluous, as a mortgagee already falls within the definition of a purchaser. The intention may be to include only purchasers who take an assignment of the whole interest of the vendor or who are mortgagees. Such a construction would exclude other purchasers in particular lessees. For instance, if A, who owns property that is subject to a lease for over three years in favour of B, then leases it again to C for more than three years rather than assigning his whole interest, does C qualify as a purchaser for the purposes of s 3(2)? If C does qualify as a purchaser, he takes free of B's lease. If he does not, then priority will depend upon the order of registration under s 30) 36which, although not entirely free from doubt, is likely to lead to priority being afforded to B.37 A Fig3.2 Unregistered lease of over three years Lease B C C will take free of B's lease if he is a purchaser 35 36 37 60 See Chapter 2.3.2. This is assuming either B or C registers. If neither registers, which is unlikely, priority will depend on the doctrine of notice. See 3.5.8. PRIORITY: LAND REGISTRATION ORDINANCE The parties to an unregistered instrument continue to be bound. For instance, if B's unregistered lease from A is defeated by A's assignment of the property to C, B's lease is only unenforceable against C. It continues to bind A, who may be sued upon his implied covenant for quiet possession if B is dispossessed by C. It is thus in the interests of a vendor or mortgagor to ensure that an instrument is registered, for otherwise he may find himself personally sued by a purchaser or mortgagee whose interest in the land is defeated for lack of registration. 38 • 3.5.3 Valuable Consideration A purchaser must give valuable consideration, although the court will not enquire into its adequacy. A volunteer, who has acquired the property for no consideration, will thus be unable to claim priority under s 3(2). It is clear that a judgment creditor who obtains a charging order to secure his judgment debt is not a purchaser or mortgagee for the purposes of s 3(2). 39 3.5.4 Bona Fide The purchaser or mortgagee must be bona fide. But bona fide has meaning in the context of the ordinance from its meaning in the the doctrine of notice. 40 The requirement for bona fide does not the purchaser must be without notice, for s 4 of the ordinance a different context of mean that provides: No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing ... shall affect the priority of any such instrument as aforesaid as is duly registered. A purchaser may thus take free of an unregistered instrument even though he has notice of that instrument. Notice thus has no application _in determining the priority of instruments, but it is still relevant in determining the priority of unwritten equities. - Kwok Siu-lau v Kan Yang-chee 0919) 8 HKLR 52 FACTS The defendant took a lease of premises for five years but he failed to register the lease. The plaintiff agreed to buy the property and registered his contract for sale. The plaintiff had no notice of the defendant's lease at the time of 38 39 40 See Fast Fonuard Ltd v Magicsound Co Ltd [1990] 2 HKC 494 and (1991) Civ App Nos 180 of 1990 and 3 of 1991. Consolidated Sales Ltd v Turner C Lynn [1970] HKLR 222; and Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd [1985] HKLR 103. See Chapter 2.3.1. 61 ~ I HONG KONG LAND LAW i his purchase, although he had notice at the time his contract was registered. The purchase was completed, and when the lessee refused to agree to a rent increase the plaintiff sought possession. JUDGMENT The plaintiff took free of the defendant's lease even though he had notice of it. The reference to 'bona fide' does not reimpose the doctrine of notice which s 4 so clearly excludes. Interestingly, s 4 does not appear in the statutes establishing deeds registries in England or in a number of other common law jurisdictions. Indeed, in these jurisdictions it has been held that notice continues to be relevant. 41 If bona fide does not mean 'without notice' what does it mean? In Kwok Siu-::./au42 the court indicated that it required an absence of 'actual fraud'. While in Mak Him v ChanHung-pak, 43 a case which also concerned the priority of an unregistered lease, the court quoted with approval the following definition of actual fraud found in Battison v Hobson: 44 '"Actual fraud" I understand to mean fraud in the ordinary popular acceptation of the term, ie fraud carrying with it grave moral blame, and not what has sometimes been called legal fraud, or constructive fraud, or fraud in the eye of a court of law or a court of equity'. 45 The comments of Lord Wilberforce in Midland Land Bank Trust Co Ltd v Green 46 are also useful in so far as they address the meaning of bona fide beyond a mere absence of notice. His Lordship stated that 'it would be a mistake to suppose that the requirement of good faith extended only to the matter of notice .... Equity still retained its interest in and power over the purchaser's conscience 47 which requires an enquiry into the purchaser's motives and state of mind'. 48 The difficulty is to identify what motives would constitute a lack of bona fide, which can be illustrated by the case itself: ··," ~,il-iL, '-~ ··•---c•".!!""'!l!I! - Midland Bank Trust Co Ltd v Green [1981] AC 513 FACTS Mr Green granted his son an option to purchase a farm. The son failed to register the option as a land charge and as a result, under the Land Charges 41 42 43 44 45 46 47 48 62 See Le Neve v Le Neve (1748) 2 W&T 175. (1913) 8 HKLR 52 at 65 [1965) HKLR 87 [1896) 2 Ch 403 Ibid per Stirling J at 412, quoted with approval by Hogan Hung-pak [1965) HKLR 87 at 93. [1981) AC 513 at 528 At 528 F At 530 A CJin Mak Him v Chan PRIORITY: LAND REGISTRATIONORDINANCE Act 1925, a subsequent purchaser would not be bound even if they had notice of the option. In order to defeat the option, Mr Green sold the farm to his wife for much less than it was worth. When his son learnt of this he tried to enforce his. option, a claim that was continued by his executor after his death. JUDGMENT The option was defeated because it was not registered, the question of notice and bona fides was irrelevant to priority under the Land Charges Act 1925. Nevertheless, the Greens did not necessarily lack bona fides because of their clear intention to defeat their son's option. Their intention may have sprung from a wish to benefit all their children, rather than from malice towards their son. A mere intent to take advantage of the. operation of the ordinance to defeat an unregistered instrument may thus be insufficient to establish fraud. Something more reprehensible is required. But the dividing line between taking advantage of one's strict legal rights and using a statute as an engine for fraud may be very fine. For instance, the Privy Council in the Markfaith case 49did suggest that, where a purchaser has in effect agreed with the holder of the unregistered instrument and not just with the vendor, to take subject to his interest, he may not be allowed to subsequently deny that interest. 50 The Hong Kong Court of Appeal has considered the issue in: -Yi~--Tong fr59cS°~A Civ App No 247 Wellmake /~vestments Ltd v· cb'""an of 1995 FACTS The defendant was a tenant under a tenancy agreement for three years which contained an option to renew for a further two years. Neither the tenancy agreement nor the option were registered. The original landlord sold his reversion to the plaintiffs. The property was described in the sale and purchase agreement as being subject to the defendant's tenancy including the option to renew. Wh~n the pliantiffs sought possession the defendant claimed they should be bound by his option to renew because they had, under the agreement, bought the premises subject to his tenancy including the option to renew. JUDGMENT The plaintiffs were entitled to possession, they were not bound by the defendant's unregistered option. It was not enough that the property was 49 50 (1990] 2 WLR 1451 and (1990] 2 HKLR 84 At [1990] 2 WLR 1451 at 1458 and (1990] 2 HKLR 84 at 91. See for instance Security Trust Co v Royal Bank of Canada [1976] AC 503. 63 HONG KONG LAND LAW expressed to be sold subject to the defendant's tenancy and option, something more was required in order to bind a purchaser's conscience; for instance, an express agreement from the purchaser to give effect to the option. No doubt such a stipulation might affect the price that the purchaser would be willing to pay for the property. As it was, the purchaser was merely taking advantage of their statutory rights. 3.5.5 Interrelationship of Sections 3 and 4 Sections 3(2) and 4 appear deceptively simple when examined separately, but their interrelationship is fraught with difficulty. Section 3(2) does not appear to require a subsequent purchaser or mortgagee to be claiming under a registered deed in order to take free of a prior unregistered instrument. Thus, if C purchases A's land, which is subject to a lease of over three years in favour ofB, the subsection suggests that C may take free of B's lease even if he himself fails to register. 51 However, s 4 appears to exclude the doctrine of notice only if the subsequent purchaser registers the instrument under which he claims. In the words of De Sausmarez PJ in Kwok Siu-tau, 'As between two unregistered deeds equitable doctrines will no doubt apply ... '.52 Thus the implication is that where the subsequent purchaser is also unregistered, notice continues to be relevant and C may be bound by B's lease if he has notice of it.53 In other words, bona fide may have different meanings according to whether the subsequent purchaser is claiming under a registered or unregistered deed. This line of enquiry is somewhat academic, for there is unlikely to be a competition between two unregistered deeds: one or both of them will no doubt be registered. As De Sausmarez PJ noted in Kwok Siu-tau, 'It is said that the legislature cannot have intended to postpone a prior to a subsequent unregistered deed. That is an argument which would be of weight could not the priority of unregistered deeds inter se immediately be altered or confirmed by the registration of one of them. The penalty is severe but the escape is easy'. 54 If C, as a purchaser from A of land which is subject to an unregistered lease to B, is the first person to register their assignment, then s 3(2) will operate to ensure his priority over B's lease. It seems that the fact that C may have notice of B's lease at the time of the registration or even of his assignment is irrelevant. For instance, in Kwok Siu-tau the purchaser had notice at the time of registration; in the Citibank case 55 the bank had constructive notice at the time of their mortgage. If B, as a lessee under a I I 51 52 53 54 64 55 Rees Davies CJappears to support this view in Kwok Siu-tau v Kan Yang-che (1903) 8 HKLR 52. (1913) 8 HKLR 52 at 65. He went on to say 'But I do not desire to go further' and who can blame him! The implication may even be that the priority of unregistered deeds is to continue to be governed by the doctrine of notice. (1913) 8 HKLR 52 at 65 (1986) 2 HKLR 885 PRIORITY: LAND REGISTRATION ORDINANCE lease of land which is sold by A to C, is the first person to register, can he claim priority as the first person to register? 56 De Sausmarez suggests that he can. The purpose of the ordinance 'is to make registration the test of priority, and by imposing harsh terms on persons failing to register to compel them to do so'. 57 Perhaps the corollary should be that persons cannot take advantage of the ordinance if they do not register. The alternative view is that, following an amendment to the ordinance in 1978 58 s 3(2) is the governing section so that an unregistered instrument that is void against a subsequent instrument cannot be resurrected by registration. The subsequent instrument prevails regardless of the registration of. the first instrument. 59 It is important in any test of priority to remember the operation of s 5, which stipulates that the date of registration is deemed to be the date of the instrument where the instrument is registered within one month of its date of execution. The following examples illustrate the interrelationship of these sections. In each example the lease from A to Bis for a term of more than three years. Example 1 A leases property to B A sells property to C B takes in priority to C - Example 2 A leases property to B A sells property to C B takes in priority to Cfirst. ' 57 58 59 1 May 20 May 14May 30 May his interest is created and registered first. 1 May 4 May 14May 10 May 1 May 4May 3June 10 May Although created after B's interest, C is deemed Example 4 A leases property to B A sells property to C 56 Date Registration his interest is created first and is deemed registered Example 3 A leases property to B A sells property to C C takes in priority. registered first. Date Instrument 1 May 4May Not yet registered 10 May See s 3(1) of the Land Registration Ordinance Cap 128. (1913) 8 HKLR 52 at 66 This amendment provides that s 3(1) is 'Subject to this ordinance .... See Bramwell: Conveyancing in Hong Kong London Butterworth, (1981) at 209. 65 1 HONG KONG LAND LAW I i C takes in priority his interest. Although created after B's interest, C is registered first. Example 5 A leases property to B A sells property to C lMay 4 May 6June Not yet registered Does B take in priority to C? See s 30). Does C take in priority to B? See s 3(2). Does C have tobe without notice to take in priority under s 3(2), or can he merely register to overcome the handicap notice might bring? Example 6 A leases property to B A sells property to C Does Does Does Does 3.5.6 1 May 4 May Not yet registered Not yet registered the first person to register take in priority? See s 3(1). C take in priority to B? See s 3(2). C have to be without notice to take in priority under s 3(2)? doctrine of notice apply rather than the ordinance? Volunteers A volunteer is a person who acquires an interest in land without giving valuable consideration. A donee of a gift of land made either inter vivas or by will is classified as a volunteer. But perhaps the most common volunteer participating in the priority game in Hong Kong is the chargee under a charging order. Typically, where an individual or company runs into financial difficulties there will be a race by creditors to obtain security for the repayment of their debts. One way they can is to obtain a charging order against the debtor's property. Although a chargee under a charging order has given consideration for the debt owed to him, he has given no further consideration for the charging order and accordingly fails to qualify as a purchaser for valuable consideration. He is a volunteer ..The priority of a volunteer is governed by s 3(1) of the ordinance, which provides: Subject to this Ordinance, all such deeds, conveyances and other instruments in writing ... made, executed, or obtained and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration. 3.5.7 Prior Volunteers Priority under s 3(1) is governed by the order of registration. Thus a volunteer, upon registering the instrument under which he holds his interest, will take free of the interest of a volunteer under a prior unregistered instrument. For instance, if B obtains a charging order against 66 PRIORITY: LAND REGISTRATION ORDINANCE A's property which he fails to register before C registers a gift of the property from A, then C will take free of B's charging order because he registers first. Another example is found in: -------- Wong Kam-wing v Cyril Murkin (HK) Ltd [1989] 2 HKC 603 FACTS The plaintiff was entitled to a share in a flat that was mortgaged to a bank. On 5 May 1988 the first defendant obtained a charging order against the plaintiff's flat which he registered on 3 June 1988. Meanwhile, on 19 May 1988 the second defendant also obtained a charging order against the plaintiffs flat, which he registered on 26 May 1988. The first defendant subsequently assigned the benefit of his charging order to the third defendant. A dispute arose between the third and second defendant regarding their entitlement to the balance of the sale proceeds of the flat after the bank's mortgage was paid off. JUDGMENT The second defendant's charging order took priority over the charging order of the third defendant since it was registered first. The first in time rule laid down in s 3(1) will thus operate to protect the priority of a volunteer against a prior unregistered volunteer, but will it also protect the priority of a volunteer against a prior unregistered purchaser? 3.5.8 Prior Purchasers A literal construction of s 30) would suggest that a volunteer under an instrument which is duly registered can defeat any prior unregistered instrument regardless of whether the person claiming under that instrument is a purchaser or a volunteer. But a literal construction uncovers a conflict between s 3(1) and s 3(2), which can lead to some strange results as is illustrated by: 60 Consolidated Sales Ltd v Turner C Lynn [1970] HKLR 222 FACTS The defendant's partner was the owner of a flat. On 10 January 1970 she sold the flat for valuable consideration, but the assignment was not registered until 3 March 1970. In the meantime the plaintiff obtained a charging order against the flat, which was registered on 24 February 1970. 60 See also Kai Sun Investments Ltd v Dah Sing Bank Ltd [1983] 2 HKC 554. 67 HONG KONG LAND LAW JUDGMENT The plaintiff's charging order took in priority to the assignment since the clear terms of s 3(1) dictated that the charging order as the first to register took in priority to the subsequently registered assignment. Strangely enough, if the purchaser had not registered his assignment at all it would not have been defeated by the charging order. The chargee could not claim the unregistered assignment was null and void against him under s 3(2), for he was not a purchaser. He could only rely on the order of registration between his registered charging order and the registered assignment under s 3(1). This literal approach has been sharply criticised, in particular by Hunter Jin the Pisa case. 61 He quite rightly pointed out that the ordinance establishes a register of deeds and not of title. The purpose of the ordinance is 'to facilitate in the tracing of title not to give title itself .62 Thus he maintained it is still necessary to consider the validity of instruments that are registered. The charging order in the Consolidated Sales case was only capable of charging the interest that the judgment debtor held at the time of the order; As the land had been already sold, the judgment debtor had no interest in the land and had nothing to charge. Certainly registration is not a test of ownership and the validity of the instruments must be established. But validity, as Hunter J uses the word, imports the effect of an instrument and not just its legal validity. As we have already seen in the context of s 3(2), the effect of an instrument and its priority are certainly not separate issues, but are closely interrelated. If a purchaser can claim priority over an unregistered lease, his interest is different from that of his vendor who is bound by the lease. Similarly, if a mortgagee can claim priority over a prior unregistered mortgage, then his interest enjoys the distinct advantage of being a first mortgage rather than a second mortgage. This is an advantage which his mortgagor could not alone have granted to him. Adapting slightly the test laid down by the Privy Council in the Markfaith case 63 a volunteer may claim the interest conveyed by his donor subject only to such interests_.asare enforceable against him. Hunter J looked only to the question of the interest conveyed, and suggested that if a sale or mortgage of the property had not been registered, a volunteer under a charging order would still be bound by the unregistered instrument because the charge only attaches to the property beneficially owned by the debtor. Hunter J's comments in the Pisa case are dicta because he decided the case on other grounds. 64 But his views have been cited with approval and applied in Ng Kam-ha v Vincent Sina Traders (HK) Ltd.65Hunter Jin the Pisa case, however, ignored the question of what interests were enforceable 68 61 62 63 Ibid. at 112 64 See Chapter 3.4.2. 65 [1987] 2 HKC 517 [1985] HKLR 103 [1990] 2 WLR 1451 and [1990] HKLR 84 PRIORITY: LAND REGISTRATION ORDINANCE against the chargee or volunteer. The answer to this question is unclear. We have already seen in the CyrilMurkin case 66 that a volunteer under a prior unregistered instrument will be defeated by a subsequent volunteer claiming under a registered instrument. But will a purchaser under a prior unregistered instrument also be defeated by a volunteer under a registered instrument? The subsection does not itself draw any distinction between volunteers and purchasers, but one is left wit!\}a basic inconsistency in subs 3(2) unless a distinction is drawn. There is after all little point in sub-s 3(2) providing that an unregistered instrument is void only against a bona fide purchaser or mortgagee if a volunteer can also claim the instrument is void against him under s 3(1). The inconsistency may be resolved in favour of the s 3(2) limitation by noting that s 3(1) is expressed to be 'Subject to this ordinance'. It is accordingly submitted that a volunteer should not be able to take in priority to the rights of a purchaser under a prior unregistered instrument. A number of examples illustrate the operation of the ordinance in relation to volunteers. Date Date of instrument of registration Example 1 A gives property to B 1 May C obtains charging order against A's property 10 May 24May 20May B takes in priority to C because he is deemed registered first Example 2 A gives property to B 1 May C obtains charging order against A's property 10 May . 4June 20May C takes in priority to to B because he has registered first Example 3 B obtains charging order against A's property 1 May C obtains charging order against A's property 4 May 6 May SMay B takes in priority to C because he is· deemed registered first Example 4 B obtains charging order against A's property 1 May C obtains charging order against A's property 4 May 10 May 8 May C takes in priority to B because he is deemed registered first 66 (1989) HCt MP No 1722 of 1988 69 HONG KONG LAND LAW Example 5 A mortgages property to B 1 May C obtains charging order against A's property 4 May 20May 8May B takes in priority to C because he is deemed registered first Example 6 A mortgages property to B 1 May C obtains charging order against A's property 4 May 4June 8 May Does B take in priority to C under s 3(2)? or Does C take in priority to B under s 30)? The crucial first question in determining the priority of interests in land in Hong Kong is no longer whether the interest is legal or equitable. It is whether the grant of the interest is in writing. If the interest is written, then the Land Registration Ordinance 67 applies, and if it is unwritten then the doctrine of notice will continue to apply. The steps that have been examined in order to determine priority under the ordinance and under the doctrine of notice are summarised in the flow chart of priority on pages 72 to 73. 3.5.9 Statutory Charges A number of ordinances in Hong Kong provid~e for the creation of a charge over land to secure sums due to government. This charge arises automatically on the defined event and will be capable of protection by registration of a memorial at the Land Office. For instance, a charge may arise to secure the 68 estate duty due on the death of a donor of land if he dies within three years of the gift and the Building Authority are entitled to a charge over land to secure sums that they have incurred in carrying out remedial work pursuant to their powers under the Buildings Ordinance. 69 Both these charges are capable of registration at the Land Office in order to bind a subsequent purchaser. But what happens if no charge is registered? - Ample Treasure Ltd v Eight Gain Investment Ltd [1992] 1' HKC 457 FACTS A purchaser of property raised an objection to their vendor's title because it was based upon a gift of the property, which would have given rise to a charge to estate duty if the donor had died within three years of the gift. Section 18 Estate Duty Ordinance provided, first, that a bona fide purchaser 67 68 69 70 Cap 128 Sections 3Cl)c, 5 and 18(1) Estate Duty Ordinance Cap 128 Cap 123 PRIORITY: LAND REGISTRATION ORDINANCE for valuable consideration from the donee without notice of the charge could take free of the charge, and second, that the charge was capable of protection by registration of a notice of the charge at the Land Office. There was no evidence as to whether or not the donor had in fact died within this time period, nor had notice of a charge been registered at the Land Office. JUDGMENT A charge that was not protected by registration at the Land Office would by virtue of s 3(2) be null and void against a subsequent purchaser. The judge also suggested obiter that even if the purchaser had notice of the donor's death within three years of the gift so as to give rise to a charge they could take free of the charge if it was not protected by registration at the Land Office. By contrast, the case of Lee Siu Man v Chu Chi Wing 70 decided that where the sale took place within three years of the gift there was a latent defect in title to which a purchaser could object. If the donor did die within three years a charge would automatically affect the property acquired and be binding on the purchaser. Interestingly it seems that, following the Ample Treasure case, if the donor did in fact die within the three-year period so as to give rise to a charge, a subsequent purchaser could escape liability if no notice of the charge had been registered at the Land Office. The only point of difficulty would be whether the purchaser could claim to be sufficiently bona fide to claim the protection of s 3(2); comments of the judge in the Ample Treasure case suggest that a purchaser would be. A slightly different regime for the creation of a statutory charge subsists under the Buildings Ordinance. 71 The Building Authority under the ordinance has power to order remedial work to be carried out to property. These orders may be registered at the Land Office. If the orders are not complied with by the owner of the land the Building Authority may enter the land and carry out the work themselves; the cost is then recoverable against the owner. Under s 33 of the ordinance, the Building Authority may register a certificate of the costs expended at the Land Office and upon such registration a charge is created. The charge only arises on registration, not upon an earlier event, eg the compl½tion of the works. The charge is expressed to affect the present owner and any subsequent owner unless they are bona fide. Bona fide will be difficult to establish if an order has been registered requiring the work to be carried out and the owner or purchaser are aware that the Building Authority has carried out the work, for the creation of the charge then becomes an inevitability unless payment is made. 72 70 71 72 [1992] 1 HKC 266 Cap 123 See Wah Ying Properties Ltd v Sound Cash Ltd [1994] 1 HKC 786. 71 HONG KONG LAND LAW PRIORITY FLOWCHART BETWEEN A & B Where A's mterest ts granted before B's mterest? DOCTRINE OF NOTICE Priority to A ~ Is A's interest legal?' Is A's interest ~ granted/evidenced by writing? No Priority to A ~ Is B a purchaser for value? Yes Priority to ____'@§_ A Does B have notice? ~ Is B's interest legal? INo No Priority to B2 Priority to A3 ~ Does B have notice? jNo ~ Is A's interest a mere equity? No Priority to B2 Priority to A N ates 1~ e.g. an oral lease not exceeding three years. See para 4.4 2 3 72 Has A been negligent in protection of his interest? B must also be bona fide but if he has no notice he is unlikely to lack bona fide. See para 2.3.1 A m_ereequity may be so unlikely to re_ceive equitable protection as a proprietary right that equity will not enforce it even against a purchaser with notice. See para 2.3.5 Yes Priority to B Yes PRIORITY:LAND REGISTRATIONORDINANCE REGISTRATION Is A's interest a lease not exceeding 3 years at a market rent? Notes Yes Priority to A 1. It is the deemed date of registration under s 5 that is important - see para 3.3.2 2. Even if B registers he cannot as a volunteer avoid A's interest under s 3(2) and it is doubtful thats 3( 1) will assist - see para 3.5.8 3. There are at least three possibilities: (i) Priority to B by operation of s 3(2) provided he has no notice of A's interest (ii) Priority to B even if he has notice if he registers first by operation of s 3(2) and 4 (iii) Priority to A if he registers first by operation of s 3(1 ). No l Is A's interest registered before ~ interest B is granted?' Priority to A No Is A a purchaser for value? Yes Is B a purchaser ~ for value? )No No Priority to A' Is B's interest registered? ___'('IT__Priority to B !No 73 Is B's interest registered? I lI No ~ Priority to B i ' Is B a purchaser ~ for value? Priority to first to register i l • Yes ?3 73 Land Titles Bill 4.1 Introduction The most significant development affecting land law in Hong Kong is the proposed introduction of a system of title registration. Although the proposed legislation has not yet reached the statute book 1 it is of such importance that an appreciation of what is proposed is desirable for any student of land law. Many common law jurisdictions have moved from deeds registration to title registration; indeed, title registration is now more the rule, and registration of deeds or other interests the exception. The first moves towards making the conversion in Hong Kong were initiated by the Registrar General in the early 1990s with the establishment of a working party to consider first, the advantages of moving to a system of title registration, and second, the proposed legislation. to implement the necessary changes. The working party's deliberations have resulted in a bill, known as the Land Titles Bill, which was published at the end of 1994. Not surprisingly for such a significant piece of legislation, the bill has provoked considerable comment, but it still remains unclear if and when it is likely to be enacted. The bill has also been subject to criticism of a technical nature and it is probable that it will undergo some amendment before being enacted. However, the basic foundations and framework of the proposed legislation are settled and the stage is set should the legislature decide that the time has come for Hong Kong to embrace title registration. 4.2 History of Title Registration Title registration first attracted the attention oflegislators in the 19th century. In Australia, Sir Robert Torrens introduced a system into South Australia which looked to the principles which regulated the transfer of merchant ships. The Torrens system, as it has become known, has spread throughout Australia, New Zealand and many other former colonies. In England the move towards title registration has been somewhat more cautious. A system of voluntary registration was first established by the Land Transfer Acts of 1862 and 1875. An element of compulsion was introduced by the Land Transfer Actof 1897 but it was not until the Land Registration Act 1925that title registration was finally embraced as the way forward. Even so, its introduction has been slow and it was not until 1990 that it became compulsory to register all dealings with land. There still remain a considerable number of titles that are unregistered and it will be some time yet before England can boast a unified title registration system. Latest reports suggest that the bill, in amended form, is being re-introduced to the Legislative Council so that enactment may not be far away. 74 LAND TITLES BILL The English system of title registration developed independently of the Torrens system but the differences that have emerged are differences of detail rather than substance, and indeed over the years the systems have drawn closer together rather than diverged. We must now look at the salient features of title registration. 4.3 Principles of Title Registration The precise details of title registration differ from jurisdiction to jurisdiction. They all have their various unique features necessitated by local conditions and the factors influencing their development. However, their basic principles differ little. The basic principle at the root of title registration is that the register is all. The register should determine both the ownership of the land and the interests that subsist in the land and it is the register that should govern the transfer of ownership and the priority of the interests in the land. This basic principle gives rise to the following characteristics. 4.3. l The Mirror Principle The register is sometimes likened to a mirror which reflects the ownership of a piece ofland and the interests that subsist in the land; Rather than having to examine the title deeds and make enquiries of persons in occupation of the land, a purchaser should only have to examine the register in order to learn the nature of the estates and interests which they wish to acquire and by which they will be bound. The idea is that what is not on the register can be ignored by a purchaser, although not necessarily by the owner. The title deeds are thus replaced by the register. The owner.of the land can obtain a copy of the register as evidence of their ownership. In England this certificate is automatically issued by the registry but in Hong Kong the proposal is only to issue the certificate should the owner so request. The mirror is, however, often flawed by a number of exceptions which will bind a purchaser although they are not recorded on the register. In Hong Kong these interests are to be known as 'overriding interests'. Overriding interests erode the certainty that is the aim of every registration of title system, but they prevent the register becoming cluttered with interests that commonly affect all land or which can easily be discovered from other sources, for instance an inspection of the land. In other jurisdictions the courts have used the opportunity that overriding interests present to mitigate against the unfairness that can result when people fail to appreciate that they should record their arrangements relating to land on the land register. We will see when we examine the rules governing the creation of interests in land that the law has sought to strike a balance between certainty and fairness. Commercial concerns demand certainty in land transactions, which is promoted by the strict rules and written records represented in all registration systems. But commercial efficiency is not the sole concern of the law in relation to land transactions. 75 HONG KONG LAND LAW Land is a vital resource - it provides residential security and is essential for any economically productive undertaking. Particularly in the domestic context, arrangements relating to the ownership and occupation of land may be made which do not comply with the legal rules but which it would be contrary to social justice to ignore. Walking this tightrope between certainty and fairness should be the object of any modern system of title registration. The power of the Land Registrar and the courts to require the rectification of the register provides another exception to the perfect reflection that the register is intended to provide. However, the occasions when rectification can be required are limited and clearly defined by the propose'd legislation. 4.3.2 Tbe Finality Principle Not only does the register take over the role of the title deeds, it also supersedes the role of the assignment. The owner must enter into a document dealing with his interest in the land and that document must be registered in order to complete the effective creation or disposal of the interest. If the register is to act as the final arbiter of the legal state of the land it must be the determining factor in the creation and disposal of estates and interests which affect the land. Prior to registration, the assignment, charge or other document effecting a disposition may continue to be effective between the parties but it must be registered to complete the transfer oflegal title, mortgage or other dealing. Title registration thus makes radical changes to the way in which dealings with land must be conducted. The register is continuously updated after every dealing. Under the Torrens system in Australia, the register will show a historical record of past dealings with the land as well as the current state of the title, but Hong Kong intends to follow the English model to provide only details of the current state of the title. If an owner chooses to obtain a title certificate from the Land Registry it will thus only show the title at the time the certificate was obtained; it will not have continuing validity, A new search of the register will have to be made to check the state of the title at any given time. As with the current deeds registration system, the register will be public so that anyone can search the register in order to see who is the owner of the land and what registrable interests affect the land. However, only an owner will be able to obtain a state of title certificate. When dealing with land, the registered owner will be required to prove title to produce a copy of the current land registry entries, including copies of any instrument referred to in a current entry, and evidence of any overriding interests. Under the existing registration of deeds system a vendor must produce to their purchaser the title deeds, and afford the purchaser an opportunity to inspect the land. 76 ,-·~ I' LAND TITLES BILL I It I' I !' I 4.3.3 Tbe Curtain Principle Certain equitable interests, in particular trust interests, are kept off the register. The register is thus said in this respect to act as a curtain. The principle i~ that the purchaser should only have to deal with the registered owner and be concerned with registered matters. The purchaser should not be concerned with equities that lie behind the registered title unless of course they are protected by an entry on the register or qualify as overriding interests. The principle of conversion, whereby a beneficiary's interest under a trust for sale is vested in the proceeds of sale rather than in the land itself, dovetails with this curtain principle. The beneficiary is protected only to the extent that they can look to the proceeds of sale held by the trustees. They cannot look to the land, both because their interests are in the proceeds of sale and because the purchaser of the registered title will not be aware of or bound by their interests which will not be apparent from the register. The register also acts as a curtain in that it can draw a veil over defects in the registered owner's title. Once the purchaser is registered as owner his title cannot be impeached unless there are grounds upon which a person claiming an adverse interest can lodge a caution or there are grounds to insist upon rectification of the register. Over the past few years there has been a significant number of cases brought before the courts in Hong Kong where a purchaser has queried a vendor's title because of an apparently technical defect. 2 Sometimes this challenge has been made not necessarily because the purchaser is concerned that this defect will disturb their ownership, but because they wish to escape from an imprudent bargain. Upon registration of a vendor's title these technical defects will be 'cured', in the sense that unless they are apparent from the register a purchaser will not know or be concerned by them. In an attempt to ensure that dealings with registered titles should not be plagued by similar technical objections, solicitors, the Land Registrar or other public officer will be required to verify each application for registration. This verification will confirm that the instrument has been prepared by a solicitor and, to the best of their knowledge, information and belief has been duly executed and is effective at law. ! ! 4.3.4 Tbe Guarantee Principle The accuracy and integrity of most registration of title systems are guaranteed by the State. 3 Thus if a registered owner is deprived of their title through a successful bid to rectify the register they may be entitled to an indemnity payable from public funds. This principle is felt to be important to maintain public confidence in the register, although it is not Common technical title defects have included different signatures, incomplete nominations and difficulties over complying with statutory presumptions affecting powers of attorney. There are some registration of title systems that are not based upon a government guarantee, eg Fiji and Malaysia. I I 77 HONG KONG LAND LAW popular with governments who do not wish to commit themselves to an open-ended financial liability. However, experience in other jurisdictions has shown that the level of indemnity claims is very low, both because the circumstances in which compensation is payable are strictly defined and because once established, registration of title systems appear to work very smoothly. We will now move on to look at how the Land Titles Billproposes to introduce these basic principles into a registration of titles regime for Hong Kong. 4.4 The Land Registry The bill first proposes the establishment of a Land Registry comprising a Central Land Registry to administer the land records of the urban areas of Hong Kong Island and Kowloon and District Land Registries to administer the land records of the New Territories and Outlying Islands. 4 The Land Registry will be overseen by the Land Registrar, a public officer, who will be responsible for the smooth operation of the system and to this end will be given a number of discretionary powers and responsibilities under the provisions of the new bill. 4.4.1 The Land Registers At the Land Registry a Land Register will be kept for each lot of land that is held under a Crown lease,5 (to be called 'a Government lease'). Crown land which has not yet been granted by Government will not be recorded. A Land Register will only be opened for a lot of land once it has been auctioned or otherwise granted by Government. Likewise, a Government lease that has expired will cease to be subject to the title registration system proposed by the bill. It is proposed that the Land Register will record the following matters: 6 (a) (b) (c) (d) (e) (f) (g) the title number of the lot; the lot number of the lot; the undivided shares, if any; the location or address, if any; the date of commencement of the Government lease; the name of the owner of the land; the capacity in which the land is owned, for instance whether it is owned by the registered owner as beneficial owner or in some limited capacity such as a trustee or as a personal representative; Eight District Land Registries are specified; they will be Tsuen Wan, Tuen Mun, Yuen Long, North, Tai Po, Shatin, Sai Kung and Islands which correspond to the existing District Land Offices. Short term tenancies for terms not exceeding seven years are excluded from the definition of a Government lease for the purposes of the bill. See clause 10. 78 LAND TITLES BILL (h) (i) (j) (k) all instruments which support a current entry in the register, for instance a deed of grant, a deed of mutual covenant or legal charge; the date of registration of such instruments; any other entries required by the bill to be contained in the Land Register; and such other entries as the Land Registrar is of the opinion should be contained in the register. Upon the grant of a Government lease made after the bill comes into force there will thus be a need to open a new register for that lot. However, in respect of Crown lease lots already granted at the time of enactment the existing land records will be converted to form the basis of the new system. There are proposals to deal with the possibility of combining existing registers, should adjoining lots be amalgamated under the ownership of a single registered owner, and likewise for the division of existing registers, should the ownership of a lot be divided between more than one registered owner either through the sectioning of the lot or its division into undivided shares. 7 4.4.2 Conversion of the Existing System We have already seen that for all lots of land that have been granted by Government there is held at the existing Land Office e 9tablished under the Land Registration Ordinance a record of: the grant from the Crown under which the land is held; the registered owner; whether the land has been divided by sectioning or division into undivided shares; and any encumbrances registered against the land. The details are recorded in a Crown Lease or Temporary Register and if the land has been divided into either sections or undivided shares a Sections or Undivided Shares Register. The intention is that upon a day appointed under the ordinance when enacted, these existing land records will be automatically converted into the Land Registers that are to be kept under the Land Titles legislation. 8 In this way it is hoped that Hong Kong will avoid the inordinately long time that it has taken in some other jurisdictions, notably England and Scotland, to convert to a system of title registration. This transition will be accomplished by the recognition as registered owners of those who are presently registered holders of the Crown lease on the existing Crown lease or Temporary Registers or in a Section or Undivided Shares Register maintained under the present Land Registration Ordinance. Instruments creating encumbrances that have been or will be registered under the Land Registration Ordinance prior to enactment of the bill, for instance legal charges, covenants, leases of over three years, will have their priority protected in accordance with the Land Registration Ordinance.9 Instruments giving the right to claim an interest in the land, for 9 See clause 18. See clause 11. See clause 11(2). 79 HONG KONG LAND LAW instance agreements for sale and purchase or nominations or equitable charges, that have been or wlJl be registered prior to the enactment of the bill, will be treated as if a consent caution (in the case of a sale and purchase or charge agreement, nomination or an equitable charge) or a non-consent caution (in the case of a lis pendens or bankruptcy petition) has been lodged. 10 Nevertheless, all may not be plain sailing. The existing land records do not contain details of all the lots held under a Crown lease; there are some old lots for which no registers have been established because there have been no dealings with them. Efforts are being made to ensure that these missing records are completed before the bill comes into force. The existing land records also may not contain all the information that the bill dictates should be included in the Land Register; in particular the details of the registered owner under the existing deeds registration system may not include details of the capacity in which they hold the property. Furthermore, the existing deeds registration system works very differently from the proposed title registration system. A deeds registration system, as we have seen, only seeks to deal with the priority of written instruments. It does not guarantee legal title, as the proposed bill seeks to do. A purchaser is only protected against interests arising under instruments that have not been registered. Under the present system, a purchaser must thus inspect the registered documents which constitute evidence of the seller's title, and will take subject to any defects that are evident from those title documents. But under the new bill, an owner who is registered as such on the Land Register maintained under the Land Registration Ordinance will automatically be recognised as the absolute owner subject only to any registered matters, overriding interests and the risk of rectification of the register. The bill would thus have the effect of curing any defects in the owner's title by a wave of the statutory wand. A further significant difference is that unwritten equities fall outside deeds registration and continue to be governed by the doctrine of notice. However, a title registration system seeks to record all interests that may affect a purchaser whether they be created by instrument or not. Notice is to play no part, unless notice is imparted by entry on the register. 11 Thus there will be a need to bring these interests onto the title or otherwise slot them into the new title registration system that is proposed. The bill will require the holder of an unwritten equity to register a consent or nonconsent caution, as appropriate, in order to bring the interest onto the register and to qualify for protection against a subsequent purchaser. 12 There have been suggestions that there should be a run-in time after the bill is enacted, but before it comes into full force, to enable unwritten equities to seek protection by registration. 10 11 12 80 See clause 11(3). See Clause 22. In England unwritten interests may qualify as overriding interests provided the holder of the interest is in occupation - see s70(1)g of the I,and Registration Act 1925. LAND TITLES BILL However, it must be questionable whether it is realistic to expect unwritten equities to be registered, unless a massive publicity campaign emphasises the need for registration. Perhaps the most common instances of unwritten equities arise in just those personal and family situations where the parties are unlikely to be aware of the need for written and procedural formalities to record their respective interests in the land. 13 In courts across the common law world there has been a growing recognition that in the family context the parties should not be unduly penalised for their ignorance of the legal formalities of transfer and registration. 14 Unwritten equities, in particular implied trusts and estoppel, have played a fundamental role in these developments. Where the legal title to the family home is vested in one spouse or partner, the courts have been prepared to impose an implied trust upon that party where there has been a common intention, either express between the parties or inferred from contributions made towards the acquisition costs of the home, which has been relied upon by the other spouse or partner to their detriment. These developments have been coupled with a growing appreciation that the residential security provided by the family home deserves some protection over the administrative convenience of streamline conveyancing procedures, particularly where the beneficial claimant is in occupation or the purchaser should be aware of their likely rights in the land. 15 The strict requirement that unwritten equities be brought onto the register flies in the face of these developments. It places conveyancing convenience and commercial demands over the protection of residential security. To do so may be unrealistic in the context of the growth of owner occupation in Hong Kong and the large number of family units in which more than one family member contributes directly to the family finances. Courts in other jurisdictions have shown themselves inventive in tipt-oeing through the apparently bald requirements of registration of title legislation to achieve the delicate balance between the interests of conveyancing certainty and residential security. It will be interesting to see how the Hong Kong courts will react if faced with the same dilemma. It will also be interesting to see how groups, who place the welfare of the family on a par with the commercial interests of financial institutions, react to the bill's proposal to place in jeopardy the proprietary nature of occupational interests in the family home. 13 14 15 Although unwritten equities occur across the whole spectrum of legal relations. As Financial Investment Services for Asia v Bak Wah Trading Co Ltd has demonstrated, the Hong Kong style of completion becomes a risky business without resort to the protection that unwritten equities can afford. See for instance Gissing v Gissing [1971] AC 886. See for instance Williams & Glyns Bank v Boland [1981] AC 487and Barclays Bank Pie v O'Brien [1994] AC 180. 81 HONG KONG LAND IA W 4.5 The Effect of Registration 4.5.1 Registered as Owner What will be the effect of being registered as the owner of land should the Land Titles Bill be enacted? The answer is found in clause 19 of the bill. This clause provides that upon a person being registered as owner there shall be vested in them the 'absolute ownership of the Government lease of the land ... and all rights attaching to the land which may be exercised by virtue of such ownership of the Government lease 16 ... free from all other interests and claims.' Where the ownership of the Crown lease has been sub-divided into undivided shares the absolute ownership with attendant rights to be conferred by the bill is defined by reference to the undivided s.hare or shares. The concept of absolute ownership is new and is defined by the bill. First, sub-clause 19(2) provides that absolute ownership is subject to: (a) (b) (c) any covenants, exceptions, reservations, stipulations, provisos or declarations contained in the Government lease of the land; any registered matter affecting the land; any overriding interest affecting the land. In the case of a person who is registered as owner under the Land Registration Ordinance at the time of enactment of the bill but who did not acquire the land in good faith or for valuable consideration, their absolute ownership will also be subject to any interest which is in existence immediately before enactment and capable ofregistration under the Land Registration Ordinance. 17 Second, sub-clause 19(3) provides that the owner of the land is not by virtue of his absolute ownership relieved from a duty to which he is subject as trustee. Finally, absolute ownership will be subject to the power to rectify the register conferred upon the Land Registrar by clause 73 and upon the court by clause 74 of the bill. The fundamental principles that we have examined earlier are evident in clause 19. Absolute ownership will be conferred only upon actual registration. Prior to registration, equity may give effect to the parties' intention whether demonstrated by their entry into a written assignment, charge or other disposition or by some other conduct recognised in equity as sufficient to support the creation or disposition of a proprietary interest. But such 'off the register' dealings will not be recognised at law and will not bind a purchaser who is registered as owner. They will thus lose their proprietary nature and take effect only as personal interests enforceable through remedial action between the parties. 16 17 82 instance an option to renew or an easement Only purchasers for valuable consideration and who are in good faith in the sense of lacking actual fraud rather than lack of notice will take free of an unregistered instrument under the Land Registration Ordinance. It appears that this further restriction is seeking to replicate this limitation; although the protection of unwritten equities that prevails under the Land Registration Ordinance is not similarly·preserved. For LAND TITLES BILL r I;,; '' The absolute ownership will be limited only by those matters defined by the bill. The terms of the Government lease and registered matters should be reflected by the mirror the register provides. Only overriding interests and the risk of rectification of the register will have to be separately investigated by a purchaser. The primacy of the register will however place beyond investigation any defects in the owner's title that either will not be evident from the register or will not support an overriding interest or a claim to rectify the register. Volunteers 4.5.2 : t It is proposed that the limitations on absolute ownership will be extended where the person to be registered as owner has acquired, or will be acquiring, their title by way of gift. Clause 20 provides that the owner of registered land or a registered charge who is a volunteer will also hold the land or charge subject to: (a) (b) (c) (d) any unregistered interests subject to which the immediately preceding transferor held the land or charge; the provisions of the Bankruptcy Ordinance (Cap 6); Part V of the Companies Ordinance (Cap 32); section 33(9) of the Buildings Ordinance (Cap 123). A personal representative and a trustee in bankruptcy who have received their titles by operation of law rather than consideration will be treated in a similar way to donees. They will be bound by such unregistered interests as bound the deceased or bankrupt, as appropriate. 18 Also, a squatter who acquires title by adverse possession under the Limitation Ordinance1 9 will be treated in the same way as a volunteer. 20 4.5.2.1 Unregistered Interests A donee who receives their gift from a donor who is registered as an owner will continue to be affected by the interests that bind the donor whether those interests are protected by registration or not. 21 Thus, where a donor's ownership is subject to an implied trust, for instance because their spouse has contributed to the acquisition of the property, a donee will be bound by that trust even though it is not protected by the registration of a consent or non-consent caution. A purchaser from that donee, however, will not be concerned with the implied trust unless it is protected on the register. Where the land is held by a donee at the time of first registration (for instance when the existing registers under the Land Registration Ordinance are automatically converted to Land Registers under the Land Titles legislation) the provisions of clause 20 will dictate that the donee will hold 18 See clauses 58(1) and 59(2). 19 Cap 347 20 See clause 20(3). See cla use 20. 21 83 HONG KONG LAND LAW the land subject to those interests that bound their donor. The priority of their donor's interest in the land will have been governed by the Land Registration Ordinance, which we examined in the last chapter. 22 A donee will, of course, continue to be bound by those interests they themselves have created, whether or not they are registered. 4.5.2.2 Bankruptcy Ordinance Certain transactions may be set aside against a donee under the provisions of the Bankruptcy Ordinance-, 23 these include, under s 49(1), fraudulent preferences made to a creditor where the debtor is made bankrupt within six months of the preference and, under s 47(1), a gift or settlement made by the bankrupt within two years of the date of the gift or settlement or within ten years of the gift or settlement, unless it is possible to prove that the bankrupt was able to pay their debts at the time of the gift or settlement without recourse to the gift or settlement. 4.5.2.3 ,Part V Companies Ordinance- 4 As with a bankrupt, a fraudulent preference made to a creditor by a company within six months of its winding up may be set aside. 4.5.2.4 Section 33(9) Buildings Ordinance- 5 The Building Authority are empowered under s 33 of the Buildings Ordinance to recover the cost of remedial works that they have carried out pursuant to their powers under the ordinance. A certificate as to these costs may be issued and registered. If it is not registered it will be void against a subsequent bona fide purchaser for valuable consideration but a donee will be bound by the certificate and in particular liable to pay the costs it certifies whether or not it is registered. We will now look in a little more detail at the matters by which an owner's absolute title will be limited. 4.6 Overriding Interests It is proposed that a person registered as an owner will take subject to overriding interests even though they do not appear on the register. As already noted, overriding interests will constitute a crack in the mirror which it is intended the register will provide. The bill sets out in clause 21 the overriding interests that are to limit a registered owner's title. It must be noted that, although the bill adopts the name used by the Land Registration Act 1925, these interests are defined 22 23 24 25 84 See Chapter 3.5.6. Cap 6 Cap 32 Cap 123 LAND TITLES BILL in a much more limited fashion than in England. 26 They will include the following rights. 4.6.1 Chinese Customary Rights 27 Land to which Part II of the New TerritoriesOrdinance 28 applies may be subject to Chinese customary rights which will continue to be recognised without registration under the new title registration regime. We look in Chapter 9 at the Tong and Tsowhich provide examples of such customary rights. 4.6.2 Public Rights-9 Public rights of way and other public rights will also qualify as overriding interests. 4.6.3 Easements 30 Certain easements qualify as overriding interests, including rights of way, rights to water and easements in existence at the time of enactment of the bill and which have been protected by registration under the Land Registration Ordinance. There are also proposals to include as overriding interests easements that would pass on the division of land under the rule in Wheeldon v Burrows.31 4.6.4 Covenants32 Covenants in existence at the time of enactment of the bill will also qualify as overriding interests provided that the covenants run with the land. In order to run with the land, the covenant must satisfy the requirements of s 41 of the Conveyancing and Property Ordinance3 3 which we will examine in Chapter 17. But as interests in land which are generally created by instrument, covenants must also be registered under the Land Registration Ordinance in order to bind a purchaser. They should thus already be protected by registration which will be preserved upon conversion of the register. Perhaps the most common form of land covenant in Hong Kong exists in Deeds of Mutual Covenant that govern the rights of co-owners of multistorey developments and provide a mechanism for the management of such developments. We will be looking at the workings of deeds of mutual covenant in Chapter 16, but it should be noted that not all the terms of a deed of mutual covenant will necessarily qualify as land covenants. 26 27 28 29 30 31 32 33 In particular in England the Land Registration Act 1925 preserves the protection afforded to the interests of those in occupation of the land - see s 70(1)g. See clause 21(1)(a) Cap 97 See clause 21(l)(b). See clause 21(1)(c). See Chapter 13.3.6. See clause 21(1)(c). Cap 219 85 HONG KONG LAND LAW 4.6.5 Government Rights 34 The rights reserved to the Crown or indeed any another person under a Crown lease will qualify as overriding interests. Such rights would include the exception and reservation of the Government's right to minerals found in all Crown leases and the Government's right to re-enter for breach of the Crown lease covenants. Various statutory rights that are vested in government are also classified as overriding interests, for instance the Government's right of resumption under the Crown Lands Resumption Ordinance3 5 or to enter and inspect and require the repair, alteration, removal, demolition etc, of a building under the Buildings Ordinance. 36 4.6.6 Statutory Charges37 Certain statutory charges will qualify as overriding interests. Perhaps the most significant of these is the first charge imposed to secure the payment of estate duty under s 18(1) of the Estate Duty Ordinance. 38 4.6.7 Leases Not Exceeding Three years 39 Leases for a period not exceeding three years taking effect in possession for the best rent without taking a premium are exempt from registration under the Land Registration Ordinance and will not require registration under the Land Titles Bill when it is enacted. They will qualify as overriding interests. However, other rights, eg an option granted by the lease, will require protection as a separate interest by the lodging of a caution. 40 4.6.8 Rights Acquired by Adverse Possession41 The bill identifies a title acquired by the operation of the Limitation Ordinanaf' 2 as an overriding interest. Thus a title that has been acquired by the extinguishment of the previous owner's title through a successful claim to adverse possession for the requisite limitation period will be protected although it has not been registered. There is no particular provision in the bill dealing with the right of a squatter to apply for registration as an owner upon proof of the extinguishment of the previous owner's title. However, the Land Registrar would be able to consider such an application either where the squatter's rights are recognised by a court order under clause 4(c) or within his discretionary power conferred under clause 4(d) of the bill. 34 35 36 37 38 39 40 41 42 86 See clause 21(1)(d). Cap 124 Cap 123 See clause 21(1)(e). Cap 111 See clause 21(1)(f). See Markfaith Investment Ltd v Chiap Hua Flash Lights Ltd [1990] HKLR 84. See clause 21(1)(g). Cap 347 LAND TITLES BILL What is not so clear from the bill is the status of a squatter who is in adverse possession but cannot yet claim to have extinguished the registered owner's title because they cannot prove adverse possession for the full period required by the Limitation Ordinance. 43 It may be argued that a squatter has no interest in the land prior to extinguishment of the owner's title and thus there is nothing to record or protect either by entry on the register or as an overriding interest. Furthermore, there is nothing in the bill to prevent a squatter exercising his right to accrue periods of adverse possession against successive registered owners. 44 4.6.9 Statutory Rights to Seroices'5 The service companies have by statute the right to enter land for the erection, construction and laying of electricity supply lines, telephone and telegraph lines and poles, wires, pipelines, canals, dams and aqueducts etc. These statutory rights will qualify as overriding interests. The bill includes a power for the court to order the registration. of an overriding interest and for the registrar to give effect to that order. 46 Upon such registration the overriding interest would presumably cease to be overriding and would be protected under the provisions of the bill depending upon whether it was recorded as a registered interest or caution. 4. 7 Registrable Matters The essence of the mirror principle is that, save for overriding interests and the powers under the bill to rectify the register, all interests in the land and any dealings with those interests should be reflected on the register. This record of land interests may be achieved in a number of ways. The interest may be regarded as a registered interest which is capable of supporting a substantive entry on the register or the interest may be protected by the entry of a caution, inhibition or restriction. 4. 7 .1 Registrable Interests It has already been noted that the Land Register will be concerned only with land held under a Government lease. The Government lessee will be registered as the owner and dealings with the Government lease that may support a substantive entry on the register include: • the assignment of the Government lease when the assignee will be recorded as the new owner; 47 43 44 45 46 47 The and See See See See relevant periods are 20 years where the right of action accrued before 1 July 1991 12 years where the right of action accrued after 1 July 1991. Chapter 7.3.2. clause 21(1)(h). clause 21( 4) &(5). clause 37. 87 HONG KONG LAND LAW • the creation, transfer, charge and discharge or partial discharge of a mortgage by way of charge, although not a floating charge prior to crystallisation; 48 • the creation, transfer, surrender or other termination, eg forfeiture, of leasea of over three years; 49 • the creation, modification, release or extinguishment of an easement; 50 • the creation, release, modification or extinguishment of a covenant, including deeds of mutual covenant;51 and • charging orders and lis pendens but the effect of their registration is limited to five years. Thereafter their registration must be renewed. 52 4.7.2 Cautions Cautions are of two types: consent cautions which may only be entered with the consent of the registered owner, and non-consent cautions which may be entered without the consent of the registered owner, although the registered owner must be informed of the entry of the non-consent caution so that they can decide whether to apply for its removal. Consent cautions are intended to protect any consensual dealing with the land which is not capable of substantive registration nor qualifies as an overridinginterest. 53 Perhaps the most obvious example arises under a sale and purchase agreement entered into by the registered owner and a purchaser. As the dealing is agreed to by the registered owner it is to be expected that they will also agree to the entry of a consent caution. Of course, if they do not do so the purchaser may always register a non-consent caution. Non-consent cautions are intended to protect those dealings with the land which are not consensual or are based upon an implied intention. 54 In these circumstances it is not expected that the registered owner will consent to the entry of the caution, either because the dealing is not voluntary or because they wish to deny the implied intention. The registration of a non-consent caution will be necessary where a bankruptcy or winding-up petition is presented against the registered owner. 55 An application for the registration of a non-consent caution may also be successful where an interest is claimed under a trust, whether express or implied, or on the grounds of estoppel. A caution, whether a consent or a non-consent caution, is not intended to freeze the register but to protect the priority of the interest that is the subject matter of the caution. 56 It is proposed that the priority of dealings 4s 49 50 51 52 53 54 55 56 88 See See See See See See See See See clauses 32-37. clause 42 and 45. clauses 43, 46 and 47. clauses 44, 46 and 47. clause 31. clause 63(1). clause 63(2). clause 63(2)(b). clause 64. LAND TITLES BILL will be governed by the time of their entry on the register. 57 Thus, the entry of a caution will prima facie protect the interest to which it relates over a registration of a subsequent dealing. There are, however, three caveats to this general rule. First, it is proposed that the priority of an interest protected by a consent caution may always be varied with the consent of the cautioner. 58 Second, it is proposed that where a consent caution is intended to protect a subsequent dealing the priority of that subsequent dealing will relate back to the entry of the caution. 59 For instance, where a sale and purchase agreement is protected by a consent caution the priority of the assignment completed in pursuance of that agreement will relate back to the entry of the consent caution. Upon the registration of the subsequent dealing the consent caution will then be removed by the Land Registrar, since the interest it was protecting will have in effect merged with the subsequent dealing. 60 Third, it is proposed that the priority of an interest protected by a nonconsent caution which is subsequently established as justifying the registration of a substantive interest will date back to the registration of the nonconsent caution. For instance, if a claim to an interest supported by estoppel is subsequently upheld by the court or by the agreement of the parties so as to lead to the registration of an interest such as a charge, lease or easement, then the priority of that interest will be governed by the date of registration of the non-consent caution. 61 It will be possible to remove a caution either by application of the cautioner or the registered owner or by order of the court. 62 The registered owner, in the case of a consent caution, will have to obtain the consent of the cautioner, and in the case of a non-consent caution, will have to satisfy the Land Registrar first that the cautioner received a copy of the application to remove the caution at least seven days prior to the application for removal and second, that the caution was wrongfully registered 63 or the ground on which the caution was registered no longer exists. 4.7.3 lnhibition1' 4 It is proposed that the court may inhibit the registration of any dealing either generally or for a particular period or until a particular event. The inhibition order would itself be registered and when registered would prevent the registration of any dealing inconsistent with the order. 57 58 59 60 61 62 63 64 See clause 30. See clause 64(1)(b)(ii). It is not clear why the bill does not also propose that the priority of a non-consent caution may be varied by the consent of the cautioner. See clause 64(1)(b)(i). See clause 65( 4). See clause 30(3)(b). See clause 65. It is proposed that a person who wrongfully registers a caution may be liable in damages. See clauses 67-69. 89 HONG KONG LAND LAW 4.7.4 C RestrictionS' 5 It is proposed that the Land Registrar may, for the purpose of preventing fraud or improper dealings or other sufficient cause, make an order prohibiting all dealings or such dealings which do not comply with certain specified conditions. Such an order would be made either upon an application of a person interested in the land or upon the Land Registrar's own initiative. An example of when a restriction might be appropriate is where the land is held on trust for sale and it is important that the capital monies on any dealing be paid to the trustees or where the land is to be sold under the terms of the trust only with the consent of a particular person(s). It is proposed that a restriction will, like an inhibition, be registered for a limited time, until the occurrence of a certain event or generally, and will preventany dealing with the land which is inconsistent with the restriction. The intention is that a restriction can be removed or varied by the Land Registrar either on his own initiative or upon the order of the court. The owner or other interested person may also apply for the removal or variation of a restriction, which the Land Registrar may grant or refuse upon giving the persons affected by the restriction an opportunity to be heard. 4.7.5 Trusts The curtain principle dictates that trusts are kept off the register. Clause 62 provides that whilst a registered owner who holds the land on trust may be described as such on the register, details of the terms of the trust itself are not to be entered on the register. 66 We need, however, to look at how the bill would affect the position of trustee and beneficiary. Although the terms of the trust are not evident from the register, the trustee remains subject to the terms of the trust. 67 It is, after all, the essence of the trust that the trustee is obligated to perform the terms of the trust and in the performance of those obligations is subject to strict fiduciary duties. The fact that the terms of the trust will be unregistered is irrelevant to the enforcement of the trustee's obligations to the beneficiaries. These are personal obligations which are unaffected by the provisions of the bill. The published version of the bill proposes that a person dealing with a registered owner who is described as a trustee will be deemed to have an unrestricted power of sale. This is a radical proposal. As we shall see, at present a trustee's power of sale must be expressly granted and may be subject to all manner of restrictions or conditions, including for instance the consent of a third person. It is understood that this radical proposal is unlikely to be enacted. A less controversial proposal would be to provide protection to a person dealing with a trustee by entitling them to presume, in the absence of evidence to the contrary, that the trustee is not acting in breach of trust. ·1 1 I I ' See clauses 70-72. 66 See clause 62(3). 67 See clause 62(2) and also clause 19(3). 65 90 0 LAND TITLES BILL A beneficiary's rights against a trustee are protected but can they protect their interests in the land against a third party? Of course a beneficiary under a trust for sale has no interest in the land. The doctrine of conversion ensures that their interests are in the proceeds of sale or notional proceeds of sale, although the registrar can seek to protect against the risk of wrongful appropriation of the purchase money by registering a restriction requiring the payment of any capital monies to at least two trustees. Where the beneficiary's interest under the trust does exist in the land itself then a beneficiary may be able to protect that interest against a person dealing with the land by the registration of a caution. 4.8 Dealings with and Transmissions of Registered Land The principle of finality dictates that the register governs any dealings in the land. Even transmissions of title which take place by operation of law must be recorded on the register. 4.8. l Dealings Clause 26(1) of the bill proposes that no interest in registered land is capable of being disposed of except in accordance with the bill and that any disposition is ineffectual to pass title or any interest in the land unless it is registered. The clause is intended to prohibit dealings off the register. However, under clause 26(2) of the bill an unregistered dealing is capable of operating as a contract which will bind the parties to the dealing. Thus, for instance, if the registered owner enters into a lease of over three years which the lessee fails to register, the lease will be ineffectual to create a legal lease over the land but may operate as a contract between the parties so as to enable the registered owner as landlord to sue for rent and upon the tenant's covenants and for the tenant to hold the registered owner liable under any of the landlord's covenants, including the covenant for quiet enjoyment. However, the unregistered lease will not bind a third party both because the principles of privity of contract exclude third party liability, and because the unregistered lease does not create any interest in the land. It is understood that there are suggestions that the bill should go further and prohibit the possibility of equitable interference either through the doctrine of Walsh v Lonsdale, or part performance, whereby the agreement between the parties could support the creation of an equitable interest through the award of specific performance of the agreement. 68 There is, however, still the possibility that equity might also intervene through the doctrine of estoppel or constructive trusts so as to hold a third party bound by an unregistered dealing. For instance, where a third party has either expressly, or through their conduct impliedly, agreed to take subject to the unregistered interest it would be open to the courts to estop them from denying that agreement and to impose upon their registered 6s See Chapter 6.2 and 6.3. 91 HONG KONG LAND LAW ownership a constructive trust g1vmg recogmt1on to the unregistered dealing. 69 A constructive trust might also be imposed where a purchaser takes property from a registered owner in the knowledge that the registered owner is acting in breach of a trust subject to which they hold the land, whether that trust be express or implied. 70 Registration will not only govern validity but also priority. Clause 30 of the bill proposes that the priority of interests in land should be governed by the date of the application for their registration and not the date of any instrument support:ing the application. There are no proposals for any priority notice system as is found under the English land registration legislation, whereby a purchaser can freeze the register for a limited time to ensure that the priority of their application to register is preserved, provided they register within the time limit granted by the priority notice. A purchaser or other person taking an interest in the land will thus have to register as soon as possible after the completion of the documentation required to support their application for registration. 71 Although where a dealing is preceded by an agreement which is the subject matter of a consent caution we have already seen that priority may be claimed from the registration of the consent caution. Likewise, a matter that is protected by a non-consent caution can maintain its priority from the date of the nonconsent caution though it is later recorded by a substantive entry in the register. 4.8.2 Transmissions by Operation of Law The title to land may pass by operation of law in several situations. On the death of a joint tenant the operation of survivorship will vest the title in the surviving joint tenant, while on the death of an owner or tenant in common the title to their property will pass to their personal representative. The title to a bankrupt's property will pass automatically on their bankruptcy to their trustee in bankruptcy. The bill provides for whom may apply to be registered as owner in each of these circumstances. 4.8.2.1 Death of a Joint Tenant Upon the death of a joint tenant their name will be removed from the register upon the presentation of satisfactory evidence of their death. 72 69 70 71 72 92 See for instance the principles enumerated in Binions v Evans [19721Ch 359 as approved in Ashburn Ansalt v Arnold [1989] 1 Ch 1 which have been applied in Lyus v Prowsa Development Ltd [1982] 1 WLR 1044 and in Hong Kong approved in Fast Forward Ltd v Magicsound Co Ltd [1990] HKC494 and Wellmake Investments Ltd v Chan Yiu Tong (1996) CA Civ App No 247 of 1995. See for example Peffer v Rigg [1977] 1 WLR 285. It is understood that in Australia where a similar system prevails many transactions are completed at the Land Registry to ensure that registration is achieved at the earliest possible opportunity. See clause 55. LAND TITLES BILL 4.8.2.2 Death of a Sole Owner or Tenant in Common 73 The personal representatives of a sole owner or tenant in common will be entitled to be registered as owners upon presentation of the grant of representation. Alternatively, the personal representatives of a sole owner or tenant in common may require the registrar to register a disposition entered into by them provided they prove their title by presentation of the grant. Thus, if personal representatives in the course of their administration should sell the deceased's land they will be able either to establish title by being registered as owners or by producing the grant to enable the purchaser to be entered on the register as the new o,wner. 4.8.2.3 Death of a Trustee 74 Trustees hold as joint tenants and thus upon proof of the death of a trustee their name will be removed from the register and the registered land will be vested in the remaining trustees. Where a sole surviving trustee dies, their personal representative will be entitled to be registered as owner unless express power to appoint a new trustee is granted by the trust instrument. 4.8.2.4 Insolvency 75 A trustee in bankruptcy will be entitled on presentation of the adjudication order to be registered as owner of the bankrupt's land. A liquidator's appointment upon presentation of the winding-up resolution or order should be entered on the register and thereafter the company will be unable to deal with the land unless the instrument effecting the dealing is acknowledged by the liquidator in accordance with the bill. The title of the land registered in the company's name does not pass to the liquidator; only the power to deal with it passes to the liquidator. 4.9 Rectification and Indemnity An exception to the principle of finality of the register is provided in the power of the registrar or the court to rectify the register in the case of error or fraud. It is important that the integrity of the register be maintained by providing a fair and efficient mechanism to deal with error and fraud. Where a person obtains registration as a result of fraud then it would clearly be wrong for them to be able to use the statute to retain the advantage of registration. Thus arises the need for rectification. But the equity of the situation is perhaps not so clear should the registered title pass to a bona fide purchaser. In such a situation one of two innocent parties will have to bear the loss caused by the error or fraud, although the loser may be able to claim an indemnity from government to ease the resulting injustice. 73 74 75 See clause 56. See clause 57. See clauses 59 & 60. 93 HONG KONG LAND LAW 4.9.l Rectification It is proposed that rectification may be effected by either the Land Registrar or by the court. The Land Registrar will be able to rectify the register to correct clerical errors in the register where the interests of the registered owner are not materially affected or where all interested parties consent. 76 The court will be able to order rectification of the register where it is satisfied that an entry has been made or not made as a result of the fraud, mistake or omission of any person. However, this right to seek rectification of the register will be lost where the land becomes registered in the name of an owner who has given valuable consideration and is in possession of the land unless that owner did themselves cause or contribute to the fraud, mistake or omission by their act, neglect or default or if that owner had knowledge of the fraud, mistake or omission which gave rise to the rectification application.-77 4.9.2 Indemnity The guarantee principle has been the cornerstone of public confidence in many, but not all, registration of title systems. The bill intends to adopt the guarantee principle but on,ly in limited and defined circumstances. The basic principle proposed is that a person who suffers a loss by reason of an entry made or omitted from the Land Registry will be entitled to an indemnity by the government where such entry is made or omitted by reason of fraud on the part of any person or any mistake or omission on the part of the registrar or his staff.78 The right to indemnity will, however, be lost where the person claiming the indemnity has caused or substantially contributed to the loss or has derived title, otherwise than for value and in good faith, from a person who caused or substantially contributed to the loss. Furthermore, in the case of loss arising through fraud the person claiming the indemnity must have taken all reasonable steps, including legal proceedings, to recover damages from the person whose fraud has resulted in the loss and have failed to recover all or part of such damages. 79 Where the government has paid any indemnity they too may take proceedings against the person who has caused the loss. 80 Applications for an indemnity must be made to the High Court within six years of the time when the claimant knew or might, but for his default, have known of the existence of the claim. 81 Any indemnity awarded will be limited to the value of the claimant's interest in the land immediately before discovery of the fraud, mistake or omission. There is also power for the government to fix a ceiling to the amount of any indemnity that the court can award in the case of fraud. 82 76 77 78 79 80 81 94 82 See See See See See See See clause clause clause clause clause clause clause 73. 74. 75(1). 75(2). 79. 78. 76. Formalities at Law 5.1 Introduction The social and economic value of land has led to a need to regulate its means of disposal. In medieval times, freehold land could only be transferred by the ceremony known as feoffment of livery seisin, which required the parties publically to enter the land and perform some act, such as passing a piece of earth or a twig over the land, that symbolised the physical transfer of possession. Such a public ceremony was convenient for the lord of the land for it helped him keep track of his tenants, but it was inconvenient for the tenant and his purchaser. They might have to travel long distancesto attend the ceremony. Furthermore, they would often prefer to keep their land dealings private. Thus documentary methods of transfer were developed. 1 The lease played an important role in the development of these documentary methods for conveying freehold land because leases fell outside the feudal structure and their transfer did not require such formality. While documentary methods of transfer of freehold land were convenient, initially they were not essential. Not even feoffment of livery seisin required documentary evidence, although a deed or charter would usually be employed to record the event. It was not until the Statute of Frauds was passed in 1677 that documentary evidence became necessary for dealings in both freehold and leasehold land. The Statute of Frauds 1677 has been incorporated into Hong Kong law, and its provisions relating to the grant and transfer of interests in land are now found in an updated form in the Conveyancing and Property Ordinance. 2 The documentary forms of conveyance that were developed in England employing the lease were somewhat cumbersome, and so in 1845 the Real Property Act rationalised the conveyance oflegal estates in land by adopting a simple deed. This requirement for a deed to convey a legal estate in land was incorporated into Hong Kong law in 1984 by the Conveyancing and Property Ordinance. 3 There have emerged three levels of formality for the acquisition and disposal of interests in land: ~ i) Deeds; ii) Documents in writing; and iii) Oral agreements. 5.2 Deeds - Section 4 Section 4(1) states: 'A legal estate in land may be created, extinguished or disposed gLonl-y bycleecE' -- ··- •~--·•· 1 2 3 • See Megarry & Wade (5th Ed) 1169. ·See ss 3, 5, 6, and 7. Sees 4. 95 HONG KONG LAND LAW All legal estates must be created, extinguished, or disposed of by deed. There are a number of exceptions to this rule set out in sub-s 4(2) but these need not concern us for the moment. 4 5.2.1 Legal Estate in Land Section 2 of the Conveyancing and Property Ordinance defines 'a legal estate' to include leases, easements, and mortgages which must thus all be dealt with by deed. The requirement for a deed extends not only to the grant of a legal estate but also its transfer and its extinguishment. Thus if A creates a mortgage for, say, five years in favour of B, B then transfers the mortgage to C, and finally C discharges the mortgage to A, all three transactions must be effected using a deed. Fig5.1 A Discharge of legal mortgage Creation of legal mortgage By deed B-----------------C Transfer of mortgage 5.2.2 Tbe Nature of a Deed A deed is a document that is signed, sealed, and delivered. At a time when few people could write or sign their names they would use an imprint in wax of their personal emblem, known as a seal, or, if they had no seal, their thumb print. The chop in China is similar to the seal. However, with the development of education, a person's signature became much more important as an indication that they intended to be bound by a document. The process of sealing, as a result, has become little more than a formality represented merely by a small red wafer or paper spot stuck onto the deed. This development is reflected in s 19 of the Conveyancing and Property, Ordinance, which provides: s 19 (1) A deed by an individual shall be signed by him. (2) A document shall be presumed to have been sealed by an individual if the document signed by him (a) describes itself as a deed; or (b) states that it has been sealed; or (c) bears any mark, impression or addition intended to be or to represent a seal or the position of a seal. The section introduces a requirement that did not exist at common law, namely thaJ; a deed be signed. The section does not abolish the need for An important exception is leases not exceeding three years. See 5.4. 96 FORMALITIES AT LAW sealing but reduces its significance by providing that a document is presumed to be sealed if it is described as a deed, if it states that it has been sealed, or if there is an impression of a seal or something representing an impression of a seal. A deed must also be delivered. Delivery is some act or statement by the person executing the deed that shows that he intends irrevocably to be bound by it. At one time delivery would be effected by the use of formal words such as 'I deliver this as my act and deed', but delivery is now usually effected by the act of the handing over the deed to the other party or his agent. If a deed is delivered subject to a condition, it as known as a deed executed in escrow. For instance, many lenders will not actually loan the borrower any money until the borrower has executed the mo~tgage that is to provide security for the loan. Yet the borrower certainly does not want to mortgage his property unless he receives the loan. Thus the borrower will execute the mortgage in escrow on condition that he receives the loan. 5.3 Documents 5.3.1 in Writing - Sections 3 and 5 Declaration ofTrnsts in Land Section 5(1)(b) states: 'A declaration of trust respecting land or any interest therein shall be manifested and proved in writing signed by the person who is able to declare such trust or by his will.' 5.3.1.1 Manifested and Proved in Writing An express declaration of trust of an interest in land must either be made in writing or there must be written evidence of an oral declaration which is signed by the settlor. 5 For instance, if A says to B that he is holding his flat on trust for C, there is no effective declaration of trust; but if A writes a letter to B to so inform him, or if A writes a letter to B and confirms or refers to his oral declaration of trust, either of these letters is sufficient written evidence to support the oral declaration. There are two ways in which a trust is usually declared. A may declare himself a trustee to hold his flat on trust for B. Fig5.2 A s 5(1)(b) writing B But if A does not wish to be a trustee he may find someone else in whom he has confidence to be a trustee in his stead. If he chooses this course the Trusts may be implied. See Chepter 6.4. 97 HONG KONG IAND IA W creation of the trust will be in two stages: first, A will have to transfer his flat to the chosen trustee; and second, the trust in favour of B must be declared. Fig5.3 A s4- by deed T s 5(l)(b) - writing B The first stage comprising the transfer to the trustee must comply with the necessary formalities, and so must be by deed if A's flat is held under a legal lease. It is the second stage, comprising the declaration of trust in favour of B, that need only be in writing. 5.3.1.2 Land or Any Interest Therein The requirement for writing to declare a trust of land applies not only to legal estates in land but also to equitable interests. Thus if B wished to declare a trust of his interest in the flat in favour of C, either by declaring himself a trustee or by transferring his equitable interest to a trustee, he must do so in writing. Fig 5.4 s 4- by deed A------Tl s 5(l)(b) - in writing s 5(l)(b) - in writing B C or s 4- by deed A-----~Tl s 5(l)(b) - in writing s 5(1)(a) B~~~-T2 in writing s 5(l)(b) C 98 in writing \ I FORMALITIES AT LAW 5.3.1.3 Signed by the Person Able to Declare such Trust The declaration must be signed by the person declaring the trust. Signature by an agent is insufficient. 5.3.2 Equitable Interests Section 5(1)(a) states: 'no equitable interest in land can be created or disposed of except by writing signed by the person creating or disposing of the same, or by his agent thereunto lawfully authorised in writing or by will, or by operation of law.' Equitable interests in land must be created or disposed of by writing signed by the grantor or person effecting the disposal, as the case may be, or by their agent who must also be authorised in writing. 5.3.2.1 Equitable Interest in Land Equitable interests are defined for the purposes of the section in a negative . fashion, as 'any estate, interests or charge in or over land which is not a legal estate'. 6 The most common types of equitable interests are a beneficiary's interest under a trust, the interest of a purchaser under a sale and purchase agreement - sometimes known as an estate contract - covenants relating to land, and a mortgagor's equity of redemption. The three types of legal estate, ie leases, easements, and legal mortgages may also exist in equitable form. 7 For instance, if A grants an equitable mortgage of his property to B, who then transfers that equitable mortgage to C, who reassigns the mortgage to A, each of these three transactions must be in writing. Fig5.5 A Creation of equitable mortgage In writing Reassignment of equitable mortgage B------------ C Transfer of equitable mortgage Likewise, if A holds property on trust for B for life with remainder to C, then B and C enjoy equitable interests that can only be transferred to D in writing. See s 2 of the Conveyancing and Property Ordinance. See Chapter 6.3. 99 HONG KONG LAND LAW Fig 5.6 A on trust for B for life C in remainder writing is required D for the disposition of an equitable interest to be in writing extends only to equitable interests in land. An equitable interest in moveable property in Hong Kong may be created or disposed of orally. This contrasts with the position in England where writing is required for the disposition of an equitable interest in both land and pure personalty. 8 D It should be noted that the requirement 5.3.2.2 In Writing The disposition of an equitable interest in land must be in writing. In contrast to a declaration of a trust in land, written evidence of the disposition is insufficient. 5.3.2.3 Signed by the Person Disposing of it or his Agent Authorised in Writing The disposition of an equitable interest in land must not only be in writing: it must also be signed. But, in contrast to the requirements for a written declaration of a trust in land, a disposition of an equitable interest may be signed by an agent provided the agent is authorised to do so in writing. 5.3.3 Contracts for the Sale of Land Section 3(1) states: ' ... no action shall be brought upon any contract for the sale or other disposition of land unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing andsigned by the party to be charged or by some other person lawfully authorised by him for that purpose.' To be enforceable, a contract for the sale of land must be in writing or it must be evidenced in writing by a memorandum that is signed by the party against whom enforcement is sought or by his agent. This requirement dates back to the Statute of Frauds 1677 and, as might be expected with such a long-standing provision on such an important topic as the sale of land, it has been the source of much litigation and has acquired a highly technical meaning. See s 53(1)(c) of the Law of Property Act 1925. 100 FORMAUTIES AT LAW 5.3.3.1 No Action Shall Be Brought An oral contract for the sale of land is not void, but it is unenforceable at law. 9 Thus if one party should fail to perform his obligations under the contract the innocent party cannot go to court to enforce the contract or to obtain damages for its breach. But redress that can be exercised without having to resort to court action may still be taken. So, if B orally agrees to buy A's flat for HK$1,000,000 and pays A a deposit of HK$100,000 but then fails to pay the balance of the purchase price, A cannot sue B for performance of the contract to recover the outstanding HK$900,000, for the contract is unenforceable, but A can keep the deposit of HK$100,000 as well as retaining the flat. 10 The Privy Council considered the issue of enforceability in: FACTS The Liu's sold their flat to the appellants with a lease back for one year subject to one month's notice by the landlord. The parties agreed that the Lui's would stay in the premises until the landlord could find another tenant. On 9 November 1990 the parties orally agreed to a surrender of the premises: on 30 November the landlord thought they had a prospective tenant but they withdrew and on 15 November the landlord requested the Liu's to stay on. However, the Liu's signed a lease for another apartment on 29 November and vacated the premises on 10 December. They claimed back their deposit less the outstanding rental but the landlord refused to accept their surrender of the tenancy and counterclaimed for rent until they re-entered on 11 February. The landlord claimed there had been no effective surrender which complied with s 3 of the Conveyancing and Property Ordinance. JUDGMENT The Liu's could not rely on the surrender by way of defence to the landlord's counterclaim for outstanding rental as it did not comply with s 3 of the Conveyancing and Property Ordinance. However, they might have a defence by way of part performance of the oral agreement or estoppel and the case would be remitted to the lower courts to consider these issues. Their lordships would not accept the unqualified proposition that an oral agreement might be used by way of defence regardless of s 3 of the ordinance. The essential question was whether the party was seeking to 9 10 In England s 2 of the Law of Property Miscellaneous Provisions Act 1989 requires all contracts for the sale of land to be in writing, to contain all material terms and to be signed by both parties. Oral contracts are thus void. Monnickendam v Leanse (1923) 29 TLR 445 101 HONG KONG LAND LAW enforce the oral agreement, whether that was byway of a claim or a defence. The Liu's in their defence were in effect seeking to enforce the terms of agreement both to recover their deposit and to meet the landlord's claim for rental beyond the date of their leaving the flat. This they could not do, for the agreement was oral. 5.3.3.2 For the Sale or Other Disposition of Land The section applies not only to the sale of a flat or piece of land where the owner is disposing of his wholeinterest under the Crown lease, but also to an agreement to create or transfer or extinguish any other interest in land, for instance a lease, mortgage, covenant, or easement. The section also applies to land in the New Territories; it was held Wu Koon Tai and another v Wu Yau Loi 11 that Chinese customary law did not override the provisions of the section. 5.3.4 Unless the agreement or some memorandum or note thereof, is in writing signed by the party to be charged or by some other person lawfully authorised by him for that purpose. The parties' agreement for the disposition of an interest in land must satisfy the usual requirements of any valid contract. There must be a concluded contract based upon a11 offer and acceptance that is supported by . consideration and an intent to create legal relations. The parties m\Ji.t also enjoy the capacity to enter into the contract. For this reason, an i~arit in Hong Kong will have difficulty in purchasing property, although there is no legislative prohibition upon his doing so. 12 The parties' agreement must be in writing or there must be adequate written evidence of the oral agreement. Many agreements for sale of land are themselves in writing but often, particularly. in the early stages of a transaction, the parties will not have put their agreement in formal written terms but will just have entered into some preliminary correspondence or other documentation. For instance, if A orally agrees to sell his flat to B, B may then write to A along the following lines: Dear A In connection with our agreement for the sale of your flat in Knowles Court for HK$1,000,000, I would be grateful if you could send me a receipt for the deposit I have paid. Best wishes, B The requirements of the section would be satisfied, for although the agreement itself is not in writing there is adequate written evidence of the terms of the agreement. But what sort of written evidence is sufficient? 11 ~ l 12 102 [1995] 2 HKC 732 In England an infant cannot hold a legal estate in land. Sees 1(6) of the Law of Property Act 1925. FORMALITIES AT LAW 5.3.4.1 Certainty of Terms The memorandum must provide evidence of the material terms of the parties' agreement. In particular, the parties must be named or otherwise identifiable, 13 the property must be sufficiently identified, 14 not only as to its physical location but also the legal nature of the interests to be disposed of - for instance, the term. and its commencement date if the disposal in question is a lease, 15 the price or a formula for ascertaining the price must be stated, 16 and any other particular terms must also be mentioned unless either the party in whose favour the term is made is prepared to waive it or the party required to perform the term is still prepared to do so. A Hong Kong case that illustrates several of these features rather well is: ■ •• --~ ·•····••■■ •11- Dr Franklin Li & Others v Crocus Properties Inc (1982) CA Civ App No 137 of 1981 FACTS The plaintiffs had agreed to buy two units on a floor in World Wide House, a development erected above the MTR station in Central. The agreement was evidenced in writing by a document called a Confirmation of Instructions, which contained the details of the parties, details of the property including its area, which was subject to final calculation by the architect, and the price calculated according to a price per square foot. The total price was subject to adjustment should the area differ following final calculation by the architect. The Confirmation of Instructions detailed a number of other terms, including a term that the plaintiffs would pay the costs of preparing a sub-deed of mutual covenant'to govem their rights and liabilities regarding the use of the common areas and facilities on the floor in question. The vendor subsequently tried to insist upon a further term relating to the use of the property which the plaintiffs refused to accept. The plaintiffs sued for specific performance of their agreement as evidenced by the Confirmation of Instructions. The vendor argued that there was no sufficient memorandum on the grounds that (1) the property could not be ascertained by the architect, (2) the price could not thus be ascertained, and (3) the terms of the sub-deed of mutual covenant were material and had not been settled with sufficient certainty. JUDGMENT The Confirmation of Instructions was a sufficient memorandum and thus enforceable. The property could be sufficiently identified from oral evidence and thus the price was ascertainable. The existence of a sub-deed 13 14 15 16 See Rossiter v Miller (1878) 3 App Cas 1124; Potter v Duffield [1874] LR 18 Eq 14. See Cowley v Watts (1853) 17 Jur 172. See Dolling v Evans (1867) 36 LF Ch 474. King's Motors (Oxford) Ltd v Lax [1970] 1 WLR 426; Brown v Gould [1972] Ch 53; Sudbrooke Trading Estate v Eggleton [1983] 1 AC 444; Score International Enterprises Ltd v Continental Cement & Gypsum Co Ltd (1995) CA Civ App No 2:;rnof 1994 103 HONG KONG LAND LAW of mutual covenant was not essential to the parties' agreement or to the completion of the transaction. 5.3.4.2 Signed by the Party to be Charged The memorandum must be signed by the party who is to be sued since a memorandum will not be enforced against someone unless it is evident that he acknowledges by his signature that there is an agreement. If we go back to B's letter:17it is signed by B, and it is thus an adequate memorandum if A should wish to sue B. But it is not a sufficient memorandum upon which B can rely should he wish to sue A. 'Signed' has been given a wide meaning. It not only includes a full signature but any personal acknowledgement of the agreement, for instance initials 18 or a personalised rubber stamp. 19 It is also sufficient if the party to be sued has been merely named in the document provided that he is named in such a way that it is clear he recognises the document as an expression of the contract. 20 Signature by a duly authorised agent is sufficient even if that authority is given orally or is implied by the nature of the agency. For instance, an auctioneer has implied authority at the time of the auction to sign a sale memorandum on behalf of both the vendor and purchaser, 21 but a sales agent or solicitor does not have implied authority to sign a contract. 22 They must be expressly authorised either to sign a contract 23 or the document that is relied on as the memorandum. 24 5.3.4.3 Acknowledgement of the Agreement The memorandum need not be in any particular form but it should contain some express or implied recognition of the oral contract. 25 A very common device, therefore, to avoid correspondence constituting an enforceable memorandum is to mark it 'subject to contract' as an indication that the parties have not yet come to a final agreement. Solicitors and sales agents often will label their correspondence 'subject to contract' until the parties have come to full agreement on all the detailed terms of the transaction and these have been embodied in a formal written agreement signed by the parties. As this practice does afford the parties an opportunity to withdraw from their initial oral agreement, it has been the 17 18 19 20 21 22 23 24 25 104 See 5.3.4. See Hill v Hill (1947] Ch 231. See Goodman v J Eban Ltd [1954] 1 QB 550. See Leeman v Stocks (1951] Ch 941. See Chaney v Maclow [1929] 1 Ch 461. See Tbirkell v Cambi (1919] 2 KB 590. See North v Loomes (1919] 1 Ch 378. It is irrelevant whether or not the document was intended to be a memorandum. See Daniels v Trefusis (1914] 1 Ch 788 and So Amy & Others v Au Leslie (1995] 2 HKC 113. Law vjones [1974] Ch 112 threw doubt on the need for the memorandum to acknowledge the agreement, but these views were criticised and not followed in Tiverton Estates Ltd v Wearwell (1975] 1 Ch 146. '1 FORMALITIESAT LAW ' source of much litigation. For instance, a purchaser may decide to withdraw if the bargain is no longer so lucrative, or a vendor may wish to sell the property to someone else who has offered a higher price. There have been a number of attacks on the use of 'subject to contract'. But it has survived subject to a number of exceptions. For instance, the effect of the stipulation may be ignored if it is meaningless in the particular situation, 26 or if there are very strong and exceptional circumstances showing that the parties do not intend to be bound by the stipulation. 27 Furthermore, there have been attempts to use the principles of waiver 28 and estoppel2 9 to circumvent a 'subject to contract' stipulation, but again such an attempt is only likely to be successful in exceptional circumstances. 5.3.4.4 Form of Memorandum The memorandum need not be in an particular form. There have been some unusual examples, for instance a defence in legal proceedings,3° a letter, 31 and an entry in a diary. 32 A mer_norandum will usually be made after the oral agreement, but there is one exception. A written offer that has been subsequently accepted either orally or in writing can constitute an acceptable memorandum, although it clearly cannot acknowledge a contract that did not at the time exist. 33 The memorandum may be contained in more than one document provided that the document signed by the party to be sued contains some express or implied reference to the other documentation to be relied upon or to the transaction itself.34 The leading case on joinder of documents is: Timmins v Moreland Street Property Co Ltd [1957] Ch 110 FACTS The defendant agreed to buy certain property belonging to the plaintiff. He paid a deposit of £3,900 to the plaintiff's agents. The plaintiffs agents issued a signed receipt for the deposit which gave details of the property. The defendant subsequently refused to proceed with his purchase and the plaintiff sued for specific performance of their agreement evidenced by the defendant's cheque read with the receipt. 26 27 28 29 30 31 32 33 34 Tbe Hong Kong Housing Authority v Hung Pui (1987) HCt Action No A 403 of 1986 Alpenstow Ltd v Regalian PLC [1985] 1 WLR 721 and Wong Lai Ha v Chung Sau Wah [1994] HKC 646 See Law vjones [1974] Ch 112 and Cohen v Nessdale Ltd [1981] 3 All Er 118. See Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan County Council [1980] 41 P & CR 179; and A-G v Humphreys Estate (Queen's Garden) Ltd [1987] AC 114. See Yangtsekiang Garment Manufacturing Co Ltd v JM Ronald Denault & Scott Ltd [1977] HKLR 320. See Smith Bird v Blower [1939] 2 All ER 406. See Re Hoyle [1893] 1 Ch 84. See Tiverton Estates Ltd v Wearwell [1975] Ch 146. Chan Yat v Fung Keong Rubber Manufactory Ltd [1967] HKLR 365. 105 HONG KONG LAND LAW JUDGMENT The cheque and receipt could not be read together. The cheque, which was signed by the defendant, did not necessarily point to the receipt or indeed to the particular transaction in question. It gave no indication on its face of the purpose for which the payment was being made. It is interesting to note that if it had been the purchaser suing the vendor in Tiverton Estates Ltd v Wearwell he may well have succeeded, for the receipt that was signed by him would no doubt have contained an express reference, or at least a stronger basis for an implied reference, upon which it would have been possible to join the cheque. It was not possible simply to lay the documents side by side to see if a memorandum can be gleaned from them. It is necessary to find some reference in the document signed by the party to be charged either to the other document to be joined or to the transaction itself. The reference may be express or implied: for instance, a letter may be read with the envelope in which it is sent. 35 It is also now clear that an express or implied reference to the transaction in the document signed by the party to be charged is sufficient to justify the joinder of other documents. In Elias v George Sahely & Co (Barbados) Ltd,36the Privy Council approved the test in Timmins and found that a receipt signed by the defendant's agents which, although it contained no reference to the document to be joined, did contain reference to the sale, was sufficient to justify the consideration of oral evidence to explain the transaction and identify the document to be joined. 5.4 Oral Agreements - Sections 4(2) and 6 Section 4(2) states: 'This section does not apply to: ... (d) the grant, disposal or surrender of a lease taking effect in possession for a term not exceeding 3 years (whether or not the lessee is given power to extend the term) at the best rent which can be reasonably obtained without a premium'. And Section 6(1) states: 'All interests in land created by parol . . . have . . . the force and effect of interests at will only. (2) Nothing in section 3 or 5 or in subsection (1) shall affect the creation by parol of leases taking effect in possession for a term not exceeding 3 years (whether or not the lessee is given power to extend the term) at the best rent which can be reasonably obtained without taking a premium.' An interest in land purported to be created orally does not create any legal estate in the land: it creates only an interest at will that may be revoked 35 36 106 See Pearce v Gardner [1897] 1 QB 688. [1983] AC 646 FORMALITIES AT LAW at any time. But the creation of leases not exceeding three years is a well-established exception to this rule and the need for written formalities. An oral or written lease, to qualify within this exception, must comply with a number of requirements. , 5.4.1 Not Exceeding Tbree Years The lease must not exceed three years. A periodic lease, which may well run for more than three years before it is determined, will still qualify. Furthermore, a power granted to the tenant to extend the term beyond the three years initially granted is acceptable. V 5.4,2 Taking Effect in Possession The lessee must be entitled to immediate. possession. If the term is to commence at some future date, then the lease is called 'a reversionary lease' and must be created by deed to qualify as a legal lease. 5.4.3 ( i i Be at the Best Rent Without Taking a Premium For an oral lease to qualify as a legal lease there must be consideration, and that consideration or rental must be adequate. In addition to rental, a landlord may be able to recover payment for the grant of the lease itself. This is called a 'premium' and is generally 'a once and for all' payment made to the landlord at the beginning of the lease. A premium is usually only charged where the lease is for a lengthy term and the rental is low, but if a premium is charged fora lease not exceeding three years the lease cannot be created orally. 5.4.4 Grant, Disposal, or Surrender Section 4(2)(d) not only exempts the grant but also the assignment or surrender of a lease not exceeding three years from the requirement for a deed. This differs from the position in England where a deed is still required for an assignment or an express surrender of a lease not exceeding three years. 37 But the same exception is not carried through into s 6(2), which only saves the creation of parol leases not exceeding three years. It would thus appear that writing, although not a deed, is still necessary for the assignment or surrender of a lease not exceeding three years. 5.5 The Conveyancing Perspective Only one document is necessary for the transfer of an interest in land - a deed for a legal estate and an instrument in writing for an equitable interest. But the complexity of many transactions involving land means that it is often 37 See s 54 of the Law of Property Act 1925. 107 HONG KONG LAND LAW desirable to employ two documents rather than one, the first being an agreement in which the parties agree to the transaction in question, and the second being the transfer document itself entered into in performance or completion of the contract. In the case of the sale and purchase of a flat, a purchaser will usually satisfy himself as to the physical suitability of the flat by an inspection. For instance, he will be able to check that it has sufficient bedrooms, that it is conveniently located, that the desired services are available, etc. But he, or rather his solicitor, will also need to be satisfied with the legal nature of the flat - for instance, what are the terms of the Crown lease; is the vendor able to sell the flat; are there any easements or covenants that affect the flat? An inspection of the title deeds, of the property itself, and a search at the Land Office will be required in order to establish these matters. In addition, enquiries of other persons or bodies may be necessary in order, for instance, to be satisfied that the property is not adversely affected by any planning legislation or building regulations. These enquiries can take some time, yet the parties often wish to be sure that the sale will only fall through if it is found that the transaction is adversely affected by any of these matters. An agreement can provide the certainty the parties seek while the purchaser conducts his investigations into the vendor's title and the nature of the property. It is becoming more common for the purchaser to insist that he substantially complete his investigations before he enters into an agreement for sale and purchase rather than afterwards, but even in these circumstances it is usual to conduct the transaction in two stages. There may well be financial matters that need to be settled after the agreement is signed and before the transaction can be completed by the formal transfer of title. For instance, the purchaser may need to raise mortgage finance or arrange to sell other property in order to raise funds to pay the purchase price. The value of land is such that few people have the funds to pay the purchase price just sitting in their bank accounts! The standard form of a sale and purchase transaction will thus usually comprise the following stages: • Pre-contract- Upon finding a suitable property the purchaser, or more likely his solicitors, will conduct an investigation into the legal nature of the property, including a search at the Land Office and an inspection of the title deeds and the property. It is not unusual at this stage for the vendor to insist upon the purchaser entering into a preliminary agreement supported by a small deposit to show his commitment to buy. This prelimi~agreement may be an actionable memorandum under Ji -~(D CPO, a PI9Y!sigg.a.L.a._gi:ee_J_QentJntended .to be biill!ig_g_until_a_ Jormal sal_e_andpun:hase 3:greement isentered inl00f3.J'.lagreement to __ 38 agree which}~ not bindiri_g_g~_.£~~J:)~tties. • Agreement for sale and purchase - The agreement is drawn up by the vendor's solicitors, and upon approval of its terms by the purchaser it will be signed by both parties. Usually the agreement is prepared in duplicate with both parties signing both parts. One part is retained by 38 108 Yeung Siu Hong v Chan Siu Mee Sandie [1992] 2 HKC 559 l FORMALITIES AT LAW the vendor and the other is kept by the purchaser. The terms of the agreement are for the parties to settle, but the agreement will usually provide for the purchaser to pay the purchase price in return for the vendor's obligation to prove and pass his title to the purchaser. 39 The purchaser will be expected to support his performance of the agreement by the payment of a proportion, usually 10 per cent, of the purchase price by way of deposit, which will be forfeited to the vendor should the purchaser fail to complete his purchase. • Post-contract - The purchaser under an agreement for the sale and purchase of land is regarded in equity as the beneficial owner of the property, at least so long as specific performance is available for equity assumes that both parties will perform their obligation under the contract. 40 The vendor becomes a trustee of the legal estate subject to a lien on the property for the outstanding purchase price. The purchaser will be entitled to seek specific performance provided he is in a position to perform his contractual obligations; in particular, if he has paid or is able and willing to pay the purchase price. But should the purchaser fail for some reason to complete the agreement, he will no longer be in a position to seek specific performance. His interest, ceases to qualify as an interest in land. It is thus sometimes termed a 'defeasible equitable interest'. After the agreement the parties must prepare to fulfil their contractual obligations. The vendor must prove title and prepare for the passing of title on completion. The assignment, as the deed required to pass the legal title of the property to the purchaser, is prepared by the purchaser and approved by the vendor. 41 The purchaser must arrange to pay the purchase price. For instance, if his purchase is dependent on mortgage finance, he will have to ensure that the mortgage funds are available on completion. • Completion - At completion the vendor will hand over to the purchaser the title deeds and the assignment, which he has executed under seal, in return for payment of the purchase price. The assignment must also be executed by the purchaser, in order for the purchaser to agree to perform the Crown lease covenants. For convenience, the purchaser usually executes the assignment before completion. Completion used to take place in person, but it is now more common for completion to be by way of undertaking, whereby the purchaser pays over the purchase price upon the vendor's undertaking to send the documentation to which the purchaser is entitled. Other transactions may adopt a similar two-stage format. For instance, it is becoming increasingly common for a mortgage deed to be preceded by a loan agreement, and a lease by an agreement to lease. 39 For an example of a simple contract see Form 2 Third Schedule of the Conveyancing and Property Ordinance. 40 41 See Chapter 6.3. See Form 1 Third Schedule of the Conveyancing and Property Ordinance for an example of a simple assignment. 109 Formalities: The Intervention .Of Equity 6.1 Introduction Clear rules lead to certainty, but they can also lead to injustice - particular!, when people conduct their affairs in ignorance of the rules. Many people are unaware of the legislative requirements that we have just examined. Few outside a lawyer's office may appreciate what a deed is, let alone that you must use a deed to create a legal estate. It is thus not unusual for a lease of more than three years to be created orally, or a borrower to merely deposit his title deeds with a lender as security for a loan, or an owner to give permission verbally or in writing for his next-door neighbour to use a facility on his property. Injustice would result if such transactions were to have no legal effect, and thus equity may in certain circumstances step in to enforce these informal arrangements. We must now look at a number of circumstances when equity will grant a remedy to enforce a transaction that fails to satisfy the strict legislative requirements. 6.2 Part Performance Section 3(2) states: 'This section applies to contracts or other dispositions whenever made and does not affect the law relating to part performance ... '. 1 The requirement for written evidence of a contract for the sale of an interest in land does not affect the doctrine of part performance. Thus it is not quite true to say that all oral contracts are unenforceable. An oral agreement may be enforceable in equity if supported by sufficient acts of part performance. 6.2.1 Basis of Part Peiformance The Statute of Frauds 1677 was passed to overcome the evidentiary problems in establishing and enforcing an oral contract for the sale of land, in particular to combat the temptation to give perjured evidence. For instance, if A and B made an oral contract for the sale of A's flat to B, it could be very tempting for A to deny the existence of the contract if he wished to escape from the sale so he could sell his flat for a higher price to someone else. But the Statute of Frauds' 1677soon gave rise to its own injustice, for a party could deny an oral contract that had been acted on by the other party. For instance, if A and B, having made an oral contract for the sale of A's flat to B, then carried it into effect by B paying A the purchase price and A giving B possession of the flat, A would nevertheless be entitled to claim back possession of the flat if B could not enforce his oral agreement. Clearly equity could not stand by and allow A to use the statute so unjustly. It soon See also s 7 CPO. 110 FORMALITIES: THE INTERVENTION OF EQUITY developed the doctrine of part performance to prevent the statute itself being made an instrument for fraud. Equity would enforce the agreement not as a result purely of the oral contract but as a result of the innocent party's subsequent actions, which it would be fraudulent for the other party to ignore. The doctrine is based 'upon the equities resulting from acts done in execution of the contract, and not . . . upon the contract itself'. 2 In our example, by reason of his agreement with A and the encouragement of A, B has performed certain acts: he has paid the purchase price and gone into possession. In view of these acts it would be unjust to allow A to escape from his agreement despite its oral nature. Equity would thus grant an order for specific performance requiring A to perform his obligations under the oral contract. 6.2.2 Requirements of Part Performance 6.2.2.1 Contract There must be a concluded contract between the parties and it must be possible to ascertain its terms. 3 The acts of part performance themselves may give no hint of the terms, but once they are accepted as sufficient acts to establish the existence of the contract, oral evidence may be brought of the terms of the contract. For instance, in our example B's act of going into possession does not provide any indication of the price B agreed to pay for A's flat. But once this act is accepted as sufficient to support B's enforcement of the contract, oral evidence may be brought of the terms of A and B's agreement, including the price B agreed to pay. 6.2.2.2 Specific Performance The contract is only enforceable in equity and is thus dependent on the contract being capable of specific performance. Originally the court could only grant specific performance - they could not grant damages, so if for some reason specific performance could not be granted the purchaser was without a remedy. Fcir instance, if the vendor had sold the property to an innocent third party before the purchaser could seek the assistance of equity, then the .purchaser was without redress. Now s 13A of the Law Amendment and Reform (Consolidation) Ordinance 4 ·confers upon the court a power to grant damages in these circumstances. Part performance as an equitable doctrine cannot be claimed as of right. The courts may decline to rely upon the doctrine if there has been unreasonable delay, or if for some other reason they feel the plaintiff is not entitled to the assistance of equity. 5 Per Earl of Selbourne in Maddison v Alderson (1883) 8 App Cas 467 at 475 In England the doctrine of part performance no longer has any application; by s 2 of the Law of Property Miscellaneous Provisions Act 1989 all contracts for the sale of land must be written and signed by the parties in order to be valid. The doctrine of estoppel however provides an alternative means of enforcing an oral agreement. Cap 23 Coatsworth vjohnson (1886) 54 LT s 20 111 HONG KONG LAND LAW Sufficient Acts of Part Peiformance 6.2.3 Since the basis of the doctrine is the fraud done to the plaintiff, the acts must be done by the plaintiff with the knowledge of the defendant. But what sort of acts by the plaintiff will be sufficient? The title 'Part Performance' would suggest that the act must be in performance of the contract. That may often be the case, but it is not necessarily so. For example, B, following an oral contract to purchase A's flat, not only pays the purchase price and is let into possession but also carries out certain renovation and improvement works to the flat. All these acts may be accepted as acts of part performance, but while B's payment of the price and going into possession flow from the contract, his improvements to the flat do not directly do so. He was, however, only in position to carry out these improvements as a result of the contract. They are connected with, although not in performance of, the contract. The exact nature of an acceptable act of part performance and its connection with the contract is not an easy matter to pin-point, particularly in the light of what appears to be a relaxation of judicial attitudes in recent years. The classic statement of the test is found in: a Maddison v Alderson (1883) 8 App Cas 467 FACTS Mrs Maddison acted as housekeeper for Mr Alderson for many years without the payment of any wages as a result of an oral promise by Mr Alderson to leave her a life estate in his house. He made a will to this effect, but it was not validly executed. Accordingly, when Mr Alderson died he died intestate. Mrs Maddison alleged that his promise amounted to a contra.ct which, although oral, should be enforceable as a result of her long service without wages. JUDGMENT There was no contract and even if there was, Mrs Maddison's long service without wages was not an acceptable act of part performance upon which specific performance could be ordered. The Lord Chancellor, the Earl of Selboume, explained that the acts done 'must be referred to the actual contract, which is the measure and test of their legal and equitable character.' 6 That measure was 'that the acts relied upon as part performance must be unequivocally, and in their own nature, referable to some such agreement as that alleged.' 7 The plaintiffs acts must point to the existence of the contract between the parties. Mrs Maddison's actions did not do so. She could have been working for Alderson without 6 7 112 (1883) 8 App Cas 467 at 475 (1883) 8 App Cas 467 at 479 l • FORMALITIES: THE INTERVENTION OF EQUITY wages but in return for accommodation, or perhaps because she had a particularly close relationship with him! In not dissimilar circumstances, however, the English Court of Appeal some 85 years later came to a rather different conclusion. -------Wakeham v Mackenzie FACTS [1968] 1 WLR 1175 Mrs Wakeham was a widow who gave up possession of her council house (the equivalent of public housing) in order to look after an old widower. She did not receive any wages from him although she paid for her board and heating, the understanding being that he would leave his house to her on his death. This occurred fourteen months later. The widower in fact failed to do this, and Mrs Wakeham sought specific performance of his oral arrangement. JUDGMENT Mrs Wakeham's acts of paying for her board and heating, giving up her council house, and going to look after the widower were sufficient acts of part performance to support a decree of specific performance to transfer the house to her. The court avoided reaching the conclusion of the House of Lords in Maddison v Alderson by relying on the case of Kingswood Estate Co Ltd v Anderson 8 as 'exploding' the need for the acts to refer to a contract of the type alleged. It was sufficient that the acts referred to some contract. The court took the view that the arrangement did clearly indicate some contract. It is difficult to reconcile these two cases except on the basis of a change of attitudes by the courts. Indeed, in Wakeham v Mackenzie the court were at pains to point out the different procedural conditions that prevailed at the time of the Statute of Frauds 1677 from those now prevailing. The most authoritative statement of the courts' current attitudes is to be found in the House of Lord's decision in: ! I Steadman v Steadman U976]AC 536 FACTS The parties' marriage had broken down. After the breakup the husband continued to live in the matrimonial home in which his wife claimed a half share. Maintenance orders had been made against the husband for the [1963] 2 QB 169 113 HONG KONG LAND LAW support of his wife and the child of the marriage, but they were in arrears. The husband applied to court for a variation of the maintenance orders. Outside the court his solicitor met his wife and it was agreed that she would sell her share in the matrimonial home to her husband for £1,500 and the maintenance order would be discharged if he paid all but £100 of the arrears of maintenance. The court was told of the agreement and they discharged the maintenance order and remitted the arrears, save for £100. The husband paid the £100 and his solicitors prepared a transfer deed transferring the house to him. His wife subsequently refused to sign the transfer. Her husband sought specific performance of the oral agreement on the basis that the payment of £100 arrears of maintenance and the preparation of the transfer deed were sufficient acts of part performance. JUDGMENT The alleged acts of part performance were sufficient to support a decree of specific performance of the agreement for the wife to transfer her interest in the matrimonial home to her husband for £1,500. Authorative the judgment may be, but clear it certainly is not. All five judges delivered lengthy judgments. Lord Morris dissented. The other four judges, although in agreement on the result, gave differing views. Their decision centred on the issues discussed below: 6.2.3.1 The Burden of Proof The Earl of Selbourne had laid down that acts should be 'unequivocally referable' to the contract although he had also suggested that it was sufficient if 'the alleged contract . . . is reasonably to be inferred from the res gestae themselves' ,9 which suggests a lower standard. The majority of the Lords preferred this latter test. Lord Reid, for instance, described the test as to 'take the whole circumstances, leaving aside the oral contract, to see whether it is proved that the acts relied on were done in reliance on a contract: that will be proved if it is shown to be more probable than not.' 10 In other words, the fact that there is an explanation for the plaintiff's conduct other than the existence of the contract will not be fatal. It is enough that it is the most likely explanation. 6.2.3.2 What Sort of Contract? Must the alleged acts of part performance point to a contract relating to land? The acts do not have to pin-point the particular type of land contract, 11 but there was some suggestion in Steadman, notably from Lord Reid, that the acts need not indicate a contract relating to land. It was sufficient if they 9 10 11 114 (1883) 8 app Cas 467 at 476 [1967] AC 536 at 541H-542A Kingswood Estate Co. Ltd. v Anderson [1963] 2 QB 169 FORMALITIES: THE INTERVENTION OF EQUITY merely related to any contract. However, subsequently in Re Gonin 12 the view that the acts relied on must point to a contract relating to land has been reasserted. 6.2.3.3 Payment of Money Closely ass~ciated with the previous issue is the question of whether the payment-of money can ever constitute an act of part performance. In Maddison v Alderson the Earl of Selboume indicated that the payment of the purchase money was 'an equivocable act not (in itself), ... indicative of a contract concerning land' .13 The plaintiff could merely be loaning the money to the defendant, or making payment for some other obligation. Furthermore, generally no injustice would be suffered by the plaintiff as he could be adequately compensated by repayment of the money. But the majority of the Lords decided that the payment of money could constitute an acceptable act of part performance when viewed in the light of the surroun_diqg circumstances. The payment of money by itself will not therefore constitute part performance, but it is not to be rejected entirely. Taken with other acts it may swing the decision in the plaintiffs favour. ,. ' 6.2.4 Examples of Part Peiforrnance Establishing the test of what is a sufficient act of part performance is one thing-" applying it is quite another. Although the act of part performance must be viewed in the light of the circumstances of the case, perhaps the most helpful. guide is a comparison of examples of the most common acceptable and unacceptable acts of part performance. 6.2.4.1 Possession The taking of possession 6y the plaintiff with the defendant's consent is often quoted as the best example of an act of part performance. 14 It is an act that points clearly to the fact that the plaintiff must have been granted some right to go onto the land by the defendant, and furthermore is an act in which the defendant must have played some active part by the granting of possession to the plaintiff. However, if the plaintiff merely continues in possession, having already entered into possession under a previous grant, his possession will not constitute part performance since it is just a continuance of a right he already enjoys. 15 Thus a lessee who holds over after the expiry of his lease will not be able to rely on his continued possession alone to enforce an oral contract for the renewal of his lease: there must be some further act, such as the payment of a higher rental, to point to a contract with his landlord to renew his tenancy. 16 12 13 14 15 16 [19791Ch 16 (1883) 8 App Cas 467 at 479 Kingswood Estate Co.,Ltd. v Anderson ante Kingswood Estate Co. Ltd. v Anderson ante See Willis v Stradling (1797) 3 res 378 f URBi>i~L0JN"'~ i'U1'L_;:L; U}; 7:{1GlESI 115 HONG KONG LAND LAW 6.2.4.2 Alterations The making of alterations or improvements to the property is another common example of part performance. But the alterations must be carried out either by a plaintiff purchaser or by a plaintiff vendor at the request of the purchaser, 17 for the carrying out of alterations on one's own land does not by itself point to a contract granting some right in the land. 18 It is merely an exercise of a right that the vendor already enjoys. The carrying out of alterations by a tenant holding over after the expiry of his lease or very close to its expiry may also indicate that the tenant is acting in reliance on a promise to extend his tenancy. 19 6.2.4.3 Preparatory Acts An act that is preparatory to the contract itself, as opposed to carried out in performance of or as a result of the contract, is not sufficient. Instructing solicitors, inspecting the land, and applying for approval of plans 20 are examples of acts that have been rejected for this reason. In Steadman v Steadman, 21 however, instructions to prepare a transfer of the land were accepted together with other acts as sufficientto constitute part performance. 6.3 The Rule in Walsh v Lonsdale 'An Agreement for a Lease Is As Good As a Lease Provided Specific Performance Is Available.' The rule in Walsh v Lonsdale is derived from the maxim that equity looks on as done that which ought to be done. Thus if there is an agreement that is capable of enforcement by the award of a decree of specific performance, equity will view the parties' relationship as if the decree of specific performance had been granted. Contracts for the sale of an interest in land are generally regarded as contracts that equity will specifically perform. Damages are usually said to be an inadequate remedy, for each piece ofland is unique - so that any loss suffered by the purchaser cannot be compensated in money terms alone. A purchaser under a specifically performable contract for a lease will thus be recognised in equity as if the contract to grant him a lease had been performed and he held under the lease itself. The recognition does not extend to the actual grant of the legal lease, as the necessary formalities have not been complied with and it is only in equity that the contract will be looked upon as if it had been performed. The lessee can maintain that he holds under an equitable, but not a legal, lease. There are two situations in which the rule in Walsh v Lonsdale may be of assistance: namely, where there is an agreement for the grant of an interest in land, and where inadequate formalities have been employed. 17 18 19 20 21 116 See Rawlinson v Ames (1925] Ch 339. See Dickinson v Burrow (1904] 2 Ch 339. See Broughton v Snook (1938] Ch 345. See New Hart Builders v Brindley [1975] Ch 342. [1976] AC 536 FORMALITIES: THE INTERVENTION OF EQUITY Agreement for the Grant of an_Interest 6.3.l The case of Walsh v Lonsdale itself concerneda lease: contract for the grant of a D9 FACTS The defendant agreed to grant to the plaintiff a lease of a factory for seven years. The rent was payable in advance. The plaintiff entered into possession and paid the rent, but not in advance. The defendant demanded a year's rent in advance, but the plaintiff did not pay and the defendant ~\distrained. The plaintiff claimed the distress was unlawful, arguing that he was not claiming under the agreement to lease but as a yearly tenant under common law by reason of his payment of rent. As a yearly tenant he was not obliged to pay rent in advance. >r JUDGMENT W(J,: '\ \) (i~'\lli iiJ The distress was lawful since the defendant held under the agreement for the lease of seven years and not under an implied yearly tenancy. It should be noted that where a tenant, with the consent of the landlord, enters into possession and pays rental, a periodic tenancy is implied at law. But the rules of equity prevail over the rules of law, and thus an implied periodic tenancy will give way to an equitable lease where the tenant has entered the land in pursuance of an agreement to grant a lease. The Master of the Rolls Sir George Jessel clearly summarised the position: There is only one Court and the equity rules prevail in it. The tenant holds under an agreement for a lease. He holds, therefore, under the same terms in equity as if the lease had been granted, it being a case in which both parties admit that relief is capable of being given by specific performance. That being so he cannot complain of the exercise by the landlord of the same rights as the landlord would have had if a lease had been granted. 22 6.3.2 Impeifect Formalities The law will readily construe an abortive attempt to grant an interest in property as an agreement to grant the interest in question. An example is found in the case of: 22 (1882) 21 Ch D 9 at 14E 117 ··HONGKONG LAND LAW Parker v Taswell (1858) 2 De G&J 559 FACTS The defendant agreed to renew the plaintiff's lease of a farm for a term of ten years. The document recording their agreement was only executed under hand. A dispute arose between the plaintiff and the defendant as to certain terms of the lease and as a result the plaintiff brought an action for specific performance of their agreement. JUDGMENT Specific performance was granted. A lease not created under seal was not devoid of all efficacy: it could be enforced as an agreement to create a lease, the intention of the parties plainly being that there should be a lease. Thus, if A purports to grant to B a lease for four years but he does so in writing rather than under seal, the transaction will be construed as an agreement by A to grant B a lease of four years. As we have seen, B can call upon A, by a decree of specific performance if necessary, to execute a deed granting a lease of four years, and in the meantime B holds in equity under an equitable lease for four years. 6.3.3 Requirements of the Rule The essential feature of the rule is the availability of specific performance. But when will specific performance be available? 6.3.3.1 An Agreement For a Lease There must be an enforceable agreement between the parties. .The agreement must therefore comply with s 3 of the Conveyancing and Property Ordinance, 23 being in or evidenced by writing, or if merely oral it must be supported by part performance. There must also be consideration, for equity will not assist a volunteer. Thus the doctrine will be of no assistance where incorrect formalities have been employed to effect a gift of land. The doctrine is framed in the context of leases but it is also applicable to the creation or disposition of other interests in land. Thus if A agrees to sell B his flat, B will be recognised as the owner in equity once the agreement is made. 24 Likewise, if A agrees to grant an easement or mortgage to B, B will be regarded as the holder of an equitable easement or mortgage as the case may be. 23 24 118 Cap 219 See Lysaght v Edwards (1876) 2 Ch D 499. FORMALITIES: Tlf,E TNTF;RVENTION OF EQUITY 6.3.3.2 Specific Performance is Available Specific performance is a discretionary remedy that the courts may refuse to grant. If, for instance, the court does not consider it equitable to award the remedy in the circumstances of the case, 25 or if the plaintiff has not come with 'clean hands' because he is in breach of the agreement, 26 or if the grant of a decree would cause hardship because it would force the landlord to breach his own obligations, 27 the court may decline to order specific performance. Furthermore, the parties to the contract may vary or exclude the right to specific performance provided a clear intention to do so is shown. In Hong Kong it is not uncommon for a vendor to try to exclude the purchaser's right to specific performance should the vendor fail to complete the agreement, because for instance he has accepted a higher offer. Such an exclusion of the right to specific performance will only be effective if clear words are used. There have been many cases brought over the past few years to determine which wording is effective but only a small number have succeeded. 28 6.3.4 Effect of the Rule The rule gives effect to the agreement or abortive grant in equity rather than at law which the doctrine boasts is 'as good as a lease' or the other grant in question. Is that strictly true or are there any differences? 6.3.4.1 Priority Traditionally the primary distinction between legal estates and equitable interests is the extent to which they bind third parties, but as we have seen this distinction has largely been eroded by the Land Registration Ordinance. 29 An agreement to create or dispose of an interest in land must be in writing to be enforceable, unless it is enforceable as a result of acts of part performance. 30 An equitable interest under the doctrine of Walsh v Lonsdale will thus usually be supported by an instrument that must be registered under the ordinance in order to preserve its priority in the same way as a deed that creates a legal estate must be registered. It is only in the case of an equitable interest supported by part performance that the interest may suffer a disability in terms of priority over its legal equivalent. 25 26 27 28 29 30 Chu Kit Yuk & another v Country Wide Industrial Ltd. & others [1995] 1 HKC 363 See Coatsworth v Johnson (1886) 55 LJQB 220. See Warmington v Miller [1973] QB 877. Wong Lai Fun v Le Ha [1992] HKLR 125, Lee Tak Kwong v Choi Pui Kei Stephen [1991] 2 HKC 1091, Kentex Investment Ltd v Hui Lap Ping Sam HCt MP No 3447 of 1991 and Cheong Pik Shan v Lee Bun & another (1994) HCt No A3113 of 1992 Cap 128. See Chapter 3. See Chapter 5 and 6.2. 119 (I HONG KONG IAND IA w l 6.3.4.2 Enforcement of Covenants There are differences in the extent to which leasehold covenants may be enforceable between the successors in title to legal and equitable leases. 31 6.3.4.3 Easement An agreement to create or dispose of an interest in land which operates under the rule in Walsh v Lonsdale is not effective to pass easements or other appurtenant rights affecting the land under the operation of s 16 of the Conveyancing and Property Ordinance, which we shall be examining in due course.32 6.4 Resulting and Constructive Trusts 6.4.l Introduction Section 5(2) of the Conveyancing and Property Ordinance3 3 states: 'This section does not affect the creation or operation of resulting, implied or constructive trusts.' Equity will not allow a person to use a piece of legislation in order to act fraudulently. Thus, despite the requirements for writing set out ins 5(1) of the ordinance, there are circumstances when equity will imply a trust to prevent a person denying a declaration of trust or a disposition of an equitable interest in land that is not recorded in writing. There are essentially two kinds of implied trust: the resulting trust and the constructive trust. A detailed examination of these implied trusts lies outside the scope of this book, but their prominence in the context of the creation of interests in land that has emerged in recent years merits an examination of their essential characteristics. It is easy to confuse resulting trusts and constructive trusts. Indeed, they are often referred to in the same breath with little or no acknowledgement of their differing concepts. 34 But there is emerging a recognition by the courts, at least in England, that it is important not to confuse the two concepts, particularly as different consequences can flow depending on whether the implied trust is resulting or constructive. 35 Thus, while they are both classified as implied trusts, they are distinct types of implied trust and justify separate examination. 31 32 33 34 35 120 See Chapter 14. Cap 219 see Chapter 13. Cap 219 In Hong Kong Courts see for example the comments of deputy Judge Tong QC in Lui Kam Lau & another v Leung Ming Fai [1994] 3 HKC 477 at 485 where he states that 'it hardly matters what label one uses'. See for example Drake v Whipp 0995) The Times 19 December. FORMALITIES: THE INTERVENTION OF EQUITY 6.4.2 Resulting Trusts If property is transferred to A but the purchase price is paid by B, equity will presume that B intended A to hold the property on resulting trust for him so that A will merely hold the legal estate and the beneficial interest will vest in B. Fig 6.1 A I $B -At Law - In Equity A similar presumption may arise if some but not all of the purchase price has been supplied by B. A will then hold the property on trust for himself and B in such shares as reflect the proportion of the purchase price that each has paid. Fig 6.2 At Law tY~ A ! 4 In Equity The nomination neatly illustrates the concept of the resulting trust. A person who has entered into an agreement to buy property may nominate another to take the assignment of the property. If the nominator continues to provide the purchase money this will give rise to a resulting trust so that the nominee holds the legal estate on bare trust for the nominator. 36 However, if there is evidence to suggest that the nominee provided the purchase price 37 or that the nominator intended the nominee to be more than just a nominee and to take the whole or part of the beneficial interest, the resulting trust will be rebutted and the nominee take the intended beneficial interest. 38 In fact, conveyancers sometimes use the nomination as a means of effecting a sub-purchase, although they are well advised to state in the assignment that the nominee has provided the full purchase price and is entitled to the beneficial interest if they qre to avoid the problems that the cases have illustrated. 6.4.2.1 Presumed Intention The basis for the implication of a resulting trust in these situations is one of presumed intention. If a person provides the funds to purchase property, 36 37 38 See Formking Development Ltd v Lee Kwok Hung, Robert [19931 1 HKC 412. See Lionwill Investment Ltd v Triple Will Ltd [1992] 2 HKC 430 and Easyknit Investment Co Ltd v Yetonce Ltd 0991) HCt MP No 1454 of 1991. Fulltrend Co Ltd v Longer Year Development Ltd & another [1990] 1 HKC 542, Kwong Kai Hing & another v Chan Lik 0995) HCt MP No 1529 of 1995 and Yeung Kit Lam & another v Lau Yiu Shing 0995) HCt MP No 3392 of 1994 121 HONG KONG LAND IA W he is presumed to have intended to acquire the beneficial ownership of that property unless a contrary intention is proved or there exists a counter presumption. 39 For instance, B may be merely loaning the money to Aor it may be that B intends to give the property to A as a gift. In certain circumstances equity will presume that B intended to· give the property to A - this is known as the 'presumption of advancement' . 6.4.2.2 Presumption of Advancement Equity will not impose a resulting trust where B is otherwise responsible for A's welfare and well-being. In such circumstances equity does not recognise the need to protect B's generosity: it is his duty to provide for A. Traditionally such responsibility for the welfare and well-being of another has been owed by a father to his children, whether those children are legitimate, illegitimate, or his step-children; and by a husband to his wife. This same responsibility has not been owed by a mother to her children, unless perhaps the mother is solely responsible for her child's welfare, or by a wife to her husband, or between unmarried partners. But changing social mores and moves towards greater sexual equality, based upon the greater economic independence of women, have challenged these traditional presumptions. For instance, in Hong Kong doubts have been expressed as to the continued absence of the presumption between mother and son 40 and the continued application of the presumption of advancement between a husband and his wife, 41 although the presumption of advancement between husband and wife in relation to the matrimonial home has received a boost in: Ho Nga Sheung v Ma Fook Leung 0993) 2 HKC 647 FACTS The plaintiff and defendant were husband and wife. They bought the property in dispute as their matrimonial home. The property was assigned into their joint names with the aid of a mortgage. The husband paid the mortgage instalments. The wife did not make any direct financial contribution to the acquisition of the property although she did pay some household expenses. On the break-up of the marriage the plaintiff applied for an order for sale of the property under the Partition Ordinance and the issue arose as to the wife's interest, if any, in the property. JUDGMENT There was a presumption that where the matrimonial home was acquired by a husband in the joint names of himself and his wife that the husband 39 Ngai Hong Cycle (Electric) Ltd v China Harmonious Ltd (1994) HCt MP No 4343 .of 1993 Lily Cheung v CED (1987) HCt MP 2045 of 1987 and Re Mak Woon Shui (dec'd) [1992] 2 HKC 144 41 CIR v Yeung Cheung Foon, David (1989) CA Civ App No 142 of 1988 40 122 FORMAUTIES: THE INTERVENTION OF EQUITY intended to advance to the wife a beneficial interest in the property. The presumption was rebuttable but had not been rebutted in the present case. It is important to remember that even if the presumption of advancement is held to exist in a given relationship it is only a presumption and can be rebutted. That rebuttal is increasingly likely to be established, particularly as the courts can look to the q:mstructive trust to give effect to the parties' common intentions. For instance, in Mcgrath v Willis 42 Nourse LJ described the presumption of advancement as 'a judicial instrument of last resort'. 6.4.2.3 Timing of Intention The relevant time for measuring the parties' intention is the date of acquisition of the property, although subsequent acts may be used to infer or demonstrate the parties' intentions at the date of acquisition. 43 For instance, if A has acquired the property with the aid of a loan, then repayment of the whole or part of that loan by B some time after the acquisition of the property may point to an intention that was formed at the time of acquisition that B was intended to share the beneficial ownership of the property. In order to support an intention based upon contributions subsequent to the acquisition of the property, the courts have looked particularly to the extent to which a claimant's subsequent contributions can be referred or linked to a belief that in making those contributions he was acquiring a beneficial interest in the property. 44 6.4.2.4 Qualifying Contributions Contributions either to the deposit or to the balance of the purchase price will clearly support the implication of a resulting trust, but qualifying contributions are not confined to payments made at the time of purchase. The repayment of the whole or part of a loan that has been used to acquire the property may also support the implication of a resulting trust, provided it is made pursuant to an intention, that may be express or inferred, formulated at the time of acquisition that such contributions would be made and would lead to the acquisition of a beneficial interest in the property. 45 In this connection, a contribution to payment of the deposit or legal expenses at the time of acquisition will assist in the formulation of such an intention, so that the case for the implication of a trust will be that much stronger where the contributor has contributed both to the deposit and/or legal expenses and the repayment of the mortgage. 46 Contribution may be indirect where B shoulders a financial burden of A, so that A can pay the purchase price or repay a loan used to purchase the 42 43 44 45 46 [1995] 2 FLR 114 at 115 Gissing v Gissing [1971] AC 886 Gissing v Gissing [1971] AC 886 Gissing v Gissing [1971] AC 886 Gissing v Gissing [1971] AC 886 at at at at 906E 909G 908C and Burns v Burns [1984] Ch 317 at 328H 907F and Burns v Burns [1984] Ch 317 at 328H 123 HONG KONG LAND LAW property. For instance, a husband and wife may arrange their finances in such a way that the wife pays the household expenses so that the husband can use his salary to repay the mortgage. But any indirect contribution must be financial in nature- mere housekeeping duties are insufficient. 47 Furthermore, it must be clear that any indirect contribution is made in pursuance of a clear financial arrangement between the parties whereby the claimant would acquire an interest in the property. 48 It is not clear whether a right, referable to the status of one of the parties which confers a financial advantage, may also qualify as a financial contribution sufficient to support a resulting trust. For instance, would the entitlement to a Home Ownership Scheme flat, or the reduction in price from the market value that a sitting tenant may be able to negotiate, qualify? One of the difficulties in admitting such a contribution would be measuring in financial terms the value of that entitlement. 6.4.2.5 Illegality The question of how the illegality of a transaction may affect the acquisition of proprietary interests was raised in the House of Lords case of: FACTS Ms Tinsley and Ms Milligan were lovers who jointly purchased a house in the name of Tinsley to enable Milligan to make false claims for government benefits. After some years Milligan admitted to the government what she had done but the government decided not to prosecute her. Tinsley and Milligan then parted: Tinsley moved out and Milligan remained in occupation. Tinsley brought an action for possession asserting that she was the sole legal and beneficial owner. JUDGMENT Tinsley was not entitled to possession; she and Milligan were jointly entitled to the beneficial interest in the house. Milligan could establish her claim to an interest by way of resulting trust upon proof of her contributions to the purchase price without any need to rely on the underlying illegality of the reason the house was registered only in Tinsley's name. The result would have been different if Tinsley and Milligan had not been lovers but wife and husband or child and father. In these circumstances, the presumption of advancement would have operated to presume that the beneficial ownership was intended to pass with the legal estate to the wife 47 48 124 Burns v Burns [1984] Ch 317 Gissing v Gissing [1971] AC 886 at 908A and Burns v Burns [1984] Ch 317 at 329C FORMALITIES: THE INTERVENTION OF EQUITY or child, since a gift would have been presumed. The husband or father would have had to rely on their illegal design to rebut the presumption of advancement and establish their claim to the beneficial ownership. This the law would not have allowed. The distinction may seem somewhat arbitrary but the House of Lords refused to accept a rule based upon a 'public conscience test' advocated by the Court of Appeal 49 which looked to the seriousness of the illegality. By contrast, in New Zealand statute has conferred upon the courts a discretion as to whether or not relief should be granted where illegality is proved. 50 Thus illegality does not prevent the proprietary interest passing but it does prevent a party enforcing or asserting a proprietary claim where to do so they must rely upon the illegal transaction. The effect is thus procedural rather than substantive. Where the illegal design has not been carried into effect, although it has prompted the transfer of the legal estate, the transferor may still rebut the presumption of advancement by bringing evidence of the illegal design. "' ~ ~ .-,~· "" - ,.,. Tribe v Tribe [1995] 3 WLR 912 FACTS The plaintiff held shares in a company which sold ladies' clothing from a number of leasehold shops, two of which were in poor repair. The plaintiff, as he was reaching retirement age, wished to pass the business to one of his sons. He transferred some of the shares in the company to his son although the consideration remained unpaid. The next year the landlord started proceedings to enforce the plaintiff's repairing obligations under the lease of the shops. The cost of the repairs would have required the plaintiff to sell the company. He thus transferred the remaining shares in the company to his child. The transfer was expressed to be for consideration but there was no intention that the consideration would be paid. In fact the landlord did not pursue the enforcement of the covenant; instead the plaintiff bought the reversion of one shop and surrendered the other to the landlord. Once the danger of losing the leases had passed the plaintiff then asked his son to transfer the second batch of shares back to him. The son refused and the plaintiff claimed that the son held the shares on trust for him. JUDGMENT The transfer of the second batch of shares had been prompted by an illegal purpose but as the illegal purpose had not been carried into effect the plaintiff was entitled to lead evidence to show that the presumption of advancement was rebutted. 49 50 [1992] Ch 310 See ss 6&7 of the New Zealand Illegal Contracts Act 1970. 125 HONG KONG LAND LAW 6.4.3 Constructive Trusts The constructive trust is somewhat controversial, for its nature and parameters are ill-defined. A constructive trust arises by operation of law when the courts require an owner, as a result of his conduct, to hold property as trustee for the benefit of those who are prejudiced by his conduct. There is controversy on two fronts. First, there is disagreement about whether a constructive trust is a substantive institution in itself or •• merely a remedial device which the courts may employ in the same way as, for instance, an injunction. Second, it is uncertain when a constructive trust should properly be applied. In America the constructive trust is more readily accepted as a device to remedy unjust enrichment whenever it may arise. It is, in the oft-quoted words of Cardozo J: . . . the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him to a trustee. 51 But in English law, while the courts have flirted with this approach, the predominant view, at least for the time being, appears to prefer to categorise the constructive trust as an institution in itself existing within ill-defined but limited boundaries. It is clear that the constructive trust is not created intentionally by the parties: it is imposed by the court in order to correct or remedy a wrong. As such its nature is clearly remedial - but is the remedy the imposition or the recognition of an institution with all its ramifications on the rights and duties of the parties and their proprietary interests? In other words, does a declaration by the court that there is a constructive trust change the parties' relationship and respective interests, or give recognition to a relationship and interests that already exist? The former view would suggest that the constructive trust is a merely a remedial device, although one that has far-reaching consequences for the parties' relations; the latter view that the constructive trust is an institution that does not owe its existence solely to the court, but rather is a consequence of the· parties' conduct. Regardless of whether a constructive trust is viewed as a remedial device or a substantive institution, English law presently appears concerned to confine the occasions for using a constructive trust to a number of situations which, although not closed, cannot be categorised simply whenever justice so requires. What then are the accepted situations where equity will impose or recognise a constructive trust? 6.4.3.1 Fraudulent, Inequitable, or Unconscionable Conduct Perhaps the most significant situation, at least for the property lawyer (as opposed to the trust lawyer), arises when the owner of property has been 51 126 Beatty v Guggenhiem Exploration Co 0990) 225 NY 380 at 386 FORMALITIES: THE INTERVENTION OF EQUITY guilty of such fraudulent, inequitable, or unconscionable conduct that equity will not allow him to continue to enjoy unfettered rights of ownership. In this case, equity will require the property to be held by the owner as a constructive trustee. For instance, a criminal will not be allowed to benefit from his crime - thus a murderer cannot inherit the property of his victim, 52 nor will a person be allowed to retain property that he has acquired through undue influence. 53 We have seen that a declaration of trust or the disposition of an equitable interest relating to land must be in writing, 54 but equity will not allow that requirement to be used fraudulently by an owner who has entered into an arrangement or understanding to the effect that another is to enjoy some interest in property that the owner holds or is to acquire. For instance, where a person has relied on that arrangement or understanding and has then acted to his detriment, the owner will not be allowed to deny the arrangement or the interest to which it gives rise. He will be deemed instead to hold the property as a constructive trustee in order to give effect to the c~mmon understanding. It is in this situation that the constructive trust has overlapped and become confused with the resulting trust, but there are clear distinctions. 6.4.3.2 Common Intention v Presumed Intention A constructive trust of this type contrasts with a resulting trust in that it is not a direct result of the presumed intention of the parties: its imposition results from a need to prevent injustice. However, the imposition of a constructive trust in these circumstances ultimately rests upon a common understanding or intention as to the existence of rights over the property which the owner is seeking to avoid. 55 Greater flexibility is evident in ascertaining a common intention than the limited circumstances where a court will presume an intention in order to establish a resulting trust. There may be direct evidence of the parties' intention, but the courts have not shrunk from inferring a common intention from the parties' conduct, both at the time of and subsequent to the acquisition of the property, when there is no express or direct evidence of their intention. In drawing an inference from the parties' conduct both at the time of and subsequent to the acquisition of the property, the courts have adopted an objective approach. It is not so much what inferences the parties actually drew, but what a reasonable man would infer from their conduct. 56 The courts have, however, stopped short of expressly condoning the imputation of an intention that the parties never had - although the dividing line between objective inference and imputation is a narrow one, if it can be said to exist at all.57 Indeed, the signs are that the courts may be prepared to step over the dividing line at least to the extent that once a common intention is 52 53 54 55 56 57 In the estate of Crippen [1911] P108 Barclays Bank Pie v O'Brien [1994] 1 AC 180 and CIBC v Pitt [1994] 1 AC 200 Section 5 Conveyancing and Properly Ordinance Cap 219 and Chapters 5.3.1 and 5.3.2 See for instance in Hong Kong Hon Po Sun v Lau Ngai [1995] 1 HKC 556. Gissing v Gissing [1971] AC 886 at 906B Pettitt v Pettitt [1970] AC 777 at 805 and Gissing v Gissing [1971] AC 886 at 897F and 904E 127 HONG KONG LAND LAW established that the parties are to hold the property jointly they will overlook the fact that the parties never thought of the proportions in which the property would be held; the court will infer what the parties would have intended if they had thought about it.58 Unlike a resulting trust, the intention need not be evident at the time of acquisition of the property. The parties may decide to vary their respective interests in the property. Thus a contribution to the repayment of a loan used to acquire the property may well, but need not, be made in pursuance of an arrangement formulated at the time of acquisition. Such a contribution may support an inference of a common intention, formulated at the time the contribution was made, that the claimant should have an interest in the property.59 The intention need not be formulated with the party who is to enjoy the interest. A trust may be imposed upon an owner, or more likely in this situation a prospective owner, where he has agreed or arranged with a third party, usually in this situation the vendor, that someone is to have an interest over the property which it would be inequitable for him subsequently to deny. 60 6.4.3.3 Unconscionability v Qualifying Contributions In order for equity to impose a constructive trust it is not sufficient for the legal owner to renege on a common understanding, for equity will not assist a volunteer. It must be inequitable or unconscionable for him to do so. Such inequity may arise because the claimant has acted on that understanding to his detriment, or because the owner has been unjustly enriched. The limits of acceptable detriment are wider than the contributions required to support a resulting trust. Financial detriment clearly qualifies, but the detriment need not be financial - for instance, physical labour towards the improvement of the property may be sufficient. 61 The difficult question in deciding the limits of acceptable detriment is how to define the nature of the link between the common intention of the parties and the detriment suffered by the claimant. The detriment must be referable to the common intention, but must it be referable only to the acquisition of a beneficial interest in the property or may it have some additional motivation? The answer unfortunately remains unclear. As a result of these distinctions, the sphere of operation of a constructive trust in giving rise to an equitable interest in land is far wider than the resulting trust. The following provide examples of the circumstances where constructive trusts have been employed to give recognition to interests in land: 58 59 6o 61 128 See Midland Bank Pie v Cooke [1995] 4 All ER 562. Gissing v Gissing [1971] AC 886 at 906 E and Lloyds Bank PLC v Rasset [1990] 2 WLR 867 at 877B Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044 Cooke v Head [1972] 1 WLR 518 and Eves v Eves [1975] 1 WLR 1388 FORMALITIES: THE INTERVENTION OF EQUITY 6.4.3.4 Examples of Constructive Trusts • An understanding that B retain a beneficial interest in land acquired by A from B For instance, in Bannister v Bannistet' 2 a lady agreed to sell her property to her brother-in-law at a gross undervalue on an oral understanding that she would be able to live in one of the properties rent-free for the rest of her life. When her brother-in-law tried to evict her, the court held that he was a constructive trustee holding the property subject to the oral undertaking. • An understanding that B retain an interest in land purchased by A from a third party For instance, in Binions v EvanS' 3 a landowner agreed to allow the widow of his employee to live rent-free in one of his cottages. When the cottage was sold the purchaser expressly took subject to this arrangement. When the purchaser tried to evict the widow, the court held that the purchaser held the cottage as constructive trustee subject to the widow's right to occupy the cottage. 64 • An understanding that B should acquire a beneficial interest in land either held by A or acquired by A from a third party This situation is closest to that which gives rise to a beneficial interest under a resulting trust, which we shall be exploring further in the context of matrimonial property. There are other situations where equity regards a party's conduct as sufficiently reprehensible to justify the imposition of a constructive trust. • Transfer of property in breach of trust A transfer of trust property in breach of trust may give rise to a constructive trust upon a number of persons involved in the transfer. First, a purchaser who receives the trust property with notice of the breach will be deemed to hold the property as a constructive trustee. As we have seen in the context of our examination of priority, a bona fide purchaser of the legal estate for value with notice, whether actual, imputed, or constructive, will not be allowed to ignore a prior equitable interest. He will take the legal estate as a constructive trustee subject to the prior equitable interest. Second, a constructive trust may be imposed on one who has wrongfully intermeddled with trust property. For instance, where the trustees have transferred trust property to an agent who deals with the property inconsistently with the trust, that agent may become liable as a constructive trustee. Last, even a person who has assisted in the disposition of trust property in breach of trust may become liable as a constructive trustee if he did so with either actual or constructive knowledge of the breach. 65 6z 63 64 65 [1948] 2 All ER 133 [1972] Ch 359 See also Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044 and Ashburn Ansalt Ltd v Arnold [1989] Chl. For example see Blyth v Fladgate [1891] 1 Ch 337. 129 HONG KONG LAND LAW • Profit by a Trustee or Fiduciary A trustee 66 or fiduciary67 is not permitted to profit from his position. If he does so, he holds that profit or benefit as constructive trustee. • Vendor/Mortgagee as Constructive Trustee A vendor holding property subject to a specifically performable contract for sale and a mortgagee exercising his power of sale are often termed 'constructive trustees', for they do not hold the property entirely for their own benefit. As such they both are obliged to deal with the property with due consideration of the interests of the purchaser or the mortgagor as the case may be. 6.4.4 Matrimonial Home Resulting and constructive trusts have been pushed into the limelight in recent years with respect to the ownership of the matrimonial home or the home of partners of an informal union. The ownership of the matrimonial home is not governed by any special rules. Prima facie if property is held in the name of one spouse or partner it is his property. Attempts have been made to introduce a concept of 'family assets' through the equivalent of s 6 of the Married Person's Status Ordinance. 68 This section confers upon the court power to decide questions relating to the ownership or possession of property between a husband and wife. But these attempts were rejected by the House of Lords in Pettitt v Pettitt 69 and Gissing v Gissing 70 when they decided that the section was a convenient procedural device but no more. It did not entitle the courts to vary the spouses' respective proprietary interests. The courts have now been given wide powers to alter the parties' beneficial ownership of the matrimonial home and other assets upon divorce. Reliance on general equitable principles, however, remains necessary to determine the ownership of the matrimonial home in other circumstances - for instance, upon the breakdown of an informal union, or upon the death or bankruptcy of a spouse or partner of an informal union. The ownership of the matrimonial home is not subject to special rules but it is characterised by an ignorance of and a lack of concern for legal formalities. Given the trust inherent in any close personal relationship, the parties to a marriage or informal union rarely think in terms of recording their respective interests in their property with the formality required by law. It is thus often necessary to resort to the implications of equity and the principles of resulting and constructive trusts to ascertain the beneficial ownership of the matrimonial home. It is interesting to examine how the courts have applied these principles in this context. A not uncommon scenario is for a couple in the early years of their marriage or relationship to buy a flat with the aid of a mortgage. The legal 66 67 68 69 70 130 For example see Karak Rubber Co Ltd v Burden [1972] 1 All ER 1210. For example see Keech v Sandford (1776) Se! Cab King. Cap 182 which enacts s 17 Married Women's Property Act 1882 [1969] 2 All ER 385 [1970] 2 All ER 780 FORMALITIES: THE INTERVENTION OF EQUITY title to the flat is put in the name of one of the parties, say the husband or male partner. Initially the wife or female partner may go out to work and contribute to the family finances. She may help repay the mortgage repayments directly or she may pay for other family household expenses. Children may then be born and the wife or female partner may give up work to stay at home to look after the children. If the relationship then ends, either as a result of a break-up or the death of one of the parties, the question may arise as to who owns the flat. At law the husband or male partner clearly owns the property- the legal title is in his name - but equity may take a different view. There is unlikely to be any written declaration as to the ownership of the beneficial interests, but the wife or female partner may establish an interest based on the resulting or constructive trust principles that we have looked at. In the matrimonial context the courts have rarely differentiated clearly between these two types of implied trust. Indeed, in Gissing v Gissing Lord Diplock thought it was 'unnecessary for the present purpose to distinguish between these . . . classes of trust. '71 As we have seen, a resulting trust is dependent upon a presumed intention, and a constructive trust may arise where there is a common intention that it would be inequitable to deny. It is thus vital in order for a spouse or partner to establish a beneficial interest in the matrimonial home that there be an intention that they are to have such an interest, and that it would be inequitable to deny that intention because one of the parties has relied on that intention and has acted to their detriment. In the case of a resulting trust, contributions to the purchase price provide evidence sufficient to establish both the required presumed intention and detriment, but in the case of a constructive trust the two issues may, but need not, be so closely intertwined. What is required in order to establish a sufficient intention and a sufficient detriment? 6.4.5 Common Intention There may be direct evidence of the parties' common intention. For instance, in Eves v Eves 72 the fact that the Eves' home was conveyed into the name of Mr Eves because he persuaded his partner that she was too young to have the legal ownership transferred into her name was taken as showing an express intention that the house was to be owned jointly. However, evidence of an express intention is likely to be rare - it is probably not often that a couple sit down to thrash out exactly how they intend to own the property that is to be their home. The House of Lords recognised that it may frequently be necessary to infer an intention from the parties' conduct in the leading case of:73 71 72 73 (1971] AC 886 at 905B [1975] 1 WLR 1338 For an application of such principles to Hong Kong see Lui Kam Lau v Leung Ming Fai (1994] 3 HKC 477. 131 HONG KONG LAND LAW Gissing & Gissing FACTS Mr and Mrs Gissing were married for many years. The matrimonial home was purchased in the sole name of the husband. The price was raised primarily with the aid of a mortgage, the balance being paid by the husband. The wife made no direct contributions to the cost of the house as the husband paid the mortgage instalments. She did, however, improve the garden and buy some furniture and equipment for the house, as well as clothing for herself and their son. The remaining household expenses were met by the husband. Upon the break-up of the marriage the wife claimed a share in the matrimonial home. JUDGMENT The wife had no interest in the matrimonial home. Her contributions to the household expenses and to improving the property were not referable to a prior common intention that she would acquire a beneficial interest in the home. The House of Lords recognised that in a matrimonial context there was unlikely to be direct evidence of the parties' intention but accepted that spouses or partners may have nevertheless formed such a common intention. It was thus often necessary to infer what the parties intended from their conduct. In so doing the courts were prepared to go so far as to infer such intention as a reasonable man would infer from the parties' words and conduct. Words and conduct at the time of the acquisition of the property were clearly relevant. Subsequent actions are also relevant, but only in so far as they could either cast light on the parties' intentions at the time of acquisition, or if they support the inference of a subsequent fresh agreement or understanding between the parties to vary the existing beneficial ownership of the home. What inferences would a reasonable man draw from certain conduct? 6.4.5.1 Payment of Purchase Price Where the purchase price is paid directly from the parties' own funds, the parties' intention is usually simply drawn, according to resulting trust principles, from the parties' respective contributions to the purchase price at the time of acquisition. But payment of the full purchase price from a purchaser's own resources is rare. It is more likely that the parties have arranged only to pay a small proportion of the purchase price from their own resources, for instance the deposit, and to fund the balance by raising a mortgage secured upon the property and repayable by instalments. 132 FORMAUTIES: THE INTERVENTION OF EQUITY 6.4.5.2 Payment of Deposit Contributions to the deposit provide important support for the inference of a common intention. Since the payment is made at the time of the acquisition, it is contemporaneous with the usual time for the formation of an intention as to the ownership of the home. The payment of a deposit or initial expense may, as such, provide a framework against which other evidence of a common intention may be measured. 6.4.5.3 Mortgage Instalments In order to support the inference of a common intention to share the beneficial ownership of the home, the repayment of mortgage instalments must be made pursuant to an understanding, formulated at the time of acquisition, that such payments would give rise to an interest as and when made. Alternatively, they may provide evidence to support the inference of a common intention to vary the beneficial ownership of the property after acquisition. Thus if the property was acquired by the husband or male partner prior to the marriage or the start of the relationship, so that it is impossible to establish a common intention as to the joint ownership of the beneficial interests at the time of acquisition, it may nevertheless be possible to establish a common intention to vary the beneficial ownership of the property on constructive trust principles where the wife or female partner has contributed to repayment of the mortgage instalments. 6.4.5.4 Indirect Financial Contribution The House of Lords recognised in Gissing that in the matrimonial context, where a family's assets may be pooled, indirect financial contributions may also qualify provided they are clearly referable to meeting the costs of acquisition. For instance, a couple may have an understanding that because of their limited resources the wife or female partner will meet the housekeeping or other joint expenses so that the husband or male partner can use his funds to repay the loan. Unfortunately for Mrs Gissing, there was no evidence that she bore some of the household expenses in order to assist her husband in meeting the loan repayments. 6.4.5.5 Improvements Contributing financially to the improvement of the property may support a common intention that the contributor is to enjoy a beneficial interest in the property, although the improvements must be of some substance. Indeed, as between husband and wife, s 9 of the Married Person's Status Ordinance 74 now provides a statutory right to a beneficial interest or an enlarged beneficial interest where a spouse has made substantial improvements in money or money's worth. Contribution to the improvement 71 Cap 182 133 HONG KONG LAND LAW of the property through labour as opposed to the cost of improvements is unlikely to be sufficient to establish a common intention, unless a spouse can take advantage of s 9. Despite earlier decisions in support of an inference based upon labour, the House of Lords have indicated that while labour may be sufficient detriment, it is not sufficient to establish an inferred intention. 75 6.4.5.6 Domestic Duties Housekeeping or mothering duties do not by themselves raise an inference of a common intention that the home is to be held jointly. Such action could be equally referable to the discharge of the wife's duties as a wife and mother. The vital quality of conduct sufficient to found an inference of a common intent is that it must be referable to the acquisition of the home. 6.4.6 Detriment In Gissingthe question of detriment was not clearly considered as a separate issue. The financial contributions, whether direct or indirect, that the House of Lords identified as possible sources of a common intention also provided sufficient detriment. The English Court of Appeal have considered this question of detriment more closely in: Grantv FACTS The plaintiff, Mrs Grant, and defendant decided to live together after the birth of their first child. Mrs Grant already had two older children from her first marriage. A house was purchased in the name of the defendant and his brother. The defendant told Mrs Grant that if the house was in their joint names it could prejudice her divorce. The purchase price was met by two mortgages and the balance by the defendant. Initially Mrs Grant made only a small contribution to the household expenses, but after the birth of a second child she returned to work and made substantial contributions to joint household expenses, which enabled the defendant to use his earnings to pay the mortgage instalments. After a fire at the property the family moved into public housing. They used the insurance monies to repair the property, which was let, and the balance was paid into a joint savings account. On the breakup of the relationship, Mrs Grant claimed a share of the house. JUDGMENT Mrs Grant was entitled to a half share in the house. 75 134 See Lloyds Bank Pie v Rasset [1990] 2 WLR 867. il ' I, I FORMALITIES: THE INTERVENTION OF EQUITY The Court of Appeal emphasised that it was necessary to establish not only a common intention that the property be held jointly, but also that the claimant relied on that intention and as a result acted to his or her detriment so it would be unconscionable for the legal owner to deny his or her interest. They then considered what conduct would be sufficient detriment referable to the parties' common intention, and identified two broad circumstances when the treatment of conduct might differ. First, there was the situation where the court was obliged to infer a common intention; and second, the situation where there was direct evidence of the parties' intention. 6.4.6.1 Inferred Intention We have seen that where it is necessary to infer an intention the claimant's conduct must be referable to the acquisition of the home. The courts are most reluctant to infer any intention from conduct that is not directed towards meeting the financial cost of acquiring the home. 76 The claimant's conduct in these circumstances will thus serve the twin function of demonstrating a common intention and sufficient detriment. 6.4.6.2 Express Intention Where there is direct evidence of the parties' intent there is no need for the court to infer a common intention from the parties' conduct. For instance, Mrs Grant was persuaded not to insist on the home being bought in joint names because that would prejudice her divorce. Furthermore, the parties demonstrated that they were jointly entitled to the insurance monies by placing them in a joint account. These actions provided direct evidence of the parties' true common intention that the property should be held jointly. It was thus not necessary for Mrs Grant to rely on her subsequent conduct to infer a common intention. 77 Mrs Grant did still have to show that she had acted to her detriment as a result of that common intention. The court was satisfied she had done so by her contribution to the household expenses, which had enabled the defendant to use his funds to repay the mortgage. In this case the detriment was referable to the acquisition of the property, as the defendant could not have paid the mortgage without this assistance. But the court did not express any common view as to whether detriment had to be referable to the acquisition of the home or what other link had to be shown between the intention and detriment. Nourse L J suggested that 'it must be conduct on which the woman could not reasonably have been expected to embark unless she was to have an interest in the house', 78 while Sir Nicholas BrowneWilkinson V-C was prepared to accept a less restrictive link when he suggested that 'any act . . . relating to the joint lives of the parties is . . . sufficient detriment to qualify. The acts do not have to be inherently 76 77 78 See Lloyds Bank Plc v Rasset [1990] 2 WLR 867 and in next paragraph. See also Eves v Eves [1975) 1 WLR 1338, Cooke v Head [1972) 2 All ER 38 but compare Lloyds Bank Plc v Rasset [1990] 2 WLR 867. See also Midland Bank PLC v Dobson [1986] 1 FLR 171. 135 HONG KONG LAND LAW referable to the house'. 79 If the acts do indeed not have to be referable to the acquisition of the house, then there is a possibility that the performance of domestic duties may qualify as sufficient detriment. The House of Lords have not ruled out this possibility in the case of: Lloy~·Bank PLC v Ross~t [1990] 2 WLR 867 FACTS The Rossets brought a semi-derelict property which was acquired in the name of Mr Rasset, as the purchase price was being provided by a family trust. Mrs Rasset spent a good deal of time and effort redecorating and overseeing the renovation of the property, although she made no financial contribution to the cost of the property or the cost of its renovation. Without his wife's knowledge, Mr Rasset mortgaged the property and when he failed to meet the mortgage payments the bank sought possession. Mrs Rasset argued that she had acquired a beneficial interest in the property to which the bank took subject. JUDGMENT There was no express intention that Mrs Rasset was to have an interest in the property and her labour was insufficient to establish an inferred intention. The House of Lords expressly approved Grant v Edwards and expressed the view that it was 'extremely doubtful' 80 that any less-than-direct contributions to the purchase price, whether to the initial cost or by repayment of mortgage instalments, would support an inferred intention that the property was to be jointly owned. The meeting of household expenses or physical labour which had been evident in Grant v Edwards and Eves v Eves 'fell far short' 81 of the conduct that would support the inference of a common intention. Such conduct was only sufficient to provide evidence of detriment where there was direct or express evidence of a common intention regarding the beneficial ownership of the property. It is interesting to note Sir Nicholas Browne Wilkinson V-C 's comments in Grant v Edwards on the similarity between the principles upon which a resulting or constructive trust may be implied and the doctrine of proprietary estoppel, and it is evident that there is increasing use of this doctrine in establishing an interest in the matrimonial home. at 648G so at 657B 81 at 877. See also Irvin v Blake 0993) 67 P&CR 263. 79 136 FORMALITIES: THE INTERVENTION OF EQUITY 6.4.7 Quantification Having established that the parties did have a common intention that the home be owned jointly the court must establish the proportions in which the beneficial interest is to be held. It is here that the divergence between resulting and constructive trust principles is cast into greatest relief. Under a resulting trust it is the parties' contributions at the time of acquisition which will govern the proportions of their beneficial interest, while under a constructive trust it is the common intention of the parties which will govern the division. The court will often be guided by the parties' respective financial contributions in inferring this common intention but they are by no means limited to financial matters; they can take into account all the circumstances of the case to search out the parties' intentions. The difference in approach is evident from the case of: Lui Kam Lau v Leung Ming Fai FACTS I I ( i. 'I I ( I The defendant had been the common law husband of a Madam Ng Pui Lin who had died. Her personal representatives claimed possession of premises in which the defendant and Madam Ng had lived, which were registered in Madam Ng's name. The defendant however claimed that Madam Ng had held the property on trust for him because he had made substantial repayments of the mortgage and had eventually redeemed the mortgage, at her request. JUDGMENT The defendant was entitled to remain in possession of the premises as he was entitled to a half share in the premises. The court was not entirely clear in their appreciation of the distinction between a resulting and constructive trust: they did first seek to view the situation from the point of resulting trusts where the presumption of advancement could have given rise to the presumption that the defendant intended the mortgage repayments to be a gift to Madam Ng. The court however rejected that approach in favour of finding a constructive trust based upon possibly a direct, but in any event, an inferred, common intention by reason of the substantial direct contributions to the purchase price. Under this trust the defendant was entitled to a half share in the premises, although his contributions represented a slightly lesser proportion. But what if it is clear that the parties never discussed or intended any agreement of how they would share ownership of their home? At one time it appeared clear that the courts would not intervene in these circumstances 137 I ,.I r HONG KONG LAND LAW to infer an intention the parties never had, but a change of attitude can be detected in:82 FACTS Mr and Mrs Cooke married in 1971 and moved into a house bought for £8,500 in Mr Cooke's sole name: his wife was under age at the time and thus could not hold the legal estate in the house. The purchase was financed with a mortgage of £6,450 and the balance was paid from the husband's savings and a wedding gift from his parents of £1,100. In 1978 the mortgage was replaced by a mortgage to the bank which also secured the husband's company's overdraft. In 1979 Mrs Cooke was persuaded to consent to this mortgage taking priority to any interest she might have. The property was subsequently transferred to the joint names of Mr and Mrs Cooke. In 1987 the bank sought possession of the house as the mortgage repayments were in arrears. At first instance Mrs Cooke established that the mortgage should be set aside against her share, on the grounds that her consent had been obtained by undue influence, but the court held that her share in the house was only 6.74%, being her direct contribution to the house, ie her share of the wedding gift of £550. The parties both admitted that they gave no consideration as to how the property should be held at the time of acquisition and no common intention could be implied from subsequent conduct, as Mrs Cooke, although she had carried out repairs and improvements to the house and had paid certain household bills, had not made any contribution to the mortgage repayments. JUDGMENT Although the parties had not discussed the ownership of their home, it was clear that their presumed intention was to hold the property equally, which was reinforced by their subsequent transfer of the property into their joint names The Court of Appeal refused to accept that positive evidence that the parties never discussed nor intended any agreement as .to the proportions of their beneficial interests precluded them from inferring one. They noted that the Cookes' attitude was typical of 'hundreds, perhaps thousands of others .... There will inevitably be numerous couples, married or unmarried, who have no discussion about ownership and who, perhaps advisedly, make no agreement about it.' The court felt that it would be 'anomalous' to put such couples 'beyond the pale of equity's assistance ... just because they were honest enough to admit that they never gave ownership a thought.' 83 138 l 82 McHardy and Sons (a firm) v Warren (1994] 2 FLR 338 83 at 571 per Waite LJ FORMALITIES: THE INTERVENTION OF EQUITY The court in taking this approach had to reconcile the case of Springette v Defoe 84 in which the court applied strict resulting trust principles to apportion the beneficial ownership in the home according to the parties' financial contributions, when it was clear that the parties had never considered how they would hold their beneficial interests. The court did so by resorting to Gissing v Gissing and Grant v Edwards from which they drew the principle that the court should seek to determine the proportions in which the parties are to hold their beneficial interests by looking at what the parties 'must be assumed to have intended' .85 To do so the court should undertake a survey of the whole of the course of dealings between the parties and would not confine itself to the limited range of acts of direct contribution of the sort that are needed to found a common intention. It is to be remembered that Mrs Cooke did not have to establish that there was an intention that she have an interest in the house, that was clear from her contribution to the deposit and the subsequent transfer of the house into her and her husband's joint names. What she was seeking to establish was the quantification of her share in the common ownership. 6.5 ~Propri~ One of the most important developments in land law in recent years has been the emergence of the doctrine of proprietary estoppel. The parameters of the doctrine are as yet ill-defined, but the doctrine is firmly established as a source of an equity based upon estoppel. 86 That equity may arise where A has actedto his detriment as a result of a beHef, whic:h ~as known to and enc;u-~~g;c:iJ;;,B, that h~-eith~;-h~i~~ in or over 'ifs prop_e,rty.In these circumsta~~~s B ~ill be e;t;pp~d fr;~-~i~rcising his -rights-if to do so would be inconsistent with A's belief. Three distinct elements can be identified, which we will have to examine in a little more detail: (1) a representation or assurance by B which is (2) relied on by A who (3) as a result acts to his detriment. However, before we examine these elements it is important to trace the development of the doctrine. i;-g~i~g"t~-b~-gi;;;~~-right 6.5.l Development of Proprietary Estoppel Proprietary estoppel may have come to prominence only in recent years, but it has its origins in the 19th century. An early example can be found in the case of: 84 [1992] 2 FLR 388 85 at 570 per Waite LJ The most recent attempt to establish the parameters of the doctrine is to be found in the judgment of the High Court of Australia in Commonwealth of Australia v Verwayen 0990) 170 CLR 394. 86 139 HONG KONG LAND LAW ----------Dillwyn v Llewelyn (1862) 4 De G F & J 517 FACTS The plaintiff's father allowed his son to build a house on land the father owned. The understanding was that the father would give the land to his son. He signed a memorandum to that effect, but he failed to execute the formal deed necessary to transfer ownership. When the father died it was discovered that the land was left in his will to his widow. His son claimed he was entitled to the land. JUDGMENT The son was entitled to the land. Although equity would not normally assist a volunteer to perfect an imperfect gift, the son had suffered detriment in building the house -which supplied the consideration necessary to claim performance of the memorandum. The analogy to part performance in Dillwyn v Llewelyn is obvious, but subsequent cases moved away from this analogy to a clearer identification of a distinct doctrine. The classic exposition of this is found in the case of: Ramsden v Dyson (1866) LR 1 HL 129 FACTS The respondents, Dyson and an associate, agreed to take a grant of land from Sir John Ramsden and a rent was fixed. The respondents built on the land and subsequently claimed that they believed, as a result of the words and action of Sir John Ramsden and his agents, that the grant of land would be for a renewable lease of twenty years rather than the tenancy from year to year offered by Sir John Ramsden. JUDGMENT The respondents were only entitled to a tenancy from year to year. 6.5.1.1 Common Expectation Approach Although the respondent's claim was rejected on the facts, the judgment of Lord Kingswood, who dissented, contains a classic exposition of the doctrine: 140 FORMALITIES: THE INTERVENTION OF EQUITY I I I [ If a man, under a verbal agreement with a landlord for a certain interest in land or, what amounts to the same thing, under an expectation, created or encouraged by the landlord, that he shall have a certain interest, takes possession of such land, with the consent of the landlord, and upon the faith of such promise or • expectation, with the knowledge of the landlord, and without objection by him, lays out money upon the land, a Court of equity 1 will compel the landlorgtg_give effect to such promise or expectation. 87 l I ... ·~ ,., ) Lord Kingswood frames his explanation in the context of a landlord and tenant relationship, but the doctrine has a general application. The basis of the claimant's belief is a common understanding or expectation that is encouraged by the owner. Both the claimant and the owner originally share a common belief from which equity will prevent the owner withdrawing where the claimant has relied on that common understanding to his detriment. An example of the 'common expectation' approach identified by Lord Kingswood is found in: j , iiilP! .... ·~ 1% ~·· ·•· ·•,-, ~ ,. , , -ii Plimmer v Wellington Corporation (1884) 9 App Cas 699 FACTS i • I Plimmer was a licensee of land under a revocable licence from the Wellington Corporation. At the request of the corporation he went to considerable expense to erect an extension to the jetty he had built on the land. The jetty was subsequently requisitioned and Plimmer claimed compensation on the basis that he had an estate or interest in the land and not merely a revocable licence. JUDGMENT As a result of the corporation's request Plimmer had acted to his detriment in the belief that his licence would not be terminated. Equity would thus not . stand by and allow the corporation to revoke his licence, and so for the purposes of compensation Plimmer's licence was irrevocable. 6.5.1.2 Acquiescence Approach Lord Cranworth in Ramsden v Dyson identified a slightly different scenario from the common expectation approach adopted by Lord Kingsdown in which equity might invervene: 87 (1886) LR 1 HL 129 at 170 141 HONG KONG LAND LAW If a stranger begins to build on my land supposing it to be his own, and I, perceiving his mistake, abstain from setting him right, and leave him to persevere in his error, a Court of equity will not allow me afterwards to assert my title to the land on which he had expended money on the supposition that the land was his own. 88 Here it is the mistaken belief of the claimant, of which the owner is aware but does nothing to correct, that results in the claimant acting to his detriment. The equity in this instance springs from the owner's failure to correct the claimant's mistaken belief, and is accordingly often referred to as an 'equity of acquiescence'. 6.5.1.3 The Five Probanda It has been Lord Cranworth's 'acquiescence' approach that has dominated the development of proprietary estoppel, due to the much quoted five probanda identified by Fry Jin Wilmott v Barber 89 as the elements necessary to establish a claim over land by an estoppel. These five probanda are: • the claimant must have made a mistake as to his legal rights; • the claimant must have expended some money or carried out some act on the faith of his mistaken belief; • the owner must know of the existence of his own right, which is inconsistent with the right claimed by the claimant; • the owner must know of the claimant's mistaken belief of his rights; and • the owner must have encouraged the claimant in his expenditure of money or in other acts which he has done, either directly or by abstaining from asserting his legal rights. These probanda clearly relate to instances of estoppel arising from acquiescence, where the claimant mistakenly believes that he is entitled to certain rights and the owner of the land is aware of that mistaken belief but does nothing to disabuse the claimant, even when the claimant acts to his detriment. But they do not accommodate instances when an estoppel may arise as a result of a common expectation from which the owner seeks to renege after the claimant has acted to his detriment. In these circumstances the owner may not be aware of his own rights that are inconsistent with those of the claimant, or he may not know of the claimant's mistaken belief or the claimant's detriment. Nevertheless, these five probanda have been taken up and repeated in many subsequent cases, even though they have not always been satisfied on the facts before the court. 90 Ii 88 89 90 142 (1886) LR 1 HL 129 at 140 (1880) 15 Ch 96 Matharu v Matharu 0994) 68 P&CR 93 FORMALITIES: THE INTERVENTION OF EQUITY Crabb v Arun District Council [1976] Ch 179 FACTS i 1 Crabb owned some land, the access to which was by way of a road owned by the defendants. Crabb decided to divide his land into two parts and to sell them separately. He met with the defendants and it was agreed that the defendants would grant the necessary additional rights of access. No formal agreement was entered into, but the defendants fenced the land, providing access points as had been agreed. Crabb sold a part of the land but, relying on his agreement with the defendants, did not reserve any right of way over the land sold for the benefit of the land retained. Differences arose between the parties and the defendants blocked the agreed access point to the land Crabb had retained, and refused to grant Crabb the necessary access to this land unless he paid them £3,000. JUDGMENT Crabb was entitled in equity to the right of way without payment. 'I In deciding whether the equity was established, Scarman LJpurported to apply the five probanda, but whilst he was in no doubt that the first four had been established there was a question over the fifth: the defendants had no knowledge that Crabb had sold off part of the land and thus acted to his detriment by leaving the retained land with no access. The case does, however, fit happily into the common expectation category. Both parties had reached an understanding that Crabb was to have the necessary access rights. The defendants, however, were seeking to withdraw from their commitment in view of the differences that arose and despite the encouragement that they had given to Crabb, both by the understanding itself and by their own fencing works, which had been conducted with that understanding in mind. Indeed, Scarman LJnot only cited the five probanda but also Lord Kingswood's statement of the law. 6.5.1.4 The Modern Trend The difficulty of fulfilling all the five probanda has become increasingly obvious, and the courts have shown a willingness to relax their strict application and adopt a more general test of detrimental reliance. This trend is identified in the case of: 143 HONG KONG LAND LAW nw,rn,'ln, Victoria Trustees Co [1982] QB 133 FACTS The plaintiffs held a lease that granted them an option to renew that was not registered because it was not thought necessary. The landlords assigned the reversion to the defendants. The plaintiffs, believing the option to be enforceable against the defendants, incurred substantial expenditure on improvements to the premises. Some years later a case established that an option to renew should be registered in order to bind a subsequent landlord. The plaintiff's option was thus void against the defendants, who refused to renew the lease. The plaintiffs sought to argue that the defendants were estopped from refusing to renew the lease, for they had stood by and allowed them to incur expenditure. JUDGMENT The plaintiffs failed to establish a right to renew the lease based on proprietary estoppel as there was no evidence that the defendants had encouraged them to believe the lease would be renewed. That belief arose from a common mistake. A distinction was drawn between an estoppel arising by acquiescence where the owner had acquiesced or failed to disabuse a claimant of a mistaken belief, and an estoppel by representation where the owner has actively encouraged the claimant in a belief from which he subsequently seeks to withdraw. Oliver J was of the view that Fry's five probanda were only relevant, if at all, to the acquiescence cases where there was some obligation on the owner to inform the claimant of his mistake, which he could clearly only do if he was aware of that mistake. Indeed, Oliver preferred: a very much broader approach which is directed rather at ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which, knowingly, or unknowingly, he has allowed or encouraged another to assume to his detriment than to inquiring whether the circumstances can be fitted within the confines of some preconceived formula serving as a universal yardstick for every form of unconscionable behaviour. 91 A slavish adherence to the five probanda thus appears to be on the wane. For instance, in Re Basham Dec 'd 92 and Maharaj v Chand 93 a more flexible 91 92 93 144 [1981] 2 WLR 576 at 593D [1986] 1 WLR 149B [1986] 3 All ER 107 FORMALITIES: THE INTERVENTION OF EQUITY approach is evident; but there have been occasions when the courts have clung to its strictures. 94 Elements of Proprietary Estoppel 6.5.2 There are three elements that we must look at: • assurance, • reliance, and • detriment. 6.5.2.1 Assurance There must have been some assurance as to the claimant's present or future rights given by the person against whom the estoppel is raised. If there is no assurance, promise, or representation, then there is nothing to be estopped. This was the problem for the Hong Kong Government in: ----■ AG of Hong Kong v Humprey's Estate (Queen's Gardens) Ltd [1987] AC 114 FACTS I I I The government and Hong Kong Land entered into an agreement in principle to enter into a land exchange by which Hong Kong Land would obtain a grant of land on May Road in exchange for a number of apartments in its Tregunter development which were to be used as government quarters. The agreement was expressed to be 'subject to contract' and negotiations continued. In the expectation that the agreement would be implemented, government servants were allowed a licence to occupy the Tregunter apartments and Hong Kong Land paid the agreed difference in value of the exchange and was given a revocable licence of the site of the proposed new grant to allow them to demolish the existing buildings. The property market fell and Hong Kong Land decided to withdraw from the proposed exchange and reclaim the money they had paid. The government claimed that they should be estopped from doing so. JUDGMENT The agreement between the government and Hong Kong Land was not binding and Hong Kong Land had not made any representations or encouraged the government to believe that it was binding. The government had merely acted in the hope that the agreement would be performed but that was a hope that had not been encouraged by Hong Kong Land who had not done anything to compromise their right to withdraw from the agreement. 94 See for instance Coombe v Smith (1986] 1 WLR 808. 145 HONG KONG LAND LAW The assurance must be given by the owner of the land or one of his employees or agents. For instance, in Crabb v A run District Counci/ 95 it was the employees of the council who assured Crabb that he would be granted the access rights he required and in Matharu v Mathanf 6 it was a husband's assurance to his wife that his father's house was their home that gave rise to an estoppel when the father tried to evict the wife. The rights that may be promised are many: for instance an outright disposal of ownership, 97 the grant of a licence to occupy, 98 a lease, 99 and an easement. 100 The rights must, however, relate to land and be within the capacity of the owner to grant - although it appears that a claim may succeed even if the property is not clearly identified or the rights promised are future rights over such property. FACTS The deceased's stepdaughter had worked for the deceased for some thirty years without payment. After her mother died, she and her husband looked after the deceased. On several occasions she and her family had considered moving away but was dissuaded by her stepfather, who constantly assured the plaintiff that she would lose nothing by staying and looking after and working for him. A few days before her stepfather died, he indicated that he wished to make a will in which he would leave his house to his stepdaughter and some money to her son. However, he failed to do so and died intestate, his estate passing to other relatives. JUDGMENT The stepdaughter was entitled to the deceased's residuary estate. She had acted to her detriment on the faith of a belief that was encouraged by the deceased that she was going to have certain rights over his property after his death. •I i The court felt that the stepdaughter's claim should not fail either because the rights promised could only arise in the future, ie after the stepfather's death, or because they were over property that at the time of the representations was not yet ascertained, ie the stepfather's estate. Neither of these factors affected the unconscionable nature of the stepfather's 95 96 I 97 98 99 100 l·i 146 [1976] Ch 179 (1994) The Times 13 May. The family were Indian and the court was persuaded that in the context of the family's cultural background anything said by the son to his wife would have the authority of the father. For example Dillwyn v Llewelyn (1862) 4 De GF & J5A For example Greasley v Cooke [1980] 1 WLR 1306 For example Griffiths v Williams 0977) 248 Estates Gaz 947 For example Crabb v Arun District Council [1976] Ch 179 FORMALITIES: THE INTERVENTION OF EQUITY II conduct on which the estoppel was based. However, vague promises of being looked after that are not related to any particular property or assurances of probable future entitlement are unlikely to succeed. The assurance will usually take the form of an express promise, but in the instance of an estoppel arising by acquiescence the owner's mere silence may constitute the necessary assurance. If the owner is aware of the claimant's mistaken belief and his own inconsistent rights, he has a duty to stop the claimant relying on his mistaken belief to his detriment. He cannot stand by and reap the benefits of the claimant's mistaken belief. For instance, in Taylor Fashions, 101 if the mistaken belief as to the validity of the option to renew had only been the lessee's, then the landlord would have been under a duty to prevent them incurring expenditure on improvements as a result of that mistaken belief. 6.5.2.2 Reliance The claimant must have relied upon the owner's assurance and as a result acted to his detriment. The claimant's reliance thus forms a vital link between the owner's assurance and the detriment suffered by the claimant. For instance, in Taylor Fashions1°2 there was a suggestion that the lessees would have undertaken the improvements in any event. This causal link can present particular problems in the domestic situation where the acts of detriment relied on are not financial in nature but are in the form of personal hardship, which it might be said the claimant undertook not because of the owner's assurances but because of the close relationship between the owner and the claimant. Greasley v Cooke [1980] 1 WLR 1306 FACTS Miss Cooke went to work for the Greasley family as a maid at the age of 16. She worked for the family for 43 years. For 28 of these years she looked after a mentally retarded daughter of the family and for 29 years she was the mistress of one of the sons. For the first fifteen years she received payment, but after the father of the family died she received no money because she was encouraged to believe that she could live in the house for the rest of her life. Subsequently the family sought to evict her. JUDGMENT Miss Cooke was entitled to remain in the house for as long as she wished despite allegations that there was insufficient evidence that she had acted as she did because of a belief that she would be entitled to remain at the house. 101 [1982] QB 133 102 Ibid. 147 HONG KONG LAND LAW Lord Denning MR was of the view that there was a presumption that the claimant had acted to her detriment in reliance on the owner's assurances, and that the burden of proof was on the owner to prove that this was not the case. Lord Denning's views have not been supported wholeheartedly. For instance, the Privy Council in AG of Hong Kong v Humprey's Estate (Queen's Garden) Ltd 103 appear to have placed the burden of proof back on the claimant, although they also acknowledged in Lim Teng Huan v Ang Swee Chuan 104 that reliance may be an 'inevitable inference' from the claimant's actions. Nevertheless in GrantvEdwards 105 Sir Nicholas BrowneWilkinson V-C suggested that setting up house, having a baby, and meeting general household expenses might constitute sufficient detriment even though they might be more directly referable to the 'mutual love and affection of the parties and not specifically referable to the claimant's belief that she had an interest in the house.' 106 It is important that the owner be aware that the claimant may act upon his assurances to his detriment. This knowledge may arise either because the owner actually knows that the claimant is relying on the assurance to his detriment or because the assurance was made with the intention that it be relied upon. For instance, in Crabb v Arun District Council 107 the council did not know that Crabb had sold part of his land in reliance on the assurance that access would be granted. Nevertheless, an estoppel was established because the council was aware that Crabb might well rely on their negotiations. 6.5.2.3 Detriment The classic form of detriment is the expenditure of money on the land, whether by way of building or by the improvement of an existing building. More recently there has been the case of: 108 Lim Teng Huan v Ang Swee Chuan [1992] 1 WLR 113 FACTS The plaintiff and defendant jointly purchased land in Brunei. The defendant decided to build a house on the land and at his own expense started building work. When the house was partially completed, the parties entered into a written agreement in which the plaintiff acknowledged that the building was with his consent and agreed that he would exchange his interest in the land for unspecified land which the defendant expected to acquire from the government. The defendant completed the house and I03 104 105 106 107 108 148 [1987) AC 114 at 124D per Lord Templeman [1992) 1 WLR 113 at 118D per Lord Browne-Wilkinson [1986) 1 WLR 808 See also Maharaj v Chand [1986) 3 All ER 107 but compare Coombe v Smith [1987) 1 WLR 808. [1979) Ch 179 See also Voyce v Voyce (1991) 62 P&CR 290. FORMALITIES: THE INTERVENTION OF EQUITY went into occupation. The plaintiff then sought a declaration that he was the owner of a half share in the land. JUDGMENT Although the agreement was unenforcable it did show the parties' intentions regarding the ownership of the land upon which the defendant had acted in completing his construction of the house and taking up occupation. The plaintiff would accordingly be estopped from denying that the defendant was entitled to the sole ownership of the land subject to the payment of compensation. We have already looked at the examples of Dillwyn v Llewelyn, 109 Plimmer v Wellington Corporation, 110 or, in Hong Kong, Citibank NA v Lai Tat-chee. 111 It is clear that other acts may be acceptable although they do not involve monetary expenditure. In Greasley v Cooke, Lord Denning MR indicated that: 'It is sufficient if the party to whom the assurance is given acts on the faith of it in such circumstances that it would be unjust and inequitable for the party making the assurances to go back upon it.' 112 In that case the detriment was long service without wages and, in effect, foregoing an independent life outside the employer's family. In Re Basham Dec 'd 113 it was also long service without wages and lost opportunities that constituted the necessary detriment. The acceptance of non-financial detriment provides an alternative and possibly easier ground for claiming an interest in the matrimonial home than the traditional constructive trust route that we have examined. An example is found in the case of: ER 107 FACTS The plaintiff was granted a sublease of land by the Fiji Native Land Trust. The plaintiff told the defendant that the house he had built on the land would be a home for her and her children, one of whom was fathered by the plaintiff. The defendant gave up her flat and moved into the house and looked after the plaintiff and the children. She also contributed to the household expenses from her earnings, The plaintiff left the defendant but told her she could stay in the house. He later sought to evict her. 109 (1862) 4 De G F &J 517 no (1884) 9 App Cas 699 111 [1986] 2HKLR 855 112 [1980] 1 WLR 1306 at 309 113 [1986] 1 WLR 1948 149 HONG KONG LAND LAW JUDGMENT The plaintiff was estopped from evicting the defendant. Upon reliance on the plaintiff's assurances the defendant had acted to her detriment in giving up her former home, supporting the plaintiff's application for land from the Fiji Native Land Trust, paying household expenses, and looking after the plaintiff and their children. II Non-financial detriment need not revolve around personal hardship it may take many forms. For instance, in Crabb v A run District Council 114 it was acting in such a way as to leave the claimant's retained land without access. Despite the courts' acceptance of a broad test of detriment in terms of inequitable conduct, it would be a mistake to think that it is an easy test to pass. As the cases illustrate, the courts are cautious in their application of the test, for an owner's rights will not be limited without very careful consideration. All the circumstances must be considered by the court, including the benefits, for instance by way of rent free accommodation, that the claimant has obtained as well as the detriment he has suffered. All in all it is often obvious that the enforcement of the owner's strict legal rights would be inequitable, and where there is room for doubt the courts will be reluctant to intervene unless the remedy awarded can be tailored to balance the parties' interests. i I '. ii l 6.5.3 Remedies Having established that an equity exists, the question then arises as to how that equity is to be satisfied. Here the courts have shown themselves at their most flexible in applying the principle established in Plimmerv Wellington Corporation that 'the Court must look at the circumstances in each case to decide in what way the equity can be satisfied'. 115 There are evident from the cases two different approaches that the courts have adopted in deciding what remedy is appropriate. The first has been to seek to satisfy the expectation raised by the assurance given to the claimant and the second to compensate the claimant for the detriment that they have suffered in reliance on the assurance. On occasions the two approaches may lead to the same conclusion, but not always. Divergence is particularly likely to emerge where the detriment suffered is small compared with the assurance made and it is clear that the court will not sanction redress which is out of proportion to the detriment suffered they must seek 'the minimum equity to do justice' _116 It may be sufficient for the courts to protect the equity in a negative fashion by refusing to grant the owner a right to possession that he would 114 115 116 150 [1976] Ch 179 (1884) 9 App Cas 699 at 714 Crabb v A run District Council [1976] Ch 179 at 198 per Scarman LJ FORMALITIES: THE INTERVENTION OF EQUITY otherwise have enjoyed. But one factor that distinguishes proprietary estoppel from promissory estoppel is that the courts have been prepared to go further and positively protect an equity arising by estoppel by the grant of a proprietary interest. Proprietary estoppel may thus be used as a sword as well as a shield. It is completely within the discretion of the court to decided the nature of the remedy to grant the claimant. 6.5.3.1 Injunction to· Restrain Where it is sufficient to merely stop the owner from exercising a right to which he would otherwise be entitled, the courts will protect the equity by the grant of an injunction restraining the owner from exercising his rights of ownership. Most commonly that right is the right to claim possession from the claimant. ll!illlli!'!!!!!!'.!~, ,;, ,. _-.-~,~'""'"::,:..,.,.i!!l;: .. ,I •Et_,!!!!!I!!!.\\:i Inwards v Baker [1965] 2 QB 29 FACTS A son wished to build a bungalow but could not afford to buy any land. His father suggested the bungalow be built on his land. The son did so, and went into occupation under the impression that he could stay as long as he wished. The father died and his personal representatives sought to evict the son. JUDGMENT The son was entitled to remain as long as he wished. 6.5.3.2 Entitlement to Money The court may, in effect, order the repayment of the detriment the claimant has suffered in money terms. Repayment may be secured by a charge over the land as in the case of: i,dlii1~1it ..,.... ,11ili;J,,_ .... ,~,iiilr:: ...i2l'""'iiiii!'!lllllllii-9!!,.,J.\ib,.1,,.iii• :~.:~.,.~ •• !Ill,.,~ Chalmers v Pardoe [1963] 1 WLR 677 FACTS The plaintiff held a lease of land in Fiji. The defendant built a residence on the land as a result of an agreement that the plaintiff would sublet the land to the defendant on receiving the necessary consent from his landlord, a government body. The parties quarrelled and the plaintiff refused to seek consent. 151 HONG KONG IAND IA W JUDGMENT The plaintiff should be estopped from denying his agreement, but as the court could not order him to grant the sublease he was ordered to repay the cost of the building to be secured by a charge over the land. The repayment of money may also be secured by protecting the claimant's right to stay until repayment is received. 117 Dodsworth v Dodsworth 0973) 228 Estates Gazette 1115 FACTS The defendant accepted an invitation from his sister for he and his wife to go and live with her in her bungalow. The defendant and his wife spent money on improvements and the defendant did considerable work on the bungalow in the expectation that they would be able to stay as long as they wished. After a while the sister regretted her invitation and tried to evict the defendant and his wife. JUDGMENT The defendant and his wife should be entitled to reimbursement of £700 and eviction would be ordered when they had been repaid. In establishing the compensation due to the claimant it may be inappropriate to take into account outside factors which have mitigated the detriment suffered: Baker v Baker (1993) 25 HLR 408 FACTS Mr Baker left his public housing to live with his son and his family. He gave almost £34,000 to help his son buy a new home in which t;hey were to all live on the understanding that he would have his own rent-free room in the new home. The arrangement worked well until his daughter-in-law falsely accused Mr Baker of molesting her daughter. He left the home and after a period in temporary accommodation secured a public housing unit in which he was very happy. 117 152 See also Re Sharpe [1980] 1 WW 219. FORMALITIES: THE INTERVENTION OF EQUITY JUDGMENT Mr Baker was entitled to compensation for the loss of rent-free accommodation for the rest of his life. This compensation was to be measured at the time he left his son's home and was not to be reduced by the fact that he had since obtained other accommodation. It was wrong in principle to take into account a public benefit in satisfaction of a private equitable right. 6.5.3.3 Entitlement to Remain Where the courts feel that the occupation of the claimant should remain undisturbed, they have not only rejected the owner's claim to possession but have also declared the claimant entitled to remain in occupation for a given period. For instance, in Greasley v Cooke 118 Miss Cooke was allowed to stay in the property for the rest of her life. In England the grant of a right to occupy for life gives rise to technical problems in the light of the Settled Land Act 1925, but in Hong Kong there is no problem arising from this or similar legislation. There may, however, be difficulties given the leasehold nature of land in Hong Kong. Clearly the claimant cannot claim an interest greater than that enjoyed by the owner. Thus if the owner's Crown lease is due to expire shortly it is difficult to see how the claimant's occupation can be protected beyond the term of the Crown lease, even though the owner may obtain a renewal or re grant of his Crown lease. Even if the Crown lease has many years to run, there is still the practical problem that it is impossible to grant a lease for life in Hong Kong. The solution in these circumstances is to direct that the property be held in trust for the claimant for life. 6.5.3.4 Entitlement to a Proprietary Interest The court may also go so far as to order the creation or transfer of a proprietary interest in the property. For instance, in Crabb v A run District Council 119 the court ordered the creation of an easement, and in Dillwyn v Llewelyn 120 and Re Basham Dec 'd,121 the transfer of the property concerned. Perhaps the most controversial example is to be found in the case of: Pascoe v Turner FACTS Mrs Turner, a widow, become friendly with the plaintiff and after two years moved into his house as his housekeeper. They subsequently lived together 118 119 120 121 [1980] 1 WLR 1306 [1976] Ch 179 (1862) 4 De G F &J 517 [1986] 1 WLR 1498 153 HONG KONG LAND LAW as man and wife and moved to another house brought by the plaintiff. In reliance on the plaintiff's statements that he had given her the house and contents, Mrs Turner spent money on redecoration, improvement, and repair of the house. The relationship broke up and the plaintiff sought possession. JUDGMENT The plaintiff should be required to transfer the house to Mrs Turner. The court felt that only a complete transfer of ownership would protect the claimant's equity in view of her own limited resources and the harassment that she had suffered at the hands of the plaintiff. 6.S.4 Nature of Proprietary Estoppel It is impossible to ascertain the exact nature of the equity before the court has considered whether an equity has been established and how it should be satisfied. The equity may thus fluctuate prior to its determination by the court. For instance, in Dodsworth v Dodsworth 122 at first instance the court refused to grant the defendants a licence to remain, for that would have forced the parties to live together. But after the sister's death the defendants reasserted their claim to a right of occupation. In fact the court once more declined to award such a right, but this time it was because to do so would unduly prejudice those interested in the sister's estate. The uncertain nature of an equity arising by estoppel gives rise to a number of issues. 6.S.4.1 Misconduct An equity arising by estoppel may be affected by misconduct on the part of the claimant prior to but not after the nature of the equity has been determined by the court. The effect of misconduct was considered in: !!! ........ .p~..... 'Williams v Staite [1979] Ch 291 i ~ ....oi:-.J!•!•ij FACTS The Staites were married. Mrs Staites' mother owned two neighbouring cottages. She lived in one and when the Staites were married she told her daughter t~at she could have the other cottage as a wedding present and live there as long as she wished. The Staites took up this offer and Mr Staite gave up the cottage that went with his job. Mrs Staites' mother died a couple of years later. Her executors sold both properties to a builder who tried to evict the Staites, but they successfully resisted his claim and in a previous court action had been awarded a right to occupy the cottage for life by way of proprietary estoppel. The builder sold both cottages to Mr Williams who 122 I A 154 (1973) 228 Est Gaz 1115 FORMALITIES: THE INTERVENTION OF EQUITY moved into the other cottage. Arguments arose between Mr Williams and the Staites over the use of a paddock that went with the cottages. During these arguments the Staites were guilty of certain misconduct, and Mr Williams claimed that as a result their equitable licence to occupy was revoked and he was entitled to possession. JUDGMENT The Staites' equitable licence to occupy was not revoked subsequent misconduct. by their Lord Denning MR felt that in extreme circumstances where other remedies, eg nuisance or trespass, had failed, an equitable licence by estoppel might be revoked - but this was not such a case. The court did, however, observe that misconduct or some other change in relevant circumstances could affect an equity prior to its determination by the court. 6.5.4.2 Priority It is clear from the case of Williams v Staite that once the court has determined that an interest has arisen by proprietary estoppel it will bind third parties in the same way as an interest created according to the requisite statutory formalities. It is as if the court order awarding the interest takes the place of the instrument. The extent to which an equity arising by estoppel will affect third parties prior to the determination of the nature of the equity by the court is uncertain. It seems clear that the equity will bind a third party who has actual notice, 123 but it is less clear first, whether a purchaser with constructive notice will be bound, and second, whether the holder of a subsequent equitable interest will be bound regardless of notice. According to the traditional rules we have examined in Chapter 2, there would seem no reason why a purchaser should not be bound even if he has only constructive notice. The difficulty is that the purchaser will not know nor will he be able to find out what he is bound by until the court determines the nature of the equity. The holder of a subsequent equitable interest would be bound regardless of notice if the equity is regarded as equivalent to an equitable interest, on the basis of the rule that the first interest in time prevails. But if the equity is classified only as a mere equity, which given its uncertain nature may well be the case, the priority of a subsequent equitable interest will also depend on notice. 6.5.4.3 Transferability It is also uncertain to what extent the benefit of an equity can be transferred to a third party. If the equity is truly proprietary in nature it should be capable of passing to third parties, but the close connection between the 123 ER Ives Investment Ltd v High [1967] 2 QB 379 155 HONG KONG ZAND LAW detriment suffered by the claimant and the nature of the remedy granted raises doubts about the extent to which a third party can, in effect, claim the benefit of another person's detriment. 6.5.5 Relationship with Constructive Trusts Sir Nicholas Browne-Wilkinson V-C in Grant v Edwards 124 noted the similarity, at least in the matrimonial context, of constructive trusts and proprietary estoppel. They are both based upon the principle that equity will prevent a person from asserting his strict legal rights if to do so would be inequitable given his past conduct. But there are differences. 6.5.5.1 Common Intention v Representation The inequitable conduct upon which a constructive trust is based arises as a result of the owner reneging on a common understanding between the parties which must be evidenced by the conduct of both parties. An estoppel may also arise as a result of the owner going back upon a common understanding, but that understanding is based upon his representations rather than the conduct of the claimant. Furthermore, an estoppel may arise where there is no common understanding but rather a mistaken belief by the claimant that the owner does nothing to correct, despite being aware of that belief. 6.5.5.2 Detriment The link between the detriment and representation appears to be more loosely drawn in the case of estoppel than the link between the common understanding and detriment in the case of a constructive trust. As a result a wider range of detriment appears acceptable to support estoppel than a constructive trust. For instance there is no doubt that domestic hardship may establish a claim based upon estoppel, while no claim based upon such hardship has yet succeeded in establishing a constructive trust. 6.5.5.3 Remedies A constructive trust gives rise to an equitable interest, while proprietary estoppel may give rise to a whole range of interests - some of which are clearly proprietary, some less so. Thus while a claimant will be sure of the nature, although not necessarily the extent, of his interest, under a constructive trust a claimant based upon estoppel will not even know the nature of his right until the courts have considered his claim. 124 156 11986] Ch 638 Adverse Possession 7 .1 Introduction We have examined in the last two chapters how interests in land can be created and transferred. Another way to acquire ownership of land is through the operation of the Limitation Ordinance, 1 which lilllits the thµe within which actions for the recovery of the possession of land can be brought. In order to understand how the ordinance leads to this result it is necessary to look at the role of possession in the proof and acquisition of title. 7 .2 Possession 7.2.l and Title Relativity of Title Title to land has historically been based upon possession. If there was a dispute over the ownership of land the court would decide in favour of the person who could show that he had the better, ie the earlier, right to possession. The titles to land are thus relative rather than absolute) If the owner ofland, A, is dispossessed by B whose occupation is in turn disturbed by C, then B does not have to prove that he is the owner of the land in order to take action against C. He merely has to prove that he has a better right to possession than C. Likewise C cannot argue in his defence to an action by B that A is the true owner of the land. He cannot claim what is known as 'jus tertii' or the right of a third party.2 Only A can set up his own better right to possession in order to defeat B's right to possession. Thus, although a squatter has no documentary title to the land, he does have a right to protect his possession against all those who do not have a better right to possession. This concept of relativity of title is derived from the fact that historically the actions developed for the recovery of land that were based upon possession were far more efficient, and thus more popular, than those actions based upon ownership. Even an owner ofland preferred to base his claim for repossession of his land upon his better right to possession rather than his ownership. As a result, actions based upon ownership fell into disuse and title to land became inextricably linked with possession. 7.2.2 Lim{tation of Actions An ability to recover the possession of land that was based purely on an earlier right to possession had its disadvantages. The possibility that an occupier might be evicted even after he had been in possession of the land for a considerable time might well discourage him from improving or developing the land. Even if the occupier was prepared to take the risk and Cap 347 Tang Chi Ho v Wong Yuk Ho & others 0996) CA Civ App No 198 q 1995 157 l'J I HONG KONG LAND LAW invest his labour in developing the land, he might be unable to persuade banks or other financial institutions to invest their money so he could develop the land to its full potential. There was also the difficulty of bringing an action to court that was based upon evidence of events that had taken place a long time ago. Accordingly, the holder of a prior title even at common law had to bring his action for possession within a specified time known as the 'limitation period'. The common law rules have now been superseded by the st~tutory time limits which are contained in the Limitation Ordinance. 3 7 .2.3 Nature c!f Title by Adverse Possession If an owner cannot bring an action to evict a squatter because the period during which he is permitted to bring an action has expired, then the squatter can rest secure in the knowledge that there is no one with a prior title that can evict him. His right to possession cannot then be disputed by anyone. The Limitation Ordinance, in fact, goes further than preventing the owner from bringing any action: it actually extinguishes his title or ownership of the land. 4 In this somewhat negative fashion the squatter has acquired the undisputed title or ownership of the land. He is not a purchaser or even a transferee of the owner's estate and cannot, for instance, claim free of prior interests that have not been registered or of which he has no notice. He acquires a separate estate upon his assumption of possession which, ortce the limitation period has expired, cannot be defeated. It is an estate that the squatter is able to transfer or dispose of during in his lifetime or by his will and will pass on his intestacy. Interestingly, the estate acquired appears to be a fee simple estate, subject in the case of leasehold land to the right of re-entry of _the landlord .. 7.2.4 Proof of Title The importance of possession in establishing ownership is reflected in the procedure for proof of title to land. A vendor proves his title to land to a purchaser by establishing his right to possession of the land for the period considered sufficient to exclude any reasonable probability of a superior adverse claim. This period is known as the 'title period'. At common law the title period is at least 60 years, but this period has now been reduced to 15 years. 5 7.3 Limitation Periods The Limitation Ordinance 6 provides that the limitation period for actions brought for the recovery of land by the Crown is 60 years, and by any other --- ·--. - Ibid. Sees 10 of Cap 347. See s 13 of the Conveyancing and Property Ordinance Cap 219. See s 7 of Cap 347. 158 1 ADVERSE POSSESSION person the period is.2Q_yearswhere the right of action accrued bt::fo_Le lJuly 1991 and.12 years where the right of action accrued after 1 July 1991.7 This reduction of the limitation period will bring Hong Kong int~-Iine with the limitation period in England, which has been 12 years since 1874.8 Other limitation periods of importance are the periods of six years for actions on a simple contract or on a tort, as well as for the recovery of arrears of rent; 9 and 12 years for actions on a specialty, which include covenants relating to land that are contained in a deed, for instance a lease under seal or deed of mutual covenant. 10 The limitation period in respect of actions brought upon a mortgage generally follow the 2o~year period, which is also to be reduced to 12 years for actions accruing after 1 July 1991.11Thus a mortgagee must sue foi: repayment of the principal sum advanced under the mortgage or claim the exercise of his powers for recovery of this sum within 20 or 12 years, 12 as appropriate, of the due date for repayment. 13 r.,,,11:: :11111,~ Tang Kun Nin v Tang Chun Cbak 0992) HCt MP No 761 of 1991 FACTS The plaintiffs had succeeded to property from their father who in turn had succeeded to the property from his father, the plaintiffs' grandfather. In 1917, the plaintiffs' grandfather had mortgaged the property for $40, repayment being due in 1919. At least since 1962, when the plaintiffs inherited the property, there had been no repayment or demand for payment. JUDGMENT The time for enforcement of repayment of the principal and interest had expired as had the time for bringing a foreclosure action or other enforcement remedy. Accordingly the plaintiffs were entitled to a declaration that the mortgage had been discharged. A claim for the repayment of interest due on the mortgage debt, however, must be brought within six years. A mortgagor will also lose his right to repay the mortgage debt and recover his property if the mortgagee in exercise of his powers goes into possession of the property and for a period of 20 or 12 years, as appropriate, the mortgagor fails to repay any 8 9 10 11 13 See See See See See See Limitation Limitation (Amendment) Ordinance 1991. Act 1874. s 4 of the Limitation Ordinance Cap 347. s 4(3) of the Limitation Ordinance Cap 347. s 19 of the Limitation Ordinance Cap 347. also Fung Kam Cheung v Kwok Yiu Wing [1991] 1 HKC 321 and CastleCity Ltd v Choi Yue Development Ltd [19951 2 HKC 593. 159 HONG KONG LAND LAW part of the mortgage debt or assert his right to redeem the property. 14 In either situation an acknowledgement by one party of the rights of the other, for instance the payment or acceptance of any money due under the mortgage, may start the period running again. 7.3.1 Accrual of Right of Action Section 8(1) of the Limitation Ordinance1 5 provides that the tig_ht_ofacti_on, to re~_oyerland accrues from the time of dispossession or the discontinuance 9L_p9_s~essicm. It is, however, clear that time will not begin to run until there is someone in adverse possession of the land from whom the owner can seek possession .. Dispossession of the land by its nature implies that someone else has taken possession, but where an owner has discontinued or abandoned his possession nobody may have immediately followed into possession. In these circumstances time will not run from the discontinuance of possession but from the time adverse possession is taken by a squatter. There must be someone against whom action can be taken. 16 The reduction of the limitation period from 20 years to 12 years introduced by the Limitation (Amendment) Ordinance results in two limitation periods depending on when adverse possession started. Where the adverse possession commenced before 1July 1991, the limitation period is still 20 years. The amending ordinance does not, in other words, affect an existing cause of action, and the owner still has 20 years in which to assert his prior title against the squatter. It is only where adverse possession started after lJuly 1991 that the shorter 12-year limitation period is applicable. It will thus be some time before an owner's title will be extinguished by a 12year period of adverse possession. 7.3.2 Aggregation of Periods The period need not be established by the possession of only one person. For instance, if A is dispossessed by Bin 1965, and Bin tum is dispossessed by C in 1980, then C may claim in defence to an action for possession by A the period of possession by B as well as his own period of possession. C will, however, remain at risk from an action by B, for as against B he must be in possession for the full period. Fig. 7.1 B takes possession from A in 1965 1960 1965 1970 C in possession 1975 1980 1985 Time running against A-20 years 14 15 16 160 See s 14 of the Limitation Ordinance Cap 347. See Cap 347. See s 13 of Cap 347. 1990 1995 ADVERSE POSSESSION Periods may also be accumulated if a squatter sells or gives his possession of the land to another, whether that gift is made during his lifetime or upon his death. Thus, in our example C would be able to accumulate the periods of B's possession if in 1980 B had either sold or given the land to him or had died, and in his will or on his intestacy had left the land to C and C had entered into possession. Periods of possession must be continuous to be accumulated. Possession is likely to be continuous where a squatter disposes of his right to possession by sale or gift, but iL~~q\latter abandons possession and there is a gap before another squatter takes possession of the land, then the second squatter cannot accumulate the first period of adverse possession with his own. He must possess the land for the full period. Thus, in our example if -B had given up possession in 1975 but it was not until 1980 that C took up possession, C will be at risk of an action for possession from A until the year 2000. The interruption in continuous possession means that C cannot accumulate B's period of possession with their own. 7.3.3 Future Interests The basic limitation periods may be extended where the person entitled to bring an action to recover possession holds a future interest. In such instances the owner's action will be barred on the expiry of the normal limitation period or six years from the time his interest falls into possession, whichever is the later. 17 Thus, if land is held by A for life with remainder to B and C is in possession for 25 years before A's death, B will still have another six years after A's death in which to recover possession from C before his title is extinguished. Thus effectively C will have to be in possession for 31 years before he can extinguish both A and B's titles. Fig. 7.2 Future Interests 1960 C takes possession 1960 1965 1980 A's title extinguished 1970 1975 1980 1985 A dies 1985 1991 B's title extinguished 1990 1995 1991 Time running against A - 20 years Time running against B - 20 years I Time running 1 against B - 6 years Alternatively, if C had taken possession prior to 1 July 1991 but only ten years before A's death, the ordinary limitation period would apply and B would have another ten years before his title was extinguished. In these 17 See s 9 of Cap 347. 161 HONG KONG LAND LAW circumstances, the additional six-year period available to the holder of a future interest does not produce a longer period. Fig. 7.3 1975 C takes possession 1975 1985 A dies 1980 1985 1990 1995 1991 6 years Times running against B 20 years We will see that most future interests in Hong Kong must exist behind a trust. Action for possession in these circumstances can then be taken by either the beneficiaries or by the trustees. The trustees' title is not extinguished and their right to take action is not extinguished until the titles of all the beneficiaries have been extinguished. 18 Thus, in our example above where land is held in trust for A for life with remainder to B, the trustees' title is not extinguished until B's title is also extinguished. The trustees cannot, however, bring an action should there be a gap between the expiration of one beneficiary's right to take action and the start of another beneficiary's right to do so. For instance, in the first scenario we have seen that there is a gap of five years between 1980, when A's title is extinguished, and 1985, when B's alternative period of limitation starts. During this time the trustees' title is not extinguished, but their right to take possession proceedings is suspended until restored by B's right to take action. 7.3.4 Disabilities The basic periods may also be extended where the persons entitled to bring an action to recover the land are under a disability, for instance, minority or insanity. 19 The limitation period is then either the normal limitation period or six years from the date the disability ends, whichever is the longer, subject to a maximum period of 30 years. For instance, if the original owner of the land is only two years old when he is dispossessed, he will have 22 years, ie 6 years from attaining his majority at 18, before his claim for recovery of possession of the land is barred. 18 19 162 See s 20 of Ca]cl347 See s 22 of Cap 347. ADVERSE POSSESSION Infancy Fig 7.4 1970 A takes possession from B who is 2 years old 1970 1975 1980 1985 1990 1995 20 years Time running against B 1986 6 years 1992 B attains 18 years The disability must exist at the time the right to seek possession accrued. If the disability arises subsequently, the usual limitation period applies. 7.3.5 Fraud or Mistake Where there has been fraud or fraudulent concealment on the part of the defendant as the person in possession of the land, then the limitation period does not begin to run until the prior owner discovers the fraud or could with reasonable diligence have discovered the fraud. In those rare cases when an owner is able to seek relief from the consequences of a mistaken belief, the commencement of the limitation period will also be postponed to the date the mistake was discovered. 20 7.4 Adverse Possession The possession of the land by the squatter must be adverse. It is clear that the squatter must show either: • that he has dispossessed or ousted the owner; or • that there has been a discontinuance or abandonment of possession by the owner followed by an assumption of possession by the squatter. 7.4 .1 Discontinuance of Possession An owner will be presumed to be in possession of the land, even if he is not in actual physical possession of the land, unless the contrary is clearly proved. Very little is required in order to support this presumption. In the case of land that is built upon it will usually be comparatively easy to establish whether or not there has been discontinuance - for instance, the leaving of just a few personal possessions may be sufficient to establish that there has been no abandonment of the premises. Where the land is vacant 20 Sees 26 of Cap 347. 163 HONG KONG LAND LAW the question is more difficult. The mere failure of the owner to make use of the land, even if some other person does, is not sufficient to prove discontinuance of possession provided the owner intends throughout to use the property for some specific purpose. The difficulty of establishing adverse possession of vacant land is illustrated by the cases of: Leigh v jack (1879) 5 Ex D 264 FACTS In 1854 the plaintiff conveyed land to the defendant upon which the defendant built a factory. Subsequently, the defendant acquired another plot close by which had been owned by the plaintiff. The two plots were separated by a strip of land owned by the plaintiff, which she intended to dedicate as a roadway. In 1854 the defendant started storing building materials on the roadway, and in 1856 he enclosed part of it. The plaintiff made no use of land herself during this time, except to repair a gate at one end of the road. The plaintiff sued for possession. JUDGMENT The plaintiff was entitled to possession. She had not discontinued her use of the land, for she had repaired the fence and had throughout the period an intention to make use of the land by dedicating it as a public highway. N$?r had the defendant established dispossession, for his <\S;!?-~~ot inconsistent with the ,.;;.... plaintiffs intended...future use of the land . ....., ______ ____ ', ·-·----- FACTS In 1937 the plaintiffs purchased a vacant site behind some shops. The Second World War prevented development of the site, but in 1948 they had the site surveyed and applied for planning permission. Although this was refused they did not abandon their intention to develop the site. In 1953 they dumped some rubbish on the site. In the meantime, from 1943 to 1948 the defendant, who was a tenant of one of the shops, cultivated part of the land and in 1948 he erected a shed on the land and started using it for breeding greyhounds. The plaintiffs sought possession. l JUDGMENT ll, j It The defendant was not in adverse possession of the land. The plaintiffs had never discontinued their possession in view of their intended future use of 164 ADVERSE POSSESSION the land, which they had pursued so far as they were able. Nor had the plaintiffs been dispossessed, for the defendant did not have the necessary intention to oust the plaintiffs. A similar view was taken in Wallis's Cayton Bay Holiday Camp Ltd v Shell Mex and BP Ltd.21 There the owners intended to use the disputed vacant land as an extension to a petrol station in which they were interested, but had delayed their development plans until the necessary road connections had been built. 7.4.2 Dispossession/Assumption of Possession Where there has been no discontinuance of possession the squatter must establish dispossession of the owner, and even where there has been discontinuance of possession the squatter must also establish that he has been in possession of the land. The dividing line between dispossession and an assumption of possession appears to be a fine one. In Treloar v Nute, 22 SirJohn Pennycuik commented: 'I doubt if there is any real difference in the concept of taking possession and the concept of dispossession except in the special type of case where the owner, although not technically in possession, has some purpose to which he intends to put the land in the future.' Nourse LJwent even further in Buckinghamshire County Council v Moran 23 when he stated that 'I think it is doubtful whether the distinction between dispossession and a discontinuance of possession can ever have any decisive consequences .... ' Clearly, in either case tiLe squatter must estabijsh ~ been in possession of the land, but if he is to establish dispossessi0n he mlJ.§.Uilso establish that his occupation of the land is inconsistent with the owner's intended u~ottneproperty~---- - ·--=--· - -- ~ But ~hAf is me;nt by pc;ssession for the purposes of the Limitation Ordinance? In the words of Slade J in Powell v McFarlane, 25 it bears 'the traditional sense of that degree of occupation or physical control, coupled with the requisite intention commonly referred to as animus possidendi, that would entitle a person to maintain an action of trespass.' Thus both factual possession and an intention to possess must be established. 7.4.2.1 Factual Possession Possession must be 'open, not secret; peaceful, not by force; and adverse, not by consent of the true owner'. 26 The possession must be open in order to give the owner the opportunity to object by taking action. It may be 21 22 23 24 25 26 [1975] 1 QB 94 [1976] 1 WLR 1295 at 1300 [1989] 3 WLR 152 at 170 See cases at 7.4.1 0979) 38 P&CR 452 at 469 Mulcahy v Curramore PEY Ltd [1974] 2 NSW LR464 at 475 165 HONG KONG LAND LAW necessary for the squatter to prove dispossession, but clearly the law cannot condone violent acts, thus the dispossession or assumption of possession must be peaceful. The possession must be adverse. It is not necessary for r- possession to be hostile in order to be adverse. Indeed, possession may t,~ adverse even though neither party knows that their rights are inconsistent. The requirement for adversity goes rather to the nature of the possession. We have already seen that where there is dispossession of the former owner, 'the acts must be inconsistent with his enjoyment of the soil for the purposes for which he intended to use it.' Where the owner has consented to the occupiers' use of the land, whether by way of lease or licence, the possession cannot be adverse. For instance, in Country Rich Development Ltd v Ma Chan Fuk Kiu 27 the defendant cast a death sentence on her claim to adverse possession when she pleaded in her defence that she had entered into possession pursuant to an agreement for sale and purchase from the then owner. Furthermore, an acknowledgement of the owner's title by either an offer to pay rent 28 or the acceptance of a tenancy agreement to compromise a claim to possession 29 will also be fatal. An attempt was made by Lord Denning MR to establish a doctrine of implied licence to deal with those cases where the owner retained an intention to use vacant land in the future. The owner was deemed to have granted a licence to the occupier to use the land, thus preventing his possession from being adverse. The case in which Lord Denning MR tried to establish this doctrine is: Wallis Cayton Bay Holiday Camp Ltd v Shell Mex & BP Ltd [1975] 1 QB 94 FACTS The plaintiff's holiday camp adjoined a garage to which the defendant sold petrol. Nearby was a farm. In 1950 the council bought part of the farm for a proposed road. Between the site of the proposed road and the garage was the disputed strip of land which the defendant acquired in 1961 together with the garage, so that they would have a frontage to the new road when it was built. The defendant bought the remainder of the farm in 1961 in order to enlarge their caravan site. The site of the proposed road and the disputed land were not fenced, and the plaintiff incorporated these areas into their caravan site. After almost 12 years the new road proposal was dropped, and the defendant tried to sell the disputed land to the plaintiff. The plaintiff did not respond until 12 years had elapsed, when they claimed title by way of adverse possession of the land. 27 28 29 166 0994) HCt HCA No A5503 of 1993 R v Secretary of State for the Environment 0990) P&CR 487 Colchester Borough Council v Smith [1991] Ch 421 l ADVERSE POSSESSION JUDGMENT The plaintiffs had not acquired title by adverse possession, for when an owner intended to use the disputed land for a particular purpose in the future, the use by the squatter was attributable to an implied licence arising from the owner's forbearance in taking action against him. 1 Amendments introduced in England by the Limitation Act 1980 30 cut short this development. Although these amendments have not been incorporated into the Limitation Ordinance, the Hong Kong courts in Man Kam-tong v Man Lin-tai 31 declined to follow Lord Denning's implied licence doctrine. The finding of an implied licence, the court felt, is only justified from the clear facts of the case and not the mere fact that the owner intends to use the land in the future. Trivial acts of trespass will not be sufficient to establish possession. There must be a sufficient degree of physical control over the land, which will vary depending on the circumstances of the case. What may be sufficient acts in one case may be insufficient in another. The nature and value of the property, the use to which it may be put, and the means the owner might adopt to protect his title are important considerations. The fencing of vacant land is often quoted as an example of sufficient control, but it is not decisive.32 Building on the land will usually suffice. 33 Cultivation or the grazing of animals on the land will generally be insufficient unless accompanied by other acts, for instance fencing, or unless grazing or cultivation are the only uses to which the land can usefully be put. 34 An illustration of what acts may or may not qualify is found in the case of: ~· 1•• • ~--~-~,., ...., ' -~, Treloar v Nute [1976] 1 WLR 1295 FACTS The plaintiff owned a field adjacent to which was land that the defendant's father acquired in 1961. The defendant's father mistakenly believed his purchase included the plaintiff's field. He initially used the disputed land for grazing, storing timber and stone, and his children rode motorcycles over it. He also filled in a gully that formed part of the land. In 1963 he erected a fence, which he re-erected when the plaintiff pulled it down. In 1965 he gave the disputed land to his son, who in 1974 started to build a bungalow there. 30 31 32 33 34 Sees 4. [1985] 2 HKC 299 George Wimpey Co Ltd v South [1967] Ch 487 Tam Mo Yin & another v AE & others 0995) HCT MP No 1868 Red House Farms (Tbordon) Ltd v Catchpole 0977) Estates Gaz 798 167 f HONG KONG LAND LAW JUDGMENT The plaintiff's title had been extinguished by adverse possession. The court was not impressed by the grazing and storage, but laid much more weight to the levelling of the gully as an act preparatory to the building of the bungalow. 7.4.2.2 Animus Possidendi (Intention to Possess) The squatter must not only prove factual possession, but he must also prove that such possession was taken with the intention of excluding all oth_E;rs from possession, including the owner. Such intention is described, in the words of Slade J in Powell v McFarlane as: 'the intention in one's own name and on one's own behalf, to exclude the world at large, including the owner with the paper title so far as was reasonably practicable and so far as the processes of the law will allow'. 35 For instance, in Williams Brothers Direct Supply Ltd v Raftery 36 the defendant failed to establish adverse possession because it was clear that he used the land because he thought he was entitled to do so although the English Court of Appeal has made the point that the necessary intention was an intention to possess and not an intention to dispossess. •··- Hughes v Cork 0994) EGCS 25 FACTS The plaintiff had bought a rectangular plot of land in 1980. The following year some question arose as to the title to a small part of this plot when the plaintiff discovered that the boundary fence had been diverted to form a small triangular indentation into the plot. He removed the fence, which some time later was rejected by the neighbours. An examination of the conveyancing history revealed that although the plaintiff's seller had used the disputed land for many years and had purported to sell it to the plaintiff it in fact belong to someone else who had sold it to the plaintiff's neighbours when the dispute emerged. JUDGMENT The plaintiff was entitled to possessory title of the disputed land. He had occupied the land because he thought, as it turned out mistakenly, that he was the true owner, but this was no bar to his obtaining title by adverse possession. The important factor was that he intended to possess the land which he and his seller had done. 35 36 168 (1979) 38 P&CR 452 at 471 [1958] lQB 159 ADVERSE POSSESSION It appears that where tb-~ acts of possession are µ11eqµivocal, the act itself should be sufficient to establish the necessary animus. This was certainly the view of the Hong Kong Court of Appeal in: CA Civ App No 1989 FACTS Mr Ma, the owner of land in Ping Shan, left the land in 1953 or 1954 and did not return before his death in 1964. He left the management of his land in the control of a lady who allowed the plaintiff and her husband to use the land for growing sweet potatoes. The plaintiff fenced the land and by 1963 or 1964 had built over most of the land. In 1987 the plaintiff sought a declaration that she had acquired title by adverse possession. JUDGMENT Whilst the plaintiff had entered the land upon the licence of the previous owner, that licence had been revoked by his death and since then she had been in adverse possession of the land. Her acts of fencing the land and building over the land were unequivocal acts excluding the owner from possession, and no further evidence of intention was necessary. The English courts do not appear to have taken such a robust line. For instance, in Powell v McFarlane 37 Slade J noted the reluctance of the courts over many years to infer the necessary intention even where factual possession had been clearly shown. Unequivocal.qcts are acts that clearly show an intention to exclude the true owner. They are likely to be acts of exclusive physical possession ratlier than acts which, while associated with ownership, are of a more marginal character and might be equally consistent with an intention to profit or derive some enjoyment from the land. Whether a particular act is regarded as equivocal or unequivocal will depend on the circumstances of the case, but such acts as fencing, the building of permanent structures, or full-scale farming cultivation of the land by way of pl9ughing and harvesting are. more likely to be regarded as unequivocal than gr~zing, the harvesting of the natural produce of the land, or the erection of temporary structures. Where acts are equivocal, the intention with which they are done is vital. The question of intention was the central issue in: or 37 0979) 38 P&CR 452 169 HONG KONG LAND LAW FACTS The disputed land adjoined a farm owned by the plaintiffs grandfather and was bought by the defendant in 1952. He intended to build a house on the land, but in 1955 he was transferred abroad where he stayed for 11 years. In 1956 the plaintiff, who was then 15 years old, started grazing the family cow on the land. He also harvested the hay from the land and used to shoot over the land. Later when he started a tree-felling business he put up a business signboard on the land. On several occasions, while the defendant was abroad, his wife visited the land but saw nothing untoward. On his return the defendant applied for planning permission for the land but was refused, and he subsequently entered in to a grazing agreement in respect of the land. The plaintiff then claimed title by adverse possession. JUDGMENT The plaintiffs actions in 1956 were not sufficient to establish adverse possession. His acts were equivocal in that they could be said to be directed towards taking the profits from the land rather than to dispossessing the owner and occupying the property as his own. Furthermore, as the first acts were carried out when he was only 15 years old, it was unlikely that they were done with a view to claiming the land wholly as his own property. The question of intention, and in particular the role of the intention of the owner, has come before the courts in: Buckinghamshire County Council v Moran [1989] 3 WLR 152 FACTS In 1955 the council acquired the disputed land for road development. Since 1967 the land was maintained by the owners of an adjoining house. In 1971 Mr Moran acquired this house. He was aware of the council's intended use of the land, but nevertheless he sought to incorporate the land into the garden of the house. The land was already fenced but he put a lock on the gate and had electricity cables installed. In 1976 Mr Moran spoke with the council about the future use of the land, and as a result through his solicitors made a claim to be acquiring title by adverse possession. Nevertheless it was not until 1985 that the council commenced proceedings for possession. 170 ADVERSE POSSESSION JUDGMENT The council's claim for possession failed: they had been dispossessed by Mr Moran's exclusive and adverse possession of the land which was not compromised by their future intention to use the land for road widening. I Both Slade and Nourse noted that the emphasis placed upon the owner's future intended use of the land by cases like Leigh vJack 38 and Wallis Cayton Bay Holiday Camp Ltd v Shell Mex & BP Ltd 39 had created an unwarranted confusion. The intention of the owner was only relevant to the extent that it might influence the intention of the squatter. Nourse stated at p 170 that: By this route I have come to a belief that the intention of the true ow'ner. .. is irrelevant in practice. To that I would make one exception. If an intention on the part of the true owner to use the land for a particular purpose at some future date is known to the squatter, then his knowledge may affect the quality of his intention, reducing it below that which is required to constitute adverse possession. The importance of the intention of the squatter arises because a title derived from the operation of limitation is based upon adverse possession by the squatter and is to be contrasted with the operation of prescription which is based upon a presumed grant when the intention of the grantor becomes all important. Prescription acts positively, limitation acts negatively through the acts of the squatter including the intention with which they are done. A further point that may be derived from Buckinghamshire Coun(v Council v Moran is the requisite intention is an intention to possess to the exclusion of all, including the true owner, and not necessarily an intention to own the land. In order to establish a sufficient intention to possess, the court will lay very little weight upon past or present declarations of intention by the claimant. They are 'obviously easily capable of being merely self-serving' .40 Even declarations made at the time of taking possession will be treated with suspicion 'unless they are specifically brought to the attention of the true owner'. 41 The intention of the claimant must thus be inferred from the acts themselves. 7.5 Leasehold Lap.d Given the leasehold nature ofland in Hong Kong, the special rules affecting tenants and their landlords are particularly important. 38 39 40 41 (1879) 5 Ex D 264 [1979] 1 QB 94 Powell v McFarlane (1979) 38 P&CR 452 at 480 Powell v McFarlane 0979) 38 P&CR 452 at 476 171 dONG KONG IAND IA W 7 .5.1 Landlords v Tenants A tenant cannot claim to be in adverse possession against his landlord since he is in possession of the land with the consent of his landlord pursuant to the terms of his lease. But once the tenancy has expired or been brought to an end, adverse possession by an occupier against his former landlord will begin to run. 7.5.1.1 Periodic Tenancies The limitation period will begin to run against a landlord under an oral periodic lease as soon as the initial period expires. But the payment of rent will restart the period. Thus, so long as the tenant continues to pay rent, the limitation period will not start to run. Haywood v Chaloner [1968) 1 QB 107 FACTS Some time prior to 1938 the Saville estate let a small piece of ground as garden land on a half-yearly tenancy for a very modest rental. In 1938 the estate was sold and the new owner never asked for the rent, the last rental being paid in 1942. The appellants, being the present owners of the land in question, sought possession from the persons then in occupation of the land, who were successors of the original tenant. JUDGMENT The tenancy ceased at the expiry of the last period in respect of which rent was paid. Thereafter the possession of the respondent and his predecessors in title became adverse, so that the title of the appellants had been extinguished. A landlord who waives his right to rental from a periodic tenant should thus require his tenant to periodically sign a written acknowledgement of his status as a tenant to avoid the running of the limitation period. 7.5.1.2 Tenants at Will The limitation period in respect of a tenancy at will, other than a tenancy at will by the Crown, runs from the expiry of one year from its commencement unless it is previously determined. 42 i :! 42 172 See s 12 of Cap 347. ADVERSE POSSESSION 'I 7.5 .1.3 Rental A landlord will lose his right to recover rental from his tenant after six years from the date the i:ent became due. 43 7.5.1.4 Forfeiture Most written leases contain a right for the landlord to forfeit the lease should the tenant breach or fail to observe any of the terms of the lease. A right to forfeit a lease will expire 20 years from the date of the breach where the breach occurred before 1 July 1991, and 12 years where the breach was committed after 1 July 1991.44 However, where the breach is continuing the limitation period will start again with each fresh breach. 7.5.2 Ii I Landlord/Tenant v Third Parties If a third party takes up adverse possession against a tenant, the limitation period immediately begins to run against the tenant. However, the limitation period does not begin to run against the landlord until the expiry of the tenant's lease. For instance, if A let property to B for ten years in 1975 and after five years of the term, in 1980, B was dispossessed by C, then A will have until 2005, ie 25 years from the date C dispossessed B, in which to bring an action to evict C, for the limitation period does not begin to run against him until the expiry of B's ten-year term. Fig 7.5 Limitation against a Landlord A lets property to B for 10 years --------,> 1975 1980 1980 C qispossesses B 1985 1990 1995 2000 2005 Time running against A - 20 years If, however, A had granted the lease to Bin 1985 and Chad dispossessed B in 1991, then A will only have 17 years from the date C dispossessed B in order to claim possession, since the reduced 12-year limitation period introduced by the Limitation (Amendment) Ordinance 1991 applies. A's right of action accrues only on the expiry of B's lease in 1995, which is after the vital 1 July 1991 cutoff date. 43 44 See s 18 of Cap 347. See s 12 of Cap 347. 173 f HONG KONG LAND LAW :t A lets property to B for 10 years ----~ 1985 1990 1995 2000 2005 1991 C '---------~ dispossesses B Time running against A 12 years 2010 2007 In the cases of dispossession of a government lessee holding under a Government lease expiring in 2047 the limitation period against the Government of the Hong Kong Special Administrative Region would not expire for another 60 years, in 2107! 7.5,2.1 Surrender and Merger Can a dispossessed tenant whose right to claim possession has become time-barred surrender his term to his landlord? It might be argued that the tenant's title has been extinguished and so he has nothing to surrender to his landlord, but the Hong Kong courts have rejected this view in: Cheuk Chau Co Ltd v Chau Kwan-nam & others (1983) HCMP No 274 of 1982 FACTS A piece of land in the New Territories was assigned to the plaintiff in 1980, The vendor and the plaintiff mistakenly identified the boundaries of the land, which in fact included a strip on which the defendants had lived for over 20 years. The plaintiff surrendered the lease to the Crown and took a new lease of the same land. The plaintiff then sought possession of the strip of land from the defendants. JUDGMENT The vendor and plaintiff's original title to the land had been extinguished by the defendants' possession of the land, but as a result of the surrender of the land to the Crown and the subsequent re-grant of the land, a new title was conferred upon the plaintiff free from the defendants' interests. The plaintiff was thus entitled to succeed in his claim for possession, The court followed the much-criticised judgments of Lord Denning and Lord Ratcliffe in Fairweather v St Marylebone Property Co Ltd 45 They were of the view that the tenant's title was only extinguished against the squatter 45 l. 174 [1962] 2WLR 1620 ADVERSE POSSESSION and not the landlord. The lease remained effective between the landlord and the tenant, and any covenants and the right of re-entry were enforceable until the expiry or prior determination of the lease. Thus the tenant did have something to surrender. A dispossessed tenant will also be able to renew a claim for possession against a squatter where he acquires his landlord's reversion. His lease, so far as it exists against the landlord, merges in the landlord's reversion and he then steps into the shoes of the landlord and acquires his rights to take action to recover possession upon the expiry of the lease. As the Cheuk Chau case vividly illustrates, a squatter is in a precarious position in his attempt to acquire title to leasehold land. There is the danger that even though his long period of possession may have barred a tenant's claim for possession, the tenant may come to an arrangement with his landlord to surrender his lease and take a re-grant or acquire the landlord's reversion, so as effectively to revive his right to reclaim possession. Lord Denning recognised this danger in Fairweather but felt it was an inevitable result. He pointed out that a similar result could be achieved if the tenant ceased to pay the rent under the lease so as to give rise to a right for the landlord to forfeit the lease. The squatter could not resist the landlord's forfeiture by seeking to pay the rental unless the landlord agreed to accept the rental, nor could a squatter claim relief from forfeiture. However, so far as Crown land is concerned, it is unlikely that the Crown as landlord would knowingly seek to defeat a title acquired by adverse possession by a squatter against a Crown lessee. This is what happened in the Cheuk case, but it is clear from the report that this result was unintentional. 7.5.2.2 Renewal under Ordinance It is common for Crown leases to be granted for renewable terms. To overcome the administrative inconvenience of renewing all Crown lease terms by individual documentation a number of ordinances have been passed to provide for the automatic exercise of these options to renew the le<1~eter~s. The Crown Leases Ordinance' 6 provides for the automatic renewal of Crown leases on Hong Kong Island and Kowloon. In the New Territories the New Territories (Renewable Crown Leases) Ordinance' 7 effects the automatic exercise of options to renew in Crown leases and the New Territories Leases (Extension) Ordinance' 8 automatically extends Ne,v Territories Crown leases which are due to expire on 27 June 1997 to 30 June 2047, pursuant to the terms of the Joint Declaration. In the normal course the expiry and renewal of a lease will revive the title of dispossessed tenant. The expiry of the lease confers authority on the landlord to recover possession of the land from any squatter and to deal with the land, including the granting of a new lease to the dispossessed tenant. 46 47 48 Cap 40 Cap 152 Cap 150 175 .I HONG KONG LAND LAW The rights of a dispossessed tenant to seek possession against a squatter thus may be revived in the same way as was illustrated by the surrender and new grant in Cheuk Chau Co Ltd v Chau Kwan-nam & others. Squatters on land held under Crown leases which contain a right of renewal thus face a further hurdle - the possibility of the revival of a Crown lessee's claim to repossession following the automatic renewal of the Crown lease. A series of cases 49concerning the operation of the New Territories (Renewable Crown Leases) Ordinance have recently demonstrated the operation of that ordinance in the light of a large number of renewals that took effect in 1973 to renew the leases for a further 24 years until 27 June 1997. The lower courts in .!!'LI: Mei Ling Mary v Yeung Hong 50 came to the conclusion that a squatter could assert their possession against a Crown lessee under a renewed lease where they had been in adverse possession for a period sufficient under the Limitation Ordinance to extinguish the right of the lessee to recover possession before the renewal took effect in 1973. But the lower courts reluctantly felt unable to assist those post-1953 squatters whose period of adverse possession prior to the deemed renewal was insufficient to extinguish the title of the Crown lessee. The issue caused widespread concern as is evident from the large number of cases brought before the courts. Given the lamentable state of lot demarcation, a large number of titles in the New Territories are dependent on adverse possession. Calls were even made for legislative intervention 51 but fortunately such intervention has proved unnecessary. The Privy Council has come to the squatters' aid in the case of: 1m1mt Co PingKwan_v Lam 1.Jtive,totJ --- •-- -[1996] 3 WLR 448 FACTS The land in question was held under a block Crown lease for a term of 75 years from 1 July 1898 with a right of renewal for a further term of 24 years less 3 days. The respondents, Lam Island Development Ltd, took an assignment of the residue of the Crown lease in March 1973 just before the right of renewal was automatically exercised by the operation of the New Territories(Renewable Crown Leases) Ordinance. However, since 1959 the land had been continuously occupied by the appellants against whom the respondents now claimed possession. 49 50 51 176 Cheuk Chau Co Ltd v Chau Kwan Nam & others 0983) HCt MP No 274 of 1982,First Base Development Ltd v Or Lau Chun (1991) HCt MP No A2669 of 1990, Lam Kee On v Lam Hing [1992] 2 HKC 317,Chui Shui On v Tang Koon Yung &another[1992] 2 HKC 323, Fortune Year Development Ltd v Mui Shu Huen 0993) HCA No A2951 of 1993, Ho YeeMing Theresa v Chung Loi Toi [1994] 1 HKC 618, Ng Fung Property Investment Ltd v Lam Ting Sin 0993) HCMP No 2446 of 1993, Tang Shu Tin v Tang Kin Kwok [1994] 2 HKC 727, and Hong Kong Ferry (Holdings) Co Ltd v Chan Kwan Fat & others [1995] 1 HKC 542 [1994] 2 HKC 1 See Tam Mo Yin & another v AG & others 0995) HCt MP No 1868 of 1994. ADVERSE POSSESSION JUDGMENT The respondents were not entitled to possession. Their title to the land had been extinguished by the operation of the Limitation Ordinance as a result of the adverse possession of the appellants. I I The Privy Council draw a distinction between a renewal in situations, first, where the renewed lease was made pursuant to an option to renew and second, where the landlord had re-entered on the expiration of the old lease and had granted a new lease, whether to the original lessee or to a new lessee. Where there is no option to renew the landlord is able to assert their title against the squatter and grant a new lease, under which the tenant also can defeat the squatter's rights, whether or not they are a new tenant or were the tenant under the expired lease. But where the lease contains an, option to renew the lessee has a property right which is enforceable against the landlord, but which, together with the legal estate in ·the lease which flows from this right, may be rendered unenforceable against the squatter by the appropriate period of adverse possession. The distinction stems from the fact where there is an option to renew which is specifically performable against the landlord, the landlord is not entitled to reclaim possession and assert their title against the squatter. The New Territories (Renewable Crown Leases) Ordinance operates in a similar way to an option to renew. Thus a Crown lessee under a lease renewed under the ordinance could not assert their; new lease against a squatter who had been in adverse possession of the land for a period before the deemed renewal which was sufficient under the Limitation Ordinance to extinguish the title of the lessee, ie at least prior to 1953. The Privy Council, admitting that the case of the post-1953 squatter, ie the squatter who had not been in adverse possession for a sufficient period to extinguish the title of the lessee prior to the renewal, was 'not so obvious', 52 nevertheless decided that the right to possession of such a squatter could not be defeated by the Crown lessee provided the squatter could establish adverse possession for a sufficient period before the action for possession was brought to extinguish the title of the Crown lessee. In the latter instance, the Privy Council felt that the ordinance should not be read so as to exclude all adverse incidents affecting a lessee under a deemed renewal. The lessee's right of action against the squatter was deemed to accrue on the date upon which the squatter moved into possession and thus the squatter's rights under the Limitation Ordinance had already started to operate before the renewal, even if they had not matured. The lessee would have been subject to these adverse right if the lease had been actually renewed pursuant to the option to renew and their position should be no different under the deemed renewal. The positiori of squatters as result of the enactment of the New Territories Leases (Extension) Ordinance has not yet been considered by the courts 52 at 459D 177 f HONG KONG LAND LAW but there appears no reason why this ordinance should operate to revive the rights of a Crown lessee to bring action against a squatter who has extinguished or is in the process of extinguishing the Crown lessee's title under the operation of the Limitation Ordinance . The ordinance extends the term of the Crown lease. It thus operates to postpone the Crown's right, as landlord, to enter into possession at the expiration of the original Crown lease term. As such it bears a closer resemblance to the exercise of an option to renew than to regrant of a lease that has expired. 7.5.2.3 Landlord and Squatter Relationship During the period between the barring of the tenant's title and the expiry of the lease, the squatter does not step into the tenant's shoes to become the tenant of the landlord. He acquires a separate title so there is no direct relationship between the landlord and the squatter. There is no privity of contract nor privity of estate, and the covenants in the lease are not directly enforceable against the squatter on the basis of either of these doctrines. This situation arose in: FACTS In 1802 the plaintiffs predecessors in title granted a lease of a house for 89 years. The lease contained a covenant to repair. The tenant mortgaged the premises, and the mortgagee went into possession and remained in possession until 1876, when he purported to assign the lease to the defendant who remained in possession until 1891, when he delivered up possession to the· plaintiff on the expiry of the lease. The plaintiff sued the defendant for breach of the covenant to repair. JUDGMENT The defendant had acquired title by adverse possession, but the lease had not vested in him and thus he was not liable on the covenants. Nevertheless, a landlord is unlikely to be without a remedy against an unwanted squatter. As we have seen, if the lease contains a right of re-entry then a failure to pay the rent due under the lease or to perform the other covenants contained in the lease will entitle the landlord to forfeit the lease and to seek possession against the squatter, who will be unable to resist forfeiture by claiming relief. 178 ADVERSE POSSESSION Tickner v Buzzacott [1965] Ch 426 FACTS The plaintiff's mother lived with a tenant of premises under a lease for a term of75 years from 1930. On the tenant's death in 1941, the plaintiffs mother continued to live in the house and pay the rent under the lease until her own death in 1960. The rent was accepted by the landlord, but he was unaware that the original tenant had died and the plaintiff's mother was a squatter. After the plaintiffs mother's death, the house remained empty and no rent was paid. In 1962 the defendant, the assignee of the original landlord, forfeited the lease. The plaintiff claimed relief from forfeiture. JUDGMENT The plaintiff's mother had acquired title by adverse possession against the tenant, but she did not hold under the lease and accordingly was not entitled to claim relief from forfeiture. A landlord is not bound to accept rent from a squatter but if he does and the rent is measured with reference to a given period, say one month, then at common law the squatter may become a periodic tenant unless it is clear that the parties, in paying and accepting the rent, did not intend to create a new landlord-and-tenant relationship. It is also possible for a squatter to become bound by the terms of the tenant's lease on the basis of estoppel. If he takes the benefit of a right granted to the tenant under the lease, he cannot also refuse to accept the burden of the lease. The mere payment of rent under the lease will not raise an estoppel because the payment is not a benefit to the tenant. Furthermore, the leasehold covenants, although not enforceable by virtue of privity of contract or estate, may be enforceable against the squatter under the principles of Tulk v Moxhay 53 as these have been varied bys 41, Conveyancing and Property Ordinance. 54 7.5.2.4 Encroachment If a landlord leases land to a tenant and the tenant encroaches on adjoining land that also belongs to the landlord, the land is presumed to be an addition to the leased land so that it becomes subject to the terms of the lease. The limitation period will thus not begin to run against the landlord until the expiry of the term. 53 54 Tulk v Moxhay (1848) 2 Ph 774 Cap 219 see further Chapter 15. 179 f l• HONG KONG LAND LAW l TamMo Yin vAttomey No 1868 of 1994 HCtMP FACTS A Crown lease lot was granted north of Yuen Long in 1931 for a term of 45 years from 1 July 1928 with a right to renew for a further 24 years (less three days). A term of the grant required the Crown lessee to construct a wall or bund and sluice gates or gei-wai on the seaward side of the lot. The Crown lessee sold off a part of the land but a dispute arose between the Crown and the plaintiffs, the original Crown lessee's successor in title, as to the area of the lot. The plans and surveys at the time of the grant were indecisive and thus the plaintiffs also based their claim to the disputed area on adverse possession - their predecessors in title had erected the wall and sluice gates and had been in possession of the land for over 60 years. JUDGMENT The disputed land, if not within the Crown lease lot, was an encroachment to it and held on the same terms as the original Crown lease. The deemed exercise of the renewal in 1973 pursuant to the New Territories (Renewable Crown Leases) Ordinance stopped time running so that the plaintiffs failed to establish that they had been in adverse possession of the land against the Crown for the requisite 60 years. The presumption that an encroachment onto adjoining land is held on the same terms as the original grant is rebuttable but the tenant's occupation must be clearly separate and adverse to form an independent claim. 55 If the land encroached on by the tenant does not belong to his landlord but to a third party, then the tenant's possession will not work to his own benefit but to his landlord's because upon expiration of the limitation period it is the landlord and not the tenant who can claim title to the land and, on the expiry of his tenant's lease, possession of it.56 55 56 180 Lord Hastings v Sadler (1898) 79 LT 355 Kingsmill v Millard (1855) 11 Exch. 313 Future Interests 8.1 Introduction We saw in the first chapter, when looking at the doctrine of estates, that the law does not recognise absolute ownership ofland but rather the ownership of an interest in land for a defined duration, such as a life estate or a lease for a fixed term. This concept of holding an estate in land for a defined duration leads to the possibility of a succession of interests in the land. For instance, if A owns a Crown or Government lease of land on Hong Kong Island for a term of 75 years which he leases to B for a term of 5 years, the Crown or Government, A, and B all have an estate in the land. But only one of them is entitled to enjoyment of the land at any one time. B has a fixedterm lease that gives him a present right to use the land for five years. He enjoys a lease 'in possession'. A also has a fixed-term lease, but A does not have a present right to use the land: he has granted that right to B. A's right to use the land does not arise until B's lease terminates, when the land will revert to A. A's interest is a 'reversion'. The Crown also has a reversion a fee simple reversion that it has agreed to relinquish to Chinese sovereignty in 1997; thereafter, the reversion on the Crown leases will vest in the Government of the Special Administrative Region of Hong Kong. Fig 8.1 Crown Fee simple reversion I I I A Leasehold reversion I I I B Lease in possession Likewise, if A provides in his will that his 75-year Crown lease should pass to his wife to enjoy during her lifetime and after her death it is to pass to their only child C, then on A's death both his wife and their child C have an interest in the property. His wife has an interest vested in possession, for she is now entitled to the rents and profits arising on B's lease and on the expiry of B's lease will be entitled to possession of the land. During the lifetime of A's wife, their child C also has an interest in the land. C's right to the land is not a right to immediate possession. His right to possession will only arise in the future on his mother's death. The interest of A's child is either a 'remainder' or an 'executory interest', depending on how exactly it has been created. 181 HONG KONG LAND LAW FigB.2 Crown - Freehold reversion - Leasehold reversion to wife for life (life interest) and then to C (remainder/ executory interest) - Lease in possession I I Wife and C I I I I B Where an interest gives an immediate right to enjoyment of the land it is said to be 'held or vested in possession'. Where an interest gives a right to enjoyment of the land in the future it is known as a 'future interest'. There are three types of future interest that we must consider: reversions, remainders, and executory interests. First, however, it is important to appreciate the distinction between vested and contingent future interests. 8.2 8.2.1 Vested and Contingent Interests Conditions of Vesting A future interest may be either vested or contingent. For an interest to be vested, two conditions must be satisfied: 1 the person entitled to the interest must be ascertained; and 2 the interest must only be prevented from taking effect in possession by the existence of some prior interest. If we look again at our example where A gives his property to: • his wife for life and remainder to their child C, we have seen that A's wife's interest is vested in possession since she is entitled to the present enjoyment of the property. Indeed, her interest is not a future interest. C's interest, although it is not vested in possession as it only gives him a right to enjoy the land in the future, is vested in interest, for both the conditions are satisfied: C is in existence and identifiable, and his right to possession is only delayed by his mother's prior interest. But if the gift was to: • A's wife for life with remainder to their only child C when he attains the age of 21, not only would the enjoyment of the interest depend on the death of A's wife but also upon the fact that C must reach the age of 21. Although C satisfies the first condition, he is in existence and ascertainable, the gift 182 FUTURE INTERESTS cannot vest until he is 21 and thus the second condition is not satisfied. His interest is contingent until he attains 21, when it will vest in interest. If A had more than one child and the gift was to: • A's wife for life with remainder to their first child to marry, neither of the conditions for vesting are satisfied. The remainder will only be vested when A's first child marries. Prior to that time all A's children hold a contingent interest, for it is impossible to say which one of his children will qualify before the contingency is satisfied. The potential beneficiary is not ascertainable nor is their right to possession merely delayed from taking effect in possession by a prior interest - it is also dependent upon the satisfaction of a further condition. It does not matter if it is very unlikely that a future interest is going to vest in possession. That will not prevent it vesting in interest. For instance, if A had made his gift the other way around: • to my only child C for life with remainder to my wife, the fact that C is more than likely to outlive his mother does not prevent his mother's interest from being vested in interest. The fact that the size of the interest is not finally quantified will not prevent the gift from vesting. For instance, if A made his gift to: • my wife for life with remainder equally between all our children who attain the age of 21, the first child to attain 21 will take a vested interest even though it is not possible to say whether he takes the whole interest or only a portion until it is clear whether or not A's other children satisfy the condition by attaining 21. The first child to attain 21 is accordingly treated as taking the whole interest subject to the possibility of a partial divesting should any other child within the class qualify by attaining 21. The divesting only affects the quantum of the interest vested in each beneficiary and not the fact of vesting itself. If a child fails to attain 21, his contingent interest fails and his estate has no interest in the property. Although the quantification of a beneficiary's share will not prevent vesting, we will see that it is significant when we come to test the validity of a class gift for the purpose of the rule against perpetuities. The law leans in favour of vesting, and a gift, which on its face appears contingent, may be construed as vested subject to a possibility of it being divested. For instance, a gift: • to my wife for life with remainder to such of our children as my wife may appoint, and in default of appointment to all our children in equal shares is construed as granting all the settlor's children a vested interest subject to divesting in the event of the settlor's wife exercising her power of appointment. 183 HONG KONG LAND LAW 8.2.2 Assignability of Vested and Contingent Interests A vested future interest is a future right in the sense that it only gives a right to enjoyment of the property in the future, but it is a present interest in the sense that it is an existing right that can be either alienated inter vivos or pass on death. A contingent future interest, on the other hand, is in some ways not an interest at all. It is only a possibility that an interest may arise should the contingency be satisfied. As such, the common law regarded contingent interests as inalienable. It is thought that a contingent interest may now be left by will by virtue of the provisions of s 3 of the Wills Ordinance. 1 But there is no statutory means in Hong Kong whereby a contingent interest may be assigned inter vivos at law. In England, s 4(2) of the Law of Property Act 1925, permits the assignment of contingent remainders, but this section has not been enacted in Hong Kong. The assignment of a contingent remainder may be enforced in equity, for equity will require an assignor of a contingent interest to assign the property to an assignee who has given valuable consideration should the contingent interest vest both in interest and possession. 2 8.3 Reversions A reversion comprises that part of the grantor's estate that is not disposed of by the grant and which will thus revert to the grantor on the expiration of a lesser interest disposed of by the grant. 8.3.1 Leasehold Reversions The most common reversions in Hong Kong are leasehold reversions. The tenant's assignment of his lease will dispose of the whole of his interest in the land and thus no reversion arises, but if the tenant grants a sublease then a reversion will arise in respect of the balance of the head-lease term. In our ' first example A's leasehold reversion represents the balance of his 75-year term which he does not dispose of when he grants the 5-year lease to B, ie 70 years. A leasehold reversion may be of a very short duration. For instance, when the Crown first granted leases in the New Territories they granted Crown leases for 99 years less the last three days from 1 July 1898. These Crown leases were just three days shorter than the lease of the New Territories that the Crown was granted. The three days represented the Crown's reversion. A leasehold reversion gives a future as opposed to a present right to possession, but for historical reasons, a fee simple owner who grants a lease is said to hold his leasehold reversion in possession. This apparent anomaly arises because the common law, following feudal principles, continues to I !, 1 2 184 Cap 30, which superseded the Wills Acts 183 7 and 1530 to which liberal interpretations had been given to permit the devise of contingent interests. Crofts v Middleton (1856) De GM and G 192 FUTURE INTERESTS recognise the fee simple owner, being the holder of seisin, as the owner in possession subject to the lease. In England the Law of Property Act 1925 continues to define a leasehold reversion as 'an estate in possession'. 3 Although in Hong Kong it is only the Crown, or from 1 July 1997 the Government of the special Administrative Region of Hong Kong, as the fee simple owner of land in Hong Kong Island and Kowloon which technically remains in possession, it is common to talk of the Crown or Government lessee who has granted a lease as also being in possession to the extent that he is entitled to the rents and profits of the land. 8.3.2 Settled Reversions A reversion may also arise where an owner of an interest in property settles either a lesser interest upon another or a contingent interest that fails to vest. For instance, if A makes a gift on trust to: • my wife for life, on his wife's death the property will revert to A, or to his estate if he is dead. Likewise, if A makes a grant on trust to: • my wife for life and then equally to our children who attain 21, a reversion to A or his estate will arise if A has no children who attain 21. A's intended gift to his children, which would have disposed of his whole interest in the property, has failed. But the interest must pass to someone and as A has not indicated any one else who should take in these circumstances, the interest reverts to him or, if he has died, his estate. 8.3.3 Legal and Equitable Reversions In England only a leasehold reversion can exist at law. The Law of Property Act 1925 provides that a settled reversion in England can only exist in equity behind a trust. 4 However, in Hong Kong there is no similar statutory limitation. A leasehold reversion will be legal unless the lease out of which it is created is equitable. A settled reversion may be either legal or equitable, depending first on the interest out of which it is created, and second on the means by which it is created. For instance, in our examples if the interest in property which A settles is equitable, his reversion will also be equitable. Furthermore, if he settles the life interest to his wife and the remainder to his children by use of a trust, then his reversion will also be equitable as we have seen a trust operates only in equity. 3 4 See s 205(1} (xix). See ss 1 (1) and (3) LPA. 185 HONG KONG LAND LAW 8.3.4 Nature of Reversions A reversion arises by operation of law rather than by express grant. As we have seen, in neither of our examples does A indicate by express words that his property is to revert to him or his estate; but the property must pass somewhere on the determination or failure of the prior estate and the law dictates that it reverts to the grantor. A reversion is always vested since it is that part of the estate which the grantor has failed to dispose of. Applying the tests of a vested interest, it can be seen that the grantor is always identifiable and his right to enjoyment is only subject to the failure or termination of a prior interest or interests. Although a reversion is initially held by the grantor it need not continue to be held by him. He can deal with his interest as he wishes. For instance if, instead of settling his property to his wife for life with remainder to his children, A had initially settled his property on his wife for life and then, by a separate and subsequent disposal, he had granted the balance of his interest to his children, his children's interest would be a reversion and not a remainder. They would have taken a transfer of A's reversion that arises on the grant of the life interest to his wife rather than a separate and distinct interest. 8.4 Remainders A remainder is a future interest that arises in favour of a person other than the settlor after the natural determination of a prior interest of limited duration. The interest remains away from the settlor rather than reverting back to him. For instance, if after the grant of a life interest the settlor directs that the interest should pass to a third person, a remainder is created. The estate of limited duration which takes effect in possession prior to a remainder is usually, in the Hong Kong context, a life estate, since it is not possible at common law to create an entailed interest of a leasehold estate. The life interest, together with the remainder and any reversion to the settlor, comprises the whole original estate of the settlor. 8.4. l Nature of Remainders In contrast to a reversion, a remainder does not arise by operation of law but by express grant Furthermore, while a reversion is always vested a remainder may be either vested or contingent. In England the Law of Property Act 1925 now provides that all remainders are equitable. 5 They can only exist in equity behind a trust. There is no similar legislative limitation in Hong Kong, but nevertheless all remainders in Hong Kong are equitable. The reason for the equitable nature of remainders in Hong Kong lies not in legislation but in history. 6 5 6 186 See ss 1 (1) and (3). For greater detail on the historical aspects of future interests see Simpson: An Introduction to the History of Land Law, Chapters 8 and 9 and Holdsworth: A History of English Law, Volume VII Chapters 3, 4, 6, and 7. 1 FUTURE INTERESTS 8.4.2 Remainders at Common Law The common law had little difficulty in accepting vested remainders over freehold land. A limited estate followed by a vested remainder did little more than carve up the grantor's estate into smaller portions, and presented no problems in identifying who was entitled to the estate at any given time. Contingent remainders gave rise to greater problems, for it was possible for there to be a period when no one was entitled to possession. For instance if A grants freehold land to: • B for life with remainder to C when he marries a period when no one was entitled to an interest in possession could arise if C was not married at B's death. The estate would then be left in abeyance until C married. If C failed to marry, then the estate would revert to A. However, it would be impossible to know whether C's remainder would fail until C died, which could leave the estate in abeyance for a considerable period of time. The common law abhorred an abeyance of a right to possession by a freehold owner, or to use its technical expression, seisin, for it was the person who was seised of the land who was responsible if the feudal services were not performed. As a result the common law was only prepared to accept contingent remainders if they conformed to a number of strict rules that were intended primarily to ensure there was no abeyance of seisin. For instance, the common law would only uphold a contingent remainder if it vested during or upon the determination of the prior estate. Thus, in our example C's remainder would only be valid if C's interest vested, ie he married, during or on the determination of B's life estate. Leaseholds fell outside the feudal structure. They do not qualify as real property but as chattels real, a distinct category of personal property. At common law it is not possible to create a life or entailed interest in a lease or any other personal property. Life and entailed interests are freehold interests, and their creation was originally dependent on the transfer of seisin, a concept confined to the feudal system. It was thus not possible to create a freehold interest in leasehold property where seisin had no place. At common law a grant inter vivas of leasehold or other personal property by A to B for life with remainder to C operates as an absolute gift of the property to B. The common law refuses to recognise the limitation on B's estate to the period of his life, and accordingly the remainder fails. It has been said that 'a gift of a chattel for an hour is a gift forever'. 8.4.3 Remainders in Equity The Courts of Chancery did not follow the common law's refusal to recognise life and future interests in leases or other personal property. By adopting the vehicle of the 'use' or 'trust', equity gives effect to life interests, but not entailed interests, in leasehold or other personal property as well as the remainders that may follow them. Thus A could achieve his purpose by the transfer of his property to trustees to hold on trust for B for life, 187 r HONG KONG LAND LAW remainder to C. The Statute of Uses 1525 did not affect uses or trusts of leasehold or other personal property, and thus equitable remainders of such property remain equitable despite this enactment. 8.4.3.1 By Deed or Will A trust creating an equitable remainder of leasehold property may be created by deed inter vivos or by will. 8.4.3.2 Vested or Contingent Equitable remainders may be vested or contingent. Equity saw no reason to follow the strict rules to which contingent remainders at common law were required to conform. As the legal estate is vested in trustees, there is no danger of the abeyance of possession that the common law rules were intended to avoid, even if the beneficial interests are still contingent. For instance, if A leaves property to: • X and Y as trustees to hold for B for life, with remainder to C ifhe qualifies as a lawyer, X and Y will hold the legal estate as trustees and be bound by the obligations that entails until they a,re required, in the performance of their duties, to transfer the trust property to a beneficiary of full age who is absolutely entitled in possession. That person might be C, if C qualifies as a lawyer, or it might be A or his estate, if C fails to satisfy the contingency. In order to avoid the common law rules against legal contingent remainders, the use or trust also became a popular means of creating future interests in freehold property. Ironically, continuity of possession is now far more significant in the leasehold context than it is in the freehold context. Seisin and feudal services are no longer important, but feudal services have their leasehold equivalent in the form of rent to which the feudal remedies of distress and forfeiture for non-payment of rent are available to a landlord, as they were to a feudal lord. Furthermore, the power of a landlord to forfeit a lease is generally also expressly extended to a tenant's failure to observe or perform any of the tenant's other obligations under the lease. Accordingly, if there is no person who is bound to pay the rental or to observe and perform the tenant's other obligations under the lease, the threat of forfeiture places the lease in jeopardy. The trust avoids this danger. The trustees, as holders of the legal estate, are bound to pay the rent and observe and perform the covenants in order to preserve the trust property. 8.5 Executory Interests Executory interests also give a person other than the settlor a right to property in the future. They differ from remainders, however, in that the 188 FUTURE INTERESTS right does not follow upon the natural determination of the prior estate but will bring that prior estate to a premature end, either by shifting the interest to a third person on the happening of a specified event or springing up in the future on the happening of a specified event. For instance, a grant by A to: • B for life, but if B marries then to C, will give rise to a 'shifting use' since B's life estate will be cut short by C's interest should B marry. A grant by A to: • Bat 21, will give rise to 'a springing use' since B's interest will spring into life when he attains 21, and will cut short A's reversionary right to the property. 8.5.l Nature of Executory Interests Executory interests, like remainders, are created expressly by the grantor rather than arising by operation of law. However, they differ from remainders in that they are, by their nature, contingent. They give rise to a possibility of an interest that will only vest in possession on the happening of the specified event. Executory interests fall into two types, executory uses or trusts and executory devises. 8.5.2 Executory Uses/Trusts Shifting and springing uses cannot exist at common law either in freehold or leasehold property. In respect of freehold property, they infringed the common law rules which limited legal contingent remainders and thus could only exist in equity behind a"use or trust that did not apply similar restrictions. With respect to leasehold or other personal property, we have already seen that the common law does not recognise anything less than absolute ownership of a chattel. Accordingly, in order to create a shifting or springing interest the holder of a lease must employ a transfer to trustees. The Statute of Uses 1525 marked a divergence in executory interests in freehold and leasehold property. The statute executed the use in respect of freehold property so that the equitable interests which lay behind the use became legal interests known as legal executory interests. The statute did not apply to leasehold or other personal property, and thus executory interests of leasehold property continue to be recognised only in equity. However, following the Statute of Uses 1525, uses of leasehold property started to become known as 'trusts' in order to distinguish them from uses over freehold property which had been executed by the statute. It is, of course, the trust that has survived and developed into the institution we adopt today to create future interests, both by way of remainder and executory interest. 189 I HONG KONG LAND LAW I 8.5.3 Executory Devises 7 There is one future interest in leasehold property that can exist at common law and that is the executory devise. This one exception is derived from the Statute of Wills 1530, which permitted a testator to leave his property 'at his free will and pleasure'. The common law courts, perhaps as a reaction to the Chancery courts' recognition of limited interests in leasehold and other personal property, interpreted this liberty widely to enable a testator to create a life interest in leases. For instance in Matthew Mannings case 8 a testator left his interest in a 50-year lease to his wife during her life and then to Matthew Manning. The interest of the testator's widow was held to be limited by the gift to Manning. The gift looks just like a life interest to the testator's wife with a gift over by remainder, but in fact the court was not prepared to depart too far from their traditional view of leaseholds in order to recognise the creation of successive estates. Instead they interpreted the gift as an executory devise. In effect, the testator's gift to his wife, which at common law took effect as an absolute gift, was brought to a premature end by the shifting of her interest to Manning on her death. The leasehold term was not sliced up into separate estates - rather it was passed on from one person to another. The Statute of Wills 1530was superseded by the WillsAct 1837. This act was originally incorporated into Hong Kong law by the Application of English Law Ordinance,9 but it has now, in turn, been superseded by the Wills Ordinance. 10 Turning back to our original example, where A by will grants a life interest to his wife with remainder to their only child C, the precise effect of this gift will depend on the wording of the will. If A provides that his personal representatives or specially appointed trustees are to hold the property oh the desired trusts, then an equitable life interest and equitable remainder will be created. Alternatively, if no trust is established by the will, the gift will take effect in law as a gift to A's wife subject to an executory devise to their child C, to take effect on the death of A's wife. The common law, however, has been cautious about extending its recognition of executory devises. In particular, the common law declined to recognise that an entailed interest in leasehold property and successive life interests were only accepted if the prospective life tenants were all living at the time of the devise. In Hong Kong only reversions and executory devises can exist at law. Remainders and executory interests can only exist behind a trust in equity. Following the Statute of Uses1525, the position with regard to freehold land ;I 7 8 9 10 190 Technically leasehold property, as a chattel real, when left by will should be termed a bequest rather than a devise, which is the term reserved for real property. But in Hong Kong a gift of leasehold land by will is more usually termed a devise. (1609) 8 Co Rep 94b. See also Lampet's Case (1612) 10 Co Rep 46b. Cap 88 Cap 30, s 3 of which provides 'a person may by his will ... dispose of all his property which he is beneficially entitled to', which it is hoped is wide enough to preserve a testator's ability to grant an executory device. FUTURE INTERESTS in England was far more complicated. At common law a future interest in freehold property might qualify as a legal reversion, a legal vested remainder, a legal contingent remainder, or a legal executory use, while in equity all these interests had their equitable equivalent. It was in the light of this confusing array of interests that the Law of Property Act 1925 reduced the number of legal estates to two, namely the fee simple absolute and the term of years absolute, and provided that all future interests can exist only in equity behind a trust. 11 8.6 Rule Against Perpetuities A perennial concern of the common law was to balance the desirability of preserving the free alienability of land against the wishes of many landowners to retain the control of their estates not only during their lifetimes but for successive generations. The development of future interests that were contingent enabled property owners to exert control over the future ownership of their property for very long periods of time. For instance, a property owner could effectively tie up the ownership of his property for several generations by simply leaving his property on trust for his grandchildren for life with remainder to his great grandchildren. Furthermore, a property owner could indulge his own likes or dislikes, eccentricities, or whims in framing the conditions to which he made a gift dependent. Contingent future interests also led to uncertainty, for until the interest was vested it was impossible to identify who was going to be entitled to the land. For instance, in the case of a life interest to grandchildren with remainder to great-grandchildren, it would be impossible to determine the ultimate ownership of the remainder until all of the settlor's grandchildren had died since there was always the possibility that a further great-grandchild may be born. The modern scientific developments of artificial insemination, in vitro fertilisation and test tube conception give rise to even greater problems, with the possibility that a child may be born after both its parents have died! The ability to create future interests, particularly contingent interests in favour of beneficiaries who were not yet born, meant it could become very difficult, if not impossible, to alienate the land. All persons who had a potential interest in the land would have to be parties to any disposal and, if those persons included children or unborn persons who were not capable of joining in the disposal, the land was effectively inalienable. To avoid these problems the common law developed the rule against perpetuities, which has subsequently been modified by the Perpetuities and Accumulations Ordinance, 12 to produce a highly technical set of rules to determine the validity of any contingent gift. The Perpetuities and Accumulation Ordinance is derived from the Perpetuities andAccumulations Act 1964. 11 See ss 1(1) and (3) LPA. 12 Cap 257 191 HONG KONG LAND LAW 8.6. l Tbe Common Law Rule Against Petpetuities What is known as the modern common law rule against perpetrnt1es developed in the late 17th century from the decision in the Duke of Noifollis case. 13 The rule applies to both legal and equitable interests in both real and personal property, and lays down a test which measures the validity of a contingent interest against the time when it vests. The rule may be stated as follows: • A contingent interest is void unless it must vest, if it vests at all, within the perpetuity period. 8.6.1.1 The Perpetuity Period The rule dictates that a beneficiary's contingent interest must vest within the perpetuity period. The perpetuity period is the lifetime(s) plus 21 years of the life or lives in being at the date the disposition takes effect. In appropriate cases, where a potential beneficiary is conceived but unborn, the period of gestation will also be taken into account. The date on which the disposition takes effect, in the case of a disposition made during the lifetime of the grantor, is the date of the disposition and, in the case of a disposition made by will, the date of the testator's death. A 'life in being' may be any human being, but not an animal or corporation, who is alive at the date of disposition. But, as it is obviously impossible to ascertain all such persons, the relevant lives in being are restricted to those that are identifiable from the grant. The life must be mentioned in the grant either expressly or by implication, and must in some way or other affect when the gift will vest. For instance, in the case of a grant by A in his will to trustees on trust for: • his wife for life with remainder to his first child at the age of 30, A is not a life in being because the gift takes effect on his death. If the gift had been contained in a settlement inter vivos, A would qualify. A's wife and children are all lives in being, provided they have not already predeceased A. The gift is therefore not void for breach of the rule against perpetuities, since the remainder must vest in the lifetime of A's children who are all lives in being. However, if the gift had been to: • A's first grandchild to attain 30, then the gift would fail. A may have grandchildren that are born after his death and will thus not qualify as a life in being. The lives in being will be 13 192 (1681) 2 Swanst 454 and was settled in its final form in Cade!! v Palmer (1833) 1 Cl and F 372 l FUTURE INTERESTS A's children, and if they all die within nine years of the birth of a grandchild, as is quite conceivable, that grandchild will not attain 30 within the perpetuity period. A baby will qualify as a life in being from the time of conception, and thus a baby en ventre his mother at the time of the grant will be a life in being. For instance, in the case of a gift by A in his will to: • his wife for life remainder to his first child to attain 30, when A's wife is pregnant at the time of A's death, the child that is subsequently born after A's death still qualifies as a life in being. The baby's birth after the date of the disposition thus does not give rise to the possibility that the gift may vest outside the perpetuity periocl. The gift is thus valid. A period of gestation may thus be taken into account in two instances: first in determining the lives in being, and second in extending the perpetuity period. For instance, if there is a gift to: • A's eldest son for life with remainder to the first child of A's eldest son, and the wife of A's eldest son is pregnant at the time of the gift, the child that is born will be a life in being. Furthermore, if A's eldest son dies leaving his wife pregnant, the period of gestation of the child that is subsequently born will be included within the calculation of the perpetuity period. A grantor is free to select lives in being which do not have a connection with the gift. A popular clause taking advantage of this ability to nominate lives in being has been 'Royal Lives Clauses'. For instance, the prescribed lives in being may be designated as 'all the lineal descendants of Queen Elizabeth II alive at the date of the grant.' However, such clauses may be struck down for uncertainty if it becomes impossible to trace all the designated lives. For instance, in Re Villar 14 the designation of the linear descendants of Queen Victoria as lives in being was upheld, it being possible at that time to trace the over 100 descendants then alive. But now it would probably be impossible to trace all the linear descendants of Queen Victoria, and the gift may well fail for uncertainty. Where no lives in being are designated or ascertainable, the perpetuity period is 21 years. 8.6.1.2 Must Vest If It Vests At All The rule does not require the interest to vest in possession, but only that it must vest in interest if it vests at all during the perpetuity period. Thus, where A makes a gift inter vivos while he is a bachelor to: • his future wife for life, then to his first-born child for life, and in remainder equally to all his other children, 14 [1929] 1 Ch 243 193 HONG KONG LAND LAW the remainder may well not fall into possession within the perpetuity period because his first- born child is not a life in being and may well survive A by more than 21 years. But this is irrelevant, for the remainder will vest in interest as soon as A's other children are born, and they must be born within the perpetuity period as A is a life in being. Under the common law a gift is void if there is a possibility that the gift may vest outside the perpetuity period, even though that possibility is very remote. The test is applied at the date the disposition takes effect, so that it is not possible at common law to wait and see whether an unlikely event actually occurs. The test at common law is thus concerned with possibilities, however remote they may be, rather than probabilities. We have seen that a gift in remainder to the first of the settlor's grandchildren to attain the age of 30 years is void at common law, and this remains so even if A has a grandchild alive at his death who qualifies as a life in being. It may be very likely that this grandchild will attain a vested interest during the perpetuity period, but it is also possible that this grandchild, and any other grandchildren who are lives in being, may die before reaching the vesting age - leaving either no other grandchildren or only grandchildren who are not lives in being and thus will not reach 30 within the perpetuity period. There are plenty of bizarre illustrations of the rule. See, for instance, the unborn widow in Re Frost,15 the fertile 60-year-old woman in Re Dawson, 16 and the precocious toddler in Re Gaites Will Trust. 17 The common gifts that tend to cause difficulties are gifts by will to grandchildren and remoter issue that are dependent either upon attaining an age greater than 21 years old or upon the satisfaction of a condition other than the attainment of a. specified age. Similar gifts to children cause difficulties when made in a settlement inter vivas, for the children of the settlor will not qualify as a life in being if they are born after the date of the settlement. 8.6.1.3 Class Gifts - the Rule in Andrews v Partington 18 The rules governing the vesting of a class gift require some further explanation. A class gift arises where the gift is to a group or class of people, for instance to: • all the children of A who attain 21 in equal shares. For the purposes of the rule against perpetuities, vesting requires not only identification of people within the class but also the share they are to take, for invalidity of a gift will affect the whole gift. It is thus necessary in order to calculate the share of each member of the class to ascertain the number of persons within the class. For instance, if A makes a gift in remainder to: 15 16 17 18 194 (1889) 43 Ch D 246 (1888) 39 Ch D 155 [1949] 1 All ER 459 Cl791) 3 Bro CC 401 1 FUTURE INTERESTS • all his grandchildren who attain 30, we have a class gift. In order to determine the vesting of the whole gift it is necessary to wait until all A's grandchildren either attain 30 or die before reaching that age. As it is possible for one of A's grandchildren to attain 30 after the expiry of the perpetuity period, the gift is void even if some of the grandchildren do attain 30 and thus a vested interest within the perpetuity period. A class gift is not divisible. The interests of all class members must vest within the perpetuity period or the whole gift will fail. The class closing rule laid down in Andrews v Partington does provide some assistance to class gifts. The rule provides that the class of persons entitled to the gift closes when the first member of the class is able to claim his interest, ie when he satisfies the condition. The class in our example would thus close when the first of A's grandchildren attains 30 years old. Grandchildren born before then may qualify if they reach 30, but grandchildren born subsequently are excluded from benefiting from the gift, even if they do attain 30. The rule may save a gift that would be otherwise void, where at the time of the disposition there is at least one qualified member of the class. In our example the gift would be saved if A had a grandchild who had attained the age of 30 at the time of A's death, since the class is closed and all possible members will be lives in being. The rule also allows at least a partial distribution to a member of the class who has satisfied the condition. For instance, if A has three grandchildren, when the eldest reaches the age of 30 a 1/3 share can be distributed to the eldest grandchild immediately. If either or both of the remaining two grandchildren fail to qualify, then a subsequent distribution can be made to satisfy the now enlarged interest of the eldest grandchild. 8.6.1.4 The Rule in Whitby v Mitchell 19 This rule is sometimes known as 'the rule against double possibilities', for it provided that where a gift was given to an unborn person, any remainder given to the issue of that person and any subsequent limitations were void. For instance, in a gift in trust to: • A for life, and then to B for life, and then to the children of B, where B was unborn at the time of the gift, the gift to B was valid but the remainder to his children was void. The rule has now been abolished by the Perpetuities and Accumulation Ordinance 20 in respect of gifts made after 13 March 1970, as it has been rendered largely redundant by the present rules governing perpetuities. 19 20 Whitby v Mitchell (1890) 44 Ch D 85 See s 1 of Cap 257. 195 J' ··HONGKONG I.AND IA W 8.6.2 Statutory Modifications.Perpetuities and Accumulations Ordinance The harshness of the common law perpetuity rules has been mitigated by the Perpetuities and Accumulations Ordinance (hereinafter PAO)21 in respect of dispositions taking· effect after 13 March 1970. These modifications, however, only apply where a gift is void at common law. The ordinance supplements the common rules, it does not replace them. It is thus still necessary to apply the common law rules before turning, if required, to the assistance of the ordinance. 8.6.2.1 Specified Perpetuity Period 22 It is now possible to specify a perpetuity period within which a contingent gift must vest provided that period does not exceed 80 years. 8.6.2.2 Wait and See 23 Rather than having to determine the validity of the gift at the date of the disposition, it is now possible to 'wait and see' if the gift will vest within the perpetuity period. If it does the gift is saved. This is the most far-reaching reform and as a result the rule against perpetuities may now be stated as: • A contingent gift is valid if it vests within the perpetuity period and is only void ab initio if it must vest if it vests at all outside the perpetuity period. For instance, a limitation by a grantor to: • his grandchildren who attain the age of 30, will not be void ab initio. The gift will only be void if it does not vest within the perpetuity period. It is necessary to wait and see whether that possibility will become a reality. The more extreme consequences of the common law rule against perpetuities are thus removed, as the rule looks to reality rather than possibilities. The rule, however, does lead to greater uncertainty. because it is necessary to wait and see if the gift will vest within a period that can extend well into the future. 8.6.2.3 Statutory Lives in Being 24 When applying the 'wait and see' rule, the definition of lives in being is prescribed by the ordinance as the following persons who are in being and 21 22 23 24 i ' l 196 Cap 257 Sees 6 PAO. See ss 8(1)-(3) PAO. See ss 8(4) and (5) PAO. FUTURE INTERESTS ascertainable at the start of the period provided that they are not so numerous as to make identification impossible: • thE; settlor; • a person in whose favour the disposition is made, including any potential beneficiary or class member; • a parent or grandparent of any person in whose favour the disposition is made; and • any person on the failure of whose prior interest the disposition is limited to take effect. These statutory lives in being are only relevant where it is necessary to rely on the wait-and-see provision. If the gift is valid at common law, it is the common law lives in being that are used to determine that validity. 8.6.2.4 Age Reduction 25 Where a gift is void at common law and has not vested within the perpetuity period despite applying 'wait and see', because it is conditional upon the attainment of an age greater than 21 years, the gift may still be saved provided the gift would be valid if the qualifying age were 21 years. In this case the age qualification is reduced to such age as is necessary to enable the gift to vest within the perpetuity period. Thus, in the case of a limitation in trust to: • all A's grandchildren at the age of 30, if at the end of the perpetuity period there is one grandchild who is aged 25, then the age requirement is reduced to 25 so that the gift will vest. If there are several grandchildren, who are for instance 21, 23, and 25 years old, then the qualifying age is reduced to the age necessary to enable the youngest to take a vested interest, ie 21 years. However, any younger grandchildren are excluded from the class for they cannot take a vested interest even with the benefit pf age reduction. If it is apparent at the date of the grant that the gift cannot vest within the perpetuity period, so that to wait and see will not help, ·then age reduction can be effected at the time of the gift 8.6.2.5 Fertility Presumptions 26 It is now presumed for the purposes of the rule that: • a male cannot be a father under 14 years; and • a female cannot be a mother under 12 years or over 55 years, 25 26 Sees 9 PAO. Sees 7 PAO. 197 HONG KONG LAND LAW However, these presumptions are rebuttable, so that medical evidence may be brought to show evidence of a person's capacity or incapacity which differs from these presumptions. Parenthood for these purposes goes beyond having a child by natural biological means and extends to adoption, legitimation, or other means. 27 8.6.2.6 Unborn Widows 28 A gift to: • A (a bachelor) for life, then to any widow of A for life, with remainder to their children then living at the death of the survivor, is valid so far as the gifts to A and his widow are concerned, but the gift to their children is void at common law because of the possibility that A's widow may not be a life in being and may die more than 21 years after A's death. The gift may now be saved by an application of 'wait and see' or, where A's widow is both unborn and survives A by more than 21 years, treating the gift to A's children as taking effect immediately before the end of the perpetuity period. 8.6.3 The Effect of a Void Disposition Where there is a series of gifts made of the same property, each gift must comply with the perpetuity rule. The fact that one gift may be void for a breach of the rule does not necessarily mean that all the other gifts must fail too. There are three possibilities to consider. 8.6.3.1 A Valid Gift Followed By a Void Gift A gift that is followed by a void gift is unaffected by the void gift. Thus, if property is left to: • A for life with remainder to A's grandsons who attain 30, A's life interest is unaffected by the gift to his grandsons which may fail to vest. 8.6.3.2 A Valid Gift Following and Independent of a Void Gift Where a valid gift follows a void gift it will not fail provided it is independent of the void gift. For example, if property is left to: 27 28 198 The problems presented by in vitro fertilisation, artificial, and test tube insemination have already been alluded to. Sees 10 PAO. 7' FUTURE INTERESTS • A's first son to become a lawyer for life, with remainder to A's wife, the gift to A's wife is not in any way dependent on the gift to A's son. Its vesting is governed by A's marriage - not by the qualification of A's son as a lawyer, which must take place within the perpetuity period where A is a life in being. 8.6.3.3 A Valid Gift Following and Dependent on a Void Gift At common law, a valid gift that is dependent upon a void gift also fails. For instance, if property is left to: • A's first son to become a lawyer, but if he has no such son then to A's wife for life, the gift to A's wife will fail although it does not itself infringe the rule against perpetuities. It will fail at common law because it is dependent upon the gift to A's son which does infringe the rule. However, if the gift is contained in an instrument taking effect after 13 March 1970, the Perpetuities and Accumulations Ordinance will save the gift.29 8. 7 Rules against Inalienability The law is concerned to maintain the free alienability of property, and we have seen that the rule against perpetuities is intended to promote the free alienability of property by limiting the time within which an interest must vest. There are also other rules that are intended to promote alienability. 8.7.1 Restrictions on Alienation A condition that seeks to significantly restrict alienation may be struck down as contrary to public policy. For instance, the following conditions have been struck down as void: • the prohibition of alienation at any time;3°and • the prohibition of alienation during a person's life;31 • alienation to anyone but A.32 By contrast, a partial restraint which does not significantly deprive an owner of his power of alienation may be acceptable, for instance, a prohibition on selling to a specified person or class of persons provided the class is not too restrictive. 33 At one time a restraint upon a married woman being free to 29 Sees 11. 3o 31 Re Dugdale (1888) 38 Ch D 176 Re Rosher (1884) 26 Ch D 801 Re Cockerill [1929] Ch 131 Doe d Gill v Pearson (1805) 6 East 173 32 33 I 11- 199 HONG KONG LAND LAW alienate her property was not uncommon, but with greater sexual equality a restraint upon a married woman being free to alienate her property is no longer valid. 34 8.7.2 Purpose Trusts A trust set up for a specific purpose, rather than to benefit a particular individual or class, will be void if it requires the property to be held by the trustees indefinitely in order to carry out the specified purpose. For instance, if a trust requires the trust income to be applied in a specific way the trustees will be obliged to retain the capital in order to discharge their trust of the income. The capital is thus inalienable. Examples of gifts that have fallen foul of this rule include gifts to maintain family graves and ancestor worship, 35 and a gift to be applied for the welfare, as opposed to the benefit, of a village. 36 Charitable trusts, where the necessary element of public benefit can be established, form an exception to this rule.37Such gifts may also be saved if the restraint on alienation is restricted to the perpetuity period. As there will generally be no lives in being, the perpetuity period for a purpose trust will usually be limited to 21 years. 8.8 Rule Against Accumulations During the subsistence of the trust, the trustees will have to manage the trust property. They will collect the income and distribute it to the beneficiary entitled in possession. For instance, the life tenant will be entitled during the period of his life interest. When the remainder becomes vested in possession it is the remainderman who is entitled to the income, but if the remainder is still contingent when the prior estate falls in, the remainderman is not yet entitled to the income. The income will revert to the settlor as undisposed-of property unless the gift is to carry the intermediate income, in which case the income is accumulated for the benefit of the contingent remainderman. 8.8.1 Statutory Powers of Accumulation Section 33 of the Trustee Ordinance3 8 confers special powers on trustees to accumulate and distribute income to infant beneficiaries. Where the interest of the infant beneficiary is vested, the trustees may apply the income for his 34 35 36 37 38 200 See s 4 (2) Married Persons Status Ordinance Cap 182. Yeap Cheap Neo v Ong Cheng Neo (1875) LR 6 PC 381, Lau Leung Shiv Lau Po Tsun (1911) 6 HKLR 149 and Ip Cheung Kwok v Ip Siu Bun [1988] HKC 437, (1990) CA Civ. App No 79 of 1988 but note the tong and tso property at Chapter 9.4. Ip Cheung Kwok v Ip Siu Bun (1990) CA Civ Ap No 79 of 1988. See, for instance, AG v Pon Yup Chong How Benevolent Association 0992) HCt MP No 1896 of 1991 where following Re Hetherington [1990] 1 Ch 1 a trust for the repose of souls of those from Pon Yup County in China who died in or around San Francisco was held to be a charitable trust for religious purposes and could be applied cy-pres. Cap 29 . .J The table on the following pages summarises the rules governing future interests and their vesting. Future Interest Table to A's wife for life in possession vested in possession NB is an absolute gift at law thus no reversion to A or his estate in trust for A's wife for life A's wife for life then to their child C in possession vested in possession equitable reversion to A or his estate vested in interest in possession executory devise vested in possession contingent on death of A's wife valid -A's wife & C lives in being "tj ~ ~ ~ ~ ~ ~ 1--l ~ ~ i,t.· ~··•-~·~ .. .,... ·""'· LiL JM., ·~·-!:U~.- ~ ;·: :; ;i 5~ ~ ~ N ~ i Future Interest Table (continued) ~ ~ ~ ~ in trust for A's wife for life then to their child C in possession vested in possession equitable remainder vested in interest in trust for A's wife for life then to their child C if he attains 21 years in possession vested in possession equitable remainder contingent on C attaining 21 years equitable reversion to A or his estate unless C attains 21 years vested in interest in trust for A's wife for life then equally to all their children who attain 21 years in possession vested in possession equitable remainder to a class contingent on children attaining 21 years equitable reversion to A or his estate unless child attains 21 years vested in interest valid -C is a life in being valid -A and his wife are lives in being in trust for A's wife for life but if A's wife becomes bankrupt to C in possession vested - equitable executory shifting interest contingent on A's wife's bankruptcy valid -A's wife is a life in being equitable reversion to A or A's estate unless A's wife becomes bankrupt vested subject to divesting - in trust to C at 21 years equitable executory springing interest contingent on C attaining 21 years valid -C in trust for A's wife for life then to their first child to marry in possession vested - equitable remainder contingent on child marrying valid equitable reversion to A or A's estate unless a child marries vested subject to divesting is a life in being -in will as child will be a life in being void -in settlement at as child may not common be a life in being law but may be saved by 'wait and see'or fertilitypresumptions ~ ~ §a t'l ~ ~ ~ ~ ~ ~ i'tVT ··~ _.,.,,-~,""'-·=•,.,. iii.ii~:ttM~M!ft. -_1111711--~-~-"'= '"~ l1i,. ___p UJ& .. ",.U... _z_ Ll_ - __.J, N . fMiiC•J~L7 ~ C· _iit"PL ·-- ~ ~ ~ ~ Future Interest Table (continued) s: § s: ~ in trust for A's wife for life then to their first child to attain 30 years in possession vested equitable remainder contingent on child attaining 30 years equitable reversion to A or A's estate unless child attains 30 years vested subject to divesting valid -in will as child will be a life in being void -in settlement as child may not be a at common life in being but law may be saved by 'wait and see', fertility presumption or age reduction in trust for first of A's grandchildren to obtain LLB in trust equally for all A's grandchildren who attain 21 years equitable executory springing interest contingent on grandchild obtaining LLB degree equitable reversion to A or A's estate unless grandchild obtains LLB degree vested subject to divesting equitable executory springing interest to a class contingent on grandchild attaining 21 years equitable reversion to A or A's estate unless grandchild attains 21 years vested subject to divesting void -grandchild may at not be a life in common being but may law be saved by 'wait and see' or fertility presumptions valid -in will for A's children will be lives in being void -in settlement for at A's children may common not be lives in law being,but may be saved by 'wait and see', fertility presumptions, or class closing rules '?:I ~ §a t?l ~ ~ N §; ~ ~ • II!., .. ! .. IL ..!!!,!, !!!!IHI :..... U!>. ■ . __j@II) W@S ..._Jc £ I U L £. §d_ J "- , M! L. ..J2JM!!l i1. ""JE N :i::: ~ ~ (;') ~ ~ Future Interest Table (continued) is: ~ in trust for A's wife for life then equally to all A's grandchildren who attain 30 years in possession vested in possession equitable remainder to a class contingent on grandchild attaining 30 years equitable reversion to A or A's estate unless grandchild attains 30 years vested subject to divesting void -for grandchildren at may not be lives common in being but may law be saved by 'wait and see', fertility presumptions, age reduction, or class closing rules FUTURE INTERESTS maintenance, education, or benefit and if the income is not so applied, it is accumulated and payable to the beneficiary upon his attaining his majority or marrying. 39 If the beneficiary's interest is contingent, then, provided the gift is expressed to carry the intermediate income, the trustees may also apply the income for his maintenance, education, or benefit and when the beneficiary attains his majority he is entitled to the income even if his interest has not yet vested. Income not so applied is again accumulated and is payable to the beneficiary if he attains a vested interest on attaining majority or marriage. In other cases the accumulated income is added to the trust capital. The fact that the infant beneficiary's contingent interest may ultimately fail does not affect his receipt of income under this power. There is also power granted to trustees in certain circumstances to advance capital for the benefit of a contingent beneficiary. 40 8.8.2 Express Powers to Accumulate In addition to the statutory right to accumulate, a settlor may expressly direct his trustees to accumulate income for the benefit of a specified beneficiary who would otherwise not be entitled to the income. For instance, property may be left: • by A in trust for such of his brother's children who attain the age of 21, the income to be accumulated until his brother's youngest child attains 21. . I The periods during which it is possible to accumulate income are limited. At common law the permitted period for accumulations is the same as the perpetuity period, but this limitation has led to bizarre results. For instance, in Thellusson v Wood 41 the settlor directed that all income should be accumulated during the lifetime of his sons, grandchildren, and greatgrandchildren alive at his death. The direction to accumulate did not offend the rule as all the specified people were lives in being, but nevertheless the enjoyment of the income, and as a result, the capital, was tied up for a considerable period. The common law rule has now been repealed by s 17 PAO, 42 which limits the accumulation period to one and only one of the following periods: (a) (b) ( c) the life of the grantor or settlor; or a term of 21 years from the death of the grantor, settlor or testator; or the duration of the minority or respective minorities of any person in being at the death of the grantor, settlor or testator; or 39 The age of majority for these purposes is 21 years in respect of interests arising under instruments made before 1990 and 18 years in respect of interests arising under instruments made after that date. See ss 8 and 21, Age of Majority (Related) Provisions Ordinance No 32 of 1990. 40 Sees 34 Trustee Ordinance Cap 29. 41 (1799) 4 Ves 227 42 Cap 257 207 HONG KONG ZAND LAW (d) (e) CD the duration of the minority or respective minorities only of any person who would under the limitations of the instrument directing accumulations would, for the time being, if of full age, be entitled to the income directed to be accumulated; or a term of twenty-one years from the date of the making of the disposition; or the duration of the minority or respective minorities of any person or persons in being at the date of the disposition.' The question of which period is appropriate depends upon the particular case and the construction of the gift. For instance, periods (a), (e), and (f) cannot apply to wills, only to dispositions inter vivos; while periods Cb),(c), and (d) may apply to either wills or dispositions inter vivos. In the case of our example above of a gift to the children of A's brother at 21 with a direction to accumulate while any of the children are under 21, the third period appears to be the most appropriate. The fourth period is inappropriate since the children are not entitled to the income while one of them is under 21. Where the accumulation may possibly exceed the perpetuity period, the whole direction to accumulate is void. It does not seem possible to wait and see. If the direction does not exceed the perpetuity period but does exceed the appropriate accumulation period, the direction is only struck down during the excess period. In those circumstances the income passes to the person who would have been entitled to receive it but for the direction to accumulate or, if no one is expressed to be entitled to the income, the income will revert to the grantor or his estate. A period of statutory accumulation is disregarded when considering the period during which accumulations made pursuant to an express power are permitted. 43 It is possible for an express period of accumulation to be followed by a statutory period of accumulation where the beneficiaries entitled are still minors at the end of the express period of accumulation. 8.8.3 Rule in Saunders v Vautier 44 A direction to accumulate income will not prevent a beneficiary who is of full age and absolutely entitled from exercising his rights under the rule in Saunders v Vautier to bring the trust to an end. If he does so he will automatically bring the trustee's power to accumulate to an end. 43 44 208 Sees 18 PAO Cap 257. (1841) 4 Beav 115 affirmed Cr and Ph 240 Settlements And Trusts For Sale 9.1 Introduction We have seen, when looking at future interests, that in Hong Kong life interests, remainders, and executory interests, save for executory devises, can only exist in equity behind a trust. The settlor transfers his property to trustees to hold as he directs. The trustees hold the legal estate and the beneficiaries the equitable or beneficial interest in the property. We now look at the different types of trusts that can be employed to create interests in succession. For instance, we know that where A wishes to leave a life interest to his wife with a remainder to their only child C, he should employ a trust. But what is the most convenient type of trust to implement his wishes? There are two types of trust that can be employed: the strict settlement and the trust for sale. These two types of trust are examined in this chapter. In addition, it is convenient at this point to look at the Chinese customary law equivalent of a trust by which successive interests in property in the New Territories may be held. 9.2 9.2.l Strict Settlements Historical Background The strict settlement has played a prominent role in the development of land law in England. In many societies land has traditionally been the source of wealth and power, and England was no exception. Landowners, anxious to retain their wealth and influential positions, sought both to protect their family landholding and to provide for their extended family by rendering the land effectively inalienable. They did so by settling land on trustees to hold the land on trusts which provided for a number of successive interests to family members. To sell the land, the trustees and all the beneficiaries would have to agree to and participate in the sale in order to pass the full legal and equitable ownership to the purchaser. Not only could it be difficult to obtain the unanimous agreement of all the beneficiaries, but it was simply impossible if some of the beneficiaries were under age or unborn and thus incapable of participating in the sale. In such circumstances, the beneficiaries could only deal with their individual equitable interests to the extent that they were capable of doing so. This inability to sell or deal with the land itself had its drawbacks. The owner in possession might be unable to raise sufficient money to maintain the land or to keep any buildings erected on the land in good repair. The improvement or development of the land was also hampered, for, in the absence of any express power granted in the settlement or the consent of all the beneficiaries, an owner in possession could not raise finance by mortgaging the land or selling or leasing part of it. The finance for repair or improvement would have to come from other sources: for instance, from 209 HONG KONG LAND IA W the owner in possession's personal assets, which he might well be unwilling to invest in property in which he only had a limited interest. As a result of these difficulties, settlements were drafted to include extensive powers for the owner in possession to sell and manage the land. In England such powers were extended to all settlements by legislation. This legislation is now contained in the Settled Land Act 1925. The popularity of the strict settlement was already on the wane in England by the mid-19th century, when the industrial revolution brought new forms of wealth from manufacture and trade. 1 There was, of course, the same desire to preserve family wealth - but that desire was not served by retaining the land in its existing state but by maximising its potential by development. Land was not so much an inherent source of wealth and power but a commodity like any other, whose value was enhanced by ensuring it could be freely developed and sold. That purpose was accommodated by the development of the trust for sale in the 19th century, but now may also be served through the vehicle of a limited company. Thus, by the time Hong Kong was established, the strict settlement was no longer the popular means employed for preserving family wealth, and it has not served that function in the territory. Interestingly, it is Chinese customary trusts that have, in some measure, sought to maintain family prosperity by rendering land inalienable. If a person wishes to leave successive interests in property, he will use the trust for sale which, as we shall see, preserves the alienability of the land. Although strict settlements are not usually intentionally created in Hong Kong, they may arise where a person in ignorance of the niceties of property law creates interests in succession without employing a trust for sale. Unfortunately, home-made wills are a fertile source of strict settlements. It is thus important to briefly review the position under a strict settlement. 9 .2.2 Alienability and Management of Settled Property The Settled Land Act 1925has not been enacted in Hong Kong, nor is there any other legislation dealing specifically with land held under a strict settlement. Accordingly, land or any other property held for interests in succession cannot, in the absence of any express powers granted in the settlement itself, be sold without the participation of all the holders of an interest in the land or by order of the court. For instance, in a simple settlement of a life interest on the settlor's wife with remainder to their children, both the wife and all the children must all agree to, and join in, a sale of the land. This is the case even if the children's interests are contingent, for instance upon their attaining 21 years of age. Where the beneficiaries are minors, there is the problem of the beneficiaries being incapable of giving consent to the sale. The same problem arises if a beneficiary suffers from some other disability, or if there are potential beneficiaries who have not yet been born. For instance, if our simple settlement of a life interest to the settlor's wife with remainder to their children contained a further gift by which grandchildren were to take their parent's '' 1 210 Clause 2 of the Trusts of Land and Appointment of Trustees Act 1996 prohibits the creation of new strict settlements in England. SETTLEMENTS AND TRUSTS FOR SALE remainder should their parent die before their interest fell into possession, the potential grandchildren would have a contingent interest even though they were unborn. Where the holder of an interest is under a disability or is unborn, or for some other reason the trustees lack the power to deal with the land, application can be made to court under s 56 of the Trustee Ordinance 2 for an order authorising the 'sale, lease, mortgage, surrender, release, or other disposition' of the trust property. The court will make an order if it is satisfied that it is expedient to do so. For instance, in Kwong Suk-chun v Wong Fungming 3 a successful application for an order for sale was made by a mother who held a flat in trust for her two infant children, where the proceeds were to be applied for the education and maintenance of one of the daughters. Section 56 also permits the court to sanction any purchase, investment, acquisition, expenditure, or other transaction which is, in the opinion of the court, expedient. It appears that under this power the court could approve the use of trust assets for the purpose of repairing, improving, or developing the trust property, although such approval is completely within the discretion of the court. The powers of the court under s 56 may be exercised generally or to permit a particular disposal or transaction, and the court may impose on the power conferred such terms, provisions, or conditions as the court thinks fit.4 It is thus conceivable that the court could confer upon the trustees a general power to sell, lease, or mortgage the property, and that such a power could be limited in order to safeguard the interests of the beneficiaries - for instance, by providing that any sale must be for full market consideration, that any lease should not exceed a certain term and should be for the best rental, or that the money raised by mortgage could only be used for certain purposes connected with the trust property, such as its improvement or repair. Examples of the general powers to sell, lease, and mortgage settled land that have been sanctioned by the Settled Land Act 1925 in England can be found in ss 38, 39, 41, 42, and 71 of that act. The powers that the court can grant under s 56 can be conferred only upon the trustees of the settlement. By contrast, the Settled Land Act 1925 in England provides a regime whereby the powers of disposal and management are exercisable by the owner for the time being in possession of the land, who is known as the 'tenant for life'. The tenant for life, in exercising his statutory powers, however, has the same duties as a trustee and must have regard to the interests of the other beneficiaries. In some cases he must also give notice to the trustees or obtain their consent to the exercise of his powers. It is the role of the trustees, under a settlement governed by the Settled Land Act 1925, to deal with the capital monies generated by any disposal by the tenant for life. To avoid having to go to court to obtain an order for the sale or other disposition of the property held under a strict settlement, or to permit activities that the court is unable to sanction under s 56, it is vital for the 2 3 4 Cap 29 (1989) HCt MP No 66 of 1989 For instance, in the Kwong case the court required the appointment trustee. of an additional 211 HONG KONG LAND LAW express terms of the settlement to give adequate powers to the trustees or the tenant for life. Indeed, in the Kwong case, the judge commented on the unsuitable form of the trust deed that had been employed where no such powers were given. 9-3 9.3.1 Trusts For Sale Historical Background The trust for sale first emerged in medieval times as a means by which a testator arranged for the payment of his debts on his death. He would leave his property to trustees on trust to sell and use the proceeds to pay his debts. The trust for sale is still used in this way: for instance, legislation now provides that the estate of anyone dying intestate is to be held on trust for sale, first to pay off his debts and then to pa~s to those entitled to his estate. 5 It was not until the 19th century that trusts for sale emerged to provide a vehicle for the creation of interests by way of succession. As we have seen, the strict settlement fell from grace with the shift of wealth from land to manufacturing and trading activities brought about by the industrial revolution. Wealthy businessmen also wished to safeguard their family fortunes by providing for interest in succession, but they did not necessarily want to confine that fortune to the ownership of a particular piece of land. Other investments were emerging, such as company shares, that could serve their purpose as well as land. Land, of course, continued to be a valuable asset, but its value was enhanced by preserving its alienability so that the optimum use could be made of the land through development or sale. The trust for sale met these wishes admirably. Indeed, they became known as 'traders settlements'. Property, which could include land and other assets, was transferred to trustees on trust for sale, with a power to postpone sale, and the proceeds of sale were then fixed with the desired trusts. Family fortunes could be safeguarded by the creation of interests in succession, but alienability was preserved by providing that those interests were in the proceeds of sale rather than the property itself. The desires that stimulated the development of tfllsts for sale still pertain in Hong Kong today, and trusts for sale continue to be used in Hong Kong in order to leave interests in succession. .I I I '··I 9.3.2 Requirements ofTrustsforSale Trusts for sale may be created by instrument inter vivas or by will, but in either case they must satisfy the requirements of the following definition found in the Trustee Ordinance 6 'an immediate binding trust for sale, whether or not exercisable at the request or with the consent of any person and fith or without power or discretion to postpone the sale.' 5 6 212 See s ~2 Probate and Administration Ordinance Cap 10. Sees 2 Cap 29'. The definition is in fact phrased in the context of a trust for sale of land, but it is also appropriate for a trust for sale of other property. SETTLEMENTS AND TRUSTS FOR SALE 9.3.2.1 Obligation to Sell There must be an obligation on the trustees to sell. A mere power for the trustees to sell is insufficient. The whole of the will or trust deed must be considered in order to ascertain whether an obligation to sell is imposed or a mere power granted. For instance, in the case of Re Newbould 7 the words 'upon trust to sell' were not sufficient where the subsequent gifts were expressed to be of the land of the donor rather than the proceeds of sale of the land. 8 Difficulties have arisen where the trusts permit the trustees 'to retain or sell the land'. Again, the whole of the terms of the will or trust deed must be considered to establish whether there is a general intention that the land should be sold or that it should be retained as land with a mere power to sell.9 In England the difficulties have been resolved, at least in respect of trusts created after 1925, for s 25( 4) of the Law of Property Act 1925 provides that a trust to retain and sell shall be construed as an imperative trust for sale. Unfortunately, s 25( 4) of the Law of Property Act 1925has not been enacted in Hong Kong. 9.3.2.2 Immediate Sale The trust for sale must be immediate. A trust that imposes an obligation to sell in the future will not qualify. For instance, in Re Horne's Settled Estate 10 a direction that there should be no sale for 21 years was fatal. 9.3.2.3 Power to Postpone Sale A power to postpone sale will not prevent a trust qualifying as a trust for sale. The definition of a trust for sale clearly contemplates that a power to postpone sale may be granted. Indeed, in England s 25(1) of the Law of Property Act 1925 implies a power to postpone sale unless there is a clear intention to the contrary.11 This provision has not been enacted in Hong Kong, and thus a power to postpone sale must be express. If there is no express power to postpone sale, a year is generally considered to be a reasonable time within which to effect the sale. 12 As the trust for sale is imperative, and the right to postpone sale is merely a power, all the trustees must agree to postpone sale. If they do not the property must be sold. 13 7 8 9 10 11 12 13 (1913) 110 LT 6 Re Hotchkys (1886) 32 Ch D 408 Re White's Settlement [1930] 1 Ch 179; Re Johnson [1915] 1 Ch 435; and Re Crips (1906) 95 LT 865 (1888) 39 Ch D 84 The Trusts of Land and Appointment of Trustees Act 1996 implies a power to postpone sale regardless of a contrary intention. Re Petrie [1962] Ch 355 Re Hilten [1890] 2 Ch 548 213 HONG KONG IAND IA W 9.3.2.4 Consent of Third Parties The fact that the trustees must obtain the consent of one of the beneficiaries or some other person before they can sell does not prevent the trust qualifying as a trust for sale. 14 For instance, it is common for a testator who has left the whole or part of his estate to his wife for life to provide that his trustees shall not sell the matrimonial home included in his estate without the consent of his wife, since his wife may wish to continue to reside there. However, if the third person, whose consent is required, is also able to direct the trustees never to sell, the trust may fail to qualify as a trust for sale. 15 9.3.2.5 Binding The prevailing view is that this requirement adds little more than to emphasise that the trust to sell must be imperative rather than a mere power. 16 In England, however, a line of cases has sought to extend the meaning to require the trustees to be able to take free of any prior settled interest.17But these cases do not appear to be applicable in Hong Kong. In England the issue only arose when it was necessary to determine whether the land was held under the Settled Land Act 1925 or had become a trust for sale, but this distinction does not arise in Hong Kong where there is no legislation dealing with settled land. 9 .3.3 Position of Trustees for Sale The position of trustees for sale in Hong Kong is little different from that of any other trustees. It is governed by the Trustee Ordinance1 8 and the express terms of the will or trust instrument by which the trust is created. A detailed examination of the position of trustees is outside the scope of this book, but there follows a brief look at the unique position of trustees for sale of land. 9.3.3.1 Sale As we have seen, the trustees are under a duty to sell unless they unanimously agree to exercise a power to postpone sale. If they do decide to sell, then they may sell by private treaty or auction as they see fit.19 In fact, very often the intention of a trust for sale is that the land will not be immediately sold but will be retained for as long as the trustees see fit in the discharge of their duties as trustees. Alternatively, the beneficiaries, if they are all of full age, may together decide that the property should be sold and direct the trustees accordingly. Pending sale, the trustees will hold the income produced by the trust property upon the declared trusts or may allow the beneficiary in possession to occupy the land. For instance, if the trusts grant a life interest to the settlor's spouse and a remainder to his or 14 15 16 17 18 l9 214 Re Wagstaff Settled Estates [1909] 2 Ch 201 Re Goodall's Settlement [1909] 1 Ch 440 Re Parker's Settled Estates [1928] Ch 247 See, for example, Re Leigh's Settled Estates [1926] Ch 852. Cap 29 Section 13 SETTLEMENTS AND TRUSTS FOR SALE her children, the spouse will be entitled to receive the income from the property during his or her lifetime and thereafter the children will be entitled to the income and capital absolutely. The trustees may allow, but are not bound to give, the spouse occupation of the property. The sums raised upon a sale must be either distributed to the beneficiaries, if they are entitled to call for distribution, or invested by the trustees in pursuance of the powers expressly granted to them by the will or trust instrument or in pursuance of their powers implied under the Trustee Ordinance. 20 It is interesting to note that the trustees cannot invest in other land unless the will or trust instrument expressly authorises such an investment or the trustees apply to court for approval. 21 It appears that any 'other land' purchased by the trustees from the proceeds of sale of land initially held in trust for sale will not necessarily be held on trust for sale in the absence of any direction to that effect in the will or trust instrument. 22 In England s 32(1) of the Law of Property Act 1925 implies a trust for sale over such 'other land', but this provision has not been enacted in Hong Kong. 9.3.3.2 Other Powers Pending sale and in pursuance of their obligation to manage the land, the trustees may need to lease the land, raise a mortgage, or pay for repairs or improvements to the property. In England trustees for sale are granted the same powers that are conferred upon the tenant for life and trustees by the Settled Land Act 1925, including the power to lease, to mortgage, and to carry out improvements. 23 Trustees for sale in Hong Kong enjoy no such implied powers. They must rely on the express powers granted to them in the will or by the trust instrument, or they must apply for the court's approval of the transaction under s 56 of the Trustee Ordinance. Section 56 is widely worded and permits the court to sanction, either generally or limited to a particular instance, 'any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, [that] is in the opinion of the court expedient'. 24 The court may impose such conditions as it thinks fit when sanctioning the exercise of these powers, and may rescind or vary any order that has previously been made or make a further or new order. As well as the transactions specifically mentioned, the section would appear, by inclusion of the word 'expenditure', to contemplate the approval of repairs or improvements to the property: indeed, the section goes on to permit the court to direct how any expenditure or costs are to be paid or borne as between capital and income. The court also has an inherent power to direct that repairs may be paid and borne out of capital as well as income. 25 20 21 22 23 24 25 Sees 4. See s 4 (l)b. Re 7bursby's Settlement (1910] 2 Ch 181 and Re Wakeham (1945] Ch 177. Section 28 (1) LPA. The Trusts of Land and Appointment of Trustees Act 1996 grants the trustees of land wide powers of management, including sale, which may be excluded or modified by the trust instrument-see ss 5&6. See, for example, Kwong Suk-chun v Wong Fung-ming 0989) HCt MP No 66 of 1989. Re Hotchkys (1886) 32 Ch D 408 I li~;i.~---• ...,.,~,/\.i/;·:..,.d,diJ i"•'\l.Jji.L.c~,.:,e;\;~- ;.,.a~-; 215. HONG KONG LAND LAW 9.3.4 Position of the Purchaser Under a trust for sale the interests of the beneficiaries are expressed to be in the proceeds of sale and not in the trust property itself. But even before the sale the interests of the beneficiaries are not treated as being in the trust property, for equity looks on as done that which ought to be done, and so from the date of the creation of the trust considers the beneficiaries' interests to be in the notional proceeds of sale. Technically, on the sale of the property, the purchaser is not concerned with the interests of the beneficiaries since they were never in the property itself. 9.3.5 Protection of the Purchaser 9.3.5.1 Payment of Purchase Price Initially equity required a purchaser to ensure the sale proceeds were applied in accordance with the terms of the trust in order to take free of the interests of the beneficiaries. Section 15(2) of the Trustee Ordinance now provides that the purchaser will obtain a good discharge if he pays the money to the persons entitled to assign the land, ie the trustee or trustees. 26 This provision contrasts with the position in England, where payment must be made to at least two trustees or a trust corporation in order to obtain a good discharge. 27 In Hong Kong there is thus no need to have two trustees of a trust for sale relating to land, although it may well be desirable to do so in order to share the onerous duties placed upon a trustee and to reduce the possibility of a sole trustee intentionally or unintentionally acting in breach of trust. 9.3.5.2 Exercise of Obligation to Obtain Consents or Power to Postpone We have seen that the trustees under a trust for sale may have a power to postpone sale or that they may be obliged to obtain the consent of the beneficiary before sale. In England a purchaser is protected if, first, the trustees fail to exercise their power to postpone correctly; and second, if the trustees fail to obtain all necessary consents, provided the consent of at least two of the relevant people has been obtained. 28 Neither of these protections is available to a purchaser in Hong Kong. 9.3.6 Status of Trustees A purchaser of land from trustees for sale should be concerned to ensure that the trustees are indeed trustees for sale. In addition to the possibility that the will or trust deed may have failed to create a trust for sale, the purchaser should check that the trust has not come to an end. Where the beneficiaries are all of full age and absolutely entitled, they may terminate 26 27 28 216 Sik Tak Sbeung & others v Sik Miu Wai (1993) HCt MP No 2797 of 1993 This was also the position in Hong Kong prior to the enactment of s 63 of the Conveyancing and Property Ordinance on 1 November 1984. See ss 26 (1) and (2) and 25 (2) of the Law of Property Act 1925 and cl 10 of the Trusts of Land and Appointment of Trustees Bill 1996. SEITLEMENTS AND TRUSTS FOR SALE the trust - whereupon their interests will vest in the property rather than the proceeds of sale, and the purchaser will be unable to obtain a clear title to the property unless the beneficiaries also join in the assignment. One way to avoid this necessity is to ensure that at least one of the beneficiaries consents to the sale by the trustees in order to show that there has been no unanimous decision to bring the trust to an end. 29 In England this precaution is unnecessary, for s 23 of the Law of Property Act 1925 solves the problem. 9.3.7 Position of Beneficiaries 9.3.7.1 Doctrine of Conversion As we have seen, equity looks on as done that which ought to be done, and from the creation of the trust for sale the rights of the beneficiaries are in the proceeds of sale and not in the property. Their rights are interests in moveable property and not in land. For instance, a gift by a beneficiary of his moveable property will include a gift of the interest under a trust for sale of land. Also a beneficiary's interest under a trust for sale cannot be made subject to a charging order, this being a method of enforcing a court judgment which is only exercisable over land. 30 However, in England, where a trust for sale is implied whenever land is co-owned, there has been a growing recognition that a beneficiary's interests under a trust for sale may in certain circumstances qualify as an interest in land. For instance, in Cooperv Critchley 31 a contract for the sale of a co-owner's interest under a trust for sale was held to be a contract for the sale of an interest in land and thus had to comply with the requirements for writing already examined. 32 In Elias v Mitchell, 33 a beneficiary under a trust for sale was entitled to protect his interest under the land registration legislation as a person interested in the land. Likewise, in William & Glyn's Bank Ltd v Boland 34 a spouse's joint beneficial ownership in the matrimonial home, which was held under a trust for sale, qualified as an overriding interest in the land under the land registration legislation. In fact, in England the Trusts of Land and Appointment of Trustees Act 1996 abolishes the doctrine of conversion, so that the beneficiaries' interests are clearly in the land. But these developments in England have largely taken place in the context of the statutory trust for sale imposed by the Law of Property Act 1925 whenever land is co-owned. 35 As such, they have largely been concerned with matrimonial property where the trust for sale has merely provided a convenient vehicle to prevent a multiplicity of co-owned 29 30 31 32 33 34 35 Re Patten (1883) 52 LJ Ch 787 Irani Finance Co Ltd v Singh [19711Ch 59 [19551Ch 431 Sees 3 of the Conveyancing and Property Ordinance and Chapter 5.3. [19721Ch 652 [19811AC 487 The Trusts of Land and Appointment of Trustees Act 1996 replaces the statutorily imposed trust for sale of co-owned land in England with a straight trust of land under which the beneficiaries' interests will be overreached upon a sale under the statutory power contained in s 2(1)(ii) of the Law of Property Act 1925. 217 HONG KONG LAND LAW interests in the land with the attendant conveyancing problems that would bring. The intention of the co-owners is that the land should be retained and their rights of occupation protected. There is no statutorily imposed trust for sale in Hong Kong where land is co-owned. Trusts for sale are largely confined to their traditional role of facilitating the holding of interests in succession. Furthermore, in England the beneficiaries' interests under a trust for sale are overreached by statute and are not dependent, as in Hong Kong, on the equitable doctrine of conversion. 36 These developments in England must therefore be treated with great caution in Hong Kong. In Hong Kong trusts for sale can only be created intentionally: they are not imposed by statute. The intention of the parties may be that the land should be retained, but it is also their intention that the beneficiaries' interests are confined to the proceeds of sale. Indeed, it would be fatal to the operation of trusts for sale in Hong Kong if the beneficiaries' interests did not remain firmly in the proceeds of sale, for the ability of the trustees alone to pass a clear title to the purchaser is dependent upon this concept. There is no statutory overreaching in Hong Kong. 9.3.7.2 Enjoyment of Trust Property The beneficiary in possession under a trust for sale is entitled to the income to the property but he is not entitled to occupy the property, unless the will or trust instrument sanctions his occupation or if the trustees all agree. In England, again in the context of the co-ownership situation, there have been a number of decisions which recognise that a co-owner under a statutorily imposed trust for sale is entitled to occupy the land. 37 Because these decisions all deal with co-owners and trusts for sale that are imposed by statute, they must be treated with caution in Hong Kong where trusts for sale serve a different purpose. 9.3.7.3 Consultation The testator or settlor may, under the terms of the will or trust deed, require the trustees to obtain the consent of some or all of the beneficiaries before exercising their power of sale. Furthermore, where all the beneficiaries are of full age and absolutely entitled they may call upon the trustees to deal with the trust property as they wish. But in other circumstances the trustees are not obliged to consult the beneficiaries in the exercise of their power of sale or any other of their powers. This contrasts with the position under a statutory trust for sale imposed in the co-ownership situation in England, where the trustees are under an obligation to consult the beneficiaries of full age and give effect to the wishes of the majority. 38 36 37 38 218 Section 2 (1) (ii) of the Law of Property Act and City of London Building Society v Flegg (1986] 1 All ER 989. The Trusts qf Land and Appointment of Trustees Act 1996 gives the beneficiaries a right to occupy the trust land where the purpose in setting up the trust has been to provide for the beneficiary's occupation-sees 12. Bull v Bull (1955] 1 QB 234 and William and Glyn's Bank Ltd v Boland [1980] 3 WLR 138. Section 26 (3) of the Law of Property Act 1925. Section 11 of the Trusts of Land and Appointment of Trustees Act 1996 increases the right of the beneficiaries to be consulted and have their wishes observed. SETTLEMENTS AND TRUSTS FOR SALE 9.4 Chinese Customary Trusts The concept of holding land for successive generations is not unknown to Chinese customary law. The tso ( :/fJ;: ) and the tong ( 1li; ) are the institutions by which such land holding is achieved. It is perhaps not surprising, given the common aim of settlements and the tsos and tongs, that they bear a close similarity to each other, although there are also some important differences. Chinese customary law also accepts the concept of land being held in order to achieve a particular purpose, in a way similar to a charitable or purpose trust under the English common law but without the common law's concern to preserve the alienability of the land unless a public benefit is achieved. For instance, land may be held under customary law for the support and upkeep of a temple or religious institution or by an association for the benefit of its members. By s 13 of the New Territories Ordinance 39, Chinese customary law continues to be recognised and enforced in relation to land in the New Territories where a significant area of land continues to be held by institutions unique to Chinese customary law. 9.4.l Nature of Tsos and Family Tongs Mills Owen J in Tang Kai-chung v Chang Chik-shang 40 described a tso as: ... an ancient Chinese institution of ancestral land-holding whereby land derived from a common ancestor is enjoyed by his male descendants for the time being living for their lifetimes and so from generation to generation indefinitely. Thus every male descendant of the common ancestor automatically becomes entitled at birth to an interest in the land for his lifetime; on his death his interest merges so as automatically to enlarge the interests of the surviving male descendants; thus his interest at any given moment during his lifetime depends on the number of male descendants then living and on his death it forms no part of his estate. A family tong is very similar to a tso, though it arises in slightly different circumstances and for slightly different purposes than a tso. Indeed, the terms are often used interchangeably, and a trust may be called a tong although its nature is closer to a tso and vice versa. New tongs and tsos are not now formed, not because there is a prohibition on doing so but because the government discourages their formation. 9.4.1.1 Purpose The primary purpose of a tso is to venerate a common ancestor, and it is thus named after the con:imon ancestor. A tso is not generally set up by the common ancestor, but by his son or sons as a matter of filial duty in 39 40 Cap 97 [1970] HKLR 276 at 280 219 HONG KONG LAND LAW accordance with Confucian tradition. They will either purchase land in the name of the tso or transfer part of land inherited from their father into the name of the tso. Exceptionally it appears that a tso may also be formed by the widow of a male dying intestate and without male issue. 41 The income from the land is used to pay for the maintenance of ancestor worship, such as the upkeep of the graves and the cost of the rites of ancestral worship, including the provision of food to be divided between the members of the tso after grave sweeping. Any balance may be applied, with the agreement of the tso members, for the benefit the members of the tso - for instance, to pay for their education or to provide financial assistance. A tong is usually established by an individual in the name of the family rather than a common ancestor. 42 For instance, a landowner may decide that, rather than allow all his land to devolve in accordance with Chinese customary law, which would generally lead to a division of the land between all his sons, all or part of his land should be set aside to be enjoyed by all his sons in common. As well as making sure that funds will be available for his own veneration and the upkeep of his grave, such a settlement may also encourage the cohesion of the family or prevent division of the land into uneconomic portions. The primary purpose of a tong is not necessarily to venerate a common ancestor but to provide for the well-being of the family by providing funds to assist in their education, health, and general welfare. It is a system of private social welfare. A tong is thus set up by a landowner in the family name before his death, while a tso is established by a landowner's sons after his death but in his name. 9.4.1.2 Subject Matter The traditional subject matter of a tso or a tong is land. All tongs and tsas have been established with land situated in the New Territories, but in some cases the land has been converted into other assets. In the New Territories, for instance, significant areas of land have been compulsorily acquired by the government for public purposes in return for monetary compensation. In Kan Fat-tat v Kan Yin-tat 43 the court noted that there appeared no prohibition upon a tso or a tong holding moveable property in Chinese customary law. A difficulty arises, however, from the fact that the recognition of Chinese customary law found ins 13 of the New Territories Ordinance is restricted to land in the New Territories, the definition of which in the ordinance does not extend to the proceeds of that land or other property acquired with those proceeds. Indeed, in the Kan case the court held that Chinese customary law ceased to apply to compensation payable on the resumption of tso or tong land, and presumably by analogy the proceeds of sale of any tso or tong land would also cease to be subject to customary law.44 41 42 43 44 220 Li Tang-shi v Li Wai-kwong [1969] HKLR 367. See, for instance, Chu Tak-bing v Chu Chan Cheung-kin [1968] HKLR 542. [1987] HKLR 516 at 527 54 At SEITLEMENTS AND TRUSTS FOR SALE A tso or tong may hold land in other parts of Hong Kong, but when it does Chinese customary law does not apply. 45 9 .4.1.3 Perpetuity Tongs and tsos are not subject to the rule against perpetuities, which has no place in Chinese customary law. Indeed, many tongs and tsos have existed for many years: for instance, the Tang Tsap Ng Tso was set up approximately 180 years ago. Whether the rule against perpetuities will apply to the proceeds of sale or compensation monies is less clear. As has already been noted, s 13 does not apparently extend to such money and thus the applicable law should be the rules of common law and equity so far as they are applicable to the circumstances of Hong Kong. In the Kan case the court felt it would be 'unjust and oppressive' to apply the rule against perpetuities to compensation arising on a forced sale of tso or tong land, although they noted that different consideration might apply to the proceeds of a voluntary sale. 46 9 .4 .1.4 Inalienable The land held by a tong or tso in Chinese customary law is intended to be inalienable. It should not be sold but retained for the purpose for which it was established. However, the land may be compulsorily acquired by government in pursuance of their powers under the Crown Lands Resumption Ordinance. 47 In practice tso and tong land may be sold, but only in exceptional circumstances, for it must be established that the sale is beneficial to the tso or tong and all members must agree to the sale. 48 9.4.1.5 Entitlement The entitlement to tso or tong property is restricted to the male descendants of the ancestor in whose name the tso is founded, for it is upon them that the obligations of ancestor worship falls. A tso or another tong may be a member of a tong provided that the tong or tso does not breach the fundamental rule that only direct male descendants may be members. Tang Yau Yi Tong v Tang Mou Shau Tso [1995] 2 HKC 245 FACTS An ancestral hall was built in Tai Po between 1928 and 1930. The project was a joint venture between the Tang clans in Dong Guan, Tai Po and Kam 45 46 47 48 See Kan Fat-tat v Kan Yin-tat [1987] HKLR 516; and Ip Cheung-kwok v Ip Sui Bun (1988] HKC 437, (1990) CA Civ App No 79 of 1988. At 527 Cap 66 Kan Fat-tat v Kan Yin-tat (1987] HKLR 516 at 534. Law Society Circular No 24/87 sets out details of the guidelines that the District Land Office adopts in sanctioning the sale of tso or tong land. 221 HONG KONG I.AND I.AW Tin, the ancestral hall being built for the veneration of their ancestors. The tong was established in1928 when Mr Tang Wai Tong on behalf of the Kam Tin Tangs, Mr Tang Fan Shan on behalf of the Tai Po Tangs and Mr Tang Kei Mong on behalf of the Dong Guan Tangs bought land and caused their respective clans to be represented in the tong. The land was assigned to the Tong in 1940. The clans also made financial contributions tb the project, for instance the Tangs of Kam Tin through the Cheung Chun Yuen contributed HK$5,231 towards the costs of construction and HK$938 for repairs to the hall in 1940. A dispute arose as to the entitlement of the Tang Mou Shau Tso, representing the Kam Tin Tangs, to be members of the tong when the manager of the tong wished to sell the land and the Tang Mou Shau Tso objected. JUDGMENT On the evidence the Tang Mou Shau Tso could be members of the tong. The Tai Po ancestral hall had been built for the veneration, in the case of the Kam Tin Tangs of Tang Mou Shau, and not, as the manager alleged, Mr Tang Wai Tong. The members of the tsowere thus all direct male descendants of Tang Mou Shau and thus did not breach the fundamental requirement that the members of a tong all be direct male descendants. The Tang Mou Shau Tso had contributed to the acquisition, construction and repair of the ancestral hall, albeit through a yuen which had identical membership, and were thus entitled to be recognised as interested in the tong. However, increasingly vocal demands are being made to give women the same rights over tso and tong property as their male counterparts and some tongs and tsos have allowed women to share in the proceeds of tong or tso land sold or the compensation of land resumed. The interests of the members of the tso and tong are limited to their lives, and the membership of the tso or tong will vary from time to time as new members are born and existing members die. The Limitation Ordinance 49 has no application to Chinese customary law so that a male descendant may bring his claim many years after his entitlement arises. Tsang Wing-lun v Tsang Lun [1993) 2 HKLR 23 FACTS Tsang Fat-tun died in 1937. Upon his death his land was registered in the names of the defendants as his sons. The plaintiff had gone to live in China when the Japanese occupied Hong Kong in 1941~42and did not return until 1982. He claimed also to be the sort of Tsang Fat-tun and entitled to a share of the proceeds of his father's land which had been sold or resumed and 222 49 Cap 347 SETTLEMENTS AND TRUSTS FOR SALE to be registered as an owner of the land that had not yet been sold. The defendants alleged that his claim was statute barred. JUDGMENT The law of limitations had no place in Chinese customary law; thus, having found that the plaintiff was the son of Tsang Fat-tun he was entitled to the declarations sought. Each member's interest is in the common property of the tso or tong, which cannot be partitioned without the consent of all the members. Tang Kai-chung v Tang Chik-shang [1970] HKLR 276 FACTS The Tang Tsap Ng Tso was divided into nine groups, six of which accorded to tongs established by the sons of Tang Tsap Ng. The number of members in each tong varied and the smaller tongs alleged that the larger tongs mismanaged the land and claimed a larger portion of the income than they were entitled to the detriment of the smaller tongs. Two of the smaller tongs applied for the tong land within the tso to be partitioned into six parts of equal value, one for each tong, in order to avoid continued oppression by the larger tongs. JUDGMENT The land could not be partitioned under Chinese customary law, for to do so would probably lead to a disintegration of the tso by the evolution of different customs for each tong within the tso. However, where the consent of all the tong or tsomembers is forthcoming it seems that a partition or something akin to a partition can take place: Beautiglory Investments Ltd v Tang Yet Tai Tong & others [1993] 2 HKC 591 FACTS The plaintiff claimed to be a tenant in common with the defendants of land in Ping Shan and as such to have a right to make an application under the Partition Ordinance. 50 The land in question had been granted by a block Crown lease to Tang Sze I Tong but in 1920 the tong elders had applied for ° 5 Cap 352 223 HONG KONG LANDLAW a division of the property to the defendant tongs and one Tang Pak Yun through whom the plaintiff claimed their interests. This division was recorded at the ~and Office. JUDGMENT Chinese customary law did not preclude the 1920 division of property and did not prevent a tong taking an interest. in property as co-owner with another tong or individual. The division had the consent of the Land Office, the tong elders and managers and had appeared to raise no objection from any other members of the tong. Godfrey J,as he then was, did however comment on the unusual nature of the division by which a clan member became a tenant in common of tong property describing it as 'something of an illogicallity'. Although technically tso or tong land is inalienable, we have seen that it can be resumed or sold in certain circumstances. The question then arises as to whether the members can distribute the compensation or the proceeds of sale between themselves, and if so in what proportions. This question was considered in: Kan Fat-tat v Kan Yin-tat FACTS The case involved a dispute between two brothers over compensation that had been paid to their father's tso following the resumption of part of the land comprised in the tso. One brother sought distribution per stirpes, and the other brother claimed that distribution could only be sanctioned with the unanimous consent of the tso and that distribution should be per capita. JUDGMENT There could be no distribution of the compensation without the unanimous consent of all members of the tso who would also have to agree the manner of distribution. The court refused to decide that custom required either distribution per stirpes, ie to be divided equally according to the number of families emanating from the common ancestor, or per capita, ie an equal division among all the members of the tso. Custom did not envisage distribution of the tsoproperty and thus there was no custom as to howdistribution should take place. It was, however, evident that distribution could take place but only if all the members of the tso agreed to distribution in the same way that they could agree to the sale or partition of the property, although 224 SETTLEMENTS AND TRUSTS FOR SALE partition and sale also formed no part of custom. Similar distribution problems may also arise in respect of surplus income. It appears that in practice most tongs or tsos will have their own wellrecognised method of sharing cash revenue. Occasionally some tsos and tongs record this division and their other practices and customs in formal rules. A common formula appears to be a compromise between the per stirpes and per capita division that was at odds in the Kan case. This compromise calls for the division of the total proceeds into two, and for one half to be distributed per stirpes and the other half per capita. 9.4.2 Administration and Management o/Tsos and Tongs A tso or tong will normally be divided into family branches or fangs ( m ) representing the families of the sons of the founding ancestor. There is no uniformity in the way in which each Jong participates in the day-to-day management of the tso or tong land: that will depend on the traditions of each particular tso or tong. Common practices are for the land to be leased to members of the tso or tong, who cultivate the land and pay a rental that is used to finance the tso or tong activities. Sometimes each jong will cultivate the land in rotation for one year, the Jong in occupation of the land taking responsibility for the meeting of that year's expenses. The day-to-day management of the tong and tsowill not usually require the participation of the whole tong or tso. However, an important decision affecting the whole tong or tso, such as the sale of the land and 1the subsequent division of the proceeds, will require the unanimous consent of all the members of the tong or tso. But how is this consent achieved amongst all members, many of whom may well be living abroad? 9.4.2.1 The Decision Process Decisions are reached in accordance with Chinese tradition by consensus rather than vote. The Elders of the tsoor tong, being the senior representatives of each family branch, and in particular the Great Elder as the oldest living male of the most senior branch, usually play a particularly important part in ensuring that an acceptable consensus is reached. Compromise solutions may be put forward or monetary compensation offered to encourage a compromise. The consent of each member may be necessary for major decisions affecting the tso or tong property, but that consent is likely to follow the lead given by the Elders or manager. 9.4.2.2 Managers Section 15 of the New Territories Ordinance 51 provides that each tso or tong must appoint a manager as its representative. The manager will be chosen by the tso or tong by consensus, but his appointment must be approved also by the Land Officer who will then register the appointment at the Land 51 See Cap 97 225 HONG KONG LAND LAW Office. The power to_appoint a manager rests solely with the tso or tong. The Land Officer is concerned only with ensuring that the appointment reflects the wishes of the tso or tong, which he does by posting notices calling for any objections to be made within a specified time, usually about a month. 52 If no objections are received, consent is presumed. More than one manager may be appointed. For instance, it is common for each Jong to appoint a manager to look after their affairs. The appointment may be for a limited time, but it is often made for life or may be passed from father to son, particularly where the father has been the Great Elder. A manager can resign or the Land Officer may, on proof of good cause, cancel his appointment. 53 The manager plays a role similar to that of a trustee. He is responsible for the day-to-day management of the property, including collecting the rents, keeping accounts, and paying for the necessary rituals or other matters that can be met from the tso and tong resources. The manager is also empowered by s 15 of the New Territories Ordinance 54 to dispose of or in any way deal with the tso or tong land as if he was the sole owner, but subject to the consent of the Land Officer. The Land Officer must be satisfied first, that any sale is for an acceptable purpose - for example, to maintain the graves or for educational purposes; and second, that the sale has the consent of the members of the tso or tong. He satisfies himself on the latter matter by placing notices giving details of the proposed sale and calling for objections. If certain members of the tso or tong are abroad, then the Land Officer may require the manager to obtain their written consent to the sale. 55 If the sale is approved, it is the manager who is empowered to sign any necessary documents on behalf of all the tso or tong members, provided he does so in the presence of the Land Officer. 56 Section 15 necessitates both the registration of the managers at the Land Office and the Land Office's approval of any sale before title can pass to a purchaser. Enway lllwe,to1J,m1mt v Ocean Investment [1994] 3 HKC 31 FACTS The plaintiff entered into an agreement to buy certain land in Yuen Long from the defendant. The agreement was conditional upon the defendant's also being in a position to sell to the plaintiff certain other land by 29 March 1993. Part of this other land was owned by a tso whose the manager had See Law Society Circular No 24/87 for the Land Offices guidelines on the appointment of tong or tso managers. 53 Li Tang-sbi v Li Wai-kwong [1969] HLKR 367 54 See Cap 97. 55 See Law Society Circular No 24/87 for the Land Office guidelines to be followed for the application of consent to sell. 56 Lai Chi Kok Amusement Park (No 2) v Tsang Tin-sum [1966] HKLR 124. 52 226 SETTLEMENTS AND TRUSTS FOR SALE died. The appointment of the new manager was notified to the Land Office on 22 March 1993 but the appointment was not registered until 1 April 1993 and the Land Officer's consent to the sales was not obtained until 19 July 1993. The plaintiff terminated the agreement for failure to comply with the condition within the stipulated time and sought recovery of their deposit. JUDGMENT The manager's registration and Land Officer's consent were necessary in order to pass title to tso or tong land to a purchaser and thus the purchaser was entitled to terminate the agreement. 9.4.3 Other Chinese Customary Trusts Certain other types of customary land holding continue to be recognised in the New Territories. Land may be devoted to the support of a particular temple, when it may be held in the name of the deity to whom the temple is dedicated. Land may also be dedicated to the support of smaller religious institutions. A tong may be established in accordance with Chinese customary law by an association formed either by businessmen or related members of the family which acquires the land in the New Territories, the income from which is applied for their business or other common purpose. 227 ,I i Co-ownership 10.1 Introduction We have seen that interests in property may be held in succession whereby property may be given to A for life with remainder to B, or a landowner may lease his property to another for a shorter period than his own Government lease. In these circumstances, both the life tenant and the remainderman, and the landlord and his tenant hold an interest in the property. These interests are separate estates. It is also possible for more than one person simultaneously to hold the same interest in a piece of property: a married couple, for instance, will often both hold the lease of their flat, or maintain a joint savings or bank account. When this occurs the married couple are know as 'co-owners' or 'concurrent owners'. They both hold an interest in property, but instead of holding different interests successively they hold the same interest concurrently. There are four types of co-ownership that are recognised at common law: • joint tenancy; • tenancy in common; • coparcency; and • tenancy by entireties. We shall concentrate on the first two, namely the joint tenancy and the tenancy in common. It is important to remember that in the context of coownership the expression 'tenant' or 'tenancy' merely means ownership. It does not have anything to do with leases, except of course that a lease is an interest that may be held by co-owners. Any estate may be held in co-ownership. Thus a leasehold term, a reversion, a remainder, executory interest, and even a life interest may all be held concurrently. It might be thought strange for it to be possible for a life interest to be held by more than one person, but it must not be forgotten that a life interest may be held for the life of another. For instance, A and B may hold an interest for their joint lives, in which case on the death of A, B will continue to enjoy his interest in the property until his death. The extent of B's interest in the property after A's death will depend upon whether he held the property with A as a joint tenant or a tenant in common. A and B's joint life interest might be limited to one of their lives rather than their joint lives: for instance, the grant might be to A and B for the life of A, in which case upon the death of A, B's interest will cease. If the gift had been to A and B for the life of B, then A's death would not bring B's interest in the land to an end. Any of the interests in land that we will be examining later, for instance a lease, easement, covenant, or mortgage, also may be held by co-owners. In Hong Kong both a joint tenancy and a tenancy in common can exist both at law and in equity. This differs from the position in England, where it is only possible for a joint tenancy to exist at law. In England there is no legal tenancy in common. 1 Where co-owners hold as tenants in common 228 Sections 1(6) and 34 of the Law of Property Act 1925 CO-OWNERSHIP in England, the legal estate is deemed held by them as joint tenants on trust for themselves as tenants in common in equity.2 A trust is also imposed in England where co-owners hold as joint tenants, so that they hold the legal estate on trust forthemselves as joint tenants. 3 The fact that in England no legal tenancy in common exists, and a statutory trust is automatically imposed upon co-owners, are significant differences between the law in Hong Kong and England. These differences were introduced in England in 1925, and thus some care is needed in interpreting subsequent English authorities. 4 Canadian, Australian, and New Zealand authorities provide a particularly useful alternative source of the law in this area, for in each of these jurisdictions the legal tenancy in common has survived. 10.2 Joint Tenancy and Tenancy in Common Contrasted 10.2.l Succession The vital difference between a joint tenancy and a tenancy in common lies in who succeeds to a co-owner's interest when he dies. When a joint tenant dies, his interest will be automatically extinguished so that the surviving joint tenant becomes solely entitled to the property. This special feature of a joint tenancy is known as the 'right of survivorship'. 5 A tenant in common's interest, on the other hand, will form part of his estate on his death and pass according to his will or the laws of intestacy. An example will help to illustrate the operation of the right of survivorship. If A and B hold as joint tenants and A dies, A's estate will receive nothing. It is B who becomes solely entitled to the property. If, on the other hand, A and B were tenants in common, then on A's death his interest in the property passes to his estate and B's interest is unaffected. B will merely become a tenant in common with the person(s) entitled to A's interest in the property, either on A's intestacy or by A's will. Fig 10.1 Succession Joint tenancy ~ I A dies B sole owner Tenancy in common AB A dies 1/2 A's estate 1/2 B Sections 34(2) and 35 of the Law of Property Act 1925. Sections 35 and 360) of the Law of Property Act 1925. The Trusts of Land and Appointment of Trustees Act 1996 introduces a significant change in the structure of co-ownership in England. The prohibition on legal tenancies in common remains but the statutorily imposed trust for sale is abolished and replaced with a statutorily imposed trust of land under which the co-owners' beneficial interests are recognised as being in the land itself and not the notional proceeds of sale. Or, in Latin, jus accrescendi 229 HONG KONG LAND LAW If there is any doubt as to which joint tenant died first, s 11 of the Conveyancing and Property Ordinance provides that the younger shall be presumed to have survived the elder. This convenient, if somewhat arbitrary, rule is h1own as the 'commorientes' rule. Thus if A and Bare joint tenants who are killed in a common disaster and A is older than B, B will be presumed to have survived and it is his estate that will be solely entitled to the property. A's estate will receive nothing. In view of the importance of the right to survivorship to a joint tenancy, a corporation, which cannot die, could not be a joint tenant at common law. This rule has now been altered by s 10 of the Conveyancing and Property Ordinance. A corporation can now be a joint tenant, and upon its dissolution the surviving joint tenant becomes entitled to the property. It is, however, unusual to find a corporation holding property as a joint tenant except where the corporation acts as a trustee. For instance, a number of banks in Hong Kong have subsidiaries that offer trustee services and, although a trustee corporation may act as a sole trustee, a testator or settlor may wish to appoint another trustee to act jointly with a trust corporation. Trustees invariably hold as joint tenants because of the convenience of the trust property passing automatically by survivorship to the other trustee(s) when one trustee dies.6 Joint tenancies also commonly arise in the matrimonial or quasi-matrimonial context, where the parties wish to benefit each other when one of them dies. 10.2.2 The Unities· A joint tenancy must display 'the four unities', - the unities of possession, interest, title, and time that we will look at in the next section. This need arises from the fact that a joint tenant does not hold any interest in the property in his individual capacity. His only interest is that which he holds • jointly with his fellow joint tenant. A joint tenant is said to hold the whole with another but nothing of himself. There is thus only one estate in the land which is held jointly and, although the joint tenants as between themselves have distinct rights, to everyone else they are like a sole owner. A tenancy in common must display the unity of possession, which is an essential feature of both types of co-ownership. It may but need not display the remaining unities of interest, title, and time because a tenant in common is regarded as holding a distinct. yet undivided share in the property independently of the other co-owners. In contrast to a joint tenancy, each tenant in common thus holds a separate, although not physically discernable, interest in the property. While the interests of a joint tenant must be equal, the shares of tenants in common may, and very often are, unequal. For instance, A and B as tenants in common need not each hold one half: A may hold one-quarter and B three-quarters, or A may holds. two-sevenths and B five-sevenths - the possibilities are endless. Section 9(3) of the Conveyancing and Property Ordinance Cap 219 230 CO-OWNERSHIP 10.3 The Four Unities The four unities are vital to a joint tenancy, and the unity of possession must exist in order for there to be any type of co-ownership relationship. Thus it is important to examine each of these unities more closely. 10.3.1 Unity of Possession The concept of unity of possession dictates that no co-owner is entitled to the possession of any particular part of the land to the exclusion of his fellow co-owner. He is entitled to the possession of the whole, with and not to the exclusion of his fellow co-owners. If A and B are co-owners of a flat they are both entitled to occupy the whole flat. Neither A nor B can exclude the other from the kitchen, bathroom, 'their' respective bedrooms, or any other part of the flat. A number of consequences flow from the concept of unity of possession. 10.3.1.1 Trespass A co-owner cannot bring an action against his fellow co-owner for trespass merely because he is in.possession of the whole of the property. His fellow co-owner is entitled by unity of possession to be in occupation of the whole property. Nor can a co-owner bring an action for conversion of the co-owned property merely because his fellow co-owner takes the usual produce of the land in lawful exercise of his rights as a co-owner. This principle is illustrated by the case of: il!!I.S~.,. ~,11,..... 1:i!'l!!ll:!:~••~.li.;1,11,c:.,.,,lll., ••~•■•!';:' - , •m,, • ~•llillJ'W.i' •~•■1 - '" Jacobs v Seaward (1872) LR 5 HL 464 FACTS A and B were tenants in common of land that was let to the plaintiff. The plaintiff was only aware that A was his landlord, so that when B gave the plaintiff notice to quit he ignored the notice and instead entered into a new tenancy with A's agent. Meanwhile, B let the property to the defendant who went onto the land and cut the hay growing on the land and put a lock on the gate. JUDGMENT The plaintiff and defendant were tenants in common, and thus the plaintiff could not maintain an action for trespass against the defendant for cutting the hay or putting a lock on the gate. Redress will be available where the co-owner in possession has exceeded his own right to possession by. acting so as to exclude or oust his 231 HONG KONG LAND LAW fellow co-owner or to destroy the co-owned property. In Jacobs v Seaward the court decided that the defendant, in putting the lock on the gate, had not intended to exclude the plaintiff but to secure the land. Nor was the cuttinjind taking away of the hay destruction of the common property but the harvesting of its natural produce. His actions thus did not constitute ouster. Ouster is wider than actual physical exclusion from the property. There may be ouster where there is interference with the other co-owners' enjoyment of the property. For instance, in Stedman v Smith 7 the resting of a roof on a common wall was sufficient, and in Oates v Oates 8 it was suggested that the letting of the property by one co-owner without the authority of the other was sufficient interference to constitute ouster. In Wilkinson v Haygarth 9 the cutting of turfs was considered sufficiently destructive to warrant redress. Redress for ouster may be in the form of compensation 10 which where the ouster has been to exclude the co-owner entirely from the premises will take the form of an occupational rent.11 Tang Yin Ling v Wong Sai Hct MP No 2527 1992 FACTS The plaintiff and defendant bought a flat as tenants in common in equal shares. They lived elsewhere and the flat was let out to tenants. The defendant married and his relationship with the plaintiff deteriorated. In 1991 the flat became empty after the last tenants moved out and the. defendant moved in with his family and would not allow the plaintiff access, claiming that the flat was his. The plaintiff applied for an order for sale of the flat under the Partition Ordinance and damages for ouster. JUDGMENT The property was jointly owned by the parties as tenants in common and accordingly the plaimtiff was entitled to an order for sale and damages for the defendant's ouster in an amount representing the rental value of the property. Where ouster has fallen short of an entire exclusion of the co-owner but is nevertheless excessive alternative forms of redress may be available. Waste is one alternative, although there must remain a doubt as to whether an action for waste between co-owners can still be maintained in 7 8 9 10 11 232 (1857) 8 E and B 1 [1949] SASR37 at 40 • (1847) 12 QB 837 Compensation is not in the nature of damages for trespass but for interference with the other co-owner's rights, see Tang Yin Ling v Wong Sai (1994) HCt MP No 2527 of 1992 at 17. See further 10.3.1.3. CO-OWNERSHIP Hong Kong. 12 An interesting modern example of allegations of unwarranted interference with a co-owner's right to possession is found in: FACTS The parties were co-owners of a road giving access to their respective properties. The defendant wanted to redevelop his property so that it was necessary to widen and surface the road. The plaintiff objected and sought an injunction to restrain the defendant on the basis that the defendant's action amounted to ouster, or alternatively constituted waste. JUDGMENT The defendant's action did not amount to ouster since it would not interfere with the plaintiff's use of the road. The surfacing of the road was an act of repair and not of waste, although the removal of ornamental trees beside the road might be waste unless their removal was necessary. The court also raised the possibility that co-owners might have an action in nuisance for an interference. A further course open to a co-owner wishing to prevent or discourage a resident co-owner's activities on the land is to initiate partition proceedings, which would either force a sale or a physical partition of the land and bring the co-ownership to an end. Even the threat of such proceedings might persuade a co-owner to stop his offending activities. 10.3.1.2 Accounting for Rents and Profits Received Co-owners are entitled to share the rental and other income and profits derived from the co-owned property. If they hold as joint tenants, they are entitled to share these benefits equally. If they are tenants in common, then their respective entitlements depend upon their shares in the property. Flowing from the principle of unity of possession, a co-owner cannot be required at common law to account for his fellow co-owner's share of the rental or other income or profits from the land which falls into his hands. There are, however, a number of exceptions that must be considered. 12 The Statute of Westminster II 1285 introduced an action for waste between tenants in common, which was subsequently extended to joint tenants. This statute was incorporated into Hong Kong law upon the establishment of the territory. Its continued application to Hong Kong, however, remains in doubt, as it is not specifically incorporated into Hong Kong law by the Application of English Law Ordinance Cap 88. See further Wesley Smith (1984) HKLJ 142. 233 HONG KONG LAND LAW (a) Ouster A co-owner who has been ousted may seek damages for the unauthorised use of the land or the rents and profits from the land. (b) Bailiff Co-owners do not normally owe each other a duty to look after or maintain their common property. Thus a co-owner who is left in sole occupation of the co-owned property is not obliged to manage the property on behalf of the other co-owner. However, a co-owner who agrees to become a bailiff or agent for his fellow co-owner in the management of the property can be required to account for the rents or other income or profits he receives. (c) Statute of Anne (4 Anne c16) This enactment granted a co-owner a right to call for an account if his fellow co-owner received more than his share of the rental or profits derived from the common property. 13 But it is unclear whether this legislation still applies in Hong Kong after the enactment of the Application of English Law Ordinance. 14 If it is not possible to rely on the Statute of Anne, it is not entirely clear whether a right to account will be recognised in equity, for the authorities are contradictory. There are suggestions that prior to the enactment of the Statute of Anne equity would order an account in these circumstances, 15 but there is also authority to the contrary. 16 It is hoped that the courts would prefer those authorities supporting an equitable duty. If there is a duty to account, it is clear that the duty does not extend to the legitimate fruits of a co-owner's sole efforts. In Henderson v Eason 17 Parke B cited the example of a co-owner who employs his capital and industry in cultivating a piece of land and takes all the profit from the crops he grows, and stated: In taking all that produce he cannot be said to receive more than his just share and proportion to which he is entitled as a tenant in common. He receives in truth the return for his own labour and capital, to which his cotenant has no right. As Parke B pointed out, if the crop had failed, the co-owner would have had to bear all the loss.An example of this principle closer to the Hong Kong In Australia this right has been extended to require an account where it is not known whether a co-owner has received more than his share. See Squire v Rogers 0979) 27 ALR 330. 14 Cap 88, since it is not incorporated into Hong Kong law by that ordinance. See Wesley Smith 0984) HKLJ 142. 15 Strelly v Winson 0684) 1 Vern 297; Pulteney v Warren 0801) 6 Ves 73 at 77 and 78; TurnervMorgan (1808) 8 Ves Jun 143 at 143; and Hillv Hickin [1897] 2 Ch 579 at 580 16 Griffies v Griffies (1863) 8 LT 758; and McCormick v McCormick (1921) 40 NZLR 384 17 0851) 17 QB 701 at 720 and 721 13 234 CO-OWNERSHIP situation today is found in the Australian case of: Squire v Rodgers (1979) 27 ALR 330 FACTS The parties were jointly entitled to a lease of land which required them to develop and keep the land in repair. Mr Squire solely complied with the covenants and developed the land by building a holiday resort, including a caravan site which he then rented out. Ms Rodgers, who ceased living on the land soon after it was acquired, took no part in developing the land nor in running the resort but subsequently sought an order for sale of the property and a share of the income Mr Squire had earned. JUDGMENT Mr Squire was bound to account to Ms Rodgers for a share of the rental from the letting of the land, but not for the income derived from services or use of equipment that he provided. The duty to account extends only to what the co-owner has actually received and not to what he ought to have received. So, if one co-owner manages the letting of property he cannot be made liable if he leaves the property empty or the rental is less than that which could have been charged for the accommodation. 18 10.3.1.3 Rental At common law a co-owner cannot claim rent from a fellow co-owner even if that fellow co-owner is in sole occupation of the property. Each co-owner is entitled to possession, and the fact that a co-owner may choose not to exercise his own right to occupy and so leave his fellow co-owner in sole occupation is of no consequence. 19 There are, however, a number of exceptions to this general rule. (a) Ouster A claim for rental will succeed if the co-owner in residence has ousted his fellow co-owner. A modern example of ouster is found in the Hong Kong case of Tang Yin Ling v Wong Sai 20 and also in the English case of: 18 19 20 Osachuk v Osachuk (1971) 18 DLR (3d) 413; and Thrift v Tbrift (1976) 10 ALR 332 McMahon v Burchell (1846) 2 Ph 127 0994) HCt MP No 2527 of 1992 and see 10.3.1.1 235 HONG KONG LAND LAW Dennis v McDonald [1982] Fam 63 FACTS The parties lived together, but were not married, in a house that they held as tenants in common. The plaintiff left the house because of the defendant's violence, and she subsequently applied for an order for sale of the house or alternatively that the defendant pay rent to her. JUDGMENT The defendant was liable to pay rent as a result of his violence towards the plaintiff. She had been effectively ousted from the property, for it was unreasonable in the circumstances to expect her to live with him. In the matrimonial or quasi-matrimonial context the courts seem to be taking a particularly liberal interpretation of ouster. For instance, Purchase J suggested in Dennis v McDonald 21 that, 'the basic principle ... does not apply in the case where an association similar to a matrimonial association has broken down and one party is, for practical purposes, excluded from the family home.' In the matrimonial, as opposed to the quasi-matrimonial, context there may be no need to form an exception to the general rule or to extend the meaning of ouster because matrimonial legislation does provide an alternative means by which one spouse can seek rental from the other. (b) Matrimonial legislation A spouse may seek rental from the spouse who is left in sole occupation of the co-owned matrimonial home through the grant of ancillary relief under the Matrimonial Property and Proceedings Ordinance, 22 which may include an order for the payment of rental. 23 On a determination of the spouses' property rights under the Married Person's Status Ordinance, 24 an allowance for rent may be achieved by discounting the value of an occupying co-owner's share in the property. For instance, in LeakevBruzzi 25 a husband who was in sole occupation of the matrimonial home after the break-up of his marriage was not given credit for the repayment of mortgage interest that he alone had made after his wife had left him. The court characterised these payments as in the nature of an occupational rent. 21 22 23 24 25 236 At 638. See also Bernard vjosephs [1982] Ch 391; and Chokar v Chokar[1984] FLR313. Cap 192 Haroey v Harvey [1982] Fam 83 Cap 182 [1974] 1 WLR 1528. See also Suttill v Graham [1977] 1 WLR 819. CO-OWNERSHIP (c) Agreement A co-owner may be required to pay rent in pursuance of an agreement to do so with his fellow co-owners. An example of such an agreement arose in the case of: Leigh v Dickeson (1885) 15 QB:06-0 FACTS The defendant was a lessee of property belonging to the plaintiff and her fellow co-owner. He subsequently acquired a share in the property so that he became a co-owner with the plaintiff. The lease expired but the defendant continued in possession. The parties entered into negotiations for a new lease, but these broke down and the plaintiff claimed a sum for the defendant's occupation of the property. The defendant sought to set off money he had expended in repairs and improvements to the property. JUDGMENT _The defendant was liable to compensate the plaintiff for his use of the property, as his occupation of the property after expiry of the lease was in his capacity as a tenant and not in his capacity as co-owner. The set-off failed. ( d) Expenses If a co-owner seeks an allowance from his fellow co-owner for the cost of improvements, repairs, or other current expenses then he does so at the risk of a claim by a non-resident owner for rental in respect of his sole occupation of the property. The rationale is that if he seeks the assistance of equity in recovery of sums spent, then he must also act fairly by compensating his fellow co-owner for his sole use of the property. The question of whether rental is awarded is, however, within the discretion of the court who may decide in the circumstances that it is inequitable for the resident owner to compensate the non-resident owner. The court so decided in: 0 ---~~---~~;::,i=IIJiic.r;,.i.,,.:~l~ffl 1~1.~!!i;m!@!:w~~~l~i!~m!!!!!iliii~lll;~@im!iL,,Ji•mL' McMahon v The Public Curator of Queensland [1952] St R Qd 197 FAGTS The McMahons ran a dairy farm as a partnership. Upon the death of one of the partners, the plaintiff sought the sale of the farm. The defendant, as 237 HONG KONG LAND LAW administrator of the deceased partner's estate, claimed reimbursement from the sale proceeds of the cost of a house built by the deceased for his own occupation. JUDGMENT The defendant should be entitled to reimbursement of the costs of erecting the house but, as the house only stood on a small portion of the land and its construction costs had been solely borne by the deceased, his estate should not be charged with an occupation rent. 10.3.1.4 Improvements At common law a co-owner is not entitled to recover from a fellow co-owner any sums he may have expended in the improvement, repair, or maintenance of the property unless his fellow co-owner agreed to the work or the co-owners were under an obligation to a third party to carry out the work, for instance pursuant to a repairing or building covenant in a lease. If this was not the case, a co-owner may be forced to contribute to work of which he does not approve. In Leigh v Dickeson 26 the defendant's set-off failed for this reason. However, a co-owner will not be allowed to benefit from improvements made by the resident co-owner to which he has made no contribution. Accordingly, upon the partition or sale of the property he may be required to make an allowance to the resident owner in respect of these expenses. This principle was established in: 2 CLR 387 FACTS The parties were tenants in common of land that was resumed by the government. A dispute arose as to how the compensation payable by the government for the resumption should be divided. The appellant claimed more than .his quarter share, to reflect the· value of houses that his predecessor in title had built on the land. JUDGMENT The appellant was entitled to a lien over the remaining three-quarter shares equal to three-quarters of the amount by which the improvements carried out by his predecessor in title had increased the value of the land. There should be set off against this amount of three-quarters of the rents and profits received by the appellant, for which he was bound to account. 26 238 See (1885) 15 QB D 60. CO-OWNERSHIP The court likened a co-owner's right to reimbursement for improvements to an equitable charge that was enforceable only when the land was partitioned or sold. The right is thus in the nature of a passive equity that lies dormant until the value of the land is realised by sale or distributed amongst the co-owners on partition. The Australian courts have clearly identified this right as proprietary in nature and enforceable against all but a bona fide purchaser without notice. Likewise, the benefit of the right may pass to a successor in title: for instance, Mr Brickwood was able to set up the equity although the expenditure was incurred by a previous owner of the land. But in Canada the courts appear to have taken a different view, and construed the co-owner's right to recover the cost of improvements as only a personal right that does not run with the land to bind a subsequent purchaser. 27 Some doubts have been expressed as to the extent to which the equity can remain enforceable between joint tenants, given that upon the death of a joint tenant his interest is extinguished and with it any equity of reimbursement. 28 There is some difference in opinion as to the amount that a co-owner can recover in respect of improvements he has made. In Brickwood v Young 29 it was a sum equivalent to his share of the increase in the value of the land itself rather than just the cost of the improvements, but the court in Leigh v Dickeson 30 suggested that recovery should be limited to the expenses incurred, subject to an upper ceiling of the increase in the value of the property. 31 It should be noted that the principles of resulting and constructive trusts that we have already looked at in Chapter 6 may found a claim to a greater share of the beneficial ownership of the property based upon its improvement. 10.3.2 Unity of Interest Joint tenants must hold the same interest, but tenants in common may hold in different shares or proportions. If A, B, and Care joint tenants of a flat, they hold the whole interest together; but if they were tenants in common they could each hold one-third shares, or A could hold a half share and B and C each hold a quarter share, or any other division of the whole property between them would be permissible. In Hong Kong, where there is a tenancy in common of a whole building, the division of the shares between the co-owners can lead to some very large and unusual fractions. As a result of this requirement of unity of interest, joint tenants are always equally entitled to any rental or other income from the land and they must act jointly in any dealing with the whole of the land. They must both enter into an effective lease, mortgage or sale of the property as a whole. There 27 28 29 3o 31 Ruptash and Lumsden v Zawick [1956] 2 DLR (2d) 145; and Canada Life Assurance Co v Kennedy (1978) 89 DLR (3d) 397 Re Byrne (1906) 6 SR (NW) 532; and Noak v Noak[19591 VR 137 (1905) 2 CLR 387 (1885) 15 QBD 60 See also In reJones [189312 Ch 461; and McMahon v Tbe Public Curator of Queensland [1952] St R Qd 197. 239 HONG KONG LAND LAW is however one exception determine a periodic tenancy. one joint tenant may serve a notice to Hammersmith and Fulham London Borough Council v Monk [1992] 1 AC 478 FACTS The defendant and his girlfriend were granted a joint periodic tenancy from the council terminable on four weeks' notice. The relationship broke up and the girlfriend left the flat. The council agreed to rehouse her in another flat provided she terminated her tenancy with the defendant. The council informed the defendant that his girlfriend had terminated the tenancy and when he refused to move out sought possession. JUDGMENT The defendant's tenancy had been lawfully terminated. A periodic joint tenancy continued only so long as all the joint tenants agreed; thus it would determine if one joint tenant terminated the tenancy by notice to quit. Thus this apparent exception is in fact an application of the rule. 32 This principle was relied upon to allow one co-owner to terminate a licence of co-owned property in the case of: Annen v Rattee (1985) 273 Estates Gaz 503 FACTS Ms Annen and her boyfriend bought a flat in London in their joint names but the relationship broke up before Ms Annen ever lived in the flat. Instead a number of people occupied the flat, including a Mr Rattee to whom Ms Annen's boyfriend had given a licence to use the flat. When Ms Annen found out about Mr Rattee's occupation, she purported to terminate his licence and subsequently sought possession. JUDGMENT The Court of Appeal applied the reasoning applicable to joint tenants holding that the licence could not continue without the permission of both joint tenants and that by withdrawing her permission, Ms Annen had effectively terminated Mr Rattee's licence. 32 240 See also Leek and Moorlands Building Society v Clark [1952] 2 QB 788; Greenwich LBC v McGrady (1983) 46 P&CR 223, and Parsons v Parsons [1983] 1 WLR 1390 CO-OWNERSHIP The problem is, however, that the licence granted to Mr Rattee was not the same as a periodic tenancy granted by both co-owners. It was granted only by Ms Annen's boyfriend and was for an indefinite period. As a licence for an indefinite period, it continued until terminated on reasonable notice by either the licensor or the licensee. It did not continue from period to period as did the lease in Hammersmith and Fulham LBC v Monk. If the licence was to bind both Ms Annen and her boyfriend's interest in the flat, it should have been granted by them both and should likewise have only been capable of termination by them both. There is, of course, the possibility that Ms Annen or her boyfriend could have licensed only their own respective interests in the property: a joint tenant may deal with his interest, but if he does so he risks destroying the unity of interest so that his relationship with his co-owner can no longer exist as a joint tenancy. We shall explore this area further when looking at the destruction of a joint tenancy by severance. 33 10.3.3 Unity of Title Joint tenants must derive their interest from the same document or act. The requirement is satisfied if the co-owners acquire their interest under the same lease, assignment, or other instrument, or if they go in to possession of land at the same time and establish a joint title by adverse possession. As a result of this rule, if A, who is a joint tenant of property with B, wishes to transfer his interest to C to hold as a joint tenant with B, he cannot do so at common law merely by transferring his interest to C.34 A and Bas joint tenants should transfer their interest to B and C as joint tenants. 10.3.4 Unity of Time Joint tenants must acquire their interests at the same time, which they will usually do as a result of the requirements of unity of title. However, at common law the unity of title and time could be different where a gift to the co-owners was contingent, and it would vest at different times, for instance, if land is granted to A for life with remainder to the heirs of B and C. The requirement is not satisfied where B and C die at different times, for their heirs' respective interests will have vested in interest at different times. However, two exceptions to this rule have emerged: the rule does not apply to gifts by will nor to a grant made behind a trust. 10.4 Creation of Co-ownership It is important when deciding whether a joint tenancy or a tenancy in common has been created always to bear in mind that the ownership of both the legal estate and the equitable interest in the property must be considered. Thus, while co-owners may be joint tenants at law, they may 33 31 See 10.5 One wonders ifs 25(2) of the Conveyancing and Property Ordinance Cap 219 might assist. 241 HONG KONG LAND LAW hold that legal estate on trust for themselves as either joint tenants or tenants in common in equity. The reverse result does not, however, follow. Co-owners who hold as tenants in common at law will hold as tenants in common in equity, for equity leans in favour of a tenancy in common and will follow the law in this respect. In Goodman v Gallant, 35 where the parties had expressly declared that they were joint tenants in law as well as in equity, the court made it clear that the declared intention of the parties is conclusive. It was not possible for the parties to go behind that declared intention and seek to establish that they held the property as tenants in common. Likewise, if the parties expressly declare that they are to take as tenants in common and specify the shares in which they are to take both at law and in equity the court must give effect to that declaration. Where the co-owners have failed to state how they hold the property either at law and or in equity, the court will look to the presumptions that arise at law and in equity. In England it is quite common to find an express declaration as to the co-owners' legal and beneficial interests in the property. This in part may be due to the imposition of the statutory trust for sale, which emphasises the divergence of the legal and equitable title. But in Hong Kong it is usual merely to state that the co-owners hold either as joint tenants or tenants in common, with no express statement as to the holding of their beneficial interest. The way is thus open to show that, although the parties took the property as joint tenants at law, they are in fact tenants in common in equity: for instance, by reason of their unequal contributions to the purchase price. 36 However, it is to be remembered that where a husband acquires property as a matrimonial home in the joint names of himself and his wife he will be presumed to have intended that they are to hold as joint tenants at law and in equity unless there is anything to rebut the presumption of advancement made to his wife. 37 10.4.1 Absence of Unities Before applying the presumptions oflaw and equity it must be remembered that if one of the unities of interest, time, or title is absent, then the relationship between the co-owners must be a tenancy in common both at law and in equity. If all the four unities are present, then whether the .coowners hold as tenants in common or joint tenants will depend on whether the relationship came into existence before or after the enactment of the Conveyancing and Property Ordinance on 1 November 1984. 35 36 37 242 [1986] Fam 106 See for example the cases of Chan Shiu-yee Shirley v Chang Kia-Chung Peter 0987) HCt HCC No A5170 of 1986; Law Ping-wong v Ho Chi-na (1987) HCt HCA No A1652 of 1986; Siu Chun-wah Alice v Malahan Credit Co Ltd 0987) CA Civ App No 63 of 1987; and Liu Kwok-wah v Chung Hang-fai Nancy [1989] 2 HKC 259. Ho Nga Sheung v Ma Fook Leung [1993] 2 HKC 647 and see also Huntingdon v Hobbs 0992) 24 HLR 652. CO-OWNERSHIP 10.4.2 At Law There is a presumption at common law in favour of a joint tenancy. This presumption is favoured because it facilitates conveyancing by avoiding the fragmentation of the title that may result from a tenancy in common. The common law will not, however, ignore an intention to create a tenancy in common that is displayed by using 'words of severance.' Common words of severance include the expressions: • • • 'in equai shares' 'equally' 'to be divided between'. Thus where an instrument is entered into prior to 1 November 1984, the common law will only presume a tenancy in common if words of severance are used. If no words of severance are used, the parties are presumed at common law to hold as joint tenants. Where an instrument is entered into after 1 November 1984, s 9 of the Conveyancing and Property Ordinance operates to reverse the common law presumption, so that even at law co-owners are presumed to hold as tenants in common even if no words of severance are used. A clear contrary intention must be expressed in the will, assignment, or other instrument by which the co-owners acquire their interests in order to create a joint tenancy. The common law presumption of a joint tenancy continues to operate in the case of trustees and personal representatives. 38 10.4.3 In Equity Equity prefers a tenancy in common, for it leans in favour of fairness rather than conveyancing convenience. Equity will thus impose a tenancy in common not only where the law would recognise a tenancy in common but also in instances where, although the legal estate might be held as joint tenants, equity will presume an intention to create a tenancy in common in equity. There are three instances where equity will presume a tenancy in common. 10.4.3.1 Unequal Contributions Where the purchase money for the land is provided in unequal shares, the parties are presumed to be tenants in common in equity in the shares that reflect their respective contributions to the purchase price. This presumption may be rebutted by evidence that the parties intended to hold as joint tenants despite unequal contributions, or that they intended to take as tenants in common despite equal contributions. Many of the cases in this area involve the ownership of the matrimonial or quasi-matrimonial home. We have looked at the principles required to establish a beneficial interest in the matrimonal home when looking at resulting and constructive trusts. 39 But once an intention for both spouses 38 39 Section 10(3) of the Conveyancing and Property Ordinance Cap 219 See Chapter 6.3 and 6.4 243 If HONG KONG LAND LAW i or partners to share in the ownership of the home is established, how do the courts decide the actual shares the parties are to hold? The idea, favoured by Lord Denning MR, that the courts can determine the parties' shares by doing what was just and equitable in the circumstances has now been rejected by the House of Lords in Gissing v Gissing.40 The parties' intention is the governing principle, but the problem is ascertaining what the parties' intention is. The court in Cowcher v Cowcher 41 was of the view that the parties' shares should be fixed at the time of acquisition when the common intention of the parties must be established, but this approach could often lead to unfairness for it ignores the actual contributions that the parties make in support of the common intention. The prevailing view formulated in Bernard vJosephs 42 is to use the parties' contributions to the purchase price as a broad guide to their intention as to the proportions in which they are to share the beneficial ownership of the home, unless there is other evidence of their likely intentions. Where the home has been brought with the aid of a mortgage and the acquisition costs have thus been paid over a long period, this can be a difficult task. It is, however, not to be conducted as a strict mathematical exercise so that temporary changes in a party's financial contributions brought about, for instance, by childbearing or the loss or change of a job may be ignored. Where the task becomes impossible the courts may fall back on an equal division as the only practical solution. 10.4.3.2 Money Advanced on Mortgage Where two or more people advance money on mortgage they are presumed, unless the contrary is shown, to have advanced the loan as tenants in common. Although as between the borrower and the lenders, the lenders are usually deemed to be jointly entitled to the loan. 43 10.4.3.3 Business Assets The concept of survivorship has little place in the business world, and thus equity will presume a tenancy in common over partnership assets or the assets of a joint business undertaking, or where premises are held jointly for several individual business purposes. 44 10.5 Severance Severance occurs when a joint tenancy is converted into a tenancy in common. Any act that destroys one or more of the four unities 45 will lead 40 41 42 13 44 45 244 [1971] AC 886 [1972] 1 WLR 425 [1982] Ch 391. See also Young v Young [1984] FLR 375, Risch v McFee (1991) 61 P & CR 42 and Stokes v Anderson [1991] 1 FLR 391 Section 48 of the Conveyancing and Property Ordinance Malayan Credit Ltd v jack Chia MPH Ltd [1986] AC 549 The unity of time cannot be destroyed, and destruction of the unity of possession leads to partition. CO-OWNERSHIP to a severance, as will the formulation by the joint tenants of an intention to exclude the operation of survivorship. The classic statement as to when a severance occurs at common law is found in Page Wood V-C's judgment in Williams v Hensman: 46 A joint tenancy may be severed in three ways: in the first place, an act of any one of the persons interested operating upon his own share may create a severance as to that share ... Secondly, a joint tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common. When severance depends on an inference of this kind without any express act of severance, it will not suffice to rely on an intention, with respect to the particular share, declared only behind the backs of the other persons interested. 10.5.1 An Act Operating on ajoint Tenant's Share Unlike the other modes of severance identified by Page Wood V-C, this means of severance may and usually will be unilateral. One joint tenant may act in such a way that he destroys one of the four unities, or in such a way that he is precluded from claiming the benefit of survivorship. 10.5.1.1 Total Alienation A joint tenant cannot leave his interest in a joint tenancy by his will, as the operation of survivorship defeats the purported gift. But a joint tenant can transfer his interest in a joint tenancy during his lifetime. However, as a transfer or assignment will destroy the unities of title and time, an inevitable result is the severance of the joint tenancy. For instance, if A and B are joint tenants and A sells his interest to X, B and X will hold the property as tenants in common in equal shares. Fig 10.2 Alienation A X 1/2 B Joint Tenants B 1/2 Tenants in Common If three parties are involved, the picture is a little more complicated. For inst~nce if A, B, and C are joint tenants and A sells his interest to X, X will hold that interest as a tenant in common as to one-third, with B and C continuing to hold the remaining two-thirds as joint tenants. 46 (1861) 1 J & H 546 at 557 245 HONG KONG LAND LAW Fig 10.3 A B C Joint Tenants X 1/3 BC 2/3 Tenant in Common Joint Tenants If A, instead of selling his interest to a stranger, X, sold his interest to B, B would hold one-third as tenant in common and the remaining two-thirds as a joint tenant with C. If B died before C, one-third would pass to B's estate and the remaining two-thirds would devolve upon C by the operation of survivorship, so that the property would be held by B's estate as to one-third and C as to two-thirds as tenants in common. If, on the other hand, C predeceased B, B would be the sole owner of the property and co-ownership is no longer relevant. Fig 10.4 If B dies first: ABC If C dies first: Joint Tenants e--~-1BC Tenant in common 2/3 B's estate ~ ra Tenant in common Joint Tenants IBC2/3I Joint Tenants B Sole Owner A severance will also occur if joint tenants purport to exchange their interests, for instance if A assigns his interest to B and B assigns his interest to A. 47 10.5.1.2 A Partial Alienation Whether a partial alienation by one joint tenant will effect a severance will depend upon the nature of the partial alienation. If the alienation destroys the unity of title or interest of the joint tenants, it will effect a severance; but if it merely creates an encumbrance over the alienating joint tenant's interests, the unity of title and interest are unaffected and no severance results. 47 246 Wright v Gibbons (1949) 78 CLR 313 CO-OWNERSHIP 10.5.1.3 Rentcharge The creation of a rentcharge, which is a money payment secured on the land, by one joint tenant will not effect a severance since the rentcharge is a mere encumbrance which can be met out of the income due to the joint tenant creating the charge. 10.5.1.4 Lease It appears that a lease by one joint tenant will effect a severance where the lease, as is the case in Hong Kong, is granted by joint tenants who hold under a lease themselves. The alienating joint tenant's interest is then held in reversion and not possession. The Australian case of Freize v Unger48 contains a useful review of the old authorities on this topic which, although uncertain as to the effect of a lease by a joint tenant of the freehold estate, do appear unanimous that a severance results in the case of a lease by joint tenants of a term of years. Some doubts are, however, expressed as to whether the grant of a periodic term (as opposed to a term of years) will effect a severance. Freize v Unger also considers the effect of a lease by one joint tenant. It appears that one joint tenant is entitled to grant a lease of his interest in the property which must be recognised by his fellow co-owners. However, the lease will only affect his interest and will not prevent the remaining co-owners from exercising their right to possession of the property or also leasing their interest. 49 There are, however, suggestions that a co-owner whose fellow coowner has unilaterally leased his interest in the property may be in a position to claim that there has been sufficient interference with his own possession to establish ouster. 50 Presumably a disappointed lessee from only one joint tenant who finds himself forced to share possession with another may claim against his landlord for breach of the covenant for quiet and exclusive possession. The case of Annen v Rattee 51 suggests that one joint tenant may also license his interest without the consent of his co-owner, but as a licence does not create any separate estate in the land it is doubtful whether a licence by one co-owner would effect a severance. 10.5.1.5 Mortgage The grant of a mortgage by one joint tenant will effect a severance at common law, for a mortgage at common law is created by an assignment of the borrower's interest to the lender which will destroy both the unities of title and interest and, as a result, the joint tenancy. However, it is not entirely clear whether the new form of legal mortgage, the legal charge, will also effect a severance. The legal charge does not transfer any proprietary interest to the mortgagee but merely creates a charge or encumbrance over 48 49 50 51 [1960] VR 230 at 242 See Jacobs v Seaward (1872) LR 5 HL 464. Oates v Oates [19491 SASR 37 at 40 (1985) 273 Estates Gaz 503 247 HONG KONG LANDIA W the property by way of security for the money advanced. 52 In England, where a legal mortgage is also usually granted by way of a legal charge, 53 the suggestion is that a legal mortgage by way of charge will still lead to a severance. The point was at issue in: First National Securities Ltd v Hegarty 54 [1985] QB 850 FACTS The Hegartys owned their home as joint tenants. Mr Hegarty forged his wife's signature in order to mortgage the family home to the plaintiffs to raise money. He defaulted on the mortgage repayments, and the plaintiffs obtained a charging order over his interest in the home. JUDGMENT The husband's act of mortgaging the property was sufficient to sever the joint tenancy, although it seems the fraudulent nature of the husband's conduct contributed to this conclusion. The Australian courts have, however, taken a different view in: Lyons v Lyons FACTS Mr and Mrs Lyons were joint tenants of certain property. On Mr Lyons' death the defendants claimed an interest in the property as Mr Lyons' persona( representatives, on the basis that a mortgage made by Mr Lyons of his interest prior to his death effected a severance. JUDGMENT The mortgage under the registration of title system in Victoria in Australia took effect by way of charge only. As a mere encumbrance it did not affect the unity of title or interest of the joint tenancy, and no severance resulted. The reasoning in Lyons v Lyons may be applied to the legal charge, so that no severance of the legal estate would result from the mere act of a joint tenant granting a legal mortgage by way of charge. After all it may be that, 52 53 54 248 See s 44 of the Conveyancing and Property Ordinance Cap 219. Sections 85-87 of the Law of Property Act 1925. See also Thames Guaranty v Campbell [1985] QB 210. CO-OWNERSHIP like the rentcharge, his portion of the income generated from the property may be sufficientto satisfy the r~payments due under the mortgage. Perhaps something more is required in order to effect a severance, such as Mr Hegarty's dishonesty or the exercise by the mortgagee of his power to realise the property under the mortgage. The Hong Kong courts in Siu Chun-wah, Alice v Malahan Credit Co Ltd 55 favoured the severance approach, although the point was not fully argued. If a legal mortgage of property does not effect a severance, there is a danger for the lender who takes a mortgage from one joint tenant since his mortgage will be extinguished by the operation of survivorship should the joint tenant die first. A lender is thus well advised to ensure that the joint tenancy is severed using some other method of severance before he lends funds to one joint tenant. 10.5.1.6 Equitable Alienation It is sufficient to effect a severance in equity if a joint tenant enters into an agreement to assign or lease his interest, for equity will look on as done that which ought to be done and give effect to the agreement. It should be noted that an equitable mortgage continues to be granted by way of assignment and will thus lead to severance. 10.5.1.7 Involuntary Alienation The bankruptcy of a joint tenant will automatically sever the joint tenancy, for the transfer of the joint tenant's interest in the property to the trustee in bankruptcy will destroy the unity of title. The question of whether a charging order will also lead to a severance is not clear. A joint tenant's interest in land is certainly property to which a charging order may attach. 56 But as a charge is merely a charge or encumbrance on the borrower's interest it is arguable that the unity of title and interest is unaffected and the joint tenancy is not severed. 57 The timing of the bankruptcy may be significant. Where one joint tenant dies after the act of bankruptcy but before they or their co-tenant are adjudicated bankrupt the severance, by the operation of relation back, will nevertheless date back to the act of bankruptcy so that the joint tenancy will have been severed during the life of the co-owners and the severed share of the deceased co-owner will fall into their estate ..This is what happened in: 55 (1987) CA Civ App No 63 of 1987 56 Kung Wong Sau Hin v Jung Kwok-sun (1985) HCt Probate No 2 57 See 10.5.1.5. 249 HONG KONG LAND IA W Re Dennis FACTS Mr and Mrs Dennis owned two properties as joint tenants. On 21 September 1982 Mr Dennis committed an act of bankruptcy by failing to comply with a bankruptcy notice. On 24 February 1983 his wife died and on 11 November 1983 Mr Dennis was adjudicated bankrupt. His trustee in bankruptcy claimed the properties were vested in him, Mr Dennis having acquired full title by the operation of survivorship on Mrs Dennis' death. JUDGMENT The severance occurred on 21 September 1982 when Mr Dennis committed an act of bankruptcy. Thus on the death of Mrs Dennis her share in the two properties passed to her estate; the right of survivorship did not operate. Where insolvent deceased operation 10.5.1.8 the joint tenant has died and it is their estate that is declared there is deemed to be no severance prior to death and the joint tenant's interest will pass to the surviving tenant by the of survivorship. 58 Litigation There is authority for the suggestion that a joint tenant who initiates litigation that affects the joint tenancy is acting in such a way as to trigger a severance of his interest. 59 But it may equally be argued that litigation, which may always be discontinued, is not a sufficiently conclusive act to supportseverance. 60 The commencement of proceedings inevitably involves the service of process which may itself constitute a severance notice, and thus it is more convenient to consider litigation as a method of severance in this context. 61 10.5.2 By Mutual Agreement Page Wood V-C's second category provides for severance to be effected by the agreement of the joint tenants. What constitutes a sufficient agreement for these purposes was considered by the English Court of Appeal in: Re Palmer (1993] Ch 72 See Re Drapers Conveyance !1969] 1 Ch 486, Ho Nga Sbeung v Ma Fook Leung (1993] 2 HKC 647 and see also Huntingdon v Hobbs 0992) 24 HLR 652. 60 See In re Wilkes (1891] 3 Ch 59. 61 See 10.5.12. 58 59 250 CO-OWNERSHIP Burgess v Rawnsley [1975) Ch 429 FACTS A widower met and became friendly with Mrs Rawnsley. They bought a house in their joint names, which consisted of two flats. The widower lived in the downstairs flat and the top flat was empty. He hoped the house would become a matrimonial home for himself and Mrs Rawnsley, whom he wanted to marry, but Mrs Rawnsley had other ideas. She just wanted to live in the upstairs flat. When it became plain that their joint venture could not succeed there was evidence that it was orally agreed that the widower would buy Mrs Rawnsley's share for £750, although Mrs Rawnsley subsequently refused to sell. When the widower died his personal representatives claimed there had been a severance and that his estate was entitled to a half share in the house. JUDGMENT The oral agreement was sufficient to sever the joint tenancy. The agreement did not have to be in writing, irrevocable or enforceable. The test is not whether the agreement bound the parties to sever the joint tenancy or perform some other act that would necessarily involve severance, but whether it shows a common intention that the joint tenancy be severed. 10.5.3 A Course of Dealings ... Page Wood V-C's last category has caused the greatest difficulty, and it is difficult to extract a common view as to what type of dealings will be sufficient to demonstrate an intention to sever. There is even doubt whether this category is distinct from the second or merely a means by which the mutual agreement of the parties may be established. The greatest difficulties have revolved around, first, negotiations that fall short of an agreement and, second, whether a unilateral notice by a joint tenant is sufficient. The effect of negotiations is perhaps the more important of the two issues, since the question of whether a unilateral declaration to sever will be effective to sever at common law has largely been superseded by the introduction of a statutory severance notice. The effect of negotiations was at issue in the case of: Nielson-Jones v Fedden [1975) Ch 222 FACTS A husband and wife were joint tenants of their family home. They separated, and while contemplating divorce they signed a memorandum agreeing that 251 HONG KONG LAND LAW the husband would sell the family home and use the proceeds to find an alternative home. The husband entered into a contract to sell the home and by agreement the parties took £200 each out of the initial £1,000 deposit. Both parties wished their financial affairs to be separated and were negotiating to that end, but the husband died before an agreement was reached. The wife claimed she was entitled to the house by the doctrine of survivorship. JUDGMENT There had been no severance and the wife was therefore entitled to the house. Walton] dismissed suggestions that the parties' negotiations constituted a sufficient course of conduct to effect a severance. In his opinion it was necessary to be able to imply or infer from the negotiations an agreement to sever. He also rejected the notion that a unilateral declaration that fell short of the statutory requirements of a severance notice could constitute a course of conduct capable of severing a joint tenancy at common law. Walton J's views were subject to criticism by the Court of Appeal in Burgess v Rawnsley. Lord Denning MR clearly felt that Page Wood V-C's third category would include negotiations between parties falling short of a final agreement. Sir John Pennycuick was also of the view that the third category is distinct from the second, and that the course of dealings need not demonstrate an agreement but merely a common intention to sever. Despite these criticisms the courts have shown a reluctance to treat negotiations that fall short of an agreement as constituting a severence. 62 It appears that it is not sufficient for the negotiations to show an intention to deal with the ownership of the co-owned property; they must evince an intention to sever the joint tenancy. None of the members of the court in Burgess v Rawnsleywas prepared to admit that the third category sanctioned severance by an uncommunicated or oral declaration by a joint tenant. Any unilateral declaration should be in writing and communicated to the other joint tenant, and thus more than likely to satisfy the requirements of statutory severance by notice (see 10.5.4). Examples of 'courses of conduct' that have fallen short of effecting a severance include the inclusion of property as a partnership asset for tax reasons 63 and the conversion of jointly owed property into separate units. 64 Severance has, however, been achieved by mutual wills where both joint tenants enter into identical wills leaving their respective interests to each other for life and then to a third party in remainder. 65 Gore and Snell v Carpenter(l990) P&CR 456 and McDowell v Hirschfield, Lipson & Rumney [1992] FLR 126 G3 Barton v Morris [1985] 1 WLR 1257 64 Greenfield v Greenfzeld (1979) 38 P&CR 570 65 In Re Wilford's Estate (1879) 11 Ch D 267 62 252 CO-OWNERSHIP 10.5.4 By Written Notice The generally accepted view was that severance by notice of a joint tenancy in land was not possible at common law. However, Havers J in Hawkesley v May 66 was of the view that Page Wood V-C's first category obviously included a declaration of an intention to sever by one party. This view was taken up by Plowman] in Re Drapers Conveyance 67 and Lord Denning MR in Burgess v Rawnsley, 68 but was criticised by Walton J in Nielson Jones v Fedden 69 and SirJohn Pennycuick in Burgess v Rawnsley. The issue has now become largely academic, since s 8 of the Conveyancing and Property Ordinance provides that a joint tenancy may be severed at law and in equity by 'a notice served by a joint tenant on the other joint tenants' .70 10.5.4.1 What Notice is Sufficient? The notice must be in writing: 71 otherwise little guidance is given by the ordinance. Usually the joint tenant will give a specially prepared notice to the other joint tenant, but difficulties have arisen over the extent to which documents served in the course of court proceedings can effect a severance whether at common law or by notice. There have been a number of cases that provide some guidance. t ~ n ~ --••<• ',ii. '•1- .,C .,, ~ -•'•• - ~ ,- '.;:,~,•~· ~ M ~• .. ,j Re Draper's Conveyance [1969] 1 Ch 486 FACTS A couple acquired a family home in their joint names. The wife obtained a divorce decree nisi and applied under the equivalent of s 6 of the Married Person's Status Ordinance, 72 asking for an order that the house be sold and ' the proceeds divided equally. Her application was successful, but before it was implemented the husband died. The wife sought a declaration as to how she held the property. JUDGMENT The joint tenancy had been severed by the wife's service of the originating summons coupled with her affidavit in support of the summons. Plowman J also observed that there was no requirement for the notice to be signed. 66 [1956] 1 QB 304 [1969] 1 Ch 486 68 [1975] Ch 429 69 [1975] Ch 222 70 The equivalent English provision is found in s 36( 4) of the Law of Property Act 1925 although its wording differs. 71 See s 62 of the Conveyancing and Property Ordinance Cap 219. 72 Cap 182 67 253 HONG KONG LAND LAW Plowman J's views were criticised by Walton] in Nielson-Jones v Fedden. He was of the view that the notice must be irrevocable. The issue of a summons was a revocable act from which the wife could have withdrawn at any time prior to the court's decision. But Walton's strict view has not received support. For instance, Sir John Pennycuik, with the apparent support of Brown LJ in Burgess v Rawnsley, rejected Walton J's strict view. In Harris v Goddard 73 the English Court of Appeal considered that the fact that court proceedings could be abandoned or discontinued at any time was not fatal but was a factor to be taken into account in deciding whether there was sufficient intention to severance, and should thus be viewed and weighed in the light of all other circumstances. Harris v Goddard also decided that the notice must show an immediate intention to sever. For this reason a wife's divorce petition, which merely asked the court to grant such order regarding the ownership of the matrimonial home as was just, was insufficient to constitute a notice to sever since it merely showed an intention to bring the existing ownership structure to an end upon the finalisation of the divorce. In the Hong Kong case of Ho Nga Sheung v Ma Fook Leung74 an originating summons requesting a sale of jointly held property under the Partition Ordinance was held to have severed the joint tenancy, a decision which may have also been influenced by the fact that the parties had already divorced. In England there is some uncertainty over whether the actual court order will be sufficient to establish severance because, although it is a result of the parties' action, it is not their act but the court's. For instance, Plowman J in Re Draper's Conveyance clearly avoided relying upon the court order. The Australian courts have taken a more lenient view, and have held a court order sufficient to effect a severance where the order alters, as opposed to declares, the rights of the parties.7 5 The notice must be served in accordance with s 62 of the Conveyancing and Property Ordinance, but it is not necessary to prove that the notice has actually been received by the other joint tenant if service satisfies the requirements of the section. 76 10.5.5 By Unlawful Killing A person will not, by reason of public policy, be permitted to benefit from his own wrong. A joint tenant who kills his fellow joint tenant will thus not be allowed to take the benefits that the operation of survivorship would have otherwise have awarded him. The precise means by which the law operates to achieve this result is unclear, as different approaches have been adopted. One view is that the killing effects a severance. 73 74 75 76 254 [1983] 3 All ER 242 [1993] 2 HKC 647 See, for instance, Re Johnstone [1973] Qd R 347. See Re 88 Berkley Road NW9 [1971] Ch 648. CO-OWNERSHIP FACTS A husband unlawfully killed his wife and then killed himself. The question arose as to which estate was entitled to the couple's jointly owned property. JUDGMENT The unlawful killing of the wife operated as a severance, so that the property devolved upon the parties' estates as tenants in common. The court rationalised the application of severance on the basis that a joint tenancy implied an understanding that the parties would accept 'the risks and chances of the natural expectancy of life, '77 which was broken if one tenant killed the other. Where three joint tenants are involved, the severance approach leads to a division of the property in thirds between the three tenants or their estates. For instance, if A, B, and Care joint tenants and B kills A, there is a severance as to A and B's shares so that A's estate holds a third, B holds a third, leaving C also holding a third as tenants in common. A different approach based upon the imposition of a constructive trust is found in: ;li"ll\il:'l'l:;;.~:~ii,0,~:~'!!•..il!!!t~~i:.,,:t..ir•~•!!1•2•1!!1'0!if::¾l;".;~I!~ . . . . . -- - . - . _ . . _; Rasmanis v Jurewitscb 0969) 90 WN (NSW) 154 FACTS The respondent killed his wife, and after he was convicted of manslaughter the question arose as to the ownership of two properties that they held jointly. The first was held jointly by the couple alone but the second was held by them jointly with a third party. JUDGMENT There was no severance. After the killing the respondent took the legal title of the properties by survivorship, but equity would intervene to impose a constructive trust to prevent the respondent benefiting from his crime. The first property was thus held by the respondent on constructive trust to hold one-half for his wife's estate and one-half for himself as tenants in common. The second property was held by the respondent and the third party as joint tenants on constructive trust to hold one-third, representing 77 At 149 255 HONG KONG LAND LAW the wife's interest, for the third party as tenant in common, and the remaining two-thirds for the respondent and the third party as joint tenants. It is not clear why the third party should benefit to the exclusion of the wife's estate. It seems rather a case of making sure the killer does not benefit than any concern for the victim's estate. The two approaches only lead to a practical difference where there are more than two joint tenants. Fig 10.5 Unlawful killing of A by B: Severance Approach Constructive Trust Approach A B Joint Tenants A B Joint Tenants on constructive trust A's estate 1/2 A's estate 1/2 B 1/2 Tenants in Common Tenants in Common Severance Approach ABC A's estate 1/3 Constructive Trust Approach Joint Tenants ABC B C C 1/3 1/3 1/3 Tenants in Common B 1/2 Joint Tenants BC 2/3 Tenant in Common Joint Tenants The constructive trust approach in this context provides greater flexibility for equity to consider the gravity of the crime. For instance, in Re Public Trustee of Manitoba and Le Clerc 78 the court allowed the operation of survivorship where the killer was found not guilty of manslaughter by reason of insanity. 10.5.6 Purchasers and Severance A sole surviving joint tenant is able to sell the whole interest in the property he .holds by showing the purchaser that his fellow joint tenants have died, and that by the operation of survivorship he has become solely entitled to 78 256 (1982) 123 DLR (3d) 650. CO-OWNERSHIP· property. But what happens if he is not a sole surviving joint tenant, because before his fellow tenant died there had been a severance? In these circumstances the purchaser will not obtain the whole interest in the property but merely his vendor's share. The remaining share will be held by the estate of the deceased tenant. It is thus vital for a purchaser buying from a sole surviving joint tenant to have proof not only of the death of the other joint tenant, but also proof that no severance took place before his death. A number of the methods of severance that we have looked at require a written instrument of some kind. For instance, an assignment or a lease of over three years of a joint tenant's interest will require a written instrument, an agreement to sever also may, be in writing, and a severance notice must be in writing. Where severance does involve a written instrument, that instrument should be registered under the Land Registration Ordinana! 9 in order to bind a purchaser so that the purchaser will know whether his vendor is a joint tenant or a tenant in common. But not all the methods of severance require writing: an agreement to sever need not be in writing, negotiations may be oral, and of course unlawful killing has nothing whatsoever to do with writing! Section 8 of the Conveyancing and Property Ordinance seeks to alleviate the· problem of proof of no severance by conduct by providing that to be effective at law, a severance must be in writing. It must be either by instrument or by notice. A severance by any other means will only be effective in equity. Fig 10. 6 Purchasers and Severance Severance by Instrument or Notice A 1/2 1 f-------E Law l • C Tenants m ommonI I I I I I ---'--I A 1/2 e--- __ B 1/2 Equity Tenants in Common Severance by Conduct AB B--------~ I I I Law \ Joint Tenants I \ I A 1/2 I \ \ I B 1/2 Equity Tenants in Common 79 Cap 128 257 HONG KONG LAND LAW A purchaser will thus only be bound by a severance by conduct if he cannot establish that he is a bona fide purchaser for value of the legal estate without notice actual, constructive, or imputed. 80 10.6 Termination of Co-ownership Co-ownership will cease when the unity of possession is destroyed, which may occur in a number of ways. 10.6.1 Sale If A and B are co-owners of a flat that they then sell to C, C becomes the sole owner and A and B's co-ownership will cease. If A and B sell to C and another party D, then a new co-ownership relationship will arise between C and D. 10.6.2 Union in a Sole Owner Co-ownership will also come to an end if the property becomes vested in one of the co-owners. This may happen where A and B are co-owners of property if: • A transfers his interest to B. If A and B are joint tenants, the transfer should be effected by way of release of A's interest to B rather than assignment, as strictly speaking A has no separate interest in the property that he can transfer to B; • A and B are joint tenants and A dies, B becomes the sole owner by survivorship; and • A and Bare tenants in common, and on A's death his share passes to B either by his will or intestacy. 10.6.3 Partition Partition involves the destruction of the unity of possession and occurs where the co-owned property, whether held jointly or in common, is physically divided between the co-owners so that each co-owner becomes a sole owner of part of the property. Thus, if A and B are joint tenants or tenants in common in equal shares of a piece of land, they may partition the land so a.s to leave A the sole owner of one half and B the sole owner of the other half. If A and B were tenants in common in unequal shares, their division of the land would reflect their respective shares. 10.6.3.1 Voluntary Partition Partition may occur as a result of the co-owner's agreement. To be effective at law the partition agreement must be by deed. 81 so See Chapter 2. 81 258 Section 4 of the Conveyancing and Property Ordinance Cap 219 CO-OWNERS 10.6.3.2 ~- Compulsory Partition At common law a co-owner has no right to demand partition, but as long ago as 1539 and 1540 a statutory right to partition was granted to joint tenants and tenants in common. 82 The right to force a sale of the property and division of the proceeds of sale was longer in corning: it was not until the Partition Ordinance 83 was passed in 1969 that this right was made available to co-owners in Hong Kong, although the right was first granted in England a century earlier by the Partition Act 1868. The Partition Act 1868was repealed in England by the Law of Property Act 1925 and replaced by provisions giving the co-owners as trustees under the statutorily imposed trust power to partition the land, subject to the consent of the beneficiaries, with power for any party interested to apply to court in default of agreement. 84 The Partition Ordinance grants the court power to: • • • make a partition order make an order for sale refuse to make an order. The court in considering what order is appropriate in the circumstances of the case can direct enquiries to be taken, for instance, as to the nature of the property and the persons interested in the property or any other matters that are thought necessary; but these enquiries must be directed before and not at the time the order is made for the power springs from the court's inherent jurisdiction and not from the ordinance itself. 85 10.6.3.3 Who May Apply? Section 3 of the Partition Ordinance provides that an application either for the partition or sale of the property under the ordinance may be brought by 'any person interested' in the co-owned property. At common law, only an owner of an interest in possession was entitled to apply for partition. Despite the wide wording of the section, it appears that this requirement remains to the extent that a party holding a settled reversionary interest or an interest in remainder will not be able to claim partition, for to do so would disturb the tenant for life as the person entitled to possession. But the requirement will not prevent a landlord applying for partition of land which is subject to a lease. This was the issue at stake in: 84 Acts 31 and 32 of Henry VIII Cap 352 See ss 28(3) and 30 of the Law of Property Act 1925. 85 Riseway Investment Ltd v Wong Kwok Chiang & another (1995] 2 HKC 25 82 83 259 HONG KONG LAND LAW Cromwell Investment Co Ltd v Fook Sun Enterprises Ltd [1975] HKLR 1 FACTS The parties owned property as tenants in common, which was let to a tea house. The respondent applied for the sale of the property under the Partition Ordinance, which was opposed on the ground that the respondent was not entitled to apply for partition where they were not in actual possession. JUDGMENT The existence of the sublease did not deprive the respondent of the right to apply for partition. Trainor J reviewed the common law authorities and, while accepting that a reversion on a freehold estate 86 could not apply for partition, was of the view that the appellant's opposition was misconceived because the respondent was in possession of an estate, although not in actual occupation. Protection is afforded to the lessees by the proviso found in sub-s 4(3) that no order for partition can be made where it would prejudice the interests of a person who is not a party to the proceedings. The question of when a mortgagee is entitled to apply for partition under the ordinance is less clear. Trainor's view would suggest that a mortgagee could apply even before he is entitled to claim possession of the property, for he is in possession of an interest. In the Canadian state of Ontario, however, the courts have interpreted a similar provision as requiring an immediate right to possession so as to prevent a mortgagee applying for partition or sale where he does not have an immediate right to possession of the property. 87 The question may to some extent be academic in the case of a mortgagee, for he is unlikely to wish to apply under the ordinance until default has been made under his mortgage when a right to possession of the property will arise. 88 However, the question does become more important in the case of a chargee under a charging order, for he has no immediate or future right to possession but only a right to apply to court for an order for sale or appointment of a receiver. In England, under the different regime imposed by the LPA, the expression 'any person interested' has been given a conveniently wide interpretation to include any person with a proprietary interest in the property, which has been held to extend to a chargee under a charging order. 89 For example, a life interest Re Gamet and McGoran (1980) 117 DLR (3d) 649 88 Sees 15. 89 First National Securities Ltd v Hegarty [1985] QB 850 86 87 260 CO-OWNERSHIP 10.6.3.4 Order for Partition By ss 4 and 5 of the ordinance the court may order partition, and in doing so has power to create any necessary rights of way or other easements, and to apportion between the separate pieces of land any obligations relating to the land, such as Crown rent. However, where there is a building on the land, the court cannot partition the land in a way that would leave part of the building on a partitioned portion, unless that building is self-contained or is not connected to the rest of the building other than by a party wall or a common staircase. 90 10.6.3.5 Order for Sale Instead of partition, the court may order a sale in two situations. (a) Partition not beneficial The court may order sale where the court is of the view that a partition of the property would not be beneficial to all persons interested by reason of: • the nature of the land: for instance, a building may be impractical to partition even if it is divided into self-contained units; • the number of persons interested or presumptively interested: 'for instance, if there are a large number of co-owners partition may be impossible or impractical; • the absence or disability of some person interested; or • any other circumstances. 91 The reference to 'any other circumstances' is very wide, but it appears to be restricted to financial considerations and does not extend to matters of sentiment. 92 (b) Application for sale by a co-owner The court may order sale, if it sees fit, upon an application for sale by a person interested unless the other persons interested undertake to purchase the applicant's interest. 93 The court may then obtain a valuation of the share of the person applying for sale so as to ascertain the price at which his share will be purchased, although it appears that the party requesting a sale or the party undertaking to buy may withdraw if the valuation is unacceptable to either of them. 94 Furthermore, even if an undertaking to buy out is made, the court may still order a sale under s 6(1) if it is of the view that the sale is beneficial, for their powers to order sale are independent. 95 94 Section 4(2) of Cap 352 Section 6(1) of Cap 352 Drinkwater v Ratcliffe [1875] 20 LR Eq 528 Section 6(3) of Cap 352 Pitt v Jones (1880) 5 App Cas 651 95 Ibid. 90 91 92 93 261 HONG KONG LAND LAW Even ifno undertaking to buy out the applying owner is forthcoming, the court is not bound to order sale. The applying party must still establish a good reason for ordering a sale. 96 Under the English Partition Act 1868there was a third occasion where a court could order sale. Upon the applicatioq of a co-owner of one-half or more of the shares in the property, the court was bound to make an order for sale unless it was satisfied that there were good reasons not to do so. This ground is conspicuously absent in Hong Kong, so that there is no means by whic? a co-owner can insist upon the sale of the co-owned property. He must be able to prove that t;he sale is beneficial or there is some reason for preferring a sale over partition. Possibly the fact that the applying owner holds one-half or more of the shares in the property would be considered a good reason to order sale. An attempt was made to limit the court's ability to order sale in: Pun Jong-sau v Poon FACTS The plaintiffs were the majority of the co-owners of a multi-storey building, and the defendants were the remaining co-owners of the building. The building comprised four storeys in the front and six storeys in the rear, and had been valued with vacant possession at HK$20,000,000. The plaintiffs sought an order for partition or sale, although they preferred a sale because division of the property would require uneconomic structural alterations. The defendants opposed the application on the grounds that the ordinance did not permit the court to order sale where partition was not feasible and practical. JUDGMENT The court was empowered and would order sale of the property on the ground that partition would not be beneficial to the parties. The defendants' construction of the ordinance was rejected although the wording of the ordinance appeared to support their construction. The court looked rather to the purpose for which the ordinance was passed, which would have been frustrated if a literal construction had been adopted. When ordering sale the court can impose terms regarding the conduct of the sale, and it is their duty to order the sale to take place in the manner most beneficial to the co-owners. 97 The court may impo1>eterms regarding the conduct of a sale to require the sale of separate properties as if they constituted a single property. Indeed, it may be necessary in order to suitably consider the interests of all parties and cater for all the difficulties 96 97 262 Richardson v Feary (1888) 39 ChD 45 Forda Investors Ltd v UOB Finance (HK) Ltd [1979] HKLR 382 and Law Shi Ying v Law Kam Tai 11994]1 HKC 378 CO-OWNERSHIP that may arise in the conduct of the sale that directions be given. A plain order that the premises will be sold will often not be sufficient, directions dealing with the timing and conduct of the sale will often be necessary. 98 Golden Bay Investment Ltd v Chou Hung & others [1994) 2 HKC 197 FACTS The parties were co-owners of four adjoining properties in Mongkok which were held by them under separate titles. Indeed, their share in the properties differed, the plaintiff owning 5 shares in one lot, 4 1/3 in another, 4 1/2 in another and 6 shares in the last lot. The remaining shares were owned by various of the defendants. The plaintiff applied for an order that they be sold together having brought evidence to show that a sale of the four lots together was more beneficial than the sale of the lots individually. 0 JUDGMENT The Partition Ordinance did not empower the court to amalgamate separate properties to form a single.property but where the court considered that each of a number of properties should be sold then it could make directions for the sale of all the properties as if they constituted a single property under section 6(4) of the ordinance. However, the court would only do so if it appeared in the legitimate interests of all the co-owners and workable in practice. 10.6.4 Refuse to Make Any Order In contrast to the Partition Act 1868, the court is granted power to refuse to make an order for either partition or sale, although not, it appears, to postpone sale. 99 But when will the court refuse to. make any order? No guidelines are laid down in the ordinance. In Canada, where a similar power exists, there has been a divergence of views over the extent of the court's discretion. The narrow view is that an owner has a prima facie right to seek partition and the courts will only intervene if the applicant's request for partition is vexatious or oppressive, or he has not come to court with clean hands. 100 In the domestic context, there was a move away from this narrow view to consider the hardship that might be caused to one of the spouses if their co-owning spouse was able to obtain partition or sale. 101 However, in MacDonald vMacDonald 102 the court concluded that only serious hardship should deprive a co-owner of 98 99 100 101 102 Law Shi Ying V Law Kam Tat 11994] 1 HKC 378 Section 2(C) of Cap 352 Re Perkins & Perkins 0972) 31 DLR (3d) 694 Yale v MacMaster 0974) 46 DLR (3d) 167; and Melvin v Melvin (1975) 58 DLR (3d) 98 (1976) 73 DLR (3d) 341. 263 \ HONG KONG LAND LAW his prima facie right to require partition. In Canada, specific legislation relating to family property has superseded these developments to limit the rights of a spouse to force the sale or partition of co-owned family property. In Australia and New Zealand, there is no power for the courts to refuse partition, and there is in any event specific legislation to deal with the special problems that are presented by co-owned family property. In England, as we have seen, there is a different legal framework for the ownership of co-owned property, namely the statutorily imposed trust for sale. A co-owner who wishes to perform that trust and sell the property can do so with the consent of his fellow co-owners or by applying to court for an order for sale. 103 The court has absolute discretion as to whether to make an order for sale, and can take into account all the circumstances of the case. The parties may not have acquired the property with a view to sale but for a different purpose, and the court will generally refuse to order sale if this purpose is still subsisting. 104 In the domestic context where property is acquired by a couple in their joint names as a home for the family, the court may refuse to order sale while the property still serves as a home, which may still be the case as far as the children are concerned, even if the marriage has broken up. 105 However, where the party applying for sale is the trustee in bankruptcy or mortgagee of one of the spouses or partners, the interests of the creditors will invariably prevail over the continued provision of a home for the children. Only in exceptional circumstances has a trustee in bankruptcy or mortgagee been refused an immediate order for sale. 106 In Hong Kong, the Partition Ordinance applies to all co-owned property, whether owned by spouses or unrelated parties. However, perhaps where the court is exercising its discretion to refuse to make an order, it should apply different principles where the property is family property and where it is co-owned by unrelated parties. In this way, in the case of family property the court can take into consideration the hardship that a sale or partition might cause. Alternatively, the court might adopt the approach of the English courts, and look to see whether the purpose for which the property was acquired is still subsisting. It should be noted that in the case of matrimonial property the courts also have power to determine questions regarding the title and possession of matrimonial property, including its sale, under s 6 of the Married Persons Status Ordinance 107 and upon the grant of ancillary relief under the Matrimonial Property and Proceedings Ordinance. 108 Thus it is only where the marriage is still subsisting, the couple is not married, or the party seeking sale is not one of the co-owners, that an application for sale under the Partition Ordinance is necessary. I 103 104 10s 106 107 108 264 See s 30 of the Law of Property Act 1925. See Jones v Challenger (1961] 1 QB 176; and Re Buchanan-Wollaston 's Conveyance (1939] Ch 738 and Abbey National Building Society v Moss (1993] NPC 153 Re Evers Trust [1980] 1 WLR 1327 Re Holliday {1981] Ch 405, Re Citro [1991] Ch 142 and Barclays Bank Plc v Hendricks (1995) CLY 2365 Cap 182 Cap 192 CO-OWNERSHIP 10. 7 Tenancies by Entireties Tenancy by entireties is a special form of joint tenancy that existed between married persons where property was transferred to them in such circumstances that they would have taken as joint.tenants if they had not been married. During the marriage neither party could dispose of any interest in the land without the concurrence of the other, nor could either of the parties sever the tenancy. The unity of the spouses was complete and could not be broken during the marriage. However, given the common law limitations on a wife's ability to hold and dispose of property, the husband under a tenancy by entireties was alone entitled to possession and the income of the land. It is unlikely that a tenancy by entireties can now be created in Hong Kong. In both England and Australia it has been held that the effect of the Married Woman's Property Act 1882, which recognised the right of a married woman to hold and dispose of property independently of her husband, precluded the creation of tenancies by entireties. 109 The relevant provisions of the Married Woman's Property Act 1882 are found in an updated form in Hong Kong in the provisions of the Married Person's Status Ordinance. no However, some room for doubt remains, for in Canada similar legislation has been held not to be inconsistent with the continued recognition of tenancies by entireties. 111 10.8 Coparcency Coparcency arose where a person died intestate and his property passed to his common law heirs who were female. Coparcency is unlikely to arise in Hong Kong, for where a person dies intestate his estate will generally pass according to the provisions of the Intestates Estates Ordinance1 12 and not according to the common law rules. Certain land in the New Territories is, however, exempt from the provisions of this ordinance, and whilst it is more than likely that Chinese customary law will govern the succession to such land it is conceivable that coparcency could arise if the persons entitled to the land were not of Chinese race. Coparcency is a hybrid form of tenancy. It most closely resembles a tenancy in common in that there is no right of survivorship, and coparceners hold distinct but undivided shares. Nevertheless, given that coparcency only arises on intestacy, the four unities are usually, though not necessarily, present. Thornley v Thornley [1893] 2 Ch 229; and The Registrar-General of New South Wales v Wood (1826) 39 CLR 46 no Cap 182 111 Campbell v Sovereign Securities Holding Co Ltd (1958) 13 DLR (2d) 195. But see Re Demaiter and Link (1973) 36 DLR (3d) 164. nz Cap 73 I09 265 LEASES 11.1 Introduction Leases play a central role in land ownership in Hong Kong. If we look at the ownership of typical residential development on Hong Kong Island or in Kowloon, we find the Crown ,or, after 1 July 1997, the Government of the Special Administrative Region of Hong Kong, is the ultimate holder of the land. The Crown or Government disposes of land by granting a Crown or Government lease of the land for a term of years to the highest bidder at an auction. The Joint Declaration between the British Government and the Government of The People's Republic of China on the Future of Hong Kong limited the right of the Crown to grant leases extending beyond 2047. Before the Joint Declaration it was common for the Crown to grant terms of 75 years together with a right to renew the term for a further term of 75 years. The lessee under a Crown or Government lease, once he has developed the land into residential .units, may decide to realise his investn;ient by selling the flats off to individual purchasers, by transferring or assigning a share in the lease. Alternatively, the lessee may decide to ret~in the development for investment and, instead 9Lselling tl1e lal)d, grant short-term leases of individual units for terms of usually about two or three years. The lessee has dealt with the development by creating new subleases rather than by the assignment of the existing Crown or Government lease itsc;If. These two ownership structures are commonly found not only in residential developments but also in commercial, industrial, or indeed any other kind of development. Whether it is a Crown or Government lease or a short-term tenancy agreement, the features of the relationship are the same. It must be said, before examining these features, that the law of landlord and tenant is a vast subject and in a book of this size we can only deal with it in outline. 1 11.2 Lease Essentials Not every occupier of land will qualify as a lessee. His occupation must display certain characteristics in order to qualify, in particular those of: • exclusive possession of the land; and • a certain duration. For a more detailed examination, see Merry: Hong Kong Tenancy Law (Butterworths) 2nd ed 1989. 266 LEASES 11.2.1 Exclusive Possession In order for occupation to qualify as a lease, the lessee or tenant must be given exclusive possession of the land. It is exclusive possession that justifies the recognition of the tenant's occupation as an estate or interest in the land itself. It marks that degree of physical control over the land that entitles the tenant to call the land his own and to keep out anyone he does not wish to enter, including his landlord. If exclusive possession is not given, the occupier will only enjoy a licence to occupy, which confers no estate or interest in the land. 2 • The importance of distinguishing between a lease and a licence is emphasised by the fact that a lessee enjoys the protection of the rent control and security of tenure legislation found in the Landlord and Tenant ( Consolidation) Ordinance, 3 while a licensee does not. !A.landlord may thus be at pains to establish that a right to occµpy is merely a licence, while the occupier is more likely to seek a lease. There are als~ other distinctions between the position of a lessee and a licensee that may encourage the parties to seek the greater protection afforded by a lease or, in rare cases, a licence. The distinction between a lease and a licence has been fertile ground for litigation, not only over the question of whether exclusive possession has been granted but also over the question of whether the grant of exclusive possession is the decisive factor in distinguishing between a lease and a licence) The leading case is: •■-- Street v Mountford [1985] AC 809 FACTS The plaintiff granted the defendant a right to occupy two rooms for £37 per week, subject to termination on 14 days' notice. The terms of the agreement were set out in a document headed 'licence agreement'. The agreement gave the defendant exclusive possession of the rooms, but contained a declaration that the defendant understood the agreement did not protect her as a tenant. A few months later the plaintiff wanted possession and sought an order that the agreement was only a licence. JUDGMENT The agreement was a tenancy. The issue at stake in Street v Mounifordwas whether the fact of exclusive possession was decisive in distinguishing a lease from a licence. Traditionally, See Chapter 18. Cap 7 267 HONG KONG LAND LAW exclusive possession dictated a lease, but in a number of cases 4 the Court of Appeal in England suggested that the express intention of the parties was the governing factor in distinguishing a lease from a licence. The fact of exclusive possession was just one factor to be taken into account in determining whether the parties' relationship was that of landlord and tenant or licensor and licensee. Lord Templeman, delivering a unanimous judgment, firmly rejected this suggestion. A grant of exclusive possession for a term is decisive. In the words of Lord Templeman: Where . . . residential accommodation is offered and accepted with exclusive possession for a term at a rent, the result is a tenancy 5 [and] If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five-pronged implement for manual digging results in a fork, even if the manufacturer ... insists that he intended to make and has made a spade. 6 Thus if the parties wish to create a licence rather than a tenancy, they cannot do so by merely calling it a licence. They must do so by ensuring that exclusive possession for a term is not given. A clear test has thus now been laid down to distinguish a lease from a licence, but there is still the problem of ascertaining whether exclusive possession has in fact been granted. Whether or not exclusive possession has been granted is a question of fact. It is not, however, synonymous with exclusive occupation of the premises. Exclusive occupancy may not be enough where the circumstances reveal that the occupier lacked sufficient overall control to call the premises his own. Where there is a written agreement, the terms of the agreement may point to the degree of an occupier's control of the premises. 7 For instance, the grant of a right to the landlord to enter and view the premises, or the prohibition of an occupier's right to transfer his interest, supports the grant of exclusive possession to the tenant. If no grant of exclusive possession was made, there would be no need to reserve a right for the landlord to inspect, nor if there was a personal licence would it be necessary to restrict the occupier's right to transfer his interest. There is nothing that he is capable of transferring. However, the descriptive labels or the particular provisions the draftsman may use are not decisive. The courts will look to the substance and not the form, and may ignore labels and provisions that do not genuinely reflect the intended effect of the agreement. Where the terms of the agreement are inconclusive or there is no written agreement, the court must look to all the circumstances of the case to See Marchant v Charters [1977] 1 WLR 1181; and Somma v Hazelhurst [1978] 1 WLR 1041 At 827B At 819F See for instance Best Sharp Development Ltd v Lucky Shoe Repairing'& Key Duplication Centre (1988) CA Civ App No 139 of 1987. 268 LEASES determine whether the occupier has sufficient control of the premises to support a claim to exclusive possession. The House of Lords in Street v Mountford formulated a broad test, but in doing so they excluded from the leasehold fold a number of exceptional circumstances in which the grant of possession for a term would not constitute a tenancy, namely: where the occupier was a lodger or service occupier; where there was no intention to create legal relations because it was a family or friendly arrangement; where the parties were vendor and purchaser; 8 or where one grantor was incapable of granting a lease. It is perhaps inaccurate to categorise these circumstances as exceptions: they are, rather, occasions when the possession granted is not truly exclusive. 11.2.1.1 Lodgers A clear distinction was made in Street v Mountford between a lessee and a lodger. A lodger may enjoy exclusive occupancy but he cannot call the premises his own. The landowner retains the overall control of the premises so there can be no grant of exclusive possession. For instance, the provision of services to the lodger by the landlord may necessarily interfere with the lodger's right to use the premises or there may be terms restricting the lodger's or his visitors' access to the premises at certain times of the day. A hotel resident or the student of a university hall will thus not qualify as a lessee. However, the line between a lessee and lodger is sometimes a fine one, as the following Hong Kong cases illustrate. Lam Man-yuen v Lucky Apartment [1964]HKLR689 FACTS The defendant let out rooms to the plaintiff on three floors of a building in Hankow Road. The rooms were furnished. Amahs cleaned the rooms and laundered the bed linen. Hot water for tea was provided. Keys to the rooms were kept at the entrance of the building, and at night it was necessary to rouse the watchman in order to enter the building. Rooms could be hired by the day, and new occupants had to fill in a registration card. Although the management did not generally interfere with the occupants' use of the rooms, they did display in the hall and each of the rooms a notice containing 'Regulations for Guests', which prohibited the keeping of cats and dogs and the making of excessive noise after midnight. When the defendant tried to evict the plaintiff, the plaintiff claimed he was a tenant. JUDGMENT The arrangement was a licence. 8 Bretherton v Paton [1986] 1 EGLR 172 269 HONG KONG LAND LAW However, the result was different in: May King Co v Young [1981] HKLR 280 FACTS The defendant purchased five flats in a building from the plaintiff. The purchase was subject to a deed of mutual covenant, which repeated a Crown lease restriction that the property could only be used for residential purposes. Four of the flats were subdivided to provide five rooms each with bathroom facilites but no kitchen facilities. The occupant of each room had a key to his room and a key to the main door. Each room was furnished, and bed linen, soap, and water were provided. The defendant's staff cleaned the rooms and looked after the common areas, as well as dealing with the checking in and out of individual occupants. The plaintiff claimed there was a breach of the deed of mutual covenant because, if the occupants were lodgers, the use would have been commercial rather than residential. JUDGMENT The occupiers were tenants and not lodgers. 11.2.1.2 Service Tenancies Where an employee is required to occupy premises owned by his employer for the better performance of his duties, the employee is a mere licensee. His occupation is so connected with his employment that it is an extension of his employment, and as such regarded as purely personal. It is not uncommon in Hong Kong to find accommodation provided by an employer, but that accommodation may not always be classified as a service tenancy. The occupation must be intended to facilitate the better or more convenient performance of the occupant's employment rather than being just coincidental to the discharge of his duties. For instance, accommodation that is provided as part of a remuneration package will generally not be sufficiently connected with the employment to qualify as a service tenancy. 9 11.2.1.3 Family Arrangements, Friendship, or Generosity The courts have been reluctant to find a lease where there is an element of charity in allowing the occupier use of the land. In Facchini v Byson, 10 Denning IJ identified 'family arrangements, an act of friendship or generosity' 11 as an exception to the general rule. The House of Lords in Street 9 10 11 270 HA Warner Pty v Williams (1946) 73 CLR 421 [1952] 1 TIR 1386 At 1389 LEASES v Mountford also excluded an occupier who is 'an object of charity' .12 An example of exclusion on this basis is found in: FACTS The plaintiffs were the personal representatives of a landowner who, as an act of friendship, had allowed the defendants to live rent-free in a number of properties that he owned. He indicated to them on a number of occasions that the last property they occupied would be theirs on his death, but when he died he had not left the property to them and his personal representatives sought possession of the property. The defendants claimed that they were tenants at will and that the plaintiffs action to recover possession was brought after the ·expiry of the relevant limitation period. JUDGMENT The defendants were licensees. Lord Templeman explained the exclusion of family arrangments or acts of friendship or generosity on the basis that the parties did not intend to create legal relations. Alternatively, it may be argued that the occupiers' possession lacks that vital exclusivity against their benefactor which is the hallmark of a lease. For instance, in Heslop v Burns Stamp LJ pointed out that 'The home was not the defendants' castle but the house in which he [the landowner] allowed them to live' .13 11.2.1.4 Shams Although the operation of the rent control or security of tenure legislation cannot influence the court in distinguishing between a lease and a licence, Lord Templ~man in Street v Mountford indicated that the court should be alert to frustrate sham devices intended to avoid the effects of this legislation. A sham, in the words ofMustill LJin Hadjiloucasv Crean, 14 arises where 'an agreement or series of agreements ... are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties'. One common device that has attracted the attention of the English courts is that of shared occupancy. The landlord may seek to prevent exclusive possession by providing that an occupier is only entitled to share possession of the premises with another. Prior to Street v Mountford, this device met 12 13 14 Per Lord Templeman at [1985] AC 809 at 818E At 1247E [1988] 1 WLR 1006 at 1019E 271 HONG KONG LAND LAW with a measure of success. For instance, in Somma v Hazelhurst 15 a couple, who entered into identical licence agreements which granted each of them a right to occupy premises subject to the rights of occupation of the other, were found to each enjoy only a licence as neither had exclusive possession. In Street v Mountford this decision was doubted, and subsequently the House of Lords has considered two different types of sharing agreements. '"'ax •"!!:!!';'.!!.'!'::'.:r..111Mr_. .. -·,• 1 ~.!!!.-■11a::i•IJ!!l!- Antoniades v Villiers [1988] 3 WLR 1205 FACTS A couple entered into identical but separate licence agreements, with the plaintiff giving them each a right to occupy a top floor flat containing one bedroom. The agreements denied that exclusive possession was granted and purported to reserve a right for the landlord to occupy the flat himself and to authorise other persons to do so. The landlord subsequently sought possession. JUDGMENT The two agreements were interdependent and should be read together as a single agreement that conferred exclusive possession on the defendants. The purported right of the landlord to introduce additional sharers was a sham. The real intention of the parties was that the defendants should enjoy exclusive possession for a term. The agreements read together thus qualified as a lease. - ----, -·~ ' AG Securities v Vaughan [1988] 3 WLR 1205 FACTS The defendants had each been granted, by four separate agreements entered into between 1982 and 1985 the right to occupy a four-bedroom flat subject to the other defendants' rights to occupy. The agreements were entered into at different times and were for different rentals, although they were each for the same period. When the plaintiff sought possession the defendants claimed they were joint tenants of the flat. JUDGMENT The defendants were licensees and not tenants. Their agreements were independent. They had been entered into at different times and were for different rentals, and thus could not be construed as together creating a joint tenancy of the premises. There was, after all, no unity of time, title, or interest. 15 272 [1978] 1 WLR 1041 LEASES Therefore, whether or not particular sharing agreements are a sham will depend on whether they are truly independent, as the parties profess, or whether they are in fact interdependent. All the circumstances of the case must be considered in order to determine whether the agreements are independent or interdependent. For instance, in Mikeover Ltd v Brady 16 two agreements which were entered into at the same time by two friends to share a flat were held to be licences because the obligation to pay the rental in each agreement was a separate and not a joint obligation. The possibility that separate agreements which fail to display all the unities necessary for a joint tenancy might nevertheless constitute a lease held by the occupiers as tenants in common does not appear to have occurred to the courts. Sharing agreements are not the only sham device that may be employed. For instance, in Markou v Da Silvaesa 17 a clause that limited the right of occupation to certain hours of the day and a clause that entitled the landlord to remove furniture at any time were challenged as shams. It might also be that services that were never intended to be actually provided could be attacked as shams. In the business context, a sham may appear in the guise of a management agreement. For instance, in Wong Kau v Wong Hsienchau 18 the management of a ballroom was alleged to be a tenancy; and in Dea/mead Ltd v Chin 19 a management or mai toi ( W~ ) agreement of a restaurant was held to be a tenancy. 11.2.2 Certainty of Duration A lease grants a right to exclusive possession for a defined or certain period of time. That period may vary from the very short to the very long. In Hong Kong it is unusual to encounter a lease for less than a week, but there are Crown leases that have been granted for as long as 999 years. 11.2.2.1 Commencement Date The commencement date of the lease must be ascertainable. It is usual to state the commencement date, but if it is not stated it may be possible to infer a date from the terms of the parties' agreement, for instance the date of taking up possession or of the agreement itself. However, where such inference is _not possible, the agreement will fail to create a lease. 20 Where an uncertain commencement date is specified in an agreement to grant a lease, for instance 'from the date the present tenant vacates', then the agreement may be viewed as conditional and will be enforceable if the event should occur, ie if and when the present tenant vacates. 21 The date of commencement of the term may be expressed to pre-date the agreement, or it may commence at an ascertainable future date. Where 16 17 18 19 20 21 [1983] 3 All ER 618 (1986) 52 P&CR 204 [1964] HKLR 422 (1987) 281 Estates Gaz 531 Harvey v Pratt [1965] 1 WLR 1025 Brilliant v Michaels [1945] 1 All ER 121; and One Queen Co Ltd v Chan Siu-Lan (1989) CA Civ App No 51 of 1989. 273 HONG KONG LAND LAW the lease is to start in the future, it is termed a 'reversionary lease'. In contrast to the situation in England, in Hong Kong there is no limitation on the time that can elapse between the granting of a reversionary lease and its commencement. 22 The grant is not subject to the rule against perpetuities because, prior to the taking up of possession, the lessee does enjoy a vested interest in the land, known as an 'interesse termini'. Although interesse termini has been abolished in England, it still operates in Hong Kong. 23 An interesse termini gives no actual estate in the land, but an interest in the land that is freely alienable and can be protected by action should a third party interfere with the lessee's entry into possession when the time comes. Because an interesse termini gives no estate in the land, no reversion can exist upon it that can give rise to problems. For instance, L grants T a lease for ten years, and a year before it is to end L grants Ta new lease for another five years, to commence on the expiry of the old lease. Then, on the strength of this lease, T grants a sublease to S for three years. T, because he has not entered the land to perfect his lease, has no reversion - only an interesse termini which may affect his or his assignees' ability to take action on the covenants in the lease unless that action is based upon contract. 24 11.2.2.2 Certainty of Duration The duration or term of the lease must be ascertainable at the commencement of the lease. For instance, in Lace v Chantler 25 a grant for the duration of the war was invalid. A more topical example in present day Hong Kong would be the lease of premises until the landlord redevelops. Who can tell when the landlord will redevelop? The grant thus cannot create a lease. It is easy to avoid falling foul of this requirement if the parties are not sure when they want their lease to end. They may enter into a lease for a fixed period subject to one or both parties' right to determine the lease upon the happening of a certain event, eg a grant for ten years with a right for the landlord to terminate upon giving one month's notice if he redevelops the premises. There are a number of terms that may appear uncertain but are nevertheless recognised. Periodic terms may continue for an unspecified period in the sense that, although each period is certain, the automatic renewal of the periods will continue for a duration that is uncertain until one of the parties exercises their right to determine the tenancy. It is this power for either landlord or tenant to serve a notice to determine the tenancy that prevents the periodic term from being uncertain. An exclusion of one or both of the parties' rights to serve a notice will render the term uncertain. 22 23 24 25 274 In England, the position is governed by s 149(3) of the Law of Property Act 1925. In England, the relevant provision is s 149(1) and (2) of the Law of Property Act 1925. See for instance Lewis v Baker [1905] 1 Ch 46, where distress could not be levied for unpaid rent. [1944] KB 368 LEASES Prudential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386 FACTS The London County Council, the predecessor in title of the London Residuary Body, granted a 'lease'· of a strip of land abutting a major road for £30 per annum until the land was required for road widening. The agreement became vested in the Prudential Assurance Co Ltd who maintained that it was a valid yearly lease entitling them to occupy the land until the landlord served a notice to quit because they required the strip for road widening. As the London Residuary Body had no road making powers they would never have been able to serve such a notice. JUDGMENT The agreement could not constitute a lease. The term it created was uncertain as the landlord was effectively unable to serve a notice to bring the tenancy to an end. The House of Lords in delivering judgment reaffirmed the very longestablished principle of certainty of duration of leasehold terms although Lord Browne Wilkinson said he did so reluctantly and expressed the hope that reform might be on the way. Perpetually renewable terms also appear to contravene the requirement for certain!)', although a renewable lease cannot exceed the term out of which it is granted. Nevertheless, there is no prohibition on such leases in Hong Kong. 26 A lease for life cannot exist at common law in Hong Kong, not because its duration is uncertain, but because it is a freehold estate and as such cannot be created out of a leasehold estate. 27 11.2.3 Rental After some hesitation it has now been established that rental is not an essential requirement for a valid lease, although most leases are commercial transactions and will be made subject to the payment of rental. 28 26 27 28 In England, such leases are converted into terms of 2,000 years. See s 145 of the Law of ProJx!rtyAct 1925 In England leases for lives take effect as leases for 90 years. Sees 149(6) of the Law of Property Act 1925. Ashburn Ansalt Ltd v Arnold [1989] Ch 1. 275 I HONG KONG LAND LAW 11.3 Types of Leases 11.3.1 Fixed-Term Leases A fixed-term tenancy may be for any ascertainable period of time: for instance, a week, a year, 3 years, 21 years, or even 999 years. 11.3.1.1 Creation As we have seen in Chapter 5, a fixed-term le.ase rnust P½ c:reated by deed if it is to q11.alify;i_s a legal estate, unless it is fo~ a term not exce~di11g}lireeye;y-s at the best rentthat can be reasonably obtained without taking a premium. We ha~e also seenwnenC()~siderfog thedoctrine in Walsh V Lonsdale 29 that a lease exceeding three years that is not created by deed may nevertheless qualify as an equitable lease, provided specific performance of the agreement to grant the lease is available. 11.3.1.2 Termination 30 At common law, a fixed-term lease will come to an end when the term expires. There is no need for the landlord or the tenant to take any action. 11.3.2 Periodic Leases A periodic lease is a lease that runs for successive periods, for instance from week to week, month to month, quarter to quarter, or year to year. At the end of the initial period, the term is automatically extended for another period and so on until either party serves a notice to bring the tenancy to an end. Each period is treated as part of the original term, which thus grows as the tenancy continues, so that a yearly tenancy that runs for three years is regarded in retrospect as a three-year term. 11.3.2.1 Creation A periodic lease need not be created by deed in order to qualify as a legal lease, since it falls within the exception for leases not exceeding three years already referred to. Nor need a periodic lease be created expressly. A periodic lease will be implied where no intention to create a particular form of lease has been expressed. The period by which the rental is measured will determine the periodic term, even if the rent is actually paid according to a different period. For instance, in Ford Chung v Ho Wai-man3 1 a tenant had a five-year lease where the rent was paid monthly, and on the expiry of the lease he remained in occupation at an increased rent. The amount of rent was calculated by the month, although for convenience it was paid every six months. The tenancy was a monthly tenancy and not a six-monthly tenancy. 29 30 31 276 See Chapter 6.3. See Chapter 11.6. [1959] HKLR 12. See also Alder v Blackman [1953] 1 QB 146. LEASES The most common occasion when a periodic tenap.cywill be implied is where a tenant 'holds over' after the expiry of a fixed-term lease. For example, if L granted Ta two-year lease at $5,000 per month, and at the end of the two-year term T remains in possession and continues to pay the rental of $5,000 per month, then a monthly tenancy arises on the same terms as the expired fixedterm tenancy save for those terms that are inconsistent with a monthly tenancy. 11.3.2.2 Termination The period of the notice required to bring a periodic tenancy to an end is, unless otherwise agreed; the same as the period of the lease: eg, for a weekly tenancy the requisite notice period is one week. The notice period required to terminate a yearly tenancy forms an exception to this general rule, for half a year's notice is sufficient to terminate a yearly tenancy provided it expires on the anniversary of the commencement of the lease. If the yearly tenancy commences on one of the usual quarter days, being 25 March, 24 June, 29 September, or 25 December, then two quarters' notice is required, although the period may be more or less than the 182 days that will usually constitute a half year. For example, if a yearly tenancy commences on 25 March, notice should be given on or before 29 September (177 days); and if a yearly tenancy commenced on 29 September notice must be given on or before 25 March (187 days). It is not possible at the commencement of a periodic lease to say how long it will last. It will continue until one of the parties serves a notice to terminate the tenancy. The requirement for certainty of duration does not thus have direct application to periodic tenancies. It is sufficient that a periodic tenancy can be brought to an end, even if it is not known when that will be. If one party is unable to serve a notice to terminate the tenancy, then the requirement for certainty in the context of periodic tenancies will not be satisfied. 32 But a restriction, as opposed to a total ban, on a party's ability to serve a notice is acceptable provided it is only for a specified period. 33 11.3.3 Tenancy at Will Doubts have been expressed over whether a tenancy at will should really be classified as a lease at all, for its duration is uncertain. However, it is more than a purely contractual relationship since the parties acknowledge that their relationship is one of landlord and tenant. For instance, if the payment of rental is agreed, the landlord may distrain if it is not paid. A tenancy at will has been described as a tenure with no estate. 11.3.3.1 Creation A tenancy at will arises where a person occupies land as a tenant with the consent of the landlord on the understanding that the tenancy may be terminated at any time. 32 33 CentaployLtdvMatlodgeLtd[1974l Ch 1 Prndential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386 277 HONG KONG LAND LAW A tenancy at will may be created expressly or by implication. The occasions when a tenancy at will may be implied are generally now limited to transitional situations. 34 For instance, if L grants Ta lease for three years and after three years T remains in possession with the consent of L, then T is a tenant at will. If T subsequently pays rental by reference to a period, he will become a periodic tenant. Another example of a tenant at will might be a purchaser or lessee who goes into possession before completion of his purchase or lease. 11.3.3.2 Termination A tenancy at will is determined by the will of either party, which may be exercised expressly by the service of a notice, or by implication when either party dies or commits an act incompatible with the continuance of the tenancy. For instance, a purported transfer of either party's interest or an act of voluntary waste will bring a tenancy at will to an end. 11.3.4 Tenancy at Sufferance A tenancy at sufferance may be called a 'tenancy' but it is not a true lease. There is neither tenure or estate. The name 'tenancy' has been used because the occupier was originally a tenant who entered the land with the owner's permission, and in this respect he differs from a trespasser. A tenant at sufferance is thus not liable for damages for trespass but for a claim for his use of the land. 11.3.4.1 Creation A tenancy at sufferance arises only by operation oflaw, not by express grant, and occurs where a tenant continues in possession after the expiry of his tenancy without the express or implied permission of his landlord. 11.3.4.2 Termination A tenancy at sufferance may be terminated at any time by the landlord suing for possession or otherwise evicting the tenant. 11.3.5 Tenancy by Estoppel The doctrine of estoppel may be relied upon to create a tenancy that is effective between the parties. A landlord must have the capacity to grant a valid lease. He must, in other words, have an estate out of which he can grant the lease, and that will constitute his reversionary interest. In Hong Kong, the landlord's estate is generally itself a lease - either a Crown or Government lease or a shorter term tenancy agreement. Where a person has no estate but nevertheless purports to grant a lease, he is estopped from 34 278 Heslop v Bums [1974] 1 WLR 1241 at 1253A LEASES denying the tenancy. The tenant also is estopped from denying his landlord's lack of title. As between the purported tenant and the purported landl9rd, there is a tenancy by estoppel on the terms of the purported grant that is as effective and binding between the parties and their successors as any other lease. 35 A tenancy by estoppel provides no protection, however, against the true owner of the land. However, ifthe purported landlord becomes the true owner of the land, the estoppel is fed and the lease perfected. 36 A purported lease over Crown or Government land by anyone but the Crown or government will not create a tenancy by estoppel. Section 4 of the Crown Lands Ordinance 37 prohibits the occupation of land other than under a Crown lease or permit. A lease by anyone else is thus illegal.38 11.4 Relationship of Landlord and Tenant A lease is essentially the grant of a leasehold estate in land, but invariably the parties will also agree the terms that are to govern their relationship as landlord and tenant. In leases these terms are usually referred to as 'covenants'. Covenants are traditionally agreements entered into under seal, but in the leasehold context the term is also employed where the lease is entered into under hand or orally. Leasehold covenants fall into three categories: • implied covenants are those terms that are so essential to the relationship of landlord and tenant that they are automatically implied; • express covenants are the express terms agreed between the parties; and • usual covenants are those covenants that will be imposed where an agreement to grant a lease has provided that the usual covenants are to be given. 11.4.1 Implied Covenants by the Landlord The following obligations will be imposed on a landlord even if the lease is silent. 11.4.1.1 Quiet Enjoyment There is implied into every lease a covenant that the tenant shall have quiet enjoyment of the premises. 'Quiet enjoyment' here does not mean lack of noise but rather freedom from acts by the landlord that interfere with the tenant's use of the premises. Excess noise might, of course, cause such an interruption but other actions may also do so. 35 36 37 38 Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd [1977] QB 580; and Wong Wai-Jong v Chung Ho [1960] DCLR 218 Church of England Building Society v Piskor [1954] Ch 553 Cap 28 Li Wing-sum v Wu man [1978] HKLR 575; and Lo Shun Cheung v Fung Siu Kam [1984] HKC 107 HONG KONG LAND LAW Some examples of breach of this covenant for quiet enjoyment include erecting scaffolding to prevent access, 39 removal of windows and doors, 40 cutting off gas and electricity, 41 harassment, 42 changing the name of a building let as offices, 43 and the supply of foul air from a centralised air-conditioning system. 44 Perhaps one of the more extreme Hong Kong examples is found in the case of: • _ ~~-~- ~,_il:11~1111111.• Yeung Wah v Alfa Sea Ltd [1993) 1 HKC 440 FACTS The plaintiff was the tenant and the defendant the landlord of premises in Cameron Road, Kowloon. The defendant was anxious to obtain vacant possession of the plaintiff's flat but the plaintiff, who had security of tenure under Part II of the Landlord and Tenant Ordinance, did not want to move. The plaintiff went to work in Beijing but was given leave every three months, when he would return to his flat in Hong Kong. On one occasion, when the plaintiff returned to Hong Kong there was scaffolding around the building and the locks had been changed so he was unable to get into his flat. When he did gain entry he found the entire front wall of the premises had been removed and his flat was in a complete mess; in particular the master bedroom, which accounted for about one third of the flat, was unusable. When the defendant's renovation works were completed the whole building had a tempered glass facade and looked more like a commercial than a residential block. The plaintiff was unable to use the master bedroom as a bedroom for there was a floor-to-ceiling glass wall which afforded no privacy or ventilation. JUDGMENT The defendant's actions not only constituted a breach of the covenant for quiet enjoyment but also a trespass which was sufficiently serious to justify an award of exemplary damages as well as damages for the discomfort and distress caused to the plaintiff. Acts that merely cause annoyance or inconvenience to the tenant will not constitute a breach of quiet enjoyment. For instance, in Brown v Flower 45the erection of an external staircase outside the tenant's windows that allowed people to look in was not an actionable interference with the tenant's use of the premises. 39 40 41 42 43 44 280 45 Owen v Gadd [1956] 2 QB 99 Lavender v Betts [1942] 2 ALL ER 72 Perera v Vandiyar [1953] 1 WLR 672 Kenny v Preen [1963] 1 QB 499 Union Assurance Society of Canton v The Hong Kong Land Co Ltd [1977] HKLR 597 but this decision has been doubted (1978) 8 HKLJ 230 The World Realty Ltd v Kwan Ngar-nin [1986] HKC 508 and [1987] 3 HKC 148 [1911] 1 Ch 219 LEASES The landlord is also responsible for interference due to the lawful, but not unlawful acts, of someone deriving title from him. 46 But the landlord is not responsible for interference by unrelated third parties or by persons with a superior title to the landlord, eg the landlord's landlord. 47 11.4.1.2 Derogation from Grant A landlord's own activities must not frustrate or derogate from the purpose for which the landlord has granted the land. This principle to a certain extent overlaps with the covenant for quiet enjoyment, but it also covers cases where there has been no physical interference. For instance, a landlord may not build upon adjoining land that he owns in such a way as to frustrate the use of the leased premises for the purpose for which they were let. In Aldin v Latimer Clark Muirhead & Co48 premises were let to a tenant subject to a covenant that they be used as a timber yard. The landlord built on his adjoining property, and as a result the free flow of air to a shed for the drying of timber, which formed part of the timber yard, was interrupted. There was no physical interference as such with the tenant's use of the premises, and after all the landlord was entitled to build on his adjoining land. But he was not allowed to build in a way that would frustrate the purpose for which he had let the property. This he had done, and was thus liable for derogation from his grant. 49 In order to succeed, the contemplated use must be actually interfered with and not merely rendered more expensive or less desirable. For instance, in Lam Kwok-leung v A-G 50 the building by the government of a public lavatory on land adjoining the plaintiff's land, which had the effect of reducing the size of the building that could be erected on the site, did not amount to a derogation of grant. The land had been leased by the Crown for development and it could still be developed, albeit less profitably. A landlord will also be liable for the actions of persons who derive title from him. 11.4.1.3 Repair There is no implied term that the premises will be fit for the purpose for which they are let at the commencement of the term, nor that they will remain so throughout the term. The landlord is thus under no implied duty to keep the premises in repair. The principle is 'caveat emptor' or 'let the buyer beware'. The tenant is taken to have inspected the premises before he enters into the lease to make sure that they are fit for his purpose, and to be satisfied with their state of repair. This is so even in the residential context, where it is often unrealistic to expect a short-term tenant to be in a position to assess whether the premises are in good structural condition of.whether the water or electrical installations are in reasonable repair. Sanderson v Berwick-upon-Tweed Corporation (1884) 13 QBD 547 Jones v Lavington [1903] 1 KB 253 48 [1894] 2 Ch 437 49 See also Harmer v Ju mil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200. so [1979] HKLR 145 46 47 281 HONG KONG LAND LAW In many other jurisdictions, the provision of housing accommodation is treated differently and an implied duty to repair imposed by legislation. For instance, in England a duty to repair the structure, exterior, and service facilities (eg the water, gas, and electricity installations and the sanitation and heating facilities) is implied into all leases of housing for a terms of less than seven years. 51 But Hong Kong lags far behind. Implied terms regarding fitness and quality have been accepted for the supply of other goods that form the necessities oflife, 52 but not for the supply of housing accommodation. Only limited inroads have been made in placing some responsibility on a landlord for the state of the accommodation he provides. (a) Implied terms In Smith v Marrable 53 it was held that a term as to the habitability of the premises at the commencement of the term should be implied into a letting of furnished premises. Furnished lettings, however, are not very common in Hong Kong, and the term will not assist if the premises become uninhabitable during the period of the lease. More recently the question of implied terms has been considered in: Liverpool City Council v Irwin (1977] AC 239 FACTS The plaintiffs built a multi-storey building in Liverpool, which they let out to council tenants at low rents. The condition of the building deteriorated rapidly, in particular the lifts broke down frequently, the stair lighting was often inadequate or non-existent, the rubbish chutes were often blocked, and the drainage was defective. Apart from the drainage defects, which were due to bad design, the deterioration was due to misuse and vandalism. The council had tried but failed to eradicate these problems. The defendant, one of the tenants, refused to pay his rent in protest at the condition of the building, with the result that the council sought possession. The defendant counterclaimed for damages. JUDGMENT The council should take reasonable steps to repair and maintain the common parts. In the circumstances the council had discharged their liability. The tenancy agreement between the council and its tenants was silent as to any right for its tenants to use the common parts of the premises, or 51 52 53 282 See s 11(1) Landlord and Tenant Act 1985 See Sale of Goods Ordinance Cap 26. (1843) 11 M&W 5 LEASES as to any obligation on the council to repair the premises or the building. The case therefore turned on the implication of terms to this effect. The established test for the implication of terms in a contract is that of business efficacy, ie was it necessary to give business efficacy to the transaction to imply such a term? Lord Denning MR in the Court of Appeal questioned this established test of efficacy. He was of the view that the test was not one of business efficacy but whether it was reasonably necessary in all the circumstances to imply such a term. The House of Lords refused to abandon the business efficacy test, but rather identified other circumstances in which the court would imply terms. Lord Wilberforce identified, in essence, two instances. In the case of an apparently complete bilateral contract, the court would only be willing to imply terms according to the established business efficacy test; but there may be circumstances, as in the case in question, where the contract was incomplete and it was necessary to establish the terms of the parties' bargain. Lord Cross and Lord Edmund Davies also identified two instances, but classified them in slightly different terms. First there were the terms the court would imply as a general rule into all contracts of that type, and second there were cases where the court would imply a term in order to rectify a particular contract. The business efficacy test was applicable to the latter type of implication. The test for the former type appears to be one of necessity. It was necessary in a tenancy of a unit in a multi-storey building for the tenants to be granted a right to use the stairs, lifts, and rubbish chutes. It would be impossible for the tenants to use the flats otherwise. Although an owner of land over which an easement is exercised is not usually under an obligation to repair the land, their lordships felt that the common parts of a multi-storey building was an exception. The common parts afforded an essential means of access and, unless the obligation to repair was expressly passed to the tenants, the only practical solution was for the landlord to undertake the obligation. The standard was, however, to take reasonable care to maintain and repair the common parts. It was not absolute. In Hong Kong there are many multi-storey buildings that are owned and let out by a single landlord, be that the Housing Authority or a private landlord, and thus the case is particularly relevant to Hong Kong. The principles in Live,pool City Council v Irwin have subsequently been applied to imply an obligation on the landlord to repair the exterior of premises so as to enable the tenant to carry out their express obligation to repair the interior. Barrett v Lounova 57 P & CR FACTS The plaintiff was a tenant of a house that had fallen into serious disrepair. The tenancy agreement required the plaintiff to repair the interior of the house, but was silent as to who was responsible for the repair of the exterior and the structure. 283 HONG KONG LAND LAW JUDGMENT The defendant landlords were required to carry out certain repairs to the exterior pursuant to an implied term to repair the exterior. It was necessary to imply such a term to give business efficacy to the parties' agreement, for the tenant could not perform her obligation to repair the interior if the landlords did not repair the exterior. This case is also of particular significance to Hong Kong, because many tenancy agreements provide that the tenant shall repair the interior but are silent as to who is responsible for the exterior. The business efficacy test has also been applied in Hong Kong to impose upon the Crown an implied term that land leased for development under a Crown lease will be fit for development in the manner envisaged by the Crown lease. 54 However, the extent to which terms can be implied based upon business efficacy or the principles established in Liverpool City Council v Irwin are limited. For instance, an express term in the agreement may exclude the operation of implied terms, while the courts appear less willing to imply terms into contracts that are well documented. 55 Furthermore, the test relied upon to justify the implication of a term appears clearly to be one of necessity. Rather surprisingly the courts appear to be more willing to imply terms in the licence context. For instance, in Wettern Electric Ltd v Welsh Development Agency 56 the courts implied a term that the premises were fit for the purpose into a licence to occupy premises. The court distinguished between the leasehold and licence situations on the basis that a licence was a mere contract while a lease created an estate in the land. The distinction does not seem warranted. The relationship of the parties under a lease is often not just governed by their postion as landlord and tenant, but also by the covenants contained in their lease. The nature of a lease is thus also contractual and subject to the same rules for the implication of terms as any other contract. (b) Tort The law of tort may provide a tenant with some redress against his landlord for the condition of his premises. For instance, if a landlord has built, renovated, or repaired the premises he has let and the manner in which he has executed that work was negligent, the tenant may recover for damage caused as a result of the defective state of the premises. Recovery in negligence for the defective state of premises is an area fraught with difficulty, but it appears that a tenant will be unable to recover for the cost of repairing the premises himself unless he is in imminent danger to life and limb. The damages that he can recover will be limited to any personal injury to himself or damage to his 55 Hang Tak Co Ltd v A-G (1986) HCt HCA No 2567 of 1983 Duke of Westminster v Guild [1985] QB 688 56 [1983] 2 WLR 897 54 284 LEASES property that the defective condition of the premises has caused. 57 In Hong Kong, a landlord's liability for the defective state of the premises he lets is founded on the common law of negligence. There is no defective premises legislation in Hong Kong to impose a statutory duty. 58 Nuisance or the rule in Rylands v Fletcher 59 may also be invoked where the landlord also owns adjoining property that interferes with the tenant's enjoyment of his premises. For instance, a blocked or overflowing drain on the landlord's premises might interfere with the tenant's use either by causing an unpleasant odour or by overflowing onto the tenant's premises and causing damage. (c) Statute There is no implied statutory duty regarding the state of repair of tenanted accommodation, but the Building Authority may take action where premises have fallen into such a dire state of repair that they are dangerous. The Building Authority may call upon the lessee of the premises to carry out repair work or they may carry out the repair work themselves and recover the cost from the owner. 60 They may also order the closure of a dangerous building. 61 The Public Health and Municipal Seroices Ordinance 62 also confers a general power upon the Urban Council or the Regional Council to require either the occupier or owner of premises to carry out such works as are necessary to abate a nuisance or to repair or cleanse premises that are a danger to health. 63 11.4.2 Express Covenants by the Landlord Implied covenants in Hong Kong are particularly important in view of the very small number of express covenants by a landlord found in leases in Hong Kong. The Crown enters into no express covenants in a Crown lease, and even in shorter term tenancy agreements the landlord rarely gives more than an express covenant for quiet enjoyment and for the payment of the Crown or Government rent due under the head Crown or Government lease. Occasionally a landlord will covenant to repair the exterior and structure of the building but, if he does, his liability will not arise until he has notice of the want of repair either because he has actual knowledge or has been given notice of the need for repairs. For instance, in O'Brien v RobinsorfA a landlord was held not liable for the collapse of a ceiling due to a latent D&FEstates Ltd v Cb7JrcbCommissioners [1989) AC 177; Department of the Environment v Thomas Bates and Sons Ltd [1989) 1 All ER 1075; Murphy v Brentwood District Council [1990) 2 WLR 944; and Sun/ace International Ltd v Meco Engineering Ltd [1990) 1 HKC 434 ss In England, see the Defective Premises Act 1972. 59 (1868) LR 3 HL 330 60 Section 26 Buildings Ordinance, Cap 123 61 Section 27 Buildings Ordinance Cap 123 62 Cap 132 63 Sections 12-15, 47, and 127 64 [1973) AC 912 s7 285 HONG KONG LAND LAW defect in its construction of which he had no notice. At one time notice had to come from the tenant, 65 but the better view now suggests that the notice may come from some other source, for instance the Building Authority or the managers of the building. 66 But it is not enough if the landlord could have discovered the need for repair because he had a right to enter and view the premises, or because the exterior of premises was clearly in need of repair. 67 11.4.3 Implied Covenants by a Tenant A Crown or Government lease or a short-term tenancy agreement will usually contain a number of covenants on behalf of the tenant, but where the tenancy agreement is oral or is silent on a particular point, it will be necessary to look at the implied obligations upon a tenant. 11.4.3.1 To Pay Rent The payment of rental is not an essential requirement for a lease, but if a rental is reserved there is an implied promise that the tenant will pay it. The implied obligation requires the rent to be paid in arrears, but most landlords will prefer the rent to be paid in advance. Thus it is usual to find an express covenant for the payment of rent in advance. An obligation to pay rent is often coupled with a right to re-enter for a failure to pay the rent. A right to re-enter the land for a failure to pay rental is implied into certain domestic and business lettings by the Landlord & Tenant ( Consolidation) Ordinance. 68 ', I 11.4.3.2 To Pay Rates There is an implied obligation for the tenant to pay rates and other taxes on the premises for which the landlord is not expressly liable. Property tax is usually expressed to be payable by the landlord. 11.4.3.3 Repair At common law, a tenant is liable to his landlord for 'waste' - an act or omission that alters the state of the land. Waste is an ancient remedy. Although the basis for its application to Hong Kong is unclear, it has been accepted and applied by the Hong Kong courts. 69 In any event, it may be that there is a distinct obligation owed at common law by every tenant to 65 66 67 68 69 286 Torrens v Walker[l906] 2 Ch 166 at 172 per Waddington J O'Brien v Robinson [1973] AC 912 at 926 per Lord Morris; and McCrea/ v Wake (1986) 269 Estates Gaz 1254 Torrens v Walker [1906] 2 Ch 166 A covenant is implied into Part II domestic lettings, which are in the main lettings entered into before 10 June 1983, but not Part IV domestic lettings which cover most other post-war domestic lettings. See s 53(3), and Tang Bik-ching v Wong Yuet-ying [1987] DCLR 30 and Ho Waijong v Tang Mei-lin (1987) LT Application No 2690 of 1987. A covenant is also implied into Part V lettings, which are in the main business lettings of not more than three years. See s 126. See Lovegrove: Waste and the Ghost of Grievious Americament 0977) 7 HKLJ 259. LEASES use the premises in 'a tenant-like manner'. 70 That standard may vary with the type of the tenant and, in particular, the length of his tenancy in the same way as the obligation not to commit waste. There are various categories of waste: (a) Equitable waste Equity will not excuse acts of wanton destruction even if an agreement purports to exclude a tenant's liability for waste. 71 (b) Voluntary waste Voluntary waste is a positive act, which falls short of wanton destruction, but which nevertheless detrimentally alters the property. All tenants are liable for voluntary waste unless their liability is expressly excluded, which will rarely be the case in a lease. An amusing Hong Kong example of voluntary waste is found in Fu Lam Investment Co Ltd v Mok Cheong-che 72 where a tenant, no doubt somewhat upset by his landlord's decision to evict him from his business premises, altered the premises in such a way that the entrance was sealed and the landlord could not get in] (c) Ameliorating waste A positive act that alters the property but in such a way as to improve it constitutes ameliorating waste. Whether such waste is actionable, except possibly by way of injunction, is questionable. 73 It can be difficult to draw the line between voluntary and ameliorating waste where the premises have been altered but in such a way that the alterations might be considered an improvement. The decisive question appears to be whether the character of the premises has been altered. The Hong Kong courts had to consider this question in: / Cheung Yeung-kan v Lui-kwan H973-1976] HKC 237 FACTS The defendant tenant had roofed in a courtyard so as to incorporate it into the leased premises. Instead of a small flat with a courtyard, the premises were changed into a large flat with no courtyard. JUDGMENT The defendant should reinstate the premises. Even though the court accepted that the change might be said to be an improvement, the fact that there had 70 71 72 73 Warren v Kean [1954] 1 QB 15 Vane v Lord Barnard (1716) 2 Vern 738 (1983) HCt No 1978 of 1983 See Doherty v Allman (1878) 3 App Cas 709 287 HONG KONG LAND LAW been alterations that changed the character of the premises was the deciding factor. (d) Permissive waste Permissive waste is a failure to repair or do some other act that ought to be done in order to maintain the premises. The duties of a particular tenant vary according to what type of interest he enjoys, in particular the length of his term. It appears that a tenant for a fixed term of years is liable for permissive waste but, in any event, many fixed-term leases will contain an express obligation to repair that supersedes the duty not to commit waste. Yearly tenants must keep the premises wind- and water-tight but will not be liable for fair wear and tear - the gradual deterioration caused by normal use or the normal action of the weather. 74 Weekly or monthly tenants must keep the premises in 'a tenant-like manner' by 'doing the little jobs about the place that a reasonable tenant would do'. 75 For instance, they should clean the windows, mend a fused light, or clear a blocked sink. 11.4.4 Express Covenants by the Tenant The express covenants given by a tenant are many and various. It is impossible to look at all the different types of covenant that may be encountered, but in the next chapter we take a brief look at the most common ones that are found in Crown or Government leases and short-term tenancy agreements. 11.4.5 Usual Covenants A lease, or more often an agreement for a lease, may provide that the parties will give the usual covenants. For instance, if the parties agree to the grant of a lease of premises for a certain term and for a certain rental but do not specify the covenants to be included in the lease by each party, then at common law there is an implied term that the lease will contain the usual covenants. The usual covenants may be divided into two classes. First are those covenants regarded as usual in every lease. These include the following covenants: 76 (1) by the landlord • for quiet enjoyment 74 75 76 288 Wedd v Porter [191612 KB 91; Warren v Kean [19541 1 QB 15; and Regis Property Ltd v Dudley [19591AC 370 Per Lord'Denning LJ in Warren v Kean [19541 1 QB 15 at 20 Chester v Buckingham Travel Ltd [19811 1 WLR 96 LEASES (2) by the tenant • • • • to pay rent and rates to keep the premises in repair to permit the landlord to enter and inspect where he is liable to repair a condition for re-entry for non-payment of rent. 1he second class of usual covenant is those held to be usual in the context of a particular letting. 1his class is not fixed, but varies depending on the area and nature of the premises and the length and purpose of the lease. For instance, what is usual for a monthly tenancy of a cubicle in Western will not be the same as for a five-year lease of factory premises in Kwun Tong. Nevertheless, some caution is required before assuming that a covenant that commonly appears in lettings of a particular nature will be classified as a usual covenant. In particular the courts may be reluctant to imply a covenant as usual if it qualifies or limits the estate granted to the tenant. For this reason a covenant against assignment or subletting has not been regarded as usual, n nor a covenant against carrying on a specifed trade. 78 11.5 Remedies for Breach of Covenants 1he usual remedies for breach of covenant will be available to the parties: daniages, injunction, or a declaration. For instance, where a lessee has brehched a covenant to repair, the landlord may be satisfied merely to seek damages for the breach, which will be measured according to the loss suffered to his reversion. If the lease has expired or is close to expiry, the damages may be assessed according to the costs of repairing the breach. A landlord will rarely be able to obtain a mandatory injunction to force the tenant to carry out the repairs, because damages will usually be an adequate remedy. By contrast, a tenant may be able to seek a mandatory injunction for a failure by a landlord to perform his repairing obligations. A tenant may well not be in a position to carry out the repairs himself, so that damages will not be adequate. Where a tenant is threatening to assign or sublet the premises, the landlord may obtain an injunction to prevent the threatened breach or, if it is not clear whether the threatened disposal is a breach of covenant, the landlord may seek a declaration from the court that the disposal does in fact constitute a breach. Such a declaration, it is hoped, will then dissuade the tenant from committing what is clearly a breach of covenant. A landlord, in addition, has a number of unique remedies to pursue should a tenant fail to perform his obligations under the lease. 11.5.1 · Forfeiture A landlord may forfeit or extinguish a lease for breach of a condition or where there is a right of re-entry in the lease. A right of re-entry will entitle 77 78 Lady de Soysa v De Pless Pol [1912] AC 194 Propert v Parker (1832) 3 My & K 280 289 HONG KONG LAND LAW the landlord to bring the lease to a premature end so that he may re-enter and recover possession of the premises should the tenant fail to perform his covenants under the lease or upon the occurrence of certain specified events, for instance the tenant's bankruptcy or liquidation. All Crown or Government leases contain a right of re-entry for a failure to pay rent or to perform or observe the other covenants contained in the Crown or Government lease. A Crown lease that is renewed or extended under the Crown Leases Ordinance 79 or the New Territories Leases (Exten0 will also include a right of re-entry. Invariably other sion) Ordinanc<:!' formal leases will contain an express right of re-entry in terms similar to the right of re-entry found in Crown or Government leases. As we have seen, the usual covenants also include a right for the landlord to re-enter for breach of a covenant to pay rent but not for the breach of other covenants. 81 In addition, a right of re-entry for non-payment of rent is implied into tenancies governed by Parts II and V of the Landlord and Tenant (Consolidation) Ordinance. 82 11.5.1.1 Procedure A right to forfeit is exercised by the landlord physically re-entering the premises. However, if the re-entry is other than peaceful the landlord will be liable for forceable entry. 83 It is usual therefore to seek the assistance of the court by taking proceedings for possession. The service of the writ, provided the writ contains a demand for possession, is an effective re-entry, but it will not be until judgment is given that the re-entry is sanctioned and may be enforced. However, once judgment is obtained, the re-entry dates back to the service of the writ so that a landlord is entitled to claim rent up to the service of the writ and mesne profits thereafter. Once a landlord has served the writ seeking possession and the tenant has accepted his decision the landlord cannot change his mind. Of course if the tenant does not accept the forfeiture the landlord may change his mind by simply not going on with the forfeiture proceedings. -· • I ■ W •M GS Fashions Ltd v B&Q Pie & others [1995) 1 WLR FACTS A tenant under a lease covenanted not to part with possession without the landlord's consent. With the hope of obtaining the landlord's consent the tenant allowed a third party into occupation of part of the premises for storing their stock. The landlord complained and served a writ on the tenant alleging that the tenant had breached the covenant against parting with possession and that the lease had been forfeited as a result; the landlord 79 so 81 l 82 290 83 Section 8 Cap 40 Section 7 Cap 150 Sun Hing Co Ltd v Brilliant Investment Co Ltd [1966] HKLR 310 See s 52(3) and 126 of Cap 7 Section 23 of the Public Order Ordinance Cap 245 LEASES claimed possession and mesne profits from the date of the service of the writ. The,tenant on receipt of the writ accepted the forfeiture and required the third party to leave. The landlord had second thoughts and tried to challenge its. right to forfeit. JUDGMENT The landlord had made an immediate election to forfeit the lease and the tenant's acceptance of the landlord's right to forfeit resolved any dispute that there may have been as to the landlord's entitlement to forfeit. Before re-entry can be effected certain formalities must be observed. These will vary depending upon the grounds upon which the forfeiture is based and the type of lease to be forfeited. (a) Non-payment of rent A forma/demand must be made by the landlord before he can re-enter for non-payment of rent, unless either the right of re-entry expressly excludes a need to do so, or the rent is at least six months in arrears and the value of the goods on the premises that may be subject to distress would not cover the cost of the arrears. 84 (b) Breach of other covenant Section 58 of the Conveyancing and Property Ordinance requires the landlord to serve a notice on the tenant before he can commence forfeiture proceedings based upon the breach of any other covenant than the covenant to pay rent. A failure to serve a notice will render the purported forfeiture abortive. 85 The notice must (i) specify the breach complained of, (ii) require the tenant to remedy the breach (if it is capable of remedy), and (iii) specify any compensation that the landlord may require for the breach. The tenant must then be given a reasonable time to consider his position and remedy the breach, where that is possible, and also to pay any requisite compensation. If he fails to do so, then the landlord can start proceedings for possession but subject to the tenant's right to seek relief, which we shall consider shortly. The question of whether a breach of covenant is capable of being remedied has caused difficulties. Clearly positive covenants, for instance to repair or to pay management charges or other outgoings are capable of remedy. A positive covenant may still be capable of remedy even if the time stipulated for performance has already passed, provided-that any damage suffered by the landlord can be compensated or remedied. A breach of covenant against a specified use will also usually be capable of remedy unless the breach involves some stigma that continues to affect the property even though the offending 84 85 Section 69(2 of the) District Court Ordinance Cap 336 ands 21G of the Supreme Court Ordinance Cap 4 The Prudential Enteiprises Ltd v PH Sbek Ltd (1988) HCt HCA No A4911 291 HONG KONG LAND LAW use has ceased. Breach of a covenant against immoral use has been found to be incapable of remedy on these grounds. 86 Breach of a covenant against assignment or subletting has been held to be incapable of remedy. 87 It was suggested in Scala House & District Properties Ltd v Forbes 88 that the breach of any negative covenant is incapable of remedy, but this approach has been rejected by the English Court of Appeal in Expert Clothing Service & Sales Ltd v Hillgate HouseLtd. 89 The correct approach is to establish whether compliance (albeit late) together with the payment of compensation, where appropriate, would effectively remedy the harm the lessors had or were likely to suffer from the breach. The question is thus to look at the harm the landlord has suffered rather than looking at the nature of the tenant's conduct. Even where a breach is incapable of remedy, a notice must be given in order to serve as a warning to the tenant of imminent forfeiture proceedings and the need to apply for relief from forfeiture. 11.5.1.2 Relief The courts of equity have long been prepared in the exercise of their inherent jurisdiction to excuse a tenant's breach of covenant in appropriate circumstances by granting relief from forfeiture. 90 However, a tenant's right to relief is now in most cases statutory. The right of a lessee, other than a Crown or Government lessee, to apply for relief differs according to whether the forfeiture is based upon nonpayment of rent or for breach of another covenant. The courts of equity have regarded forfeiture for non-payment of rent as little more than security for the rent, and would normally grant relief provided the rental arrears, interest, and costs are paid. The right to grant relief is now governed by statute, and differs according to whether relief is being sought in proceedings in the Supreme Court, 91 the District Court or the Lands Tribunal. 92 In the Supreme Court relief will be granted if: • • the lessee pays into court the rent arrears and costs before the _timefor acknowledging the service of the writ expires; or the lessee pays into court all the rent arrears and costs before the time stipulated by the court for execution of the possession order, which must not be less than four weeks from the date of the order, or any extension of that time granted by the court. The lessee will continue to hold under the original lease as the forfeiture ceases but if the lessee fails to pay the arrears and costs in accordance within these time limits he is barred from all relief. 86 87 88 89 9o 91 92 292 I. Rugby School (Governors) v Tannahill (1935] 1 KB 87 Scala House & District Property Co Ltd v Forbes [1974] QB 575 Ibid. (1986] Ch 340 See Shiloh Spinner's Ltd v Harding [1973]AC 691; and Kung Wai-ying v A-G [1974] HKIR 1. Sections 21F-21H of the Supreme Court Ordinance Cap 4 Section 69 District Court Ordinance Cap 336 which also governs relief in the Lands Tribunal (see s 8(9) of the Lands Tribunal Ordinance Cap 17.) LEASES In the District Court and Lands Tribunal relief will be granted: • if five days before the hearing, the tenant pays the outstanding rent and the landlord's costs into court; or • if a possession order has already been grqnted to the landlord, the court will delay its execution for four weeks. If-the iessee pays the rental arrears and costs within the time, the order -~ill not be enforced and the lessee will continue to hold under the original'lease; ·or • if the landlord has actually re-entered, the tenant may apply for relief at any time within six months of the landlord's re-entry and the court has discretion, according to normal equitable principles, to grant or refuse his application. If the application is granted the lessee will be deemed to hold under a new lease. An underlessee or mortgagee also may apply for relief for non-payment of rent in the same way as a lessee. 93 'fhe court has been more reluctant to grant relief from forfeiture based upqn a covenant other than the covenant to pay rent. Section 58(2) of the Conveyancing and Property Ordinance gives a tenant a right to apply for relief regardless of whether the landlord has forfeited the lease by taking proceedings for possession or by peacefully re-entering the premises. 94 The right will be lost, however, once the landlord has obtained possession pursuant to a judgment obtained in possession proceedings, subject to any right to set aside the judgment or a successful appeal. The court may grant or refuse relief on such terms as it thinks fit in the light of all the circumstances of the case. The tenant's knowledge and the nature and seriousness of the breach are clearly relevant, as well as the question of whether and how quickly the tenant has remedied the breach and the difference, if any, in the value of the landlord's reversion before and-after the breach. But attempts to lay down guidelines as to when relief will be given should be treated with caution, because the court's discretion is wide and unfettered. 95 If relief is granted, the lease will continue as though the forfeiture and the proceedings for possession had never taken place·. Where relief is granted subject to conditions, the forfeiture is suspended and contractual tenancy will continue until the time for compliance with the conditions has expired. 96 The forfeiture of a head lease destroys not only the head lease but also any subleases. A sublessee who finds his sublease in jeopardy because of the forfeiture of his landlord's own lease may also apply for relief. The court may again grant relief to a sublessee or mortgagee if it sees fit and subject to such conditions as it sees fit. It appears that relief may be available to the sub-lessee and a mortgagee under both ss 58(2) and 58(4) of the Conveyancing and Property Ordinance. 97 The difference between the two 93 94 95 96 97 See United Dominions Trust Ltd v Shell Point Trustees Ltd [1993] 3 All ER 310 and Escalus Properties Ltd v Robinson [1995] 3 WLR 524. Billson v Residential Apartments Ltd [1992] 1 AC 494 Rose Spicer, Rose v Hyman [1912] AC 623 Olivesburg Ltd v Volstead Travel Service Co Ltd [1994] 2 HKC 507 Escalus Properties Ltd v Robinson [1995] 3 WLR 524 293 HONG KONG LAND LAW sections is that if relief is granted under s 58(2) the original lease is deemed to continue, the forfeiture having ceased. In the case of relief granted under s.58(4) a new lease is granted directly from the head landlord for a term not exceeding the sub-lease term and on such other terms as the court sees fit. The possibility of resort to the court's inherent jurisdiction to grant relief from forfeiture for a wilful breach of covenant was resurrected in Shiloh Spinners Ltd v Harding1 8 but after a brief life99 has been once more put to rest by the English Court of Appeal in: 100 FACTS The defendants acquired the residue of a lease of furnished service apartments and immediately started to convert them to self-contained flats. By the terms of the lease they were not entitled to make any alterations to the premises without the consent of the landlords but they did not seek the landlords' consent and ignored the landlords' objections. The landlords served a statutory notice specifying the breach and requiring it to be remedied. After giving the defendants 14 days to remedy the breach, the landlords staged a dawn raid and re-entered the premises peacefully before the tenants' workmen arrived to continue the alterations. The workmen did regain entry and finished the alterations but the landlords claimed possession on the basis of the peaceful re-entry and the defendants counterclaimed for relieffrom forfeiture. JUDGMENT Section 146(2) of the Law of Property Act 1925101 provided a complete statutory code for the grant of relief from forfeiture for breach of covenant other than for a covenant to pay rent and in so doing extinguished the courts' inherent equitable jurisdiction to grant relief. By contrast the courts' inherent jurisdiction to grant relief from breach of a covenant to pay rent was not extinguished by the statutory regulations that had beeri enacted; this legislation did not provide a complete code. 11.5.1.3 Waiver A landlord will be unable to enforce a right of re-entry if he has waived the breach that gave rise to the right. Waiver may be express, where the landlord states that he will ignore the breach; or implied, where the landlord, with knowledge of the breach, peforms some act that recognises the continued existence of the lease. The most common example is where the landlord 98 99 100 101 294 [1973] AC 691 See for instance Abbey National Building Society v Maybeech [1985) Ch 190 The decision of the Court of Appeal was reversed on another point by the House of Lords. Sees 58(2) CPO. LEASES distrains or sues for rent or otherwise claims or accepts rent when he knows of the breach. 102 However, the acceptance of rent by the Crown does not waive a breach of a Crown lease. 103 Rent that is accepted without prejudice to a right to seek re-entry may not act as a waiver where the landlord has no choice but to put up with the tenant's continued occupation because the tenant holds a tenancy that cannot be brought to an end by forfeiture. For instance, a tenancy falling under Parts I or II of the Landlord and Tenant ( Consolidation) Ordinance cannot be forfeited: possession can only be sought on certain limited grounds. However, a tenancy falling within Part IV of the ordinance may be forfeited, and thus a qualified acceptance of rent under a Part IV tenancy may still act as a waiver. 104 A waiver will not prevent a landlord from forfeiting the lease where the tenant again breaches the same covenant. 105 Thus, where the breach is continuini:e landlord may rely on a future breach despite an earlier waiver of the sam breach, unless his act of waiver was such that it condoned the future as ell as the past breaches, 106 or was so soon after waiver that the landlord must have known that the breach would still be continuing. 11.5.2 Distress Distress is an ancient common law remedy that has its origins in the feudal right of a lord to seise his tenant's goods as security for the performance of services. Distress is now only available at common law to landlords, and then only while they remain as such. A landlord will thus lose his right to distrain if he sells his reversion. If there are any arrears of rental owing at the date of the sale, the purchaser will also be unable to distrain for these arrears, for he is not entitled to them as landlord. A landlord may distrain for up to 12 months' rental, butthe exercise of the right is now regulated by Part III of the Landlord and Tenant ( Consolidation) Ordinance. 107 A landlord must apply to the District Court for a distraint warrant, which directs the court bailiff to go to the tenant's premises and takes sufficient moveable goods in the apparent possession of the tenant to satisfy the arrears and court costs stated on the warrant. The bailiff will then execute the warrant as directed, although the tenant will often pay the rental arrears and court costs demanded when faced with the threat of seizure of his goods. If the tenant does not pay the arrears and costs, the bailiff w!ll make an inventory of the goods he has taken and inform the tenant that the goods will be sold on a certain day if he does not pay the arrears and costs. If the tenant still does not pay the arrears and costs, the goods will be sold and the arrears and costs satisfied from the proceeds, with any balance being given to the tenant. A tenant cannot dispute the warrant at the time it is made, but after it has been executed he can apply for its discharge or challenge the right of the 102 103 104 105 106 107 Matthews v Smallwood [1910] 1 Ch 777; The Prudential Ente,prises Ltd v PK Shek Ltd (1988) HCt HCA No A4911 of 1987 Section 6 of the Crown Rights Re-entry and Vesting (Remedies) Ordinance Cap 126 Liu Ying-wah v Great Mace Trading Co Ltd (1986) CA Civ App No 139 of 1986 Sees 29 of the Conveyancing and Property Ordinance Cap 219. Chinachem Investment Co Ltd v Chung Wah Weaving and Dyeing Factory Ltd [1978] HKLR 83 Cap 7 295 HONG KONG LAND LAW bailiff to take a particular article. A third party can also challenge a bailiffs right to take a particular article. This right to challenge the distress is governed by s 93 of the Landlord and Tenant ( Consolidation) Ordinance, but at common law the tenant also has a right to rescue his goods before they are impounded or to ask the court for their return where the distress is illegal. This latter common law right is known by its ancient name of 'replevin'. The tenant can also ask for time to pay if he admits that the arrears are owing but does not have the means to pay them. On such an application the court may order such time to pay as it thinks 'just and reasonable', and the warrant will then be discharged and the goods returned. 11.5.3 Action for A"ears of Rent A landlord may sue for arrears of rent in the same way as for any other debt. He cannot, however, sue for more than six years' arrears as his action will be time-barred. 11.5.4 Damages for Waste Where there is no express obligation upon the tenant to repair, the landlord will have to resort to his common law right to seek redress by way of damages or an injunction if the tenant's activities or inactivity amount to an act of waste. 11.5.5 Tenant's Remedies The tenant cannot boast such a varied armoury against breach of covenant as the landlord, but in addition to his general contractual remedies of damages, injunction, or declaration he can, where there is a breach of a repairing covenant, take advantage of a common law right to recover the cost of repairs from future rent. He must, however, first give notice to the landlord of the need for repair before he carries out the repairs and deducts the cost from his rental. 108 11.6 Termination of Leases Where the tenant is in breach of covenant, a landlord may terminate a lease by exercising his right of forfeiture, which we have already examined. There are, of course, a number of other ways in which a lease may be brought to an end. 11.6.1 Eflluction of Time Fixed-term leases will come to an end automatically upon expiry of the term. There is no need for the service of any form of notice. For instance, if premises are let for a period of ten years beginning on 1 January 1990, 108 296 Lee Parker v Izzet [1971] 1 WLR 1688. 'l LEASES the lease will expire on 31 December 1999. A tenant who remains in occupation after the expiry-of his lease becomes a tenant at sufferance until his landlord withdraws his permission for the tenant to remain on the land. In certain instances, the landlord will be able to claim double the yearly value of the premises from the tenant where that tenant has failed to deliver up possession after the expiry-of the term, and after a demand and written notice from thp landlord requiring him to do so. 109 Usually, however, the landlord will simply tely on his right to claim what are known as 'mesne profits'. Mesne profits are· damages for the tenant's use or occupation of the land, which are assessed according to the market value of the land. If, after the expiry-of his fixed-term lease, the tenant remains in occupation and continues to pay rental that is accepted by his landlord, a periodic tenancy will be implied. However, we will see in the next chapter how- the parties' relationship as landlord and tenant may continue in a number of instances following the expiry- of the initial term. 11.6.2 Notice A number of leases must be terminated by notice. These include: • periodic tenancies, • tenancies at will, • fixed terms in pursuance of an express term permitting early termination, and • certain tenancies subject to statutory- control, eg see Parts IV & V of the Landlord and Tenant (Consolidation) Ordinance. 11.6.2.1 Form of Notice ' 'I The notice must comply strictly with any requirements set out in the lease. Where no requirements are laid down, the notice must be in writing.11°A notice to terminate a tenancy pursuant to Part IV of the Landlord and Tenant (Consolidation) Ordinance must be in the prescribed form, but otherwise the only requirement is that the notice must be reasonably clear and certain. It should be addressed to the right person, although a notice addressed to an occupier by his designation - ie, as tenant- is sufficient. 111 It must properly describe the premises so that they can be ascertained with certainty. A notice to quit a part of the premises, however, is ineffective for a landlord cannot be forced to take back only part of his property. The notice must also be clear as to the date upon which the tenancy will cease. , I IlI 109 110 111 I.andlord & Tenant Act 1730, which still applies in Hong Kong. See Item 31 in the Schedule to the Application of English I.aw Ordinance Cap 88 Section 62 of the Conveyancing and Property Ordinance Cap 219 Section 62(2) ibid 297 HONG KONG LAND LAW 11.6.2.2 Length of Notice The notice must allow for the correct notice period. However, where an incorrect date is given but is such that no reasonable tenant could have possibly thought the date was correct, the notice will be effective. 112 An exact date does not have to be named provided the date of termination can be clearly ascertained. 113The correct period in respect of a periodic tenancy varies according to the length of the period of the lease, and the Landlord and Tenant ( Consolidation) Ordinance stipulates certain minimum periods of notice. A tenancy at will ends immediately notice is given, while the necessary notice period for a right to early termination of a fixed-term lease will depend upon the terms of the provision sanctioning early termination. If a tenant fails to vacate after giving a notice to quit, then he may be liable for double rent if he fails to deliver up vacant possession of the premises on the appropriate day.114 11.6.2.3 Service of Notice The notice may be served either personally or by ordinary post. 115 11.6.3 Surrender A tenant may give up his lease and surrender it to his landlord provided his landlord agrees. On a surrender, the lease will merge with the landlord's reversion and be extinguished. A surrender may be express or implied. 11.6.3.1 Express Surrender A legal lease should be surrendered by deed, 116 while the surrender of an equitable lease may be effected by writing. 117 However an agreement in writing complying with s 3 of the Conveyancing and Property Ordinance will be enforceable in equity as a surrender. Furthermore, a landlord may be estopped from denying an oral agreement to surrender if the tenant acts to his detriment in reliance on that surrender. 118 Where the tenancy falls within Part I or II of the Landlord and Tenant (Consolidation) Ordinance, the parties must use a prescribed form to effect a surrender, which must then be endorsed by the Commissioner for Rating and Valuation. 112 Carradine Properties v Aslam [1976] 1 WLR 442 113 Tang Mei-lin v Tsui Lin [1967] DCLR 33; and Leung Chung-ting v Tin Yat Co [1963] HKLR 58 114 Section 18 Distress for the Rent Act 173 7, which still applies in Hong Kong. See Item 115 33 in the schedule to the Application of English Law Ordinance Cap 88. Section 62 of the Conveyancing and Property Ordinance 116 117 118 298 Section 4 of the Conveyancing and Property Ordinance Section 5 of the Conveyancing and Property Ordinance Take Harvest Ltd v Lui [1992] 2 WLR 785. The doctrine of part performance may also be applied to enforce an oral surrender agreement. LEASES 11.6.3.2 Implied A surrender may be inferred from the conduct of the parties. If the parties act in a way that is inconsistent with their continued relationship of landlord and tenant, then a surrender will be implied. The basis of implied surrender is estoppel. Common acts that will constitute an implied surrender include: • the tenant delivering up vacant possession to the landlord. 119 The delivery up must be accepted by the landlord. For instance, a mere return of the keys will not be sufficient, 120 nor will the acceptance of the keys by the landlord be sufficient if he accepts them not because he intends to terminate the tenancy but for some other reason, for instance to make sure the premises are secure. 121 • the grant of a new lease to the tenant during the currency of the existing lease on different terms from those of the existing lease. 122 A mere variation of the terms of an existing tenancy may amount to a surrender if the variation affects the estate granted - for instance, an extension of the term or the premises - but a variation of the covenants affecting the estate will not necessarily lead to a surrender if they are minor. For instance, a change in the rental to be paid will not amountto a surrender. • the grant of a new lease by the landlord to a third party with the agreement of the tenant. 11.6.3.3 Effect of Surrender A surrender releases the parties from future liabilities, but not from past breaches of covenant or other actions unless the landlord has waived those past breaches. A surrender will only affect the lease being surrendered. If a head lease is surrendered, it does not destroy the sublease: instead the sub-tenant (S) becomes the direct tenant of the head landlord (L) and must pay his rent directly to him. It follows, therefore, that S can only surrender his sublease to T If he purports to surrender his sublease to L, the surrender will operate as an assignment and L will become T's tenant as well as his landlord! 11.6.4 Merger A merger will arise when the landlord's reversion and the lease becomes vested in either the tenant or a third person. Clearly one cannot be a landlord and a tenant of the same premises at the same time. Merger is similar to surrender. In both cases the reversion and lease become vested in one person so as to extinguish the lease. In a surrender, that person is the landlord - in a merger, it is the tenant or a third party. A merger will not, 119 120 121 122 Chamberlain v Scalley (1992) 26 HLR 26 See, for instance, The World Realty Ltd v Kwan Ngar-nin [1986] HKC 508 and [1987] 3 HKC 148 and Silver Source Development Ltd v Time Century Ltd [1992] 1 HKC 366 See, for instance, Chan v Lau Wai-kwong (1984) HCt HCA No 5062 of 1982. Take Harvest Ltd v Lui supra 299 HONG KONG LAND LAW however, occur if the tenant or third party acquires the lease and reversion in different capacities - for instance, if a tenant acquires the reversion because he is the personal representative of his deceased landlord. A merger at law is automatic, but in equity it is dependent on intention and will not occur unless intended by the person acquiring the lease and reversion. 123 11.6.5 Disclaimer A right to disclaim a lease may be granted by legislation. For instance, a trustee in bankruptcy and a liquidator may disclaim an onerous lease so as to be released from future liability. 124 Disclaimer may also arise where a tenant denies his landlord's title. 11.6.6 Frustration After some hesitation, the courts have accepted that the doctrine of frustration may apply to leases in the same way as it applies to other contracts. The court's hesitation arose from the fact that a lease is not just a contract, but it also creates an estate in the land, and it was argued that this estate could not be destroyed. But the likelihood of frustration of a lease being established is remote. 125 In Hong Kong, where landslips and subsidence are not uncommon, it is conceivable that the land, the subject matter of the lease, might disappear or be rendered inaccessible so as to frustrate the lease. 126 Where the premises have not been destroyed but there has been an interference with the tenant's right to use them, frustration is more difficult to establish, for the use must become impossible and not just more difficult. For instance, in National Carriers Ltd v Panalpina (Northern) Ltd127 the closure of a road giving access to the premises for two years out of a ten-year term did not amount to frustration. If the lease had been for a three-year term, then perhaps the result would have been different. The possibility of frustration is often avoided in short-term tenancies, for it is common for the parties to cater expressly for an interference with the tenant's use of the property due to fire, typhoon, or other similar calamity. Provision is usually made for the abatement of rent if the interference is only short term, and for termination of the lease if the interference continues for some time. 123 124 125 126 127 300 In England, merger both at law and in equity the Law of Property Act 1925. Section 59 of the Bankruptcy Ordinance Cap Ordinance Cap 32 National Carriers Ltd v Panalpina (Northern) See, for instance, Wong Lai-ying v Chinachem of 1979. [1981] AC 675 is a question of intention. See s 185 of 6 and s 268 of the Companies Ltd [1981] AC 675 Investments Co Ltd 0979) PC PApp No 9 LEASES 11.6.7 Repudiation There has also been doubt as to whether a lease may be repudiated in the same way as any other contract. The doubts have again arisen because a lease is not purely contractual, but also creates an estate in land. 128 However, the courts in Hong Kong have recognised that a tenant's breach of a lease may be accepted by the landlord so as to bring the lease to an end by repudiation. The landlord may then sue the tenant for damages arising from the breach, which will generally be calculated according the difference between the rental under the repudiated agreement and the rental (if lower) that the landlord can recover at the date of the breach. 129 A repudiatory breach must go to the heart of the contract - for instance, abandoning the premises together with a failure to pay the rent or the refusal by a landlord to perform an implied covenant to repair which renders the premises uninhabitable. 130 Total Oil Great Britain v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318 James S Lee & Co (Kowloon) Ltd v Kapok Garments Ltd (1984) HCt HCA No 8696 of 1982; Chan v Lau Wai-kwong (1984) HCt HCA No 5062 of 1982; and Hop Woo-cheung Enterprises Ltd v Intergroup Industries Ltd [1982] HKC 436 no Hussein v Mehlman [1992] 32 Estates Gaz 59 128 129 301 Government Leases and Short Term Tenancy Agreements 12.1 Introduction With the essentials of a lease firmly in mind, we need to consider in more detail the distinctive features of the most common types oflease encountered in Hong Kong: Crown or Government leases and short-term tenancy agreements. Almost all land in Hong Kong, except for those areas retained by the Crown, or, after 1 July 1997, the Government of the Special Administrative Region of Hong Kong, is held under a Crown or Government lease. The lessee may have decided that he does not require the land for his own occupation but, rather than sell it by the assignment of the residue of his Crown or Government lease term, he may sublease the land. Ifhe does so he will only enter into a tenancy agreement for a short period of time. The Hong Kong property market is too volatile for landlords to wish to commit themselves to lease for too long a term, although there is no legislation that prevents them from doing so. 12.2 Crown and Government Leases Despite promises that freehold grants would be made to the early settlers of Hong Kong, the Crown's policy since the territory was established has been that only Crown leases would be granted. The notable exception is St John's Cathedral, where a freehold grant has been made, but subject to a stipulation that the site remains a place of worship. 1 The policy of making leasehold, rather than freehold, grants has proved so successful that it is unlikely that the change of administration in 1997 will lead to any change in this policy. Indeed, the Joint Declaration on the Future of Hong Kong does not anticipate any change. It is proposed to use the expression 'Government lease' in this chapter to refer to a grant made either by the Crown or the Government of the Special Administrative Region of Hong Kong. The distinctive feature of Government grants is the interface between the public function of government and its role as a private landlord. The courts have steadfastly maintained that, in its capacity as a private landlord, the government retains the same powers and discretion as any other private landlord. Yet in reality the government does not exercise its powers and discretion in the same way as a private landlord, who would generally act in his own personal interests. The government acts in the interests, as it sees it, of the territory at large. See Church of England Trust Ordinance Cap 1014. 302 LEASES 12.2.1 Creation Most land in Hong Kong has been and continues to be disposed of by the government by auction to the highest bidder. The funds raised have played an important part in balancing the budget! But the government has been concerned not just to raise revenue but to ensure that the land sold is developed for the overall benefit of the territory. The purchaser of Crown land is thus required not only to pay the premium for the land, but also to develop the lot in the manner specified by the government. In order to ensure that the land is developed, the purchaser is not granted his Government lease at the auction or even when he pays his premium. Instead, he enters into an agreement with the government, commonly known as 'Conditions of Sale', whereby the government agrees to grant him a Government lease once he has complied with his obligations to develop the land in accordance with that agreement. To further encourage fulfilment of the Conditions of Sale, the lessee is usually not allowed to dispose of the site until he has complied with the Conditions of Sale. At one time, upon the lessee's performance of the Conditions of Sale, he would be granted a formal Crown)ease executed by deed by the Crown. However, in recent years the formalities for the grant of the Crown lease itself have not been completed. The lessee was content to rely on the Crown's agreement to grant a Crown lease provided the Crown would acknowledge by a certificate, known as a 'letter' or 'certificate of compliance', that the lessee had complied with the conditions set out in the Conditions of Sale. The lessee had, in effect, an equitable lease under the doctrine of Walsh v Lonsdale. 2 He had the benefit of an agreement by the Crown to grant a Crown lease, which the certificate of compliance indicated was capable of specific performance. Since the enactment of s 14 of the Conveyancing and Property Ordinance in 1984, the distinction between the older legal Crown leases and the more recent equitable Conditions of Sale has been removed. The Government lease is deemed issued and the legal estate in the lease deemed granted upon the lessee's compliance with the conditions upon which the grant is made. All Conditions of Sale entered into befor~ 1January 1970 were automatically ;;nverteci into Crown leases ~hen trie ?/a..~~ei/ir1c:ing_r:ft14 f:LQJ]?rtyOrdin.an.c:e_:wa~_pa~:,~<:;LQnl.,Nm.:ember .1.2&L.AlU::iJ:~r Conditions of Sale are deemed complied with upon the registration of acertificatio11 of compliance at the Lanc:LQffice. • ·-· • • Occasionally Government leases are granted otherwise than by auction. Privately negotiated Conditions of.Grant may be made for public purposes, for insta~ce, for a school. Where land is exchanged for other land, which is quite common where an old site is being redeveloped, it may ije convenient for the lessee to surrender his old Government lease and obtain°'a new grant where, for instance, he wishes to change slightly the boundaries of the site or where evidence of his title is rather fragmented. In this case, Conditions of Exchange are i~sued. Conditions of Exchange will also be issued where the premium for See Chapter 6.3. 303 HONG KONG LAND LAW a site has been settled by the tender of land exchange entitlements, commonly known as 'letters A and B', which were issued by government to compensate land owners in the New Territories for the compulsory resumption of their land. These entitlements give the holder a right to a grant of land in the territory that he may submit in satisfaction of premium at certain specially organised tenders of Government land. 3 The Conditions of Extension may be issued where an additional area of land is granted as an extension to, and on the same terms as, an existing site. These other types of agreement for a Government lease are also governed bys 14 of the Conveyancing and Property Ordinance. The Government lease will be deemed issued upon compliance with the terms of the agreement, where the agreement was made after 1January 1970. Earlier agreements have been automatically complied with and the Government lease issued. When the New Territories was incorporated into Hong Kong, block Crown leases of a village or area were granted to the indigenous population in order to replace the existing titles they held from the Chinese emperor. Instead of granting a lease to each landholder within the area, a block Crown lease grants a lease of all lots within the area covered by the lease. The details of the lots and the original Crown lessee of each of the lots are set out in a schedule to the block Crown lease together with details of the rental and use of the land. Unfortunately, the area of the lots given in some block Crown leases is not as accurate as it might be, and calls have been made for a re-survey of the land covered by these leases. 4 12.2.2 Standard Covenants The terms of Government leases are tailored to each site, but although there are individual differences certain terms are standard. There is also a variation between the terms of the other formal Crown leases and the terms of the more recent Conditions. 12.2.2.1 Term The Government lease terms are generally for a fixed period, which may vary from as long as 999 years in older leases to 99 years and, more recently, to 75 years coupled with a right to renew for a further 75 years. The Joint Declaration between the British Government and the Government of The People's Republic of China on the Future of Hong Kong provides that the Hong Kong Government cannot grant Government leases that will run beyond 30 June 2047, 50 years after Hong Kong's transition to a Special Administrative Region of China. Existing Government leases, however, that extend beyond 2047 will continue to be recognised under the Basic Law of the Hong Kong Special Administrative Region. 5 See Yau Fook-hong Co Ltd v A-G (1985) CA Civ App No 136 of 1984 and [1988] HKLR 196 for details of these tenders. See, for instance, Man Kam-tong v Man Lin-tai [1984] HKLR 181. See Annexure III of the Joint Declaration. 304 12.2.2.2 Rental Where the Government lease is sold at auction the lessee will have to pay a premium for the grant of the lease, which is generally a very substantial figure. By contrast, the annual rental that a Government lessee will have to pay is usually a modest figure. The Joint Declaration on the Future of Hong Kong indicates that after 1997 rentals will be based upon three per cent per annum of the annual rateable value of the land from 1 June 1997.6 Crown grants entered into after the Joint Declaration that extend beyond 1997 now provide for this level of Crown rental from 30 June 1997. The rental of Government leases renewed under the Crown Leases Ordinance 7 is also based on three per cent of the rateable value. The ownership of a Government lease lot may be divided up into smaller portions, either by the physical sectioning of the lot into smaller pieces of land or by its fragmentation into undivided shares. Where a Government lease lot is divided up in either of these ways, the new lessees will usually agree between themselves as to how they are going to share the liability of paying the rent. The agreement that they come to will not bind the government, which is not a party to their agreement, but there is provision in the Rent and Premium (Apportionment) Ordinance3 for the formal apportionment of the rent, which becomes known as the 'determined rent'. It is interesting to note that, upon the determination of the rent where the land is carved up into sections, each section of the Government lease lot is deemed held under a separate Government lease. 9 This is_not the case where the rent is determined in respect of a lot that has been fragmented into undivided shares. 12.2.2.3 Use The older Crown leases often do not limit the use of land except to prohibit a number of offensive trades. The standard term is: ... shall not ... use, exercise, or follow ... the trade or business of a Brazier, Slaughterman, Soap-maker, Sugar-baker, Fellmonger, Melter of tallow, Oilman, Butcher, Distiller, Victualler, or Tavern-keeper, Blacksmith, Nightrnan, Scavenger, or any other noisy, noisome or offensive trade or business whatever. A number of these trades have clearly fallen into disuse, and one wonders to what extent the restriction on 'victuallers' would prevent the operation of a restaurant, or the restriction upon 'oilmen' would restrict the use of the land as a petrol station! It appears that when considering if a trade is 'offensive' the court will not consider whether the trade is capable of being 6 7 8 9 See Annexure III of the Joint Declaration. Cap 40 Cap 125 Section 8 of Cap 125 305 JONG KONG LAND LAW offensive but rather whether in the circumstances of the case it was conducted in an offensive fashion. 10 A number of the older Crown leases of residential sites also contain a restriction on the number of dwellings that can be built on the lot. For instance, a restriction requiring use as 'a private dwellinghouse', 'a residence', or 'a villa residence' does not permit the erection of a block of flats. 11 It would appear, however, that a restriction requiring use as 'one house of European type' would not rule out the building of a block of flats. 12 The more modern Government leases have been developed by the government as a most effective means of planning control. The leases specify, often in strict terms, the use of the land. The broad use of the land will usually be specified - for instance, residential, commercial, or industrial and godown. 13 In addition, the terms may restrict the height or density of the building, or dictate the provision of certain facilities or the infrastructure either within the site or even on adjoining land. For instance, it is common to find provision for car parking in a residential site, or for the formation of a road giving access to the lot if it does not front onto an existing street. The use description in the schedule of a block Crown lease, however, is not a use restriction: it is merely a description of the use of the lot at the time of the grant, 14 but the classification in the schedule or the Crown rent roll may be helpful. 15All block Crown leases, whether for agricultural or building land, contain a building covenant which requires government approval for the erection of any building or structure. This covenant is not a user covenant as such but requires approval of the design and structure ofany building for safety and heath reasons. 16 Thus in the case of agricultural or garden land held under a block Crown lease the consent of government by way of a building licence is required to waive the user restriction, and where the land is classified as building land no licence is required but government approval to the design and structure of the building is required. The government is prepared to consider the variation of a use restriction where to do so is consistent with its planning policy for an area, but these variations or modifications are matters of private contract between the government and the lessee and the government is entitled to charge what premium it considers fit.17 10 11 12 13 14 15 16 17 306 Niceboard Development Ltd v China Light & Power Co Ltd 0993) LT MP No 14 of 1991 • which considered whether a concrete batching plant was 'offensive'. Wong Bei-nie v A-G [1973] HKLR 582; Loi Po Investment Co Ltd v Real Reach Co Ltd 0985) HCT MP 1430 of 1984; and TS Cheng & Sons Ltd vA-G (1986) HCt MP 1595 of 1986 Winfield Investment Co Ltd v Henry Fok Estates Ltd [1966] HKLR 399 See Mexx Consolidated (Far East) Ltd v AG [1987] HKLR 1210; and Cavendish Property Development Ltd v A-G [1988] HKC 480 for the meaning of 'industrial and godown purposes'. AG v Melhado Investment Ltd [1983] HKLR 327 Niceboard Development Ltd v China Light & Power Co Ltd (1993) LT MP Ref No 14 of 1991. This case also provides a helpful review of planning controls over New Territories land. Niceboard Development Ltd v China Light & Power Co Ltd supra Hang Wah-chong Investment Co Ltd v A-G [1981] 1 WLR 1141 LEASES 12.2.2.4 Repair A Government lessee is required to enter into full covenants to keep the whole of the property in repair. The government, however, does not usually rely on these covenants to require Government lessees to maintain their property: they enjoy wider statutory powers to force owners to repair buildings that have become dangerous under the Buildings Ordinance. 18 12.2.2.5 Alienation (Assignment and Subletting) A Government lessee is generally free to assign the whole of the residue of his Government lease or to sublease the premises for a shorter term provided the Government lease has been issued or is deemed to have been issued under s 14 of the Conveyancing and Property Ordinance. Prior to compliance with the terms upon which the Government lease is granted, the Government lessee will generally only be allowed to dispose of his interest in the land if the government agrees to the disposal. Consent will normally only be given to certain transactions that facilitate the development of the land and fulfilment of the conditions upon which the grant is made. For instance, a building mortgage that secures sums advanced to pay for the development of the land, or the sale of the property on the completion of the development under the stringent terms of the Consent scheme 19 are generally permitted. 12.2.3 Termination The methods of termination that we looked at in the last chapter all apply to Government leases, but there are certain distinctive features affecting Governmeqf leases. 12.2.3.1 Effluction of Time The government will rarely insist upon taking back a Government lease lot on the expiration of the Government lease unless the site is required for some public purpose. The Government lessee will generally continue in possession, either because he has a right to renew his lease or because he is able to obtain a re-grant of the land from government. Many Government leases have been granted with a right for the lessee to renew his term. A grant of 75 years together with a right to renew was the most common form of grant prior to the Joint Declaration. A right of renewal in a Government lease is automatically renewed under the provisions of the Crown Leases Ordinance. 20 The renewed Government 18 19 2 ° Cap 123. Power also exists under the Demolished Buildings (Redevelopment of Sites) Ordinance Cap 337 for the government to require the owner of certain pre-war buildings to redevelop the site. See S. Nield, 'Sale of Uncompleted Buildings' (1990) Law Lectures/or Practitioners 285. Cap 40 307 HONG KONG LAND LAW lease is on the same terms as the old, save for an increase in the rent and the exclusion of a further right of renewal. It is interesting to note that where the Government lease lot has been divided into sections, each section is deemed held under a new Government lease upon a renewal under the ordinance. 21 The Joint Declaration provides that all Crown leases expiring before 30 June 1997 may be re-granted by government without the payment of premium for terms expiring on or prior to 30 June 2047. Terms expiring after 30 June 1997 will be dealt with in accordance with the laws of the Hong Kong Special Administrative Region. 22 The terms of the Joint Declaration do not give an individual a right to demand a regrant without the payment of premium, for it is an international agreement between the British Government and the Government of the People's Republic of China. 23 But in respect of New Territories leases, the terms of the Joint Declaration have been incorporated into Hong Kong law by the New Territories Leases (Extension) Ordinance. 24 This extends most New Territories leases, which were all due to expire on 27 June 1997, until 30 June 2047. Leases for a special purpose, or for a term of seven years or less, or where the lessee objects, are not extended. The extended leases are on the same terms as the existing lease, save for an increase in rental to three per cent of the rateable value from 27 June 1997. 12.2.3.2 Forfeiture Government leases are specifically excluded from the requirement to give notice under s 58 of the Conveyancing and Property Ordinance prior to the exercise of a right of forfeiture. The forfeiture of Government leases is separately governed by the Crown Rights (Re-entry and Vesting Remedies) Ordinance. 25 The government is only required to register a notice at the Land Office in order to exercise its right of re-entry. No notice or court proceedings are necessary, although in practice the government will generally give a lessee notice of an alleged breach and give him time to remedy the breach. A Government lessee's right to relief is also separately governed by the Crown Rights (Re-entry and Vesting Remedies) Ordinance, 26 which grants a right for the Government lessee to apply to the court or petition the Governor for relief. 27 The principles of waiver of a right of re-entry apply to Government leases as they do to any lease, but the acceptance of Government rent does not operate as a waiver of the government's right of re-entry. 28 In practice 21 22 23 24 25 26 27 28 308 Section 5(2) See Annexure III of the Joint Declaration. Tbe Home Restaurant Ltd v A-G [1987] HKLR 237; and Tang Ping-hoi v A-G [1987] HKLR 324 Cap 152 Cap 126 Cap 126 Section 8. See, for instance, Kun Wai-ying v A-G [1975] HKLR l; and Chan Hung-kay v A-G[1981] HKLR 171. See s 3 Crown Rights (Re-entry and Vesting Remedies) Ordinance Cap 126. LEASES the government has developed guidelines for the waiver of certain types of breaches. For instance, the breach of a building covenant to develop the land in a certain manner within a certain time may generally be waived by the extension of the building covenant period upon the payment of a specified premium. However, these guidelines are a matter of private contract between the government and the lessee and do not give rise to any right to a waiver. 29 12.2.3.3 Resumption 30 The government has certain legislative powers to resume land for public purposes, although in such circumstances the Government lessee has a right to compensation. The primary ordinance governing resumption is the Crown Lands Resumption Ordinance, 31 but there are others. 32 'Public purposes' is very widely defined to, in effect, include any purpose that the government may decide to be a public purpose. 33 The Land Development Corporation, which is charged with the task of facilitating urban renewal, is also able to recommend that the government exercise its powers to resume land, under the Crown Lease Resumption Ordinance, where it has failed to acquire by agreement a site that is necessary to its development proposals for an area. 34 12.3 ,I Short-term Tenancy Agreements Short-term tenancy agreements abound in Hong Kong. Many people cannot afford to buy their own accommodation, despite the increase in owner occupation. They must rent accommodation, from either the government or a private landlord. From the landlord's perspective, property is still a very popular form of investment in Hong Kong. The high cost of accommodation has assured good returns, which even the volatility of the market has not tarnished. Some might say that investment in the property market is just another form of one of Hong Kong's favourite pastimes - gambling! The distinctive feature of short-term tenancy agreements is the unequal bargaining power of the parties. The landlord is very often in such a predominant position that he can dictate the terms of the agreement: the attitude is often very much 'take it or leave it'. Furthermore, as we have seen, there is little protection for the tenant at common law. Even where the 29 30 31 32 33 34 Lok On Co Ltd v A-G (1982) HCt MP 561 of 1982; and Shun Shing-hing Investment Co Ltd v A-G [1983] 2 HKC 314. See also Chapter 15.5 for principles governing the modification and extinguishment of covenants. See G.N. Cruder: Land Compensation and Valuation Law in Hong Kong, Singapore (Butterworths) 1986 Cap 124 See, for instance, Land Acquisition (Possessory Title) Ordinance Cap 130, Road (Works Use & Compensation) Ordinance Cap 370, and MTR (Land Resumption & Related Provisions) Ordinance Cap 276. See s 2(d) Crown Lands Resumption Ordinance Cap 124 and In Re Koy Investment Co Ltd [1983] HKLR 28. Sees 15 Land Development Corporation Ordinance Cap 15. 309 HONG KONG LAND IA W property market is.weak and there is a reasonable supply of accommodation, landlords are reluctant to agree to relax the terms of the agreement itself. They prefer to offer the tenants concessions that do not appear on the face of the agreement itself but are agreed as an informal collateral agreement. For instance, a rent-free period or, in the case of commercial accommodation, a fitting-out period may be offered. 12.3.1 Creatiow 5 The creation of short-term tenancy agreements will depend on the length of the term to be granted. Where the term is to take effect.in possession, is for not more than three years, and is for the best· rent without taking a premium, the tenancy may be created orally or in writing. Longer terms should be created by deed if they are to qualify as a legal lease, although as we have seen, a lease for over three years that is not created by deed may be recognised in equity either under the doctrine in Walsh v Lonsdale or the doctrine of part performance. 12.3.2 Standard Terms. Short-term tenancy agreements cover all types of accommodation, from government housing to a luxury Peak house, from a factory unit in Tsuen Wan to the offices of an international company in Central. Accordingly, their terms may differ widely. Oral short-term tenancies will generally depend solely on the implied terms that we looked at in the last chapter, since other terms that may have been orally agreed may be difficult to prove. The terms of agreements that are created in writing or by deed vary widely. The landlord, who is usually responsible for preparing the agreement, may have merely purchased a short printed form either in English or Chinese that is on sale at some stationary shops; or he may have instructed his estate agent or solicitor to draw up a formal agreement. Where a solicitor has drawn up the agreement, he will usually employ one of a number of standard forms or precedents-which one will depend on the type of accommodation that is being let. Needless to say, the general rule is that the more expensive the accommodation the longer the agreement. Despite the wide variety of agreements, there are common areas which are covered. These include: 12.3.2.1 Terms The terms encountered may vary widely, and generally depend on the type of accommodation being offered. For instance, a serviced apartment may be let for as short a time as a week; and monthly or yearly periodic tenancies are often found for lower-cost accommodation, whetherthat be residential, commercial, or industrial. Terms of two or three years are common for higher-class residential accommodation. Office and commercial 35 310 Chapters 5.1, 5.4 and 6.2 and 6.3 LEASES accommodation is also often let for two or three years, but may be let for longer terms because of the often high capital outlay of fitting out shop or restaurant premises. Even so, it is rare to find terms that exceed ten years. 12.3.2.2 Rental Generally no premium is charged for the grant of a short-term tenancy agreement: the rental alone will reflect the consideration for the lease. The amount of rent is for the parties to agree. However, in times of shortage of domestic accommodation, the government has stepped in to control the amount of rent a landlord can demand from his tenant. The present policy is to phase out such controls, but they still apply to certain pre-war domestic premises as well as certain post-war domestic premises where the lease was originally granted prior to 10 June 1983.36 These controls are found in Part I, in respect of pre-war premises, and Part II, in respect of post-war premises, of the Landlord and Tenant ( Consolidation) Ordinance. 37 The permitted rental of certain pre-war premises is somewhat complicated, and is calculated by applying a multiplier to a nominal standard rent, which is the rent payable for the premises on Christmas Day 1941, or a percentage of the 'prevailing market rent', whichever is the greater. Increases in rental are permitted in a number of circumstances, including where the landlord provides furniture or additional services or has carried out certain improvements to the property, or where the landlord must pay an increase in rates. The rental of certain post-war premises that were first let prior to 10 June 1983 may be increased with the agreement of the landlord and tenant, where the landlord carries out certain improvements or has to bear an increase in rates. But the most significant justification for an increase is where the Commissioner for Rating and Valuation is prepared to certify an increase in rent because the current rent is below a nominal figure known as the 'prevailing market rent'. In such circumstances, the Commissioner will certify an increase that is the difference between the current rent and the prevailing market rent, subject to a maximum increase of 30 per cent of the current rent, provided that the new rent is at least 85 per cent (before 1 July 1996) or 90 per cent (after 30 June 1996) of the prevailing market rent. This rather complicated formula, in the majority of cases, will lead to an increase of 30 per cent of the current rent. It is only where the current rent is very low or is close to the prevailing market rent that the rather more complicated aspects of the formula will come into play. A well-drafted tenancy agreement will make some provision for the suspension of rent where the premises for some reason become uninhabitable or, bearing in mind the mountainous terrain of Hong Kong, inaccessible. Such a term helps to overcome the somewhat uncertain application of the doctrine of frustration to leases. 36 37 See Appendix 4 of N.Bacon, Tenancies in Hong Kong, Hong Kong, Longman (1990) for a summary of those tenancies subject to Parts I and II. Cap 7. For a detailed examination see M. Merry: Hong Kong Tenancy Law (2nd ed), Hong Kong, Longman, (1990). 311 HONG KONG I.AND I.AW 12.3.2.3 Outgoings It is also common for a tenant to be required to pay the various outgoings that an occupier of property must pay. There are the general rates payable to the government and, if the property forms part of a multi-unit development, there will be the management charges, payable under the deed of mutual covenant for the repair, maintenance, and general upkeep of the building. Even where the landlord is the sole owner of the premises, he may require the tenant to pay a service charge in addition to the rental in order to cover these costs. 12.3.2.4 Use Short-term tenancy agreements will usually restrict the use of the premises. There will generally be a broad use restriction to reflect the use covenants contained in the Government lease, deed of mutual covenant, and the requirements of any relevant planning legislation, for the landlord will not want to contravene any of these restrictions. However, the use of only part of the premises for a purpose not permitted by the lease will not necessarily amount to a breach of a use covenant. It is a question of degree. For instance, occasional use for business purposes of one small room in a flat may not contravene a requirement that the premises be used for domestic purposes. 38 Many landlords, particularly of expensive commercial or residential premises, will also be concerned to preserve the value of their premises in order to protect their investment, and will place a string of limitations on what the tenant can and cannot do. For instance, in a residential lease there may be restrictions on a tenant keeping pets or making any noise late at night, while in a lease of a shop in a high-class shopping area there may be restrictions on the opening and closing time of the shop or on how the tenant may fit out the shop. 12.3.2.5 Repair In a short-term tenancy agreement for a whole building such as a house, the tenant will usually be responsible for repairing both the exterior and interior. But in a lease of a unit in a multi-storey building, the tenant will usually only be responsible for repairing the interior of the property. The common parts and exterior will be the responsibility of the landlord as sole owner of the building, or of the co-owners of the building if the ownership has been divided. A proportion of the cost of repairing and maintaining the common parts and exterior will, however, usually be recovered from the tenant through the payment of management fees. A tenant may be obliged by the terms of the lease also to put the premises in good repair if they are in a poor state when he takes them over. A covenant may state that the tenant must put and keep the premises in good repair, but an obligation to keep or leave in good repair will also require a tenant to put the premises in good repair, the logic being that he cannot 38 312 Shields v Chan [1972] HKLR 121 I LEASES keep or leave the premises in good repair until they are put in good repair. There are many different expressions for the standard of repair required - eg, 'good tenantable repair', 'well and substantial repair', and 'perfect repair', but they all boil down to a similar standard. In determining whether the standard of repair is satisfactory it is necessary to consider the locality, character, and age of the property at the start of the lease. For instance, the standard of repair required of a recently built house on the Peak will differ from that of a pre-war shop in Wanchai. 39 It is common to find an exception in a repairing covenant for 'fair wear and tear'. Such an exception will relieve a tenant of liability for damage or deterioration caused by the ordinary use of the premises or by the operation of natural forces. 40 To ensure that a tenant carries out his obligation to repair, a landlord will usually reserve a power for the landlord to enter the premises to inspect the state of repair and to require the tenant to carry out repairs that he finds necessary. Should the tenant fail to carry out the necessary repairs, the landlord will usually also reserve a right to carry· them out himself at the tenant's expense. 12.3.2.6 Alienation (Assignment and Subletting) A landlord under a short-term tenancy agreement will not usually allow his tenant to assign, sublet, or even license the whole or part of the premises. Whatever the type of covenant against alienation, the terms are restrictively construed by the court. Thus a covenant not to assign does not prohibit subletting, nor does a covenant against subletting prohibit assignment. 41 A covenant not to assign or sublet the whole of the premises does not prohibit the assignment or subletting of part. 42 The covenant may be absolute or it may be qualified, ie, subject to the consent of the landlord. Unlike the landlord in England, the landlord in Hong Kong is quite entitled to withhold his consent on any grounds whatsoever unless it is expressly stated that his consent shall not be unreasonably withheld. 43 Even if a landlord consents to a change of tenant, it is very unusual for that change to be effected by an assignment of the tenancy agreement. The landlord will generally prefer to take a surrender of the outgoing tenant's lease and to enter into a new agreement with the new tenant. 12.3.2.7 Deposit A landlord will often want a more practical remedy against a tenant for a failure to pay the rent or perform his other covenants than a right to forfeit 39 40 41 42 43 Brew Brothers Ltd v Snax (Ross) Ltd [1970] 1 QB 612 Regis Property Co Ltd v Dudley [1959] AC 370 Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 Cook v Shoesmith [1951] 1 KB 752. But see Field v Barkworth [1986] 1 WLR 137, where a restriction on subletting part was held to prohibit a subletting of the whole. In England, s 19(1)a of the Landlord & Tenant Act 1927 provides that the consent of the landlord must not be unreasonably withheld. 313 HONG KONG LAND LAW the lease or sue for the recovery of the rent or damages. It is thus common for a landlord to insist that the tenant pay him a deposit, which he may forfeit in the event of the tenant's breach. The usual deposit in Hong Kong is two months' rental. Termination 12.3.3 The common law rules regarding termination may be modified in the case of short-term tenancy agreements by the agreement of the parties or by the impact of the statutory controls found in the Landlord and Tenant (Consolidation) Ordinance. 44 This ordinance must be one of the most complex and mystifying pieces of legislation to be found in the Laws of Hong Kong, and a detailed scrutiny of its provisions is beyond the scope of this book. 45 Its security of tenure provisions are considered only in outline. 12.3.3.1 Options and Rights to Renew An option or right to renew a tenancy may arise as a result of the agreement of the parties, or under Part IV of the Landlord and Tenant ( Consolidation) Ordinance. (a) Express options to renew It is common for the parties to agree that the tenant should have an optioff to renew his tenancy agreements for a further term. The right or option will generally stipulate how and when it may be exercised - for instance, it usually provides that it is exercisable within a certain period before the end of the lease by the tenant giving a written notice to the landlord. If nothing is stated, no notice is necessaryand if the tenant stays in occupation and continues to pay the rent, he may be deemed to have exercised the option. 46 The terms of an option, like any other agreement, must be certain. If nothing is stated in the option or right of renewal, it will be presumed that the parties intended the renewed term to be on the same terms as the old save for the exclusion of the right of renewal. 47 If the right of renewal were to be included, a perpetually renewable lease would result! 48 If the parties want to vary any of the terms, then the variation must be specified in the right of renewal. Generally the renewal is expressed to be on the same terms as the old terms, save for a recalculation of the rental to reflect any fluctuation in the level of the market rental, and an exclusion of the right to renew. It is also not uncommon in Hong Kong for a tenant or a landlord to be given a right to bring the lease to a premature end. From the tenant's point of view, this 'break right' is desirable because it gives him some flexibility 44 45 46 47 48 314 Cap 7 Cap 7. For a detailed examination of the Landlord and Tenant (Consolidation Ordinance) see M. Merry, Hong Kong Tenancy Law (2nd ed) Hong Kong, Longman, 0990). Gamer v Blaxill [1960] 1 WLR 752 Lewis v Stephenson (1898) 78 LJ QB 296 Caerphilly Concrete Products v Owen [1972] 1 WLR 372 LEASES should he wish or be forced to move. From the landlord's point of view, it is desirable because he may wish to be able to evict the tenant on the happening of a specified but uncertain event, :,uch as a wish to redevelop. (b) Part IV Part IV gives certain tenants a right to demand a new tenancy provided they are prepared to pay the prevailing market rent. As time goes by, more and more tenancies are becoming subject to Part IV since it applies to domestic tenancies of: • buildings that were completed and occupied on or after 19 June 1981; • buildings whose rateable value exceeds $30,000 as at 10 June 1983; and • all new tenancies created on or after 10 June 1983. Lettings that are protected under Parts I and II of the ordinance are excluded, as are certain lettings for terms of over five years and for less than a year. 49 There is a somewhat complicated procedure 50 to follow to exercise this right to a new tenancy. First the tenancy must be formally terminated. This can be effected either by the landlord serving a notice terminating the tenancy, or by the tenant serving a notice requesting a new tenancy. These notices cannot be given more than seven months nor less than six months before the contractual end of the tenancy, and must be in a specified form. The notice can only take effect on or after the contractual end of the tenancy. The parties must then respond to the other's notice. For instance, if a landlord has served the notice, the tenant must indicate if he will give up possession or seek a new tenancy. If the tenant has served a notice, the landlord must indicate whether or not he will oppose the application for a new tenancy. The tenant then has a right to apply to the Lands Tribunal for a new tenancy at the prevailing market rent, which he must exercise before the end of his tenancy. The landlord can only oppose this application on certain specified grounds, which are: • the tenant has failed to pay the rent or has committed a breach of covenant that would give rise to forfeiture; • that the landlord reasonably requires the property as a residence for himself or a member of his close family, provided he has owned the property for at least 12 months; • that the landlord intends to rebuild the premises; • the tenant has caused unnecessary annoyance, inconvenience, or disturbance to others; • the tenant has used the premises for illegal or immoral purposes; and • the tenant has sublet the premises without occupying any of the premises himself. 49 See Appendix 4 of N Bacon, Tenancies in Hong Kong, Hong Kong, Longman (1990). so See Appendix 5 of N Bacon, Tenancies in Hong Kong, Hong Kong, Long=~~ for a summary of this procedure. 1 , • . . •....• ., .....1 _., ,, .....'.. ,· , ,., 1 mn 1 URBAN CUUiiit~i..L 1 w:;Lh., LWJ.~ A nrno 315 ( HONG KONG LAND LAW i Where the landlord has no right to oppose a new tenancy, the parties more often than not will agree on the terms of the renewal without the need to go to the tribunal, or they may agree to go to the tribunal merely to settle the amount of the prevailing market rent. The prev~iling market rent is the amount, exclusive of rates, at which the premises might reasonably be expected to be let on the terms of a new tenancy. Where the tribunal assesses the prevailing market rent, it will be primarily influenced by evidence of the rental agreed for other similar premises, known as 'comparables'. Other factors may also be taken into account: for instance, the reluctance of a tenant to move or a landlord's desire to keep a good tenant might persuade a tenant to agree a higher rental or a landlord a lower rental than if a new letting was being agreed. If the tenant decides that he does not like the terms of a new tenancy ordered by the tribunal, he may reject the new tenancy provided he does so within one month. He then has two months in which to move out and find new accommodation, during which time he must pay the prevailing market rent. 12.3.3.2 Statutory Continuance The Landlord and Tenant ( Consolidation) Ordinance 51 has the effect of statutorily continuing a tenancy to provide a measure of security of tenure to tenancies that fall within Parts I, II, IV, and V. Where the tenancy is continued under the ordinance, the passing of the contractual date of termination will have no effect. The tenancy can only be brought to an end in the manner specified by the ordinance. (a) Part I We have seen that Part I applies to certain domestic pre-war premises. It provides that a tenancy subject to Part I will continue unless terminated in the manner specified by Part I. These means are similar to those applicable to Part II tenancies. 52 (b) Part II Again we have seen that Part II applies to a dwindling number of post-war domestic premises as more and more of these premises become subject to Part IV. Under Part II the tenancy will continue unless it is brought to an end in the manner specified by Part II. The principal ways in which a tenancy can be brought to an end under Part II are: the landlord is able to obtain a possession order, or the tenant agrees to give up possession - either as a result of an agreed surrender or of his service of a one-month notice 51 52 316 Cap 7 See Appendix 4 of N Bacon, Tenancies in Hong Kong, Hong Kong, Longman 0990), for a summary of those tenancies falling within Part V. For a more detailed account of the methods of termination under Part I, see M. Merry, Hong Kong Tenancy Law, Hong Kong, Longman, (1990). I LEASES terminating the tenancy. The grounds for possession are similar to the grounds upon which a landlord can oppose the grant of a new tenancy under Part IV of the ordinance, but there are two additional grounds: a failure by the tenant to fulfil a promise to surrender, and a subletting in breach of the contractual tenancy. (c) Part IV We have already looked at those tenancies that fall within Part IV, and seen that under Part IV a tenant may serve a notice to terminate formally the tenancy with a view to renewing the tenancy, or a landlord may do likewise with a view either to renewing the tenancy or to obtaining possession. If no notice is served before the expiry of the contractual term, the Part IV tenancy continues by the operation of the ordinance until: • the landlord serves a notice of not less than six months nor more seven months with a view to obtaining possession or renewing the tenancy because, for instance, rentals have increased; • the tenant serves a notice of not less than six months nor more than seven months with a view to obtaining a new tenancy because, for instance, rentals have fallen; • the landlord and tenant agree to a renewal; • the tenant gives a one-month notice to quit, to expire on or after the contractual tenancy ends; • the landlord and tenant agree that the tenant may surrender the premises; or • the landlord exercises a right of forfeiture. (d) Part V This part applies to tenancies that fall outside the other parts of the ordinance. In the main, these are tenancies of business premises for terms of less than three years. A tenancy subject to Part V can only be terminated by the landlord by a six-month notice to quit, to expire on or after the contractual termination of the tenancy. If the landlord fails to serve a notice, the tenancy is extended. For instance, if a shop is let for two years and the landlord fails to serve a notice until the contractual period expires, the tenant will be entitled to remain in the premises for a further six months. The landlord should have served a notice not later than 18 months into the tenancy. A tenant, on the other hand, may terminate a Part V tenancy by giving a one-month notice to quit, to expire no earlier than the expiry of the contractual term. 317 Easements 13.1 Introduction ,· An easement is a right enjoyed over the land of another person. A tenant's right to use the lift in order to get to his flat, an landowner's right to use the water pipes running under his neighbour's land, or a shop owner's right to erect a sign on the building next door - these rights may all exist as easements provided they satisfy certain conditions) If one of these conditions is not satisfied, the right cannot qualify as an easement. In that case, it will be a mere personal permission or licence enforceable only between the parties. An easement, on the other hand, is an interest in land. It will be enforceable by the owner for the time being of the land that benefits from the right, 'the dominant tenement', against the owner for the time being of the land over which the right is exercised, 'the servient tenement'. , Easements may be positive or negative in nature. A positive easement confers a right that is exercisable over the land of another person - for example, the rights of way, drainage, and to erect a sign, that have already been mentioned, are all positive easements. Whilst a positive easement may to some extent interfere with the servient owner's use of the servient land, it does not directly prohibit any particular activity by the servient owner on his land. A negative easement, on the other hand, doe,s confer a right to stop a servient owner from using his land in a particular way; Examples of negative easements include a right of support for buildings on the dominant land and rights to light and air to the dominant land over the servient land. Such rights prohibit the servient owner from either removing the support provided by the servient land, or from building upon or otherwise using the servient land in a way that would interfere with the flow of light or air to the dominant land. Negative easements bear a close similarity to covenants (see Chapter 15). I !' 13.2 Characteristics of Easements The leading case that illustrates the characteristics of easements is: Re Ellenborough Park [1956] Ch 131 FACTS The original owners of Ellenborough Park were also the owners of the adjoining land on which they built a housing estate. When the houses in the estate were sold, the purchasers were given a right to use Ellenboro ugh Park as a garden subject to payment of a proportion of the maintenance costs. Some years later, during the Second World War, Ellenborough Park was requisitioned by the government so that the owners of houses on the estate 318 EASEMENTS could no longer use it. A dispute arose as to who was entitled to the compensation the government paid forrequisitioning the park. Was it just the owners of the park or also the owners of houses on the estate because they too were holders of an interest in the park? JUDGMENT The right of the owners of houses on the estate to use the park was an easement. Accordingly they were also entitled to compensation. The court identified four essential characteristics of an easement, namely: • there must be a dominant and servient tenement; • the owners of the dominant and servient tenement must be different persons; • the right must accommodate the dominant tenement; and • the right must be capable of forming the subject matter of a grant. 13.2.1 There Must Be a Dominant and Seroient Tenement An easement, as a right over a piece of land - the servient tenement, must be enjoyed by another piece of land - the dominant tenement. 1 It cannot exist in isolation, but must be attached to and benefit a dominant tenement. For instance if D, the owner of a piece of land that has no direct access to the public road, has a right to pass over the land owned by S, which lies between D's land and the public road, D clearly has a right that is of benefit to his land, for it gives his land access to the public road. D is the owner of the dominant tenement, which has a right of way over the servient tenement owned by S. Fig ]3.1 ------- -- - --------- PUBLIC ROAD , Servient Land -----~------ i 0 -, London & Blenheim Estates Ltd v Ladbrooke Retail Parks Ltd [1994] 1 WLR 31 and Voice v Bell (1993) 68 P&CR 441 319 HONG KONG IAND IA W The same benefit would not arise ifS merely gave one of his friends, who owns no land, a right to use the road because, for instance, it afforded a more convenient access to the sea. This right to use the road may be convenient to S's friend, but there is no land to which the right can attach. It is thus not an easement but a mere personal right or licence. This need for two pieces of land distinguishes an easement from a public right of way. Everyone has a right to use the public roads, but that right is not an easement because the right benefits everyone regardless of whether they own any land. A public right of way is not attached to the ownership of any land but springs from the rights of all individuals to enjoy land dedicated to public use. 13.2.2 Tbe Owners of the Dominant and Seroient Tenement Must Be Different Persons An owner of land cannot exercise an easement against his own land. As the owner of the land he is entitled to use the land anyway Thus if D acqmres the servient land from S, he can use the access road to the public highway as the owner of servient land. He no longer needs the easement he enjoyed as the owner of dominant land, and thus it is suspended. It is perhaps more accurate to describe this requirement not as a requirement for separate ownership of the dominant and servient tenement, but as a requirement for separate occupation. It is possible for a tenant to enjoy an easement over other land belonging to his landlord. For instance, if a landlord is the Crown lessee of a whole block of flats, his tenants holding leases of units in the building will enjoy an easement over the lifts, passageways, and other common access ways that are retained in the ownership of the landlord. Similarly, a landlord may retain an easement over the leased premises during the period of the lease. For instance, the owner of the multi-storey building may wish to retain a right to receive water through water pipes running through a flat that he has let. 13.2.3 Tbe Easement Must Accommodate the Dominant Tenement The easement must not only be appurtenant to the dominant land. It must also be sufficiently connected with the normal enjoyment of the dominant tenement to be of benefit to the dominant land rather than merely a personal advantage to the current owner. In Re Ellenborough Park 2 it was alleged that the house owners' rights to use the park did not satisfy this requirement. In his judgment Lord Evershed MR emphasised that it was not sufficient to show that the right increased the value of the !and, hut it bad also to be caooecred wirb rbe nanual enjoyment of the property. The question turned on the nature of the land and the nature of the right granted. A right for a flat owner to go to the Happy Valley or Shatin race courses free of charge, for example, would undoubtedly be valuable, but it would not enhance the enjoyment of the flat as a flat. Such a right would thus not qualify as an easement. A right to use a garden, on the other hand, the court felt, was sufficiently connected with the use and enjoyment of the houses as a place to live to qualify as an easement. 320 [1956] Ch 131 EASEMENTS Where the land is used for business purposes, a right that benefits the particular business conducted on the land may accommodate the dominant tenement. An example of business benefit is found in: Moody v Steggles (1879) LR 12 Ch D 261 FACTS The plaintiff owned a public house and claimed that he had a right to fix a signboard to the wall of the defendant's house. The defendant challenged the right on several grounds, one of which was that the right was not capable of existing as an easement as it did not benefit the land but the business conducted on the land. JUDGMENT The right to hang a sign could exist as an easement. The fact that it benefited the business conducted on the land was no objection. However, a right that confers a mere commercial advantage cannot be claimed as an easement. The classic example of this limitation is: Hill v Tupper (1863) 2 H&C 121 FACTS A company that owned a canal leased land on the bank of the canal to the plaintiff and granted him the sole and exclusive right to put pleasure boats on the canal. The defendant also put pleasure boats on the canal. The plaintiff tried to bring an action for interference with his right, which he claimed was an easement. JUDGMENT The plaintiff was not entitled to sue the defendant as his right was not an easement but a purely contractual right against the owners of the canal. The court's reasoning is not as clear as it might be from the reported judgment. The basis for the judgment appears to be that the right claimed was unconnected with the use of the leased land, which comprised a house and boathouse. It might be argued a connection could exist, as a boathouse is of little use if there is no right to put the boats it houses on the water by which it is built. A house also could be said to benefit from a right to put boats on a river or canal in the same way as it benefits from a right to use a garden. But the plaintiff was asserting a sole and exclusive right to use the canal, and he was thus seeking to protect his business rather than enhance 321 40NG KONG LAND LAW his use .of the land. It was a case of the land accommodating the right, not the right accommodating the use of the land. Hill v Tupper illustrates the sometimes narrow distinction between a right that merely confers a personal or commercial advantage and one that can be said to benefit the dominant tenement as such. This question is perhaps all the more difficult to resolve where accommodation of the land arises from a benefit to the business conducted on the land, for a benefit to the business will invariably be of a commercial nature. A practical consequence of the requirement that an easement must accommodate the dominant tenement is that the dominant and servient tenements must be physically close to each other, although not necessarily adjacent. In Re Ellenborough Park 3 some of the houses surrounded the park; others were not quite so close but nevertheless were close enough to benefit from the park. By contrast, a right to put up an advertising sign in Causeway Bay may benefit a business in Yuen Long but it cannot be said to benefit the land upon which the business is conducted. It cannot therefore qualify as an easement. 13.2.4 Tbe Right Must Be Capable of Forming the Subject Matter of a Grant No right can be claimed as an easement unless it is capable of being granted by deed. It is sometimes said that all easements 'lie in grant'. A number of conditions flow from this ,requirement. 13.2.4.1 Certainty The right must be sufficiently certain to permit accurate definition. For example, a right to light through a defined channel is capable of being an easement but a general right to light or to a view is not. Likewise a right to air through a defined channel is capable of being an easement, but a general right to air is not. A covenant that prohibits building on a piece of land may, however, achieve the result that an unrestricted right to light or air cannot. The need for certainty also dictates that the dominant and servient tenements be accurately identified at the time of the grant. It was for this reason that attempts to extend an easement to land that was to be identified in the future failed in both London and Blenheim Estates Ltd v Ladbrooke Retail Parks Ltd 4 and Voice v Bell.5 13.2.4.2 No Positive Burden on Servient Owner A right will not be admitted as an easement if it requires the servient owner to incur any expenditure or take any positive action. The role of the servient owner is essentially passive. He must allow the dominant owner to exerdse the easement and he must refrain from taking any action that would interfere with the easement. A servient owner cannot therefore be required to repair the subject matter of the grant - for instance, the roadway where f j 4 322 Ibid. [1994] 1 WLR 31 (1993) 68 P&CR 441 EASEMENTS the right is a right of way, or the pipes where the right is a right to drainage. 6 A servient owner may, however, separately expressly or implicitly agree to repair the subject matter ofthe easement. 7 The one exception to this rule is the obligation to maintain a fence, which will require the servient owner to bear the cost of repair. 8 13.2.5 No Exclusive or Joint Occupation A right will not qualify as an easement if it in effect excludes the servient owner from occupation of the servient land or constitutes joint occupation of the servient land. A right to park cars on a small area can cause problems for this reason: Copeland v Greenhaif[l952] Ch 488 FACTS The plaintiff was the owner of an orchard and adjoining house. Access to the orchard was by a strip of land upon which the defendant parked cars that he repaired as part of his business. The defendant claimed an easement through long use to park cars on the strip of land, subject to the plaintiff's access to the orchard. JUDGMENT The court considered that the defendant's claim amounted to a claim not for a mere easement, but for ownership of the strip and as such the claim failed. This limitation is most keenly felt in relation to rights of storage. In Copeland v Greenhalf, as we have already seen, the courts rejected a claim for storage of cars; but in Wright v Macadam 9 a right to store coal in a shed was accepted as an easement. However, the difficulties presented by rights of storage was noted in Grigsby v Melville 10 where Brightman J d,oubted whether a right of storage could succeed where it amounted to exclusive use of the whole of the servient tenement. The question is thus essentially one of degree, and it must be considered in the light of the facts of each particular case. Similar considerations apply in relation to the grant of a right to park cars on the whole or part of the servient land, which right has received a more positive response from the courts. 11 6 8 9 10 11 Rance v Elvin (1985) P & CR 65 Although this agreement is not part of the easement, it may nevertheless be enforceable against subsequent servient owners as a land covenant under the principles relating to covenants including leasehold covenants, for in Hong Kong all easements must be created for a term. Jones v Price [1965] 2 QB 618 [1949] 2 KB 744 [1972] 1 WLR 1355 London and Blenheim Estates Ltd v Ladbrooke Retail Parks Ltd [1993] 1 ALL ER 307 at 314-317 not overruled on appeal at [1994] 1 WLR 31 323 HONG KONG LAND LAW 13.2.5.1 Capable Grantor/Grantee There must be a person capable of granting the easement and a person capable of receiving the easement. For instance, if a company is granting an easement, it must be authorised to do so by the powers set out in its memorandum. Furthermore, an easement cannot be granted by or to the inhabitants of a town or other fluctuating body. They do not qualify in a collective capacity as capable grantors and grantees. 13.2.6 Nature of New Easements The class of rights that the courts may recognise as easements is not closed. Changes in our mode of living requires the law to be sufficiently flexible to accommodate new rights. Cars, swimming pools, and television have all become part of everyday life in the 20th century and with them comes the need to consider whether a right to use a parking space, or the swimming pool or a TV aerial can exist as an easement. However, the courts have shown reluctance to recognise as easements rights that are significantly different from those traditionally accepted as easements. No doubt this innate conservatism arises from a justifiable reluctance to create too many potential burdens over land. In particular, the courts have stated that it is unlikely that an extension of negative easements would be justified. The purpose that a negative easement serves is often more conveniently achieved by the use of a restrictive covenant. The court's attitude to new negative easements is illustrated in: ------■ Phipps v Pears [1965] 1 QB 76 FACTS The plaintiff and defendant owned adjoining properties, which were built very close together although they were in fact detached. Because of the close proximity of the properties, the wall of the plaintiff's house that adjoined the defendant's property had not been rendered properly against the weather. The defendant's house fell into disrepair and he was required to demolish it by the local council. As a result of the demolition, the wall of the plaintiff's house was exposed to the weather and suffered damage which the plaintiff sought to recover from the defendant on the ground that he enjoyed an easement of protection from the weather. • JUDGMENT The plaintiff was not entitled to recover damages, as a right to protection from the weather was not a right the law would recognise given its entirely negative nature. 324 EASEMENTS Common Easements 13.2.5 By way of illustration of the characteristics of easements just examined it may be helpful to list some of the more common rights that have been recognised as easements: • • • • • • • rights of rights to rights to rights of the right rights to the right 13.3 way water and drainage light and air through a defined channel support of buildings to fence use facilities, eg washing lines/poles, 12 toilets, 13 letter box; 14 to use a sign. 15 Acquisition of Easements ,., 1Jier~ are a pumber of ways in which easements can be acquired. These fall into two ma_incategories: express grant and implied grant, which may be summarised as follows: • ••• Fig 13.2 Acquisition of Easements Acquisition of Easements .--I Express ---I I By deed 7 Presumed Prescription Bys 16 CPO By enforceable agreement Necessity 13.3.1 -- Implied . Common Law Common Intention Lost Modern Grant Prescription Act 1832 Wheeldon v Borrows Express Grant of Easements/Reservations Where an owner grants a right over his land in favour of neighbouring land, an easement is created. Where an owner sells off a piece of his land, he may wish to retain a right to pass over the part of the land sold for the benefit of the land which remains in his ownership. Again an easement is created, but 12 13 14 15 Drewell v Towler (1832) 3 B & Ad 735 Miller v Bemer Products Ltd [1956J Ch 304 Goldberg v Edwards [1950] Ch 247 Moody v Steggles (1879) LR 12 Ch D 261 325 f HONG KONG LAND LAW ' in this instance it is termed a 'reservation' because the owner has not granted the right but instead has disposed of his interest in the servient land subject to the reservation of a right for the benefit of the retained dominant land. For example, A is the owner of two pieces of land, Lot 1 and Lot 2. Lot 1 fronts onto the public road but Lot 2 does not, and access is obtained by passing over Lot 1. If A sells Lot 1 to B, he will need to reserve a right of way in favour of Lot 2. A, as the continuing owner of Lot 2, the dominant tenement, has a reservation over Lot 1, the servient tenement. If A had sold Lot 2 rather than Lot 1, he would need to create an easement over Lot 1 in favour of Lot 2. Thus easements and reservations are the same interest: it is their method of creation which differs. At common law it is not possible for a dominant owner to sell the servient land subject to a reservation. Previously the right had to be created by way of re-grant by the purchaser of the servient tenement. Accordingly the assignment of the servient tenement had to be executed by the purchaser and the right itself would be construed against the purchaser, according to the principle that a right is construed against the grantor. Section 24 of the Conveyancing and Property Ordinance now provides that a reservation of rights can be made directly in the assignment so that no re- rant is necessary. t lS t us C ear t at a purchaser does not have to execute the assignment - however, it is not clear whether the section will also reverse the rule of construction of the right against the purchaser. 16 Fig 13.3 Easements and Reservations 13.3.1.1 By Deed Public Road Lot 1: B ~➔ ~====+. Public Road :;,:I i Lot 1: A ~ Reservation I ~ Public Road Easement Lot 1: A 326 16 St Edmundsbury & Ipswich Diocesan Board of Finance v Clarke (No 2) [1975] 1 WLR 468 EASEMENTS All legal easements must be granted by deed. 17 As all land in Hong Kong is leasehold, a legal easement must also be created for a term of years. The term of the easement must not exceed the period of the lease of either the dominant or servient land. Thus if the lease of the dominant land is 999 years and the lease of the servient land is only 75 years, the easement cannot be granted for longer than 75 years. The same would be the case if the lease of the servient land was for 999 years and the lease of dominant land was 75 years. An easement for another period than a term of years, for instance for life, cannot exist at law but only in equity. 13.3.1.2 By Writing or Other Means By the application of the rule in Walsh v Lonsdale, a grant of an easement in writing may be upheld in equity where specific performance of the agreement is available. Where the grant is made orally, equity may again recognise the grant of an equitable easement if the grantee can rely on part performance 18 or estoppel. 19 13.3.2 By s 16(1) of the Conveyancing and Property Ordinance Section 16(1) states: Unless the contrary intention is expressed in the assignment, an assignment shall operate to assign with the land, all rights; interests, privileges, easements or appurtenances in, over, belonging or appertaining to that land or at the time of the assignment used, held, occupied or enjoyed with that land ... The object of this section, which is similar to s 62 of the Law of Property Act 1925, is to ensure that on the sale or other disposal of land, all rights and privileges appurtenant to the land, not just formally granted easements, would automatically pas~ to the purchaser or other grantee without the need for express mention. Before the section was passed on 1 November 1984, it was usual to expressly insert similar words in an assignment in order to achieve this result. 20 However, the section may have the effect of elevating a licence enjoyed by mere permission into an easement. Its effect in this respect is illustrated by the case of : 17 18 19 20 Section 4 of the Conveyancing and Property Ordinance Cap 219 McManus v Cooke (1887) 35 Ch D 681 ER Ives Investment Ltd v High [1967] 2 QB 379 The clause was known as 'the general words clause'. 327 HONG KONG LAND LAW FACTS The plaintiff was a weekly tenant of two rooms on the top floor of the defendant's house. The defendant gave the plaintiff permission to use a coal shed in his garden. A couple of years later the defendant granted the plaintiff a new tenancy of the two rooms plus another room, but no reference was made to the coal shed in the new tenancy agreement. The plaintiff continued to use the coal shed until the defendant demanded payment for its continued use. JUDGMENT The plaintiff's right to use the coal shed was an easement which passed under s 62 of the Law and Property Act 1925 on the grant of the new tenancy. The new lease qualified as an assignment for the purposes of the section and operated to pass all existing rights, including those that were held by mere permission of the servient owner. The section does not operate just to pass the right as a mere permission. The right becomes appurtenant to the land, and as such is elevated to the status of an easement. It may be argued that this elevation is not justified on the wording of the section, but the English authority against this argument is strong and well established. 21 In support for existing authority it might be argued that the informality of the original permission is being 'cured' by the formality of the assignment, although this justification ignores the possibility that the parties may have originally intended the right only to be permissive or personal. We now look more closely at the provisions of s 16. 13.3.2.1 Assignment There must be an assignment for the section to operate. Assignment is defined in s 2 of the Conveyancing and Property Ordinance and includes a lease, mortgage and 'every assurance or conveyance of land by any instrument'. This last head has been held to qualify the rest of the definition. Thus an oral lease does not qualify because it is not an instrument, 22 and an agreement to assign or lease also does not qualify because, while it is an instrument, it does not itself qualify as an assurance. 23 An assurance must operate to transfer or create the interest. Although an agreement under the 21 22 23 328 International Tea Stores Co v Hobbs [1903] 2 Ch 165; and Goldberg v Edwards [1952] Ch 247 Rye v Rye [1962] AC 496 Borman v Griffith [1930] 1 Ch 493. But a lease for a period not exceeding three years that is created or assigned in writing will qualify for a written instrument and is effective to create or assign the lease at law. See Wright v Macadam [1949] 2 KB 744. \ EASEMENTS doctrine of Walsh v Lonsdale 24 may have the effect of creating or transfer an interest in land in equity, it is not the agreement itself that does so but the fact that equity looks on as done what ought to be done - but only where the agreement is specifically performable. 13.3.2.2 All Rights, Interests, Privileges, Easements, or Appurtenances The right must be capable of existing as an easement. As Lord Denning noted in Phipps v Pears:25 ~ A fine view, or an expanse open to the winds, may be an 'advantage' to a house, but it would not pass under section 62. Whereas a right to use a coal shed or to go along a passage would pass under section 62. The reason being that these last are rights known to the law, whereas the others are not. A right to protection from the weather is not a right known to the law. It does not therefore pass under section 62. 13.3.2.3 Over, Belonging, or Appertaining to that Land There is a need for diversity of occupation of the dominant and servient land at the time of the assignment, since the right rpust be enjoyed as· an appurtenance to the land being sold and not because of ownership of the servient tenement. This requirement was established in: Long v 177 FACTS The common owner of two riverside properties, Lot 1 and Lot 2, used to pass over Lot 2 in order to cut weeds and repair the bank of the river, although there was no path as such over Lot 2 to the river bank. Lots 1 and 2 were sold to separate purchasers, and the purchaser of Lot 1, the plaintiff, claimed he had a right to pass over Lot 2 to repair the river bank and cut the weeds. JUDGMENT SargantJ rejected the plaintiff's claim. The common owner of Lot 1 and Lot 2 had not repaired the bank and cut the reeds in exercise of a right appurtenant to Lot 1. He had done so by virtue of his ownership of Lot 2. The decision did attract some controversy as it appeared contrary to the earlier decision of Broomfield v Williams26 where no diversity of occupation 24 25 26 See Chapter 6.3. [1965] 1 QB 76 at 84 [189711 Ch 602 329 r. HONG KONG LAND LAW was required for a right to light to pass under the section. Sarjant J distinguished this earlier decision as confined to rights to lig1ttwhich formed an exception to, rather than a basis for, the general rule. The House of Lords in Sovmots Investments Ltd v Secretary of State for the Environment 27 have followed Long v Gowlettand approved the need for diversity of occupation. Where there is no diversity of occupation the right may, however, pass under the rule in Wheeldon v Burrows, which we shall look at shortly. 28 As a result of this need for diversity of occupation, the operation of s 16 is largely confined to the landlord and tenant context. If an owner sells off part of his land, there is no diversity of occupation before he does so; but if a landlord renews a lease of land, which is adjacent to land he also owns and over which the tenant enjoys some right or privilege, there is diversity of occupation between the dominant land, which is subject to the lease, and the landlord's adjacent servient land. A sale of the landlord's reversion of the dominant land to the tenant will also provide an opportunity for the operation of s 16. For instance, if L lets a propertyto T and allows T to cross over his adjoining property as a short cut to the public road, s 16 may operate, in the event that L either renews T's lease or sell his reversion to T. Although the right must be appurtenant to the land assigned, it does not have to be appurtenant to the exact estate in the land that is assigned. Thus, in Graham v Philcox 29 a purchaser of the freehold of an old coach-house was able to claim the benefit of a right of way that he had enjoyed as a tenant of part of the coach-house. In Hong Kong the different estates will not be a freehold and leasehold, but could be different leasehold estates. For instance, a tenant of a shop who, on the renewal of his lease, wishes to expand his operations and thus takes a new lease of his original shop plus another unit could claim the right in respect of both units and not just the original shop. 13.3.2.4 At the Time of the Assignment The right must be exercisable at the time of the assignment. A right that is extinguished prior to the assignment will not be resurrected by the section. For instance, a right in a lease that is surrendered or otherwise terminated before the lease is renewed will not pass. 30 This result will flow even if there merely has been a delay in completing the renewal of the lease so that there is a time gap between the expiry of the old lease and the completion of the renewal. It is the date of the renewed lease, late though it may be, that is decisive. 31 This requirement provides an escape route for owners who do not wish to elevate permissive rights. If the right is terminated just prior to the assignment, it cannot pass to a purchaser under the section. The section also gives way to a contrary intention. 27 28 29 30 31 330 [1979] AC 144 See 13.3.3.1 [1984] QB 747 MRA Engineering Ltd v Trimster Co Ltd (1987) The Times 22 October Goldberg v Edwards [1952] Ch 247 EASEMENTS 13.3.3 Implied Grant We have seen that an owner cannot have an easement over his own land. But where an owner has been accustomed to using one part of his land in a particular way, which is of benefit to the rest of his land, his use is cgmmonly termed a quasi-easement. All the elements of an easement are present except the diversity of occupation of the dominant· and servient tenements. On the sale of part of the land, there is diversity of occupation and the right may develop into an easement displaying all the characteristics we have examined. For instance, where A owns two lots of land and it is necessary to pass over one lot in order to get from the road to the other lot, the right to pass over the lot abutting the road cannot exist as an easement, for the dominant and servient tenements are in the ownership of only one person. But if A then sells the lot furthest from the road to B, the right of way will ripen into an easement. The implication of an easement in these circumstances is based upon the presumed common intention of the parties. In order to give effect to the transaction contemplated hy the parties, it may be necessary to imply an easem&t where the parties have failed to mention the right expressly. For instance, if no easement is implied in our example, the land sold by A will have no right of access to the public road. It will then be of little use and the reason for B's purchase is frustrated. As implied easements are based upon the presumed common intention of the parties, they will give way to an express contrary intention displayed by the parties. There are three instances when a grant of an easement may be implied on the sale of the quasi-dominant tenement: • under the rule in Wheeldon v Burrows; • easements arising by necessity; and • easements of common intention. l 13.3.3.1 The Rule in Wheeldon v Burrows The rule is one of intention, which is based upon the principle that a man cannot derogate from his grant. The elements of the rule were identified by Thesiger LJ in the case of Wheeldon v Burrows as being: ... on the grant by the owner of a tenement or part of that tenement as it is then used and enjoyed, there will pass to the grantee all those continuous and apparent easements (by which, of course, I mean quasi-easements) or, in other words, all those easements which are necessary to the reasonable enjoyment of the property granted, and which have been and are at the time of the grant used by the owner of the entirety for the benefit of the part granted. 32 32 (1878) 12 Ch D 31 at 49 331 HONG KONG LAND LAW The rule provides that a quasi-easement may develop by implication into an easement, provided the user satisfies three elements: (i) (ii) (iii) it must be continuous and apparent; it must be reasonably necessary for the enjoyment sold; and • ••• . it must be in use at the time of the sale. ofthe property ·• In Wheeldon v Burrows requirements (i) and (ii) are expressed as alternatives, but there is some suggestion that both limbs must be satisfied or that, at the very least the first limb must be found. Ward v Kirkland (1967] Ch 194 FACTS For many years prior tO 1928, the plaintiff's cottage and the defendant's farrriliouse had been owried by the church: In 1928 the cottage was sold to the plaintiffs predecessor-In title, together with a right to use the adjoinin'g farmhouse yard for unloading coal. In 1942 the defendant became a tenant of the farmhouse. From 1942 to 1954 the plaintiffs predecessor in title entered the farmyard in order to maintain the wall of the cottage. There was no other way of maintaining the cottage. The plaintiff bought the cottage in 1954 and converted it. From 1954 to 1958 the plaintiff also entered the farmyard in order to maintain the cottage. In 1958 the defendant bought the farmhouse and refused to allow the plaintiff to enter the farmyard to maintain the wall. JUDGMENT The right to enter the farmyard to maintain the cottage could exist as an easement, but it could not pass to the plaintiff under the rule in Wheeldon v Burrows as it was not continuous and apparent. The right did, however, pass under s 62 of the Law of Property Act 1925 33 to the plaintiffs predecessor in title who acquired the property in 1928. Ungoed Thomas J in his judgment considered whether the easements that were reasonably necessary for the enjoyment of the property sold formed a separate category from those rights that were continuous and apparent, and noted that there was no case in which a positive easement falling within the rule had not been continuous and apparent. The question of whether the two requirements were alternatives or concurrent requirements was also raised, but not finally settled, before the English Court of Appeal in Squarey v Harris-Smith. 34 The court decided, without holding that it was 332 33 See s 16 of the Conveyancing and Property Ordinance. 34 (1981) 42 P&CR 118 at 124 EASEMENTS an essential requirement, that the right of way in question was reasonably necessary to the enjoyment as well as being continuous and apparent. (a) Continuous and apparent The right does not have to be continuous in the sense that it is constantly being used. A right of way, for instance, does not need to have someone always passing day and night over the road or pathway. 'Continuous' has instead been given the wider meaning of permanent. Even if a right is not continuously being used, its existence must be always apparent. !here must be some feature on the servient land, ascertainable from a careful inspection by a person conversant with such matters, that discloses the existence of the easement. For instance, a roadway or a distinct path would point to a right of way; 35 and a drain, or in the case of a submerged drain a manhole cover, would indicate a right to drainage. 36 It was on this basis that the right to enter the farmyard to repair the cottage did not succeed in Ward v Kirkland, since there was nothing apparent from an inspection of the farmyard to show that a quasi-easement arose. i i (b) Reasonably necessary Again this requirement is not applied in the strict sense that the right must be so necessary that without it the property cannot be used, but rather that the right facilitates the reasonable enjoyment of the property. 13.3.3.2 Wheeldon v Burrows and s 16 The similarity betweens 16 of the Conveyancing and Property Ordinance and the rule in Wheeldon v Burrows is striking, but there are a number of distinctions: • Section 16 operates where there is diversity of occupation before the sale. It therefore does not apply to quasi-easements. Wheeldon v Burrows, by contrast, operates in just this situation. • Section 16 operates only where there is a formal assignment or lease of the property but Wheeldon v Burrows will apply where there is an agreement to assign or lease. 37 • Section 16 will pass rights that are not continuous or apparent or reasonably necessary for the enjoyment of the property. 38 In both cases, however, the right must be enjoyed at the time of the lease or assignment. • Section 16 and the rule in Wheeldon v Burrows both give way to a contrary intention expressed by the parties. However, whereas Wheeldon v Burrows is based upon the presumed intention of the parties so that a right cannot arise unless it is within the implied contractual rights of 35 36 37 38 Hansford vjago [1921] 1 Ch 322 Pyer v Carter (1887) 1 H&N 916; and Schwaan v Cotton [1916] 2 Ch 120 & 459 Borman v Griffith [1930] 1 Ch 493 Ward v Kirkland [19691 Ch 194 333 HONG KONG LAND LAW the grantee, s 16 may operate to create an easement to which the grantee had no right under the contract by which he acquired his interest in the land. 13.3.4 Easements of Necessity An easement of necessity is a right that is so essential to the enjoyment of the land that the land would be useless without it. The classic example is the right of way to land-locked property. A property is not land-locked if there is access by water, thus access by water will exclude an easement of necessity by land to the property. 39 It had been thought that the basis for implication of easements of necessity lay in public policy. It is clearly not in the public interest, particularly in Hong Kong where usable land is so scarce, that land should become useless. However, this view was rejected in Nickerson v Barraclough. 40 The doctrine is based rather on the implied intention of the parties at the time the premises are sold, and is thus subject to a contrary intention. The extent of easements implied by necessity is strictly limited to the use of the land at the time of the grant and may be exercised to maintain that purpose but no other. 13.3.5 Easements of Common Intention Easements may also be implied to give effect to the common intention of the parties. That intention may arise because the right is necessary for the use of the land contemplated by the parties, or because surrounding circumstances are such that the parties must have contemplated such a right. An example of the implication of a right on the basis of common intention is found in the case of: 41 Wong v Beaumont Property Trust 1 QB 173 FACTS A lease of a cellar required the lessee to use the premises as a restaurant and to use his best endeavours to develop the business, to control and eliminate all smells, and to comply with the health regulations for the time being in force. The parties did not appreciate that the existing ventilation did not satisfy health regulations. The plaintiff acquired the residue of the lease and, in order to comply with regulations, wished to fix a bigger duct onto the outside of the building. The defendant, the original landlord's successors in title, refused to allow him to do so. 39 Manjang v Drammeh 0990) 61 P&CR 194 334 40 [1981] Ch 426 41 See also Stafford v Lee (1992) 65 P&CR 172 EASEMENTS JUDGMENT The Court of Appeal was unanimous in its view that an easement should be implied. 42 The terms of the lease could not be performed unless the right could be implied. Indeed, as Salmon LJ observed, the plaintiff also could not lawfully carry on the business, for to do so would breach the health regulations then in force. It is interesting to observe that it was accepted, in particular by Lord Denning MR,that at the time the lease was granted the parties did not intend that a bigger duct be erected. They were under the impression, mistakenly as it transpired, that the existing ventilation system was adequate. It appears therefore that the test is not so much what the parties actually intended but what their presumed intention would be if they were in full possession of the facts. 13.3.6 The courts are more reluctant to uphold the implication of a reservation in favour of the grantor where the quasi-servient tenement is sold, because a grantor should not be allowed to derogate from his grant unless the circumstances are clear to the grantee. An easement may be implied, reserved in favour of the grantor on the basis of necessity, or due to the common intention of the parties; but the courts will adopt a stricter test than in the case of the implication of a grant in favour of the quasi-dominant tenement. An example of the court's stricter attitude to the implication of an easement based upon common intention is found in: Re 808 FACTS The defendant was the lessee of a building. He occupied the ground floor and sublet the rest of the floors to the plaintiff. At the time of the initial sublease, there were two advertisements on the walls of the upper floors sublet to the plaintiff. After ten years the defendant renewed the plaintiffs sublease. Neither the original or new sublease reserved-to the defendant a right to maintain the advertisements. JUDGMENT The defendant had no right in the absence of express reservation to maintain the advertisements. The mere fact that the tenant knew at the date of the sublease and did not subsequently object to the landlord using the walls of the premises for advertising was not sufficient to establish the 42 I' I Implied Reservation I !I Reference was made to easements of necessity, but it is clear that an easement was not necessary in tbe strict sense, but was necessary in order to give effect to tbe parties' intention displayed in tbeir lease. 335 HONG KONG LAND IA W required intention to imply an easement. If the landlord wished to establish an implied right, the onus was on him to show that the facts were not reasonably consistent with any other explanation. It is not possible to imply a reservation under the rule in Wheeldon v Burrows. In fact, this was the point at issue in the case. D 31 FACTS Mr Wheeldon and Mr Burrows acquired adjoining pieces of land from the same vendor. Mr Burrows purchased his land after Mr Wheeldon, so that any rights he enjoyed over Mr Wheeldon's land would have had to have been reserved by the common vendor. Mr Wheeldon died and his wife, who had inherited the land, put up a hoarding that obstructed the light passing to a workshop on Mr Burrows' land. Mr Burrows claimed that a right to light arose in his favour by implied reservation. JUDGMENT Mr Burrows was not entitled to a right to light by implication. The common vendor had failed to reserve expressly a right to light in his sale of the quasiservient land to Mr Wheeldon, and it would be to derogate from his grant to Mr Wheeldon to imply a right in the absence of an express limitation. It is interesting to note that Mr Burrows may well have succeeded if he had acquired his land at the same time as Mr Wheeldon, for the rule in Wheeldon v Burrows has been applied to simultaneous disposals. 43 In Tang Tim-fat v Chan Fok-kei 44 the court even suggested that the automatic and simultaneous renewal of many New Territories leases in 1973 by the operation of the New Territories (Renewable Crown Leases) Ordinance 45 could have led to many implied grants under the rule in Wheeldon v Burrows. 13.3.7 Prescription Prescription is the acquisition of an easement by long use. If a right has been exercised for a sufficient period of time, the law will presume the valid original grant of that right as an easement.The period of long user must be: • since time immemorial which is taken to be since 1189; or • 20 years or more in order to establish the fiction of a lost modem grant. 43 44 336 45 Scbwann v Cotton [1916] 2 Ch 120 [1993] 2 HKLR 373 Cap 152 EASEMENTS In the 18th cent~ry the courts evolved the fiction of lost modem grant to overcome the obvious problems of establishing user since time immemorial. If user could be established for a period of 20 years or more a formal grant was presumed to have been made but subsequently lost so that it now cannot be produced. The fiction is so well established that it cannot be rebutted by evidence that no such grant was made; 46 • either 40 years for rights other than the right to light or 20 years for rights to light under the Prescription Act 1832. This legislation was intended to ease some of the difficulties of establishing prescription since time immemorial or by lost modem grant but it is so poorly drafted that it merely complicates the position further. Prescriptive user must be user 'as of right' or, in other words, the use must have been exercised as if the right had been properly granted. The use must not be secret or by force or with permission. Furthermore, the exercise of the right must be continuously asserted. But prescription is of little, if any, application in Hong Kong. It is an established feature of prescription at common law that the right must be acquired by a fee simple owner of the dominant land against the fee simple owner of the servient land. 47 The leasehold nature of land in Hong Kong thus excludes prescription at common law. This position has now been confirmed by the courts in:48 Tang [1993] 2 HKLR 373 FACTS The defendant claimed a vehicular right of way over the plaintiff's land by reason of the exercise of the right since the 1960s. The plaintiff conceded that the defendant was entitled to an easement of necessity by foot over the land but disputed the defendant's claim to a vehicular right. JUDGMENT User since time immemorial had no application in Hong Kong given the history of the Territory. Presumed modem grant also had no application in Hong Kong for there were no grounds for modifying the English common law requirement that this doctrine was only applicable between fee simple owners. The Prescription Act 1832 did not assist. Although incorporated into Hong Kong law by the Application of English ww Ordinance the act did not alter the common law requirement that prescription only applies to freehold land. 46 47 48 Dalton v Angus & Co (1881) 6 App Cas 740 The principle has been re-established in England in Simmons v Dobson [1991] 1 WLR 720. There had been some suggestions that prescription should apply in Hong Kong, see Delaney 0958) 74 LQR 82, Kneebone (1977) 7 HKLR 373 and Pang Kwan-lung v Ma Choi-hop [1989] 2 HKC 449. 337 HONG KONG LAND LAW The only remaining role for prescription in Hong Kong is the possibility of acquiring a right to light after 20 or more years user under the Prescription Act 1832. Section 3 of the act does not require the right to light, in contrast to the acquisition of other rights under s 2, to be exercised 'as of right', which leaves a very narrow chink through which a right to light over leasehold land might be admitted. However, the court in Foo Kam-shing v Local Printing Press 49 rejected even this possibility. 1 13.4 Extent of Use The nature and extent of an easement will depend on whether it is created expressly or impliedly. 13.4.1 Express Grant The extent and nature of an express easement will depend primarily upon the words of the grant. A right may be general, which will confer a right that may be exercised at any time and in any way; or it may be limited, where the right is restricted in the times or the manner in which it may be exercised. For instance, a right of way may be restricted to passage by foot only, or may be exercised only during the daylight hours. Where there is difficulty in construing the terms of the grant, the surrounding circumstances at the time of the grant may assist construction. But the terms of the grant will ·not be cut down by the surrounding circumstances where the extent of the easement can be adequately defined from the terms of the grant. 50 An example of the court looking to the surrounding circumstances to construe the terms of the grant is found in: V FACTS The plaintiff sold some land to the defendant. The land surrounded a church and churchyard, but was sold subject to a right of way to the church. Access to the church was by a path, part of which was only four-and-a-half feet wide, made up of sand and gravel and covered with leaves. The question arose of whether the right of way over the path was on foot only or extended to vehicles. 49 50 338 (1953) 37 HKLR 208 Keefe v Amor [1965] 1 QB 334 EASEMENTS JUDGMENT The right of way was a right on foot only. The grant was expressed merely as a grant of 'a right of way', but the physical characteristics of the path dictated that it could not have been intended for vehicles. Where the court cannot find a clear answer in their task of construction from the terms of the grant and the surrounding circumstances, they must construe the grant against the grantor. The extent of an express grant is not confined to the purposes for which the right was originally intended at the time of the grant, unless there is a clear intention to that effect. An often-quoted example is provided by the case of White v Grand Hotel East borne Ltd,51 where a right of way granted when the dominant tenement was a private dwelling house was held to extend to business purposes when the house was converted to a hotel. However, while a change of use of the dominant tenement may increase the burden placed on the servient land, it must not lead to such an increase in use as would unreasonably interfere with the rights of others. For instance, in Jelbert v Davies 52 where agricultural land was converted to a caravan site for 200 caravans, the court decided the increased use was excessive despite the general terms of the grant. But in Hong Kong the increased use of a right of way resulting from the redevelopment of a single residence into 72 flats was not considered excessive. 53 The right must be used for the enjoyment of the dominant tenement. Thus the use of a right of way for the purpose of access to land adjoining the dominant tenement is precluded. 54 But, unless there are express words to the contrary, the right may be used by anyone expressly or impliedly authorised to use it, provided their use accommodates the dominant tenement. Thus a suggestion that a grant in favour of a dominant tenement on which a business is conducted is limited to the owners of the business and excludes their customers is unacceptable. 55 13.4.2 Implied Grant An implied grant is limited to the purpose for which it was used at the time the right arose. Thus a right of way of necessity to a property for agricultural purposes would not extend to access to a factory that the dominant owner may wish to erect on the land. An increase in use is not precluded, however, unless it is so excessive as to pose an unreasonable interference with the rights of others entitled to the grant. 51 52 [1913] 1 Ch 113 [1968] 1 WLR 589 53 Winfield Investment Co Ltd v Henry Fok Estates Ltd [1966] HKLR 399 Harris v Flower (1905) 74 LJ Ch 127 55 Woodhouse & Co Ltd v Kirkland (Derby) Ltd [1970] 1 WLR 1185 54 339 HONG KONG LAND LAW 587 FACTS In 1847 the railway company laid a track that cut off the access to some fields except by way of a crossing that had been constructed by the railway company. For many years the fields were used by campers and caravaners, but the numbers had grown substantially and the railway company tried to limit the use of the crossing. The respondent claimed an easement by prescription. JUDGMENT The plaintiffs admitted that the fields could be used for caravans, but claimed the increase in use was unacceptable. The Court of Appeal did not agree. 13.4.3 Remedies Normally an aggrieved party, whether he be a dominant owner claiming the unjustified interference with an easement or a servient owner claiming excessive use, will seek redress by one of the usual methods - action either by way of damages, injunction, or declaration. But in order for an interference to be actionable it must be substantial. For instance, the dominant owner can only take action if an obstacle impedes the reasonable exercise of his rights. In addition to the normal methods of seeking redress by action, a dominant owner may abate the interference himself by removing the obstruction. But he must exercise abatement cautiously and should make sure that he gives notice to the servient owner, and causes the least disruption .and no unnecessary damage. 56 13.5 13.5.1 Termination of Easements By Ej]luction of Time All easements in Hong Kong must be granted for a term of years, which will generally be for the shorter of the terms created by the Government leases of the dominant and servient land. At the end of the term for which the easement is granted, it will simply expire by effluction of time - although where there is a statutory renewal or extension of the Government lease term of the servient land, the grant may also be deemed to continue. 57 56 57 340 Navigation Co v Lamberg Bleaching Dyeing & Furnishing Co Ltd [1927] AC 226 at 245 See s 15 Crown Leases Ordinance Cap 40 and s 7 New Territories Leases (Extension) Ordinance Cap 150. EASEMENTS 13.5.2 Unity of Ownership There must be diversity of ownership of the dominant and servient tenement for an easement to arise. Where the ownership of the dominant and servient tenements becomes vested in the same person, the easement will cease. The extinction of the easement will be permanent where ownership vests in the government, but the easement will merely be suspended where the dominant and servient tenements become vested in the same lessee, be that a Government lessee or a lessee under a shorter term lease. Any easement attached to the lease of the dominant land will be suspended during the period of common ownership of the leases of the dominant and servient tenements. The easement will revive if the lease of either the servient or dominant tenement is assigned or expires so that the ownership of each tenement is once again separate. 13.5.3 Release A release may be express or implied. An express release, to be effective at law, must be by deed, 58 although equity may recognise a release effected by less formal means. An implied release may arise by the deemed abandonment of the right. The mere failure to exercise an easement is not decisive evidence of abandonment; for instance in the case of Benn v Hardinge 59 non user for 175years did not imply abandonment. Non-use willonly constitute abandonment if it is explicable only on the assumption that the dominant owner intended to give up the right. The point is clearly illustrated by: Moore v Rawson 3 B&C 332 FACTS The plaintiff enjoyed a right to light to certain windows. He demolished the wall in which the windows were situated and rebuilt the wall with no windows. Fourteen years later the defendant erected a building which would have obstructed the light to the old windows. Subsequently the plaintiff made a new window where one of the old windows had been, and objected to the obstruction. JUDGMENT The alterations to the wall, and not just the plaintiffs non-use, demonstrated an intention to abandon the right. 58 59 Section 4 of the Conveyancing and Property Ordinance Cap 219 (1992) 66 P&CR 246 341 HONG KONG LAND LAW In Snell & Prideaux Ltd v Dutton Mirrors Ltd,60 where it was alleged that the dominant owner had abandoned a right of way for vehicles but not on foot, the Court of Appeal in England accepted that it was possible to imply the partial release of an easement although on the facts of the case there had been no abandonment in whole or part. 13.6 Easements and Similar Rights Easements must be distinguished from a number of other similar rights which may affect land. 13.6.1 Natural Rights Natural rights exist as a natural incident to the ownership of land. Unlike easements they arise automatically, as an incident of ownership. Examples of natural rights include the right to support of the land (but not any buildings erected on the land) and the right to surface water flowing through a defined channel. But the law has not recognised a right to light as within the scope of natural rights. A right to light can only be acquired as an easement. 13.6.2 Public Rights Public rights, as their name implies, are exercisable by anyone. Unlike easements they are not appurtenant to any dominant tenement. Common public rights include the right to use the public highway, to use navigable waters, and fish in the sea; but these rights are frequently regulated by ordinance. For instance, the right to use the public highway for the purposes of a demonstration or protest march is limited by the Public Order Ordinance. 61 13.6.3 Customary Rights A customary right is a right that is enjoyed by a particular community. Customary rights differ from easements in that they are not attached to a dominant tenement; and they differ from public rights in that their enjoyment is limited to a particular community and not enjoyed by the public at large. At common law a customary right can arise only if it is ancient, certain, reasonable, and continuous. Under the common law of England, a right is considered ancient if it has been enjoyed since 1189 or it has been enjoyed within living memory, unless there is evidence that it arose after 1189. An application of such a test in Hong Kong would clearly rule out the existence of any customary rights. It might be argued that in the light of the history of the territory the application of the English common law rule is inappropriate, and that custom should be accepted if it has been exercised since establishment of the territory. However, the question is 342 6o [1994] EGCS 78 61 Cap 245 EASEMENTS unlikely to arise since land in the New Territories, where the question of custom is more likely to arise, is governed by Chinese customary law rather than the English common law. 62 13.6.4 Statutory Easements Easements may be created by statute. In Hong Kong we have, for example, the Electricity Network (Statutory Easements) Ordinance, 63 which permits the creation by statute of certain easements necessary for the establishment of an electricity network by the power companies. 13.6.5 Profits A profit is a right to take some part of the natural produce, soil, or minerals of the servient tenement, whilst an easement merely confers a right to the use of the servient tenement in some way. A further distinction lies in the fact that a profit may exist in gross whereas an easement must be attached to a dominant tenement. In the light of the declining importance of agriculture in Hong Kong, profits are not commonly encountered. 13.6.6 Licences A licence confers a permission to perform an act that would otherwise be a trespass. Licences and easements thus overlap, but the ambit of licences is wider, for they need not conform with the characteristics.of easements examined earlier in this chapter. A licence may extend to a right of occupation and it need not be appurtenant to or accommodate a dominant tenement. A licence may be created with the minimum of formality, whereas an easement must at law be created by deed. An easement creates an interest in land that is capable of binding third parties, whereas a· licence falls within the sphere of mere personal rights that will not, in the normal course, be capable of affecting third parties. 13.6.7 Covenants A covenant affects the manner in which an owner of land may use his own land, whereas a positive easement grants the dominant owner a right exercisable over someone else's land. A negative easement, however, bears a closer resemblance to covenants because it also impedes a servient owner's free enjoyment of his ownership .of land. Negative easements are confined to a small number of existing rights while covenants, provided they relate to land, may cover a wide range of activities. Covenants and easements bear a similarity in their need for two tenements to support and bear the right. Covenants are creatures of equity and must be created by agreement or deed. Easements, on the other hand, may exist at law as well as in equity and may be created expressly or impliedly. 62 63 Section 13 New Territories Ordinance Cap 97 Cap 357 343 Leasehold Covenants 14.1 Introduction We have looked at the type of covenants commonly found in leases in Hong Kong. Now we consider the extent to which these covenants may affect someone to whom a tenant may transfer his lease, on the one hand, and someone to whom the landlord may transfer his reversion, on the other. 14.1.1 Assignment Where a lease or a leasehold reversion is assigned, the original lessee or lessor, as the case may be, for all practical (but not necessarily all legal) purposes drops out of the picture and ceases to be concerned with the property. His assignee steps into his shoes. There remains only one lease affecting the land: it is the parties to the lease that change. 14.1.1.1 Assignment of the Leasehold Term A lessee who disposes of his lease by way of assignment transfers the whole of the term he enjoys to the purchaser. When one speaks of land being 'sold' in Hong Kong, what is referred to is the residue or balance of the Government lease term that is being assigned by the Government lessee to the purchaser. For instance, an owner, who holds a Government lease of land for 75 years of which there are 65 years still to run, will sell that land by assigning the 65-year residue of his Government lease to the purchaser. He then has no further interest in the land. The assignment of short-term leases is less common, for most of these leases will contain a covenant prohibiting the tenant from assigning his interest. 14.1.1.2 Assignment of the Leasehold Reversion A landlord may also wish to dispose of his interest in a piece of land. This does not arise in the case of Hong Kong's largest landlord, ie, the Crown, or, after 1 July 1997, the Government of the Special Administrative Region of Hong Kong. But a Government lessee who has let his property may wish to do so. A lessee, in these circumstances, holds his Government lease in reversion consequent upon the short-term lease he has granted. When he sells his interest in the land he will assign his Government lease term, which he holds in reversion, subject to and with the benefit of the short-term lease. The assignment of a leasehold term and a leasehold reversion can be depicted in the following way: 344 LEASEHOLD COVENANTS Fig 14.1 Assignment Leasehold Term Leasehold Reversion Landlord (L) Landlord assignment (L) lease lease Tenant ~--------Tenant's (T) assignment 14.1.2 (LA) Landlord's Assignee Tenant (T) Assignee(TA) Subletting In contrast to the assignment of a lease, the lessee remains in the picture when he sublets. He is on the one hand a lessee under his own 'head lease', and on the other a landlord under the sublease. There is not one estate but two, with their respective rights and obligations. 14.1.2.1 Sublease on a Leasehold Term A lessee may decide that he does not wish to sell all his interest under his Government or other lease. Perhaps he requires the property for his own occupation in the future or he wishes to use the property to generate income by way of rental. A disposal for a period shorter than the residue of the term of the lease creates a new lease that is a separate interest or estate from the lease out of which it is created. The rental, term, and covenants are distinct and need not be the same as the terms of the head lease. For instance, if a lessee holding a Government lease of 75 years wishes to allow another to have possession of the land for only 5 years of his 75-year term, he will create a sublease giving the right to exclusive possession of the land for 5 years. At the end of the 5-year term, possession of the land will revert to the Government lessee who may take up possession himself or grant another sublease. Most subleases in Hong Kong are created consequent upon the Government lease and are for considerably shorter terms than the Government lessee himself enjoys. The reason for the short length of subleases is purely economic. In the volatile Hong Kong property market, landlords often prefer to retain the freedom that shorter terms afford. 14.1.2.2 Concurrent Leases It is possible, but not common, for a landlord to grant a sublease of his reversion. Such a disposal is known as a 'concurrent lease'. A concurrent 345 HONG KONG LAND LAW lease passes the right to receive rent and the other rights and obligations of a landlord under the lease to the concurrent lessee during the subsistence of the initial lease. The length of the concurrent lease may be longer or shorter than the first lease. If it is longer, or the initial lease for some reason is brought to an end prior to the natural expiry of its term, the concurrent lease will fall into possession and the concurrent lessee will become entitled, to occupation of the property. A sublease and a concurrent lease may be depicted in the following way: Fig 14.2 Sublease/Concurrent Lease Leasehold Reversion ie Concurrent Lease Leasehold Term L L~--------T L____ lease T sublease Concurrent Landlord (CL) OR L---------T Sub-tenant L ___________ CL What is the effect of either an assignment or a subletting upon the obligations of the landlord and the tenant contained in the lease? There are a number of different situatic;ms to consider: • Is the original lessee still bound by his contractual obligations set out in the lease even after he has disposed of his interest? • Can the original lessee still enforce his contractual rights against the landlord even after he has disposed of his interest? • Is a new assignee of the lease or sublessee bound by the covenants the original lessee entered into? • Can the new assignee or sublessee enforce the covenants the landlord gave to the original tenant? • Is the original landlord still liable for breach of the contractual obligations he entered into under the lease even after he has disposed of his interest? • Can the original landlord sue for rental or for the performance of any other covenants made for his benefit even after he has disposed of his interest? 346 LEASEHOLD COVENANTS • Is a new landlord as assignee of the reversion able to sue for the rental, or otherwise directly enforce the covenants made by the tenant? • Can a new landlord, as an assignee of the reversion, be required to perform the covenants given by the original landlord in the lease? When considering these questions it is important to bear in mind the dual nature of a lease: it is both the grant of an estate in the land to the tenant and a contract between the original landlord and tenant, which defines their respective rights and liabilities throughout the period of the estate granted. 14.2 The Original Parties There is between the original landlord and the original tenant privity of contract. This privity continues despite the fact that either or both of them may dispose of their interest in the land. Accordingly, at common law the original parties remain bound by and entitled to enforce their respective covenants. It does not matter if the original parties have not been personally responsible for the breach of covenant. They have agreed to observe and perform the covenants throughout the leasehold term, and this liability continues even though the terms of the original covenant may be varied. For instance, in Centrovincial Estates Plc v Bulk Storage Ltd 1a tenant became liable to pay the higher rent agreed by a subsequent assignee under the rent review. The original landlord or tenant, therefore, cannot escape liability at common law by assigning their respective interests. They may step out of the picture for all practical purposes, but legally their contractual responsibilities continue. They, in effect, become sureties for the continued performance of the covenants by subsequent assignees. It is thus prudent for a landlord or tenant to try and check the financial standing of their assignees. However, it appears that where the lease is continued by the operation of statute, for instance under Part IV of the Landlord & Tenant (Consolidation) Ordinance,2 the liability of the original parties may not extend to the renewed or extended term, at least not unless the terms of the original lease so provide. 3 It is the precise terms of the parties' contractual bargain which govern their liability. In addition, statute may have a role to play in the limitation of liability.4 14.2.1 The Tenant On the one hand, the tenant will have the burden and be liable for the breach of the covenants that he has given to his landlord; on the other hand, he will enjoy the benefit and be entitled to enforce the obligations that his landlord has agreed to perform and observe. (1983) 46 P&CR 393 and Selous Street Properties Ltd v Orone! Fabrics Ltd (1984) 270 Estates Gaz 643 Cap 7 City of London Corporation v Fell [1993] 3 WLR 1164 and Herbert Duncan Ltd v Cluttons [1993] 3 WLR 1164 In England, the recently enacted Landlord& Tenant (Covenants) Act 1995 effects far reaching changes in the enforcement of leasehold covenants. 347 HONG KONG LAND LAW 14.2.1.1 Liability for Breach There are a number of ways in which a tenant may seek to protect himself from liability for a breach of covenant committed by someone to whom he has assigned his interest. (a) Contractual exclusion of liability A tenant may seek expressly to provide in the covenants he gives to his landlord that his liability should be limited to breaches committed while he is the tenant. Unfortunately, a landlord rarely will agree to such a limitation of liability. Certainly Government leases in Hong Kong contain no such limitation. (b) Chain of covenants Alternatively the tenant may require the person to whom he assigns the lease to promise to perform and observe the covenants. If the new tenant in tum assigns his interest, he will also require his assignee to give a similar covenant, so that a chain of covenants is built up to protect the original tenant and pass on liability to the party who is guilty of the breach of convenant. The practice of giving such covenants has become so widespread that, in the case of the assignment of a Government lease, they are automatically implied. 5 (c) Section 41(8) of the Conveyancing and Property Ordinance This section provides: l ... that a covenant shall not bind a person after he has ceased to have any estate or interest in the land affected by that covenant except in respect of a breach of that covenant committed by him before that cessation. l I l l l\ The intention is clearly that a lessee who assigns his leasehold term should cease to be liable on the leasehold covenants once he has ceased to have any connection with the land, save only for breaches that were committed while he still held the lease. However, s 41 only applies to covenants that fulfil the conditions set out in sub-s 41(2). We will look at these conditions more closely when considering the enforceability of land covenants. 6 Suffice it to say at this stage that the leasehold covenants given by a lessee should be capable of satisfying these conditions so as to release an original lessee from liability for any breach committed after he has disposed of his interest. 7 6 7 348 See s 35(1)a and Part I First Schedule of the Conveyancing and Property Ordinance ~~ I See Chapter 15. In England, s 5 of the Landlord & Tenant (Covenants) Act 1995 releases a tenant, under a lease entered into after 1 January 1996, from liability for breach of any leasehold covenants committed after their assignment of the lease. LEASEHOW COVENANTS (d) Disclaimer The trustee of a bankrupt or the liquidator of a company may disclaim onerous property. A lease, particularly where the rental is high and the tenant cannot escape the obligation to pay that rent because of a prohibition on assignment or sub-letting in the lease, may well be considered onerous and a target for the trustee or liquidator'-s power to disclaim. The effect of a disclaimer on the original tenant's liability to pay the rent and perform the other covenants in the lease will depend upon whether the lessee who is seeking to disclaim is the original tenant or an assignee of the original tenant. Where the tenant is the original tenant the disclaimer will indeed extinguish the tenant's liability to pay the rent or perform the other leasehold covenants. The effect of the disclaimer is to determine the lease. 8 However, where the tenant is not the original tenant but an assignee, the disclaimer will not extinguish the liability of the original tenant under their contractual liability to pay the rent and perform the other covenants. The disclaimer operates to terminate the liability of the assignee to the landlord and under any chain of indemnity covenants to the ·previous tenant or . tenants. The lease itself continues to exist and with it the liability of the original tenant to the lease. 9 14.2.1.2 Right to Sue A tenant, once he has disposed of his leasehold term, will generally have no wish to rely on the covenants given to him by the landlord: after all, he is unlikely to suffer any damage upon which to base a claim when he has no connection with the land. But a tenant may wish to sue in respect of a breach that occurred before he assigned his lease. His right to do so is unaffected bys 41(8) of the Conveyancing and Property Ordinance and will continue despite his subsequent disposal of the lease. City & Metropolitan Properties Ltd v Greycroft Ltd [1987] 1 WLR 1085 FACTS The plaintiff acquired the residue of lease of a flat. The landlord, the defendant, was in serious breach of its covenant to repair. After the plaintiff failed in his attempts to resell the property, the plaintiff forced the defendant to carry out the needed repairs. The plaintiff then assigned the lease at a profit but sought damages for breach of covenant against the defendant, including the lost costs of his earlier attempts to sell. Stacey v Hill [1901] 1KB 660 Hindcastle Ltd v Barbara Attenborough Associates Ltd [1994] 4 All ER 129 349 HONG KONG LAND LAW JUDGMENT The plaintiff was entitled to seek recovery of damages against the defendant despite his disposal of his interest in the lease. Where the breach of covenant continues after the date of the assignment, there appears to be a possibility that both the tenant and his assignee may have a right to sue in respect of the same breach. 14.2.2 Tbe Landlord An original landlord also continues to be affected by privity of contract after he has assigned his leasehold reversion. Similar que"Stions arise as to whether he will be liable for a breach of the landlord's covenants or may rely on the benefit of the tenant's covenants, once he has no further interest in the property. 14.2.2.1 Liability for Breach At common law a landlord will remain liable on his covenants even after he has assigned his reversion, 10 but he too can limit his liability by using the same methods as the tenant. Indeed, it is far more common to finp a contractual limitation of a landlord's liability than it is of a tenant's liability. n 14.2.2.2 Right to Sue A landlord will be unable to sue in respect of breaches that have occurred after he has disposed of his reversion because he will suffer no damage, but he. may wish to continue to be able to sue in respect of breaches that occurred before he disposed of his reversion. It is now well established that the effect of s 31 of the Conveyancing and Property Ordinance 12 is to deprive the original landlord of his right to sue his tenant for breach of covenant once he has assigned his reversion, regardless of whether the breach was committed before or after the assignment. The leading case is: !_~Jf!:li'!"!li"I,!' ". ... • ~ ,..,.\l!!"iJll!ll!l!!ll1,@i'jiij!:liirii 1r..ii1-.,-- ..."'!'2'!!!!1,_,::_, .. , .. Re King [1963) Ch 459 FACTS Mr King was entitled to a lease of a factory. The lease required him to keep the premises in repair, to insure the premises and lay out any insurance monies in the rebuilding of the premises, and to make good any deficiency ° 1 11 12 350 Ce/steel Ltd v Alton House Holdings (No 2) [1987] 1 WLR 291 In England, a landlord under a lease entered into after 1 January 1996 may apply to be released from liability under the landlord's covenants-see ss 6,7 & 8 Landlord & Tenant (Covenants) Act 1995. The equivalent of s 141 of the Law of Property Act 1925 LEASEHOLD COVENANTS as required. During the Second World War the factory was destroyed by fire, and could not be rebuilt due to building restrictions. After the war the land was resumed and redeveloped as a housing estate, and Mr King's estate sought directions from the court as to whether they remained liable for breach of covenant to the original landlord despite the resumption. JUDGMENT The original landlord's right to take action ceased on his assignment of the reversion. The reasons given by the English Court of Appeal judges for their decision differed. Lord Denning MR was of the view that the section was merely declaratory of the common law, while the majority felt the section amended or at least clarified the law. The majority view of the Court of Appeal has been approved in England in London & Country (A&D) Ltd v Wilfred Sportsman Ltd, 13 where the right of an assignee to claim arrears of rental accrued prior to the assignment was at issue. The court declined to follow the case of Flight v Bentley, 14 and held that an assignee, and not the landlord, was entitled to recover the arrears. They were of the view that the section had changed the law to pass the right to sue for arrears of rent to the purchaser upon the assignment of the leasehold reversion. 15 14.3 Assignees 16 There is no privity of contract between a landlord and a tenant's assignee, nor between a tenant and a landlord's assignee, but there is 'privity of estate'. Privity of estate arises where the relationship of landlord and tenant exists between the parties. When a landlord assigns his reversion, his assignee steps into his shoes and becomes the landlord in his place. Likewise, when a tenant assigns his leasehold term his assignee steps into his shoes and becomes the tenant in his place. A landlord and tenant and their respective assignees are thus all affected by the same estate, namely the lease. They are said to be in privity of estate. In the diagram below, the dotted lines show the relationships of privity of estate. Thus: 13 14 15 16 [1971] Ch 764 (1835) 7 Sim 149 See also Arlesford Trading Co Ltd v Servansingh [1971] 1 WLR 1080 See Lord Templeman's judgment in City of London Coiporation v Fell [1993] 3 WLR 1164 at 1167 for a clear explanation of the doctrine of privity of estate. 351 HONG KONG LAND LAW Fig 14.3 Privity of Estate I I I I I I I • T L&T TA - enjoy privity of contract and estate L&TA } LA & T - enjoy privity of estate alone LA&TA The concept of privity of estate is central to the enforceability of leasehold covenants. It looks beyond the strict contractual relationships, and determines liability according to the parties' relationship to the estate created by the lease. Whereas the parties to the lease contract do not change, the parties affected by the leasehold estate may do so. Accordingly, whilst we have seen that the contractual liability of the original parties to the lease continues throughout the term unless limited in some way, the liability of the parties based upon privity of estate only lasts so long as they are affected by the estate. When they cease to come within the landlord and tenant relationship, their liability ceases too. We now consider how privity of estate affects the enforceability of leasehold covenants, both where the tenant assigns his lease, and where the landlord assigns his reversion. 14.3.1 Assignment of T's Lease A lease will contain both covenants made by the tenant and covenants made by the landlord. Therefore it is necessary to look at the two sides of the same situation, namely: • • 352 can L take action on the tenant's covenants against TA ('the burden')?; and can TA take action on the landlord's covenants against L ('the benefit')? LEASEHOLD COVENANTS 14.3.1.1 Burden - Can L Take Action Against TA? Fig 14.4 Burden L '' '' '' '' '' '' '' '' '' '' '' '' T Can L take action against TA? '' '' ' TA It was decided as long ago as the 16th century in Spencer's case 17 that a landlord can take action against an assignee of the lease provided a number of conditions are satisfied. 18 (a) The covenant 'touches and concerns' the land We will look more closely at this concept later, as it is common to the enforcement of leasehold covenants. 19 (b) The covenant is intended to run with the land Sections 39 and 40 of the Conveyancing and Property Ordinance now presume an intention that the benefit and the burden of all covenants relating to land are intended to run with the land unless a contrary intention exists. Spencer's case did draw a distinction between covenants relating to things in existence (in esse), for instance a covenant to repair a wall, and things not yet in existence (in posse), for instance a covenant to build a wall. The latter were only enforceable against assignees if assigns were expressly referred to in the covenant, but s 40(2) of the Conveyancing and Property Ordinance has now removed this distinction. (c) Privity of estate The running of covenants under the principle in Spencer's case is dependent on privity of estate. We have already seen that there is privity of estate between a landlord and a tenant's assignee. This will be so even if the tenant 17 18 19 (1583) 5 Co Rep 16a In England, the effect of Spencer's case is now found in statutory form in relation to leases entered into after 1 January 1996-see s 3 Landlord & Tenant (Covenants) Act 1995. See 14.3.4. 353 HONG KONG LAND LAW assigns only part of the land comprised in the lease. His assignee will then be liable on those covenants in the lease that relate to his part of the leasehold property. The tenant and his assignee in these circumstances will generally agree on an apportionment of the rental liability under the lease, but this apportionment will only bind the landlord if he is party to the apportionment. If the landlord is not a party to the apportionment, 20 he can continue to recover the whole rent from either the lessee or his assignee, although the party who is forced to pay more than his apportioned share may seek recovery from the other lessee in quasi-contract. 21 (d) The lease and its assignment are recognised at law The doctrine in Spencer's case is limited to leases that are recognised at law, either because they are made under seal or are created orally or in writing, for a period not exceeding three years. The fact that a lease created in writing or orally might be recognised in equity under the rule in Walsh v Lonsdale does not give rise to any estate in the land, and thus no privity of estate. This traditional view is illustrated by: tl!ll!im;ra~·•ir: ~~,e~mg:~li~iiii Purchase v Lichfield Brewery Co [1915] 1 KB 184 FACTS The plaintiff agreed in writing to grant a lease, but the formalities were never completed. The original tenant assigned his lease by way of mortgage to the defendant. The plaintiff sought to enforce the terms of the lease against the defendant. JUDGMENT The defendant was not bound by the covenants, for there was no privity of estate. However, this traditional distinction between legal and equitable leases is inconvenient and has been subject to considerable criticism. For instance, Denning LJ in Boyerv Warbey 22suggested that, since the fusion of law and equity, '[T]he distinction between agreements under hand and agreements under seal has been largely obliterated. There is no valid reason nowadays why the doctrine of covenants running with the land should not apply equally to agreements under hand as to covenants under seal. '23 There is also some authority in other jurisdictions that the running of covenants may 20 21 22 23 354 The formal apportionment of Crown rent is governed by the Crown Rent and Premium (Apportionment) Ordinance Cap 125. On the assignment of a Crown lease an express covenant is implied. See s 35(1)a and Part I First Schedule of the Conveyancing and Property Ordinance. [1953] 1 QB 234 At 246 LEASEHOLD COVENANTS be applied where the lease is equitable. 24 Denning L]'s views, whilst attractive, are not without difficulty. The recognition of a lease in equity is dependent on a claim for specific performance. If there is no right to specific performance, there is no lease and the question of who is liable under its terms becomes futile. A right to claim specific performance of a contract may be assigned, but a claim for specific performance will fail if it is against the assignee of a contract, since the burden of a contract cannot be assigned. It has been suggested that Purchasev LichfieldBrewerymay be distinguished as the case involved the liability of a mortgagee who was not in possession of the property. Where an assignee goes into possession and pays rent and is generally accepted by the landlord as the new tenant, it may be possible to argue that there is a new contract, or even a new periodic tenancy, between the landlord and the tenant's assignee so as to create direct privity between these two parties. 25 Similar problems arise where it is the assignment of the lease that is equitable, for instance where an assignment of a lease for more than three years is in writing rather than under seal. In any event, a landlord under an equitable lease, or a legal lease that has been assigned only in equity, may take other action. He may still exercise a right of forfeiture. Furthermore, the language of s 41 of the Conveyancing and Property Ordinance, which we shall look at more carefully in Chapter 15, may be relied upon to admit an action by the landlord against an assignee under an equitable lease, since leasehold covenants qualify as land covenants and are enforceable as such. 14.3.1.2 Benefit - can TA Take Action Against L? Fig 14.5 Benefit of Tenant's Assignee L ~, '' '' '' '' '' '' '' '' '' '' '' T Can TA take action against L? '' '' '·TA The principles of privity of estate established by Spencer's case 26 also permit a tenant's assignee to claim the benefit of the covenants given by the landlord. 27 24 25 26 27 See De Luxe Confectionery Ltd v Addington [1958] NZLR 272. RJ Smith [1978] CLJ 98 [1583] 5 Co Rep 16a In England, the effect of Spencer's case is now found in statutory form in relation to leases entered into after 1 January 1996-see s 3 Landlord & Tenant (Covenants) Act 1995. 355 HONG KONG LAND LAW Privity of estate, being based on the relationship oflandlord and tenant, will cease when that relationship ends. Thus the liability of an assignee will cease when he ceases to have any interest in the land. Likewise an assignee is not liable for any breach of covenant that occurred prior to his acquisition of the lease. 14.3.2 Assignment of L's Reversion Again there are two sides to consider, namely: • can T take action on the landlord's covenants against LA ('the burden')? and • can LA take action on the tenant's covenants against T ('the benefit')? The rationale of privity of estate and Spencer's case extends also to the assignment of the landlord's reversion, although the rights of the landlord's assignee have been based on statute, initially in the Grantees of Reversions Act 1540 and latterly in ss 31 and 32 of the Conveyancing and Property Ordinance. 14.3.2;1 Burden - Can T Sue LA? Fig 14.6 Burden of Landlord's Covenants L ~-----------/~-LA / / / / / / / / / / / / / / / / / / / / / / / / / / T / Can T sue LA? Section 32 of the Conveyancing and Property Ordinance, which is identical to s 142 of the Law of Property Act 1925, 28 provides: The obligation under a condition or a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate 28 356 In England, s 3 of the Landlord & Tenant (Covenants) Act 1995 supersedes s 142 of the Law of Property Act 1925 in relation to the running of the burden of landlord's covenants in leases entered into after 1 January 1996. LEASEHOLD COVENANTS immediately expectant on the term granted by the lease, be annexed and incident to and shall go with that reversionary estate, or the several parts thereof, notwithstanding severance of that reversionary estate, and may be taken advantage of and enforced by the person in whom the term is from time to time vested by assignment, devolution of law or otherwise; and, if and as far as the lessor has power to bind the person from time to time entitled to that reversionary estate, the obligation aforesaid may be taken advantage of and entered against any person so entitled. The burden of the landlord's covenants thus passes to an assignee of the landlord provided the covenants relate to the 'subject matter of the lease'. This expression carries the same import as the expression used in Spencer s case, that the covenants must 'touch and concern' the land, and will be examined more closely shortly. There is no distinction drawn in the section between leases made under seal and leases made under hand. Thus there is no difference in the treatment of legal or equitable leases. 14.3.2.2 Benefit - Can LA Sue T? Fig 14. 7 Benefit of Tenant's Covenants L / / LA / / / / / / / / / / / / / / / / / / / / / / / / / / ~ T Can LA sue T? Section 31 of the Conveyancing and Property Ordinance, which is identical to s 141 of the Law of Property Act 1925, 29 provides that the benefit of the tenant's covenants run with the land provided they relate to the 'subject matter of the lease'. It states: 29 In England, s 3 of the Landlord & Tenant (Covenants) Act 1995 supersedes s 141 of the Law of Property Act 1925 in relation to the running of the benefit of tenants' covenants in leases entered into after 1 January 1996. 357 ~ f. f HONG KONG LAND LAW Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject matter thereof, and on the lessee's part to be observed and performed, and every condition of re-entry and other condition therein contained, shall be annexed and incident to and shall go with the reversionary estate in the land, or any part thereof, immediately expectant on the term granted by the lease, notwithstanding severance of that reversionary estate, and without prejudice to any liability affecting a covenantor or his estate. The benefit of a tenant's covenants may thus be relied upon by a landlord's assignee to enable him to sue the tenant for the rental, and upon the other covenants given by the tenant that have reference to the subject matter of the lease. Again, there is no distinction drawn in the section between leases made under seal and those made under hand. ?•'I ;..,i, ,. ~ ~1!1!?·~·•,......~ ....-· ['111_;,.u, Manchester Brewery Co v Coombs [1901] 2 Ch 608 FACTS The defendant agreed to take a lease of a hotel for one year. It was a term of the agreement that he would purchase beer only from his landlords. The landlords sold the hotel to the plaintiff, who brought action to prevent the defendant from selling other beers. JUDGMENT The plaintiffs could prevent the defendant from selling other beers in breach of covenant despite the fact that the lease was equitable. Some doubt remains as to whether the definition of lease includes oral leases. In England, the matter is put beyond doubt by s 154 of the Law of Property Act 1925, which clarifies the operation of the section to all tenancies. There is no equivalent to this section in Hong Kong, but it would be open to the courts in Hong Kong to adopt a liberal interpretation of 'lease'. There may, however, be evidentiary problems in establishing the content of the covenants found in an oral lease with sufficient certainty to found an action. 14.3.3 Severance of the Reversion A landlord need not assign the whole of his reversion. He may assign only part of his reversion, either as to a part of the land or as to a part of the estate. 358 LEASEHOLD COVENANTS 14.3.3.1 Severance as to the Estate A landlord assigns part of his reversionary estate when he grants a concurrent lease. The concurrent lessee, as the party holding 'the reversionary estate immediately expectant on the term granted by the lease', takes the benefit of the lessee's covenants and the burden of the landlord's covenants under ss 31 and 32 of the Conveyancing and Property Ordinance. 14.3.3.2 Severance as to the Land A landlord may have granted one lease covering several units. He may then decide to assign the reversion of the lease relating to only one of those units. Section 30 of the Conveyancing and Property Ordinance provides that every covenant or condition contained in a lease will be apportioned upon a severance of the reversion, so that the original landlord and the new landlord both may claim the benefit and will be subject to the covenants in the lease affecting their respective units. 30 14.3.3.3 Surrender/Merger of the Reversion Where A leases land to B, who in turn subleases the land to C, and then D purchases both A's and B's interest, the reversion immediately expectant on C's lease, ie B's reversion, merges with A's reversion. The privity of estate arising on C's lease is extinguished, and D is then unable to take action against C, and C is unable to take action against D. Fig 14.8 Reversion A lease D - B's estate and privity of estate between B and C is extinguished B sublease C In England the benefit and burden of the covenants are preserved by the effect of s 139 of the Law of Property Act 1925, but this provision has not been enacted in Hong Kong. The problem could be avoided, 'however, if D preserves the independence of B's interests by purchasing either A or B's interest in the name of a nominee. 30 Winster Development Co Ltd v Pang Yiu Chang [19931 1 HKC 95 359 HONG KONG I.ANDI.AW 'Touch and concern the land' and 'subject matter of the lease' 14.3.4 Whether the benefit and burden of a covenant runs with the lease or the reversion depends on whether the covenant 'touches and concerns the land' or 'has reference to the subject matter of the lease'. These tests are essentially the same, the former being the common law and the latter the statutory formulation of the requirement. The test is far easier to apply than to explain. 31 Most leasehold covenants do 'touch and concern the land': for instance, covenants to pay rent, to repair, to use the premises in a particular manner, or not to dispose of the premises. Covenants that have fallen outside the net have included covenants to pay an annual sum to someone other than the landlord, 32 to keep other premises in repair, 33 or not to open a competing business near the leased premises. 34 The classic exposition of the characteristics of the requirement was referred to in Breams Property Investment Co Ltd v Strongler 35 as being to determine whether the covenant affects either 'the landlord qua landlord or the tenant qua tenant'. 36 Covenants that are personal or private in nature are thus excluded, as are those that are collateral to the lease itself. But this test has been criticised as begging the question. The issue has come under scrutiny in respect of those obligations that support or buttress covenants that clearly do relate to land. In Hong Kong there has been the question of whether the obligation for a tenant to pay and for a landlord to repay a tenant's deposit is a covenant that runs with the land. Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] AC 99 FACTS A landlord granted the defendant a lease for five years, under which the defendant was required to pay a deposit equivalent to two months' rent as security for the performance of the tenant's covenants in the lease. The landlord subsequently mortgaged the property to the plaintiff. The landlord then defaulted under the mortgage and went into liquidation. The plaintiff entered into possession and on the expiry of the lease the defendant, having performed all the covenants, sought the return of the deposit from the plaintiff. In England, s 2 of the Landlord & Tenant (Covenants) Act 1995 abandons the requirement for a covenant to 'touch and concern the land' or 'have reference to the subject matter of the lease' in respect of covenants in leases entered into after 1 January 1996. All covenants in leases made after that date will run with the land. 32 Mayho v Buckhurst(1617) Cro Jae 438 33 Bewar v Goodman [1909] AC 72 34 Thomas v Hayward (1869) LR 4 Ex 311 35 [1948] 2 KB 1 36 ibid at 7 3l 360 l. LEASEHOLD COVENANTS JUDGMENT The defendant could not recover the deposit from the plaintiff, for the covenant to pay and repay the deposit did not run with the land. The Privy Council rejected the view of the Hong Kong Court of Appeal that the covenant did run with the land because it was so inextricably bound up with the tenant's covenants, which did touch and concern the land. This was not the critical question. The covenant had to be looked at in isolation. The English courts have examined a similar but not identical issue when deciding that a landlord's assignee could enforce a surety covenant guaranteeing the performance of the tenant's covenants in the cases of Kumar v Dunning 37 and P & A Swift Investments v Combined English Stores Group Plc.38 Sir Nicholas Browne-Wilkinson V-C in Kumarv Dunning3 9 identified the acid test as being to determine whether the covenant was beneficial to the landlord or tenant, as the case may be, and to no one else. Furthermore, he was of the opinion that a covenant to pay a sum of money might be capable of touching and concerning the land provided that the existence of the covenant and the right to payment under it affected the value of the land. These tests were approved and developed by the House ofLords in the Swift Investments case, which set out four guidelines for determining if a covenant runs with the land: 40 (1) (2) (3) ( 4) the covenant benefits only the reversioner for the time being, and if separated from the reversion ceases to be of benefit to the covenantee; the covenant affects the nature, quality, mode of use or value of the land of the reversioner; the covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant); the fact that a covenant is to pay a sum of money will not prevent it touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is 'connected with something to be done on, to or in relation to the land. In applying such a test, it is difficult to see why an appropriately drafted covenant to pay or repay a deposit should not qualify. Indeed, in the Hua Chiao case, the Privy Council were critical of the wording of the covenant in question because it failed to make provision for what was to happen to the deposit upon an assignment of the lease or the reversion. In the light 37 38 39 40 [1989] QB 193 [1989] AC 632. see also Coronation Street Industrial Properties Ltd v Ignall Industries Plc [1989] 1 WLR 304. [1989] QB 193 at 204 [1989] AC 632 at 642 361 HONG KONG LAND LAW of such omission, the Privy Council had little choice but to construe the covenant as personal to the original landlord. 41 The Swift Investments test has subsequently been considered in: Caerns Motor Services Ltd v Texaco Ltd [1995] 1 ER 247 FACTS The plaintiff leased a petrol station from Texaco. The lease contained a covenant requiring the tenant to carry on the business of a petrol filling station and to keep the business open all day for the sale of the landlord's petroleum products. Texaco assigned the lease to another petrol company and the question arose whether the new landlord could force the plaintiff to sell only their petroleum products at the petrol filling station in performance of the leasehold covenant. JUDGMENT The covenant requiring the plaintiff to sell only the landlord's petroleum products was enforceable by the new landlord for it was a covenant which had reference to the subject matter of the lease and thus ran with the land under the provisions of s 141 of the Law of Property Act 1925. The court noted that the Swift Test, although satisfied in this case, was a test that had been developed in the context of surety covenants where there was no privity of estate between the landlord's assignee and the surety. The proper approach was to look at the test in s 141 of the Law of Property Act 1925, ie did the covenant have reference to the subject matter of the lease? The Swift Test was helpful but it was not the starting point. The application of the 'touch and concern' test to options granted to the tenant to either renew his lease or to purchase the landlord's reversion also illustrates the sometimes fine distinctions that can be drawn. An option to renew the lease does run with the land, whereas an option to purchase the reversion or a right of first refusal does not. The distinction stems from the fact that an option to renew affects the lessee as a lessee, whereas an option to purchase or a right of first refusal affects the lessee as purchaser and is therefore collateral to the landlord and tenant relationship. 14.4 Subtenants The enforcement of the head lease covenants against a sublessee cannot rest upon Spencer's case,42 for there is no privity of estate between the head 41 42 362 See also Crocodile Gannents Ltd v 7be Prudential Enterprise Ltd (1989) HCt No A6152 of 1988. (1583) 5 Co Rep 16a LEASEHOW COVENANTS landlord, and the sublessee.-Although they are landlord and tenant, they have no direct relationship. They are not each other's respective landlord or tenant. Privity of contract and estate only exists between the head landlord and tenant under the head lease and between the tenant and subtenant under the sublease. Fig 14.9 Privity of Contract and Estate: Subtenants L privity of contract and estate T I privity of contract and estate ST A landlord thus cannot directly enforce his tenants' covenants against a subtenant on the basis of Spencer's case. But a subtenant cannot ignore his head-landlord. He may be faced with a forfeiture of the head lease, in which event his own sublease will fall or the landlord may enforce the covenants against him on the principles applicable to all land covenants (see Chapter 15). 363 r ' Land Covenants 15.1 Introduction We have seen how privity of estate overcomes the limitations of privity of contract where covenants relating to land affect owners of the same leasehold estate so as to facilitate the enforcement of leasehold obligations between landlord and tenant. But are there any other circumstances when it is necessary or convenient for covenants relating to land to affect a larger circle of people than the original parties to the covenant? In our study of land law we have constantly noted that land as an immovable and permanent asset is characterised by the number of interests that may subsist in the land at any given time. Co-owners, lessors and lessees including sub-lessees, beneficiaries and trustees all may hold interests in the same piece of land. Where different interests do exist in the same piece of land it will be necessary to regulate the relationship between these interests. We have already examined the rules affecting the priority of interests and the relationship of trustee and beneficiary and landlord and tenant. We have also looked at the common law regulation of co-ownership rights. In the next chapter we will be examining in more detail how co-ownership rights and obligations have been used to facilitate the ownership and management of multi-unit developments in Hong Kong. Covenants relating to land play a crucial role in this area and it is thus vital that we gain a solid grasp of the principles governing the enforcement of land covenants. Furthermore, we have seen how easements provide a mechanism to facilitate the simultaneous use of adjoining land. The recognition of the right to use adjoining servient land for purposes which accommodate the adjoining dominant tenement as an interest in land regulates the future use of both the servient and dominant tenements. Covenants also may be used to regulate the user of adjoining land. Indeed, it is in this context that the principles that we will be examining in this chapter were developed. The nineteenth century in England saw the break-up of many large estates to provide land for industrial development and the rise in population that accompanied higher standards of living. There was, however, little public control of planning and land owners thus had to rely on private law mechanisms to regulate land use. The law of land covenants developed against this background. In Hong Kong, land covenants have also been used for this purpose but not so much between adjoining owners of different pieces of land. As we will see in the next chapter,Qand covenants have been used to regulate land use between co-owners of the same land. Regulation of planning between adjoining owners falls largely under governmental control but interestingly not so much by use of public law measures but through the private law mechanism of privity of estate. The government can and does use the Crown lease covenants to control land development and use.) 364 LAND COVENANTS 15.2 Covenant Terminology Before considering the detailed rules concerning the enforcement of covenants, it is important to appreciate the context in which that enforcement is framed.(A covenant as an agreement must be made between at least two parties. One party, the covenantor, agrees with the covenantee to perform or refrain from performing some act. The covenantor is bound by or has the burden of the obligation, and the covenantee may enforce or has the benefit of that obligation. The original covenantee's ability to take action, or original covenantor's obligation to observe or perform the covenant is based upon the contract itself. There is no need to establish that the benefit or burden has passed to them.) Fig 15.1 Covenant Between Two Parties Covenantor---------------covenantee (Burden) (Benefit) Successors in title of the covenantee will wish to be able to enforce the covenant against the covenantor. To do so they will have to prove that the benefit of the covenant has passed to them. Fig 15.2 Covenant with Successor Covenantor -------------- Covenantee _ j BcncGt --Successor Even if the covenantee and his successors in title can prove that they have the benefit of the covenant, it will be of limited use if they can only sue the covenantor. Once the covenantor has disposed of his interest in the land, the covenantee and his successors in title will wish to enforce the covenant against the covenantor's successors in title. They will have to prove that the burden of the covenant has passed to the covenantor's successors. Fig 15.3 Covenant with Successor Covenantor __________ Burden j ___,_Covenantee ,,,,---------------- Successor~ 365 HONG KONG LAND LAW And Covenantor __________ Burden Suct,m __,_ Covenantee ◄-"----------------- Benefit Sm,Jsm Covenants may also be mutual. The parties to the covenant may both agree that they will only use their respective properties for a particular purpose, for instance only for residential purposes. In this context both parties are covenantors and covenantees. They each agree to bind their respective properties with the burden of the restriction and at the same time agree that they should both be able to enforce the benefit of the covenant should the other party use their property other than for residential purposes. Fig 15.4 Running of Mutual Covenants Benefit --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . Burden I I Developer: Covenant for residential use only: FirstPurchaser 1 I I I Burden Benefit Burden Benefit I I 1 ' Successor - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- Successor Benefit Burden Thus, in the case of mutual covenants it is important to establish the capacity of the party in question. If action is being taken against a party, it is the running of the burden that must be established. If a party is wishing to take action, it is the passing of the benefit that must be proved. Where both the original covenantor and the original covenantee have disposed of their interests in the land, it will be necessary to establish both the running of the benefit and the burden. The_original covenantor or covenantee, or their respective successors in title, may not dispose of their whole interest in the property. They may, for instance, grant a lease or a mortgage. The question then arises as to whether the lessee or mortgagee, as persons deriving title from the covenantor or covenantee, are able, on the one hand, to enforce the covenant and, on the other hand, are obliged to perform the covenant. In other words, does the benefit and burden of a covenant pass to persons deriving title from the original covenantee or covenantor and their successors in title? 366 LAND COVENANTS I .1 i Fig 15.5 Persons deriving a lesser title Covenantor Bunlcn ------------;► j j Lessee ____________________ 15.3 Covenantee Benefit Mortgagee The Burden - Who Can Be Sued? 15.3.1 Common Law The burden of a covenant relating to land cannot pass at common law. Austerbeny v Corporation of Oldham (1885) 29 Ch D 750 FACTS A group of landowners established a company in order to make a road. The landowners transferred their land to trustees for the company, who covenanted with them to keep the road in good repair. The defendant acquired the road from the trustees, and the question was whether he was bound to repair the road. JUDGMENT The defendant was not bound by the covenant unless it constituted an interest in the land. The court was of the view that the covenant in question was not an interest in land recognised at law. There are ways around this general principle. 15.3.1.1 Chain of Covenants The running of the burden of a covenant at common law can be achieved indirectly by means of a chain of covenants, whereby the covenantor, when he sells the land, obtains the agreement of the purchaser to observe the covenant. The covenantee still has to take action against the covenantor, but the covenantor can then take action against his purchaser. If a chain of covenants is built up as each owner sells, the guilty party who commits a breach can be made liable by passing the liability down the chain. A covenant by the purchaser of a unit in a multi-unit development to perform the Government lease and the deeds of mutual covenant is automatically 367 HONG KONG LAND LAW implied into all assignments of units in a multi-storey building. 4 As liability under a chain of indemnity covenants is based on a contractual relationship there is no necessity for the covenant to run with the land. 5 A chain of direct covenants is only as good as each link in the chain, and will no longer be effective if the original parties to the covenant can rely on s 41 (8) of the Conveyancing and Property Ordinance to break the very first link. At common law the original contracting parties remain contractually liable on the covenant even after they have parted with any interest in the land, buts 41(8) now provides that a party is not liable on a covenant that complies with the requirements of the section once he has parted with any interest in the land. Breaches of covenant committed before the disposal are the only exception. 15.3.1.2 Novation The burden of a contract may pass by novation. A novation is a tri-partite agreement between the original contracting parties and the third party to whom the burden is to pass, whereby the original covenantor is released from his contractual obligation in consideration of a direct promise by the third party to be bound by the terms of the covenant. Novations can be used in Hong Kong to pass the burden of repaying a tenancy deposit where an owner sells land that is subject to a lease. It will be recalled that the obligation to repay a tenancy deposit may not pass under the doctrine of privity of estate. 6 15.3.1.3 The Rule in Halsall v Brizell Where an agreement or covenant confers some benefit, a party or his successor in title cannot claim that benefit without also accepting the obligations to which that benefit is subject. j,ji!i !,ii,:l'.i;.., Halsall v Brizell [1957] Ch 1697 FACTS The developers of an estate in Liverpool sold houses on the estate but retained the ownership of the estate roads. The developers, by a separate deed, granted the purchasers of houses on the estate a right to use the estate roads, and the drains underneath the estate roads, and the purchasers agreed to contribute towards the cost of the upkeep of the drains and roads. The defendants acquired one of the houses on the estate and questioned Sub-section 35(1)a and Part I First Schedule of the Conveyancing and Property Ordinance Cap 19 TRW Steering Systems Ltd v North Cape & others (1993) 69 P&CR 265 See Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd[1987] AC 99. See also ER Ives Investment Ltd v High [1967] 2 QB 379; and Tito v Wadell (No 2) [1977] Ch 106. 368 LAND COVENAN1 1• whether they were bound by the covenant to contribute to the cost of upkeep of the roads and drains. JUDGMENT The defendants were bound to contribute to the upkeep of the estate roads and drains. They could not claim the benefit of the right to use the roads and drains unless they accepted the burden of the agreement to contribute towards their upkeep. The limits of the doctrine are unclear. Megarry V-C in Tito v Wadell 8 drew a distinction between conditional benefits and independent obligations. Conditional benefits arise where the benefit is only granted subject to the acceptance of an obligation. The obligation is, in effect, an intrinsic part of the property or benefit conferred. In these cases the burden clearly passed, for it was a question of taking all or nothing. An independent obligation arises where the benefit and the obligation or burden, although granted or imposed by the same instrument, are not dependent or conditional on each other. Megarry V-C referred to these cases as cases of 'the pure principle of benefit and burden'. He was of the view that the passing of the burden was also possible in these cases. Whether or not the burden did pass depended on the construction of the assignment of the benefit or property to the third • party. The assignment would have to show that the assignee was not intended to take the benefit unless he also assumed the burden. In other words, although the initial grant was not conditional, its assignment was. MegarryV-C's views on the pure principle of benefit and burden are novel, but they are also radical and would, if taken to their logical conclusion, render the law relating to land covenants irrelevant! Indeed the House of Lords in Rhone v Stephens 9 were not prepared to accept Megarry's pure principle of benefit and burden, although they 'wholeheartedly' agreed with the principles espoused in Halsall v Brizell that the enjoyment of a benefit can be conditional upon the acceptance of a burden which is relevant to the exercise of the right. (No 2) '· 8 9 [1977] Ch 106 [1994] 2 All ER at 73 per Lord Templeman 369 HONG KONG LAND LAW 15.3.2 Statutory Intervention - Section 41 of the Conveyancing and Property Ordinance The limitations of the common law have now been addressed bys 41 of the Conveyancing and Property Ordinance. The section replaces the Law of Property (Enforcement of Covenant) Ordinance, which was felt to be inadequate to deal with all the problems presented by multi-unit developments. Unfortunately, s 41 gives rise to its own problems, so this area of the law remains fraught with difficulty. Sub-section 41(3) provides: Notwithstanding any rule of law or equity but subject to subsection (5), a covenant shall run with the land and, in addition to being enforceable between the parties, shall be enforceable against the occupiers of the land and the covenantor and his successors in title and persons deriving title under or through him or them. The sub-section operates to pass the burden of a covenant to both the successors in title of the covenantor, ie purchasers and persons to whom the land of the covenantor passes on his death or bankruptcy, and to persons deriving title from either the covenantor or his successors in title, ie lessees or mortgagees. Indeed, the burden will also extend to any occupier of the land, so that a licensee, who has no title, or a squatter, who acquires title by adverse possession, will also be bound. 15.3.2.1 Characteristics of Enforceable Covenants Sub-section 41(3) does not apply to all covenants, for sub-s 41(2) provides: This section applies to any covenant, whether positive or restrictive in effect (a) which relates to the land of the covenantor; (b) the burden of which is expressed or intended to run with the land of the covenantor; and (c) which is expressed and intended to benefit the land of the covenantee and his successors in title or persons deriving title to that land under or through him or them. In order to fully appreciate the import of these conditions it is necessary to tum to the rules developed in equity to govern the running of the burden of restrictive covenants. 10 These rules originated from the historic decision in Tulk v Moxhay. 10 370 In Supreme Honour Development Ltd v Lamaya Ltd [1991) 1 HKC 198 the court felt that the section should not necessarily be given its plain meaning. As a codifying section with retroactive effect, the section had to be read in the light of previous decisions. \ LAND COVENANT.: \ FACTS The plaintiff sold a vacant piece of land forming Leicester Square in London to a Mr Elms, who covenanted that he would keep the area 'in an.open state, uncovered by any buildings'; The land passed into the ownership of the defendant who knew of the covenant but nevertheless threatened to build on the land. The plaintiff sought an injunction to restrain the defendant from doing so. JUDGMENT The defendant was bound by the covenant. He had bought the land with notice of the covenant, and equity would not allow him subsequently to disregard it. The basis for the decision in Tulk vMoxhayrested upon the purchaser's notice of the covenant. But the doctrine soon developed to establish land covenants as a proprietary interest attached to the land of the covenantee over the land of covenantor, which would affect a subsequent purchaser or occupier of the land according to the established rules of priority governing interests in land. A number of requirements must be satisfied before equity will recognise a covenant as a proprietary interest. In Hong Kong these requirements have been adopted in a modified form by sub-s 41(2) of the Conveyancing and Property Ordinance. (a) The covenant may be positive or restrictive (sub-s 41(2)) Despite a number of early decisions in which positive obligations were enforced, the courts soon bowed to their traditional reluctance •to make orders that would require continuing supervision, and the doctrine in Tulk v Moxhay was confined to the enforcement of negative obligations.11 The House of Lords has recently reaffirmed this position in England in the case of Rhone v Stevens 12 when they emphasised that whilst equity could restrict the exercise of an owner's rights by punishing a breach of a negative stipulation it could not contradict a common law prohibition by conferring a right to enforce a positive contractual obligation. In Hong Kong, where there are so many multi-unit developments, it is vital that positive covenants, for instance to pay management charges or to repair the whole or part of the property, are capable of enforcement against strangers to the covenants. It is for this reason that sub-s 41(2) removes this 11 Haywood v Brunswick Permanent Benefit Building Society (1881) 8 QBD 403 12 [1994] 2 AC 310 • 371 HONG KONG LAND LAW limitation, so that both positive and negative covenants may be enforced under the section. In an attempt to encourage the grant of mandatory remedies by the court, sub-s 41( 4) details the remedies available to enforce a covenant. There is, however, one limitation on the enforceablity of positive covenants. By sub-s 41(5), an occupier or a lessee, whether of the original covenantor or a successor in title of the covenantor or a person who himself derives title from the covenantor or a successor in title, is not directly liable for a breach of a positive obligation. The covenantee or other person wishing to enforce the covenant must take action against the covenantor or his successor in title, who may then be able to seek redress from the lessee where there is also a breach of a separate covenant contained in the lease. Fig 15.6 Running of Covenants against a Lessee/Occupier Positive Covenants Covenantor j ,,,Covenantee //<:::~::~~,venants oilly Lessee/Occupier~ (b) The covenant must relate to land of the covenantor (sub-s 41(2)a) It is perhaps obvious that if the covenant is to affect the land of the covenantor, then the covenant must relate to something to be done or not done on or in relation to the land held by the covenantor. But not every covenant that affects what the covenantor must or must not do on his land will be binding upon a covenantor's successor in title. In order to be enforceable, the covenant must be of benefit to the land of the covenantee. Indeed, the justification for recognising a covenant as a proprietary interest that affects the covenantor's land is this concept of benefit to other land. Equity saw no justification in supporting the enforcement against third parties of a covenant that conferred a purely personal advantage on the covenantee. There is thus a vital link between this requirement and that found in sub-s 41(2)(c), which looks to the question of benefit to the covenantee's land. They are like different sides of the same coin - on one side the covenant affects the land of the covenantor, and on the other the covenant must confer a benefit on the land of the covenantee. (c) 372 The covenant must be made for the benefit of the land of the covenantee (sub-s 41(1)c) LAND COVENANTS This requirement has two limbs., First, the covenantee must own land, and second, the land must be capable of benefiting from the covenant. (d) Land of the covenantee The covenantee must own land to which the benefit of the covenant can be attached. A covenant cannot exist in isolation: like an easement, it must be appurtenant to land. This requirement is illustrated by the case of:13 FACTS The defendant's husband owned land on which he wished to build. The plaintiff gave him permission, provided he did not build on that part of the land that was to be developed as streets. The land was transferred to the defendant, who built three houses on the land including that part designated for streets. The question was whether the defendant was bound by the covenant. JUDGMENT The burden of the covenant did not run because the plaintiff had no land that could be accommodated by the covenant. The covenantee must not only hold land to which the benefit can attach at the time of the creation of the covenant, but he must also retain an interest in that land if he is to continue to be able to enforce the covenant. Once he has disposed of his interest in the land, his right to take action is lost. In a deed of mutual covenant it is common for the original parties to agree that the developer should retain certain rights over the development, such as the right to erect advertising signs or chimneys on the outside walls or roof of the development. If the developer disposes of his entire interest in the development, then he loses his right to take action on this covenant for he no longer has any land that is capable of benefiting from the covenant. The necessity for a dominant tenement owned by the covenantee to which the benefit of the covenant is attached and a servient tenement owned by the covenantor over which the covenant is exercised is qualified in two instances. (1) Co-owners A deed of mutual covenant of a multi-unit development is not made between owners of separate but adjoining pieces of land but is made between the co-owners of the same land and there is thus prima facie no 13 See also Formby v Barker [1903] 2 Ch 539. 373 HONG KONG LAND LAW dominant and servient tenement. But sub-s 41(7) provides that the fact that a covenant is between co-owners does not prevent the covenant being • enforceable under the section. (2) Leasehold Reversion A landlord's reversion may also constitute a separate interest in land in order to satisfy the requirement. 14 It is on this basis that a landlord can justify enforcing the covenants in his lease against a sublessee with whom he enjoys neither privity of contract nor estate. It is his reversion that constitutes the land to be benefited by the covenant in the lease. (e) Covenantee's land must benefit from the covenant The second limb of the requirement provides that the land of the covenantee must be intended to and be capable of benefiting from the covenant. The covenant must thus affect the value of the covenantee's land or the mode of its use or enjoyment. The requirement is similar to the test applicable to leasehold covenants, being that the covenant 'touch and concern' the land of the covenantee. 15 For instance, in Supreme Honour Development Ltd v Lamaya Ltd 16 the court applied the latest test that was laid down by the House of Lords in P&A Swift Investments v Combined English Stores Group PLC 17 to determine when a covenant 'touches and concerns the land'. Whether a benefit exists is a question of fact. The wording of sub-s 41(2)(c) would suggest that the test is one of intention, and an express intention at that; but it is submitted that this approach is incorrect. 18 It is not sufficient, in the context of the passing of the burden of a covenant, that the parties merely state that the covenantee's land is intended to benefit from the covenant. That intention must be a view that can reasonably be held. In fact, the wording of sub-s 41(2)(c) is more applicable to the test of annexation, at which we will look when considering the passing of the benefit of a covenant. Traditionally the courts have looked for strict proof of benefit. For instance, in the case of a large dominant tenement, the covenant had to be capable of benefiting the whole of the covenantee's land unless the benefit was severed and expressed to affect each and every part of the covenantee's land. 19 More recent cases have tended to relax the strict proof of benefit, and to presume that a benefit is conferred unless it can be shown that such a view cannot be reasonably held. 14 15 16 17 18 19 374 Hall v Ewin (1887) 37 Ch D 74; and Regent Oil Co Ltd v ]A Gregory (Hatch End) Ltd [1966] Ch 402 Rogers v Hosegood [1900] 2 Ch 388 • [1991] 1 HKC 198 [1989] 1 AC 633 It is suggested that the section should read: 'which is capable and intended to benefit the land of the covenantee ... '. Re Ballard's Conveyance [1937] Ch 473 and Marquess of Zetland v Driver [193911 Ch 1 IAND COVENANTS v ParP,,in'.PHomes [1974) 1 WLR 798 FACTS Part of the Wrotham estate was sold subject to a covenant that it should not be developed except subject to a layout plan approved by the vendor. The area sold was so developed except for a small triangular area reached by a narrow path. This triangular area was sold to the defendant, who began developing it although no layout plan approval had been obtained. The plaintiff sought an injunction to restrain the development. JUDGMENT No injunction was granted, but damages were awarded. The court rejected arguments that the covenant should no longer be enforceable because it could no longer be said to benefit the Wrotham Park estate. Brightman J summarised the test as follows: There can be obvious cases where a restrictive covenant clearly is, or clearly is not, of benefit to an estate. Between these two extremes there is inevitably an area where the benefit to the estate is a matter of personal opinion, where responsible and reasonable persons can have divergent views sincerely and reasonably held. In my judgment, in such cases, it is not for the court to pronounce which is the correct view. I think that the court can only decide whether a particular view is one that can reasonably be held: 20 The requirement for benefit dictates that the covenantee's land should be physically close to the covenantor's land. There is obviously no difficulty in the context of a deed of mutual covenant, but difficulties can arise where the covenant affects the use of land between different owners. A covenant restricting the use of land in Yuen Long is not going to benefit land in Stanley! CD The covenant must be intended to run with the covenantor's land (sub-s 41(1)(b)) Section 40 of the Conveyancing and Property Ordinance 21 implies an intention that a covenant relating to land is intended to bind not only the covenantor but also his successors in title, eg his personal representatives ;and beneficiaries to whom he may assign the land and persons deriving title from him or them eg a mortgagee or lessee. If a covenant is intended to bind 20 21 At 808D The equivalent of s 79 of the Law of Property Act 1925 375 HONG KONG LAND LAW only the covenantor, then it must be expressly phrased to that effect.22 The section is merely a word-saving provision. It does not cause a covenant to bind any person who would not otherwise be bound under the provisions of s 41.23 The similarity between easements and covenants is striking. There is the need for a dominant and servient tenement, there is the need for proximity, and there is the need for accommodation or benefit. Jessel MR in London and South Western Railway Co v Gomm 24 described covenants as 'either an extension in equity of the doctrine of Spencer's case to another line of cases, or else an extension in equity of the doctrine of negative easements'. The development of the law relating to restrictive covenants has taken over any need to expand or further develop the categories of negative easements, which remain an interest the courts are not prepared to extend. The Law Reform Commission in England has recommended a greater assimilation of the law relating to covenants and easements by the replacement of covenants by a new interest in land called 'a land obligation', but their proposals, radical as they are, have not yet been implemented. 25 15.3.3 Enforceability of Covenants 15.3.3.1 Occupiers and Subsequent Owners As an interest in land, a covenant will bind any person on the land affected by the covenant according to its relative priority. Given the equitable nature of covenants, that priority originally depended upon the doctrine of notice. All were bound except for the bona fide purchaser for value of the legal estate ih the covenantor' s land who did not have notice of the covenant. The effect of a covenant upon a third party is illustrated by the case of: Re Nisbet and Pott;' Contract [1906] 1 Ch 386 FACTS The plaintiff's title to land was dependent on adverse possession. He did not know that the land was subject to certain restrictive covenants that would have been revealed if he had investigated title for the full statutory period. A purchaser from the plaintiff objected to his title because of these restrictive covenants, but the plaintiff claimed that he took free of the covenants as he had no notice of them. 22 23 24 25 376 See for instance Re Royal Victoria Pavilion Ramsgate [1961] Ch 581. Tophams Ltd v Earl of Sefton [1967] 1 AC 50, where the convenantee owned no land that could be benefited. (1882) 20 Ch D 562 at 583 See Transfer of Land: the Law of Positive and Restrictive Covenants (Law Com No 127, 26 January 1984). LAND COVENANTS JUDGMENT The covenants were similar to an equitable charge on the land, and as such would bind all those on the land except a bona fide purchaser for value of the legal estate without notice. The plaintiff had constructive notice of the covenants, which he would have discovered if he had examined the title for the statutory period. In Hong Kong the doctrine of notice has largely been superseded by the Land Registration Ordinance, 26 at least as regards instruments in writing, including covenants. In order to retain priority against a purchaser, an instrument affecting land must be registered. 27 It seems that a volunteer will be bound by a covenant regardless of registration or notice, but the point is not entirely free from doubt. 28 The interface between s 41 and the Land Registration Ordinance is not clear. As we have seen, sub-s 41(3) states that a covenant falling within the section is enforceable against subsequent occupiers or holders of an interest in the land. There is no express requirement that the covenant be registered. Sub7section 41(9) does provide that successive owners will be bound by a covenant that is duly registered, whether or not they have notice of the covenant, but it does not say that successive owners will not be bound by a covenant that is not duly registered, irrespective of any notice. It is hoped that, if the already limited registration system in Hong Kong is not to be further eroded, sub-s 41(3) will be read in the light of the requirements of the Land Registration Ordinance so as to require the registration of the covenant before it can be enforced against a subsequent purchaser. 15.3.3.2 Original Covenantor Privity of contract dictates that an original covenantor remains liable upon a covenant even though he disposes of his interest in the land. However, the dictates of privity are overridden by sub-s 41(8) of the Conveyancing and Property Ordinance, which provides that a covenant will cease to bind a person after he has ceased to have any interest in the land, except for a breach committed while he held an interest. Thus the developer and the first purchaser, as the original parties to a deed of mutual covenant, will cease to be bound by its terms when they dispose of their interest in the development provided, of course, that the covenant satisfies sub-s 41(2) and is enforceable against subsequent owners. 26 27 28 Cap 128 See s 3(2) and Chapter 3. See s 3(1) and Chapter 3. 377 HONG KONG LAND LAW 15.4 The Benefit - Who Can Take Action? The benefit of a covenant may pass both at law, in equity, and by statute. 15.4.1 At Common Law It is possible for the benefit of a covenant to be assigned at common law provided that: • the covenant touches and concerns the land of the covenantee; • there is an intention at the time the covenant was made that the benefit of the covenant was to run; and • the covenantee a~d assignee hold a legal estate in the land but not necessarily the same legal estate. 15.4 .1.1 The Covenant Touches and Concerns the Land of the Covenantee As the benefit of the covenant is to run with the land, the covenantee must have land that can take the benefit of the covenant. Furthermore, the covenant must 'touch and concern the land' of the covenantee in the sense that it must benefit the mode of use of the land or its nature, quality, or value. The 'touch and concern' qualification has its origins in the requirement we have examined in relation to leasehold covenants. There is no requirement that the covenantor own land to which the covenant relates, because at common law the burden simply cannot run. 29 15.4.1.2 Benefit is Intended to Run Section 39 of the Conveyancing and Property Ordinance 30 now introduces into all covenants relating to land an intention that the benefit of a covenant is to run unless a contrary intention is expressed. 15.4.1.3 Covenantee and Assignee Hold a Legal Estate Only legal estates are recognised at law, and thus the covenantee and assignee must hold a legal estate. At common law it was necessary for the assignee to hold the same legal estate as the covenantee, but s 39 of the Conveyancing and Property Ordinance now operates to permit an assignee who takes a legal estate, but not necessarily the same legal estate as the covenantee, to claim the benefit of a covenant by an assignment at law. Thus a legal lessee or a legal mortgagee can claim the benefit if the other conditions are satisfied. This change in the law was first noted in: 29 30 378 See, for instance, Smith & Snipes Hall Farm Ltd and others v River Douglas Catchment Board [1949] 2 KB 500, where the defendant covenantor owned no land. The equivalent of s 78 of the Law of Property Act 1925 LAND COVENANTS ,--~• ' ~,-,-·· ~'"-· or.,.,,,_,,,"·-"-"• ~ •• - -If Smith and Snipes Hall Farm Ltd and others v River Douglas Catchment Board [1949] 2 KB 500 FACTS The defendant covenanted with several owners to repair and maintain the banks of a river provided the owners bore the cost. One of the owners sold her land to the first plaintiff, who in turn leased the land to the second plaintiff. The river broke its banks owing to the defendant's negligent work and caused damage to the plaintiffs' land. JUDGMENT Both the first and second plaintiffs were entitled to recover damages from the defendant. Section 78 of the Law of Property Act 1925 had changed the law to permit a person deriving title from the covenantee or their successors in title (eg the second plaintifD, as well as the covenantee's successors or assignees (eg the first plaintifD, to claim the benefit of the covenant. The occasions when the benefit of a covenant can be assigned at law are limited. Only the original covenantor can be sued, as the burden of the covenant.cannot run at common law. Nor is an assignment at law of any assistance if part of the covenantee's land is sold, because at law the benefit of the covenant cannot be severed. These limitations are particularly unhelpful in the case of the passing of the benefit of a deed of mutual Covenant. 15.4.2 In Equity There are three ways in which the benefit of a covenant may pass in equity: • by assignment; • by building scheme; and • by annexation. Historically each of these modes were hedged about with technicalities, but recently the courts have taken a more relaxed attitude and looked to intention rather than strict form. A number of these technicalities are, in any event, unlikely to be the cause of difficulty in the context of deeds of mutual covenant in Hong Kong, where it is generally possible to establish the passing of the benefit by assignment or by a building scheme. : I 15.4.2.1 Assignment Some of the limitations encountered in the ability to assign the benefit of a covenant at common law are overcome in equity. The burden of a 379 HONG KONG LAND LAW covenant runs in equity and so an assignee of the benefit of a covenant can take action in equity against the person responsible for the breach whether they be the original covenantor or their successors in title. Nor does equity have any objection to the severance of a covenant so that an assignee of the benefit of a covenant can take action against a successor in title to part of the original covenantor's land. Assignment of the benefit of covenants is common in Hong Kong to pass the benefit of deeds of mutual covenant; the standard wording of an assignment of undivided shares of a unit in a multi-unit development provides that the assignment is made 'subject to and with the benefit of the deed of mutual covenant'. 31 The assignor thus assigns not only the property but also the benefit of the deed of mutual covenant. It appears that benefit must be assigned on each disposal of the land so as to build up a chain of assignments, 32 although some earlier authorities seem to suggest that an effective initial assignment may be sufficient to attach the benefit of the covenant to the land once and for all.33 Apart from the need for express words of assignment or a clear agreement to assign the benefit, there are three further preconditions to be satisfied. (a) The covenant must touch and concern the land of the covenantee Again we find the requirement that we have already examined in relation to both the passing of the burden of a covenant and the passing of the benefit by assignment at common law. The element of benefit need not be established from the express wording of the covenant itself; it may be apparent from the surrounding circumstances. It was the surrounding circumstances that established the requisite benefit in: Newton Abbott Co-operative Society Ltd v Williamson & Treadgold Ltd [1952] Ch 286 FACTS A woman owned premises known as 'Devonia' on which she carried on business as an ironmonger. She also owned property across the street, which she sold. On the sale she took from the purchaser a covenant that the purchaser would not use the premises for the business ofan ironmonger. There was no indication in the covenant that the covenant was taken for the benefit of Devonia. The woman died and left Devonia to her son, who subsequently assigned Devonia to the plaintiff with the benefit of the covenant. The property, subject to the covenant, was sold to the defendant who started to sell items of ironmongery. 31 32 33 380 -~ See for example Form 1 Third Schedule of the Conveyancing and Property Ordinance. Re Pinewood Estate [1958] Ch 280 Renals v Cowlisbaw (1878) 9 Ch D 125 at 130; and Rogers v Hosegood [1900] 2 Ch 388 • IAND COVENANTS JUDGMENT The plaintiff was entitled to an injunction to restrain the defendant's breach of the covenant. The covenant was not merely personal. The surrounding circumstances showed that it was taken for the benefit of Devonia and not just to enhance the business carried on there. (b) The covenantee's land must be ascertainable with reasonable certainty If the covenant is to benefit the land of the covenantee, it must be possible to establish what that land is. The most likely place to find sufficient details of the land to be benefited is from the covenant or deed itself. But the court will also look to extrinsic evidence gleaned from the circumstances surrounding the case. For instance, in the Newton Abbott case the covenant contained no reference at all to Devonia, but nevertheless UpJohnJ looked to the circumstances surrounding the taking of the covenant and concluded that the covenant must have been taken for the benefit of Devonia. This approach was also adopted by Wilberforce J in: Marten v Flight Refuelling Ltd [1962] Ch 115 FACTS Part of a large estate was sold and the purchaser covenanted that he would only use the land for agricultural purposes. A portion of the land sold was requisitioned for use as an aerodrome. After the war, the defendants were allowed to use the aerodrome, part of which they used for industrial purposes. The plaintiff became entitled to the estate, and the question was whether the plaintiff was entitled to the benefit of the covenant. JUDGMENT The plaintiff was entitled to the benefit of the covenant. Even though the details of the plaintiff's land to be benefited by the covenant could not be ascertained from the deed, the court was satisfied that the covenant had been taken for the benefit of the remainder of the estate. There is no need, as there is at law, for the assignee to take an assignment of the whole of the covenantee's land. The benefit of covenant can thus be severed and assigned with different portions of the land. (c) The land and the benefit of the covenant must be assigned at the same time 381 HONG KONG LAND LAW The assignment of the benefit and the land must be contemporaneous, unless action is being taken against the original covenantor when the benefit may be assigned as a chose in action. In Miles v Easter 34 Romer LJ justified this requirement on the basis that equity permitted the assignment of the benefit of a covenant in order to dispose of the property to its best advantage. Thus, if the covenantee 'has been able to sell any particular part of his property without assigning to the purchaser the benefit of the covenant, there seems no reason why he should at a later date and as an independent transaction be at liberty to confer upon a purchaser such benefit'. 15.4.2.2 lBuilding Schemes Early in the development of the law relating to covenants, equity recognised that the enforcement of common covenants within a development merited special consideration. Where a 'building scheme' or 'scheme of development' could be established, equity would permit the reciprocal enforcement of the common covenants by all owners within the development as a 'local law' affecting the development. A building scheme will thus permit both the benefit and burden to pass to all owners within the scheme but it is in the context of the passing of the benefit that the doctrine has been most often relied upon. The rule in Tulk v Moxhay has generally provided sufficient authority upon which to establish the· passing of the burden to owners within a building scheme. The classic statement of the requirements necessary to establish a building scheme is found in Elliston v Reacher, 35 being: • • • • that the parties derive title from a common vendor; the common vendor before selling lay out the estate in defined plots; the common vendor impose the same restrictions on each plot sold with the intention of benefiting all plots within the scheme; and the parties purchase their plots on the footing that the restrictions are mutually enforceable between the owners of all plots within the scheme. In Reid v Bickerstaff 36 an additional requirement was added: • the area of the scheme of development must be certain:\ In fact, Elliston v Reacher laid out the requirements of a building scheme in rather more stringent terms than is found in earlier authorities, which looked rather to a community of interest in the reciprocal enforcement of common covenants. 37 More recent English authorities have looked to these earlier authorities to justify a relaxation of the requirements of Elliston v Reacher. 34 35 36 37 382 [1933] 1 Ch 611 at 632 [1908] 2 Ch 374 (1909] 2 Ch 305 Renals v Cowlishaw (1878) 9 Ch D 125; and Spicer v Martin (1888) 14 App Cas 12 LAND COVENANTS FACTS Robert Dolphin owned the Selly Hill Estate in Birmingham, which consisted of 30 acres. After his death the bulk of the estate was sold off by nine conveyances, the first four of which were sold off by his sisters and the remainder by his nephew. All except the last were in identical form and contained a covenant by the purchaser that every house be detached, cost at least £400, have at least a quarter of an acre of ground and be 21 feet from the road. The vendors further covenanted that they would impose similar restrictions on the sale of other plots. The successors of one of the original purchasers sought a declaration that the covenants were not enforceable in the absence of assignment or annexation. • JUDGMENT There was a building scheme, although the plots were not all derived from a common vendor nor was there any evidence that the land was laid out in plots before it was sold. Stamp J was satisfied that there was sufficient intention evident from the covenants to establish a local law for the common benefit of all owners on the estate. He observed that: ... the equity arises not by the effect of an implication derived from the existence of the four points specified by Parker J in Elliston v Reacher or by the implication derived from the existence of a deed of mutual covenant but by the existence of the common interest and common intention actually expressed in the conveyances themselves. 38 Mutual enforceability does not depend on the implication of any contract between the purchasers and the common vendor, but upon a common intention that it would be inequitable to ignore. That intention may be gleaned from the existence of a deed of mutual covenant, or by the laying out of the development in lots and the imposing of a common set of restrictions on each lot. The mere imposition of common restrictions willnot be enough, however, if they are taken purely for the benefit of the vendor's retained land. They must be taken with the intention that they are to be for the benefit of the estate as a whole. The fact that the vendor covenants to impose similar restrictions on all plots sold points towards a wider community interest. 39 38 39 At 664 See Re Dolphin's Conveyance[l907] Ch 654;.and Baxter v Four Oaks Properties Ltd [1965] Ch 816. 383 HONG KONG LAND LAW The area affected by the building scheme must be clear, although Stamp J was satisfied that land need not be precisely identified in the conveyance itself 'provided it can be otherwise shown with reasonable certainty.' 40 It is important not only that the common vendor knows the area affected by the scheme but also that the owners within the scheme know the extent of their obligations and rights under the covenants. ,... .,. -~-·--·~·"' ~·-·-· Emile Elias & Co Ltd v Pine Groves Ltd [1993] 1 WLR 305 FACTS In 1938 a company divided a part of its land into five lots, which were sold to different purchasers. The fifth lot was shown on the plans attached to the conveyances of lots four and five but not on the other conveyances. The purchasers of lots one, four and five entered into covenants with the company including a covenant to erect only one dwellinghouse on the plots. A similar restriction was also given by the purchasers of lots two and three but they also entered into a number of other different restrictions. In 1948 the company and four of the owners of lots one to five released the owner of lots four and five from the covenant to enable him to build a house on lot five in addition to the house he had built on lot four. The plaintiff became the owner of lot three and the defendant the owner oflot one. In 1983 the defendant started to build another house on lot one and the plaintiff started proceedings to enforce the covenant contained in the 1938 deed, claiming that he enjoyed the benefit by virtue of a building scheme covering the five lots. JUDGMENT There was no building scheme. The development failed to satisfy two requirements of Elliston v Reacher. The area of the proposed scheme was not laid out with sufficient certainty, the inclusion of lot five was not clear to the purchasers of lots one to three and the purchasers had not all accepted a common code of covenants. The Privy Council thought it improbable that purchasers would accept the burden of covenants under a scheme unless they also acquired the right to enforce the same covenants against other owners within the scheme. Reciprocity was thus a crucial element to any building scheme. The covenants did not have to be identical, particularly where there were different types of uses within a development, but where the lots were of a similar nature and intended for a similar use 'a disparity in the covenants imposed a powerful indication that there was no intention to create reciprocally enforceable rights'. 41 40 41 384 At 659, applying Marten v Flight Refuelling Ltd [1962] Ch 115 at 311 LAND COVENANTS The effect of a building scheme as a local law for the development is illustrated by its effect on sub-purchasers who, although in no contractual relationship with the common vendor, are nevertheless within the operation of the scheme . ....... Brunner v Greenslade [1971] Ch 993 FACTS In 1926 the Bromley Park Gardens Estate was sold to a development company subject to various restrictions, including a covenant to build only private houses at a density of not more than eight per acre. Part of the estate was sold to builders in 1928, who covenanted separately with the development company to observe the 1926 covenants and also covenanted not to build. more than one house on each building plot. The builders divided their land into five plots and built one house on each plot which they subsequently sold. An owner of one of the five plots sold part of the plot to the defendant who started to build a house. JUDGMENT The plaintiff, as a sub-purchaser of one of the five plots, was entitled to enforce the covenants in the head scheme even though the sub-purchasers of the five plots had not themselves entered into covenants to that effect. 15.4.2.3 Annexation Assignment involves the transfer of the benefit of the covenant from one person to another. Annexation involves the automatic transfer of the benefit with the land itself, so the benefit must thus become part of the land by the process of annexation. (a) Express annexation Traditionally, it has been necessary for the original parties to establish annexation by showing an intention that the benefit of the covenant should run with the land from the wording of the covenant itself. This wording must sufficiently define the piece ofland to which the covenant is annexed, and also express the covenant to be made either for the benefit of the land or for the benefit of the covenantee in his capacity as owner of the land. For instance, in Rogers v Hosegood 42 a covenant that was expressed to be entered into: with the intent that the covenant might as far as possible bind the premises . . . conveyed and every part thereof, into whosesoever hands the same might come, and might enure to the benefit of the 42 [1900] 2 Ch 388 385 ( i HONG KONG LAND LAW mortgagees, their heirs and assigns and others claiming under them to all or any of their lands adjoining or near to the premises l l was held to be annexed to the land and to pass automatically to subsequent purchasers, even though the purchaser might not know of the covenant. By contrast, in Renals v Cowlishaw 43 a covenant failed to pass the annexation test where it was taken for 'the vendors, their heirs, executors, administrators and assigns'. The failure to connect the covenant with the land of the covenantee was fatal. The reference merely to 'assigns' was not sufficient, as • it might refer only to the assigns of the benefit of the covenant and not the land. There has been some difficulty in establishing annexation where the land said to be benefited is so large that it is doubtful whether the covenant can indeed benefit the whole of the land. This doubt arose in the case of: Re Conveyance FACTS The purchaser of 18 acres of land, which formed part of the 1,700-acre Childwickbury Estate, covenanted with the vendor, her heirs and assigns and successors for the benefit of the owners for the time being of the estate that he, his heirs and assigns would perform and observe certain covenants. The plaintiff, as a successors in title of the vendor, claimed an injunction to restrain a threatened breach of covenant. JUDGMENT The covenants could not possibly benefit the whole estate and therefore the purported annexation of the covenant was ineffective. The court declined to sever the covenant so as to annex the benefit to those parts of the estate that could benefit. This unfortunate result can be avoided by providing that the covenant is taken for the benefit of 'each and every part of the estate'. This was the solution achieved in: Marquess 1 FACTS A conveyance of a shop in Redcar, which formed part of a large estate, contained a covenant by the purchaser 'to benefit and protect such part or parts of the [estate] as should for the time being remain unsold or as should have been sold' with the express benefit of a covenant 'not to commit any 386 43 (1878) 9 Ch D 125 LAND COVENANTS nuisance to the vendor or the owners or occupiers of any adjoining property in the neighbourhood'. The respondent purchased the shop and opened it as a fish-;:ind-chip shop, The appellant sought an injunction to restrain this use. He claimed the benefit of the covenant in his capacity as the successor in title to the unsold land of the estate. JUDGMENT The appellant was entitled to the injunction. Although the whole of the estate could not be said to benefit from the covenant, the. covenant was expressed to be annexed to each and every part of the estate so as to permit the severance of the covenant to those parts that could benefit. But what if this formula is not expressed? There is some support for the view that the omission of these words will not be fatal. For instance, Brightman LJ in the Federated Homes Ltd v Mill Lodge Properties Ltd 44 indicated that, in his view, a covenant that is annexed to the land is annexed to each and every part of the land unless there is a contrary intention expressed. Furthermore, the more subjective approach thatthe courts have taken to the question of whether the covenantee's land is capable of benefiting from the covenant should assist by making it easier to pass the benefit test. A benefit may be assumed unless it is a view that cannot be reasonably held or supported. 45 (b) Implied annexation There is some support for the view that annexation can be achieved by implication where it is obvious from the surrounding circumstances that the parties intended the covenant to become annexed to the land. 46 (c) .. Statutory annexation (,,,.- <-.., _ •••• ,. It is unfortunately unclear to ";hat extent the Conveyancing and Property Ordinance affects the passing of the benefit of a covenant relating to land. There are two sections, ss 41 and 39, which may well do so - but neither have yet been the subject of judicial consideration in Hong Kong, at least so far as the running of the benefit is concerned. (1) Section 41 Sub-section 41(3) provides that a covenant falling within the section shall be enforceable not only by the covenantee but also by the covenantee's successors in title and assigns and persons deriving title from the covenantee or his successors or assigns. At first sight the sub-section would appear 44 45 46 [1980] 1 WLR 594 at 606 Wrotham Park Estates Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. Rogers v Hosegood [1900] 2 Ch 388 at 408 and Marten v Flight Refuelling Ltd [1962] Ch 115 at 133. 387 HONG KONG LAND LAW automatically to pass the benefit. But not all covenants will fall within subs 41(3). To do so they must satisfy the requirements of sub-s 41(2), the most significant part of which to this enquiry is that found in sub-s 41(2)(c): 'which is expressed and intended to benefit the land of the covenantee and his successors in title or persons deriving title to that land under or through him or them.' This requirement, as worded, would appear to necessitate express words to attach or annex the benefit of the covenant to the covenantee's land before the benefit can pass automatically under sub-s 41(3). If that is so, s 41 merely repeats the concept of express annexation. However, if the sub-section provided that a covenant should be 'capable and intended to benefit the land of the covenantee', a statutory passing of the benefit could more easily be achieved with the assistance of s 39.47 (2) Section 39 Section 39 provides that a covenant relating to land is deemed made with the covenantee his successors and assigns and persons deriving title under the covenantee or his successors and assigns unless a contrary intention is expressed. Does this section conveniently automatically provide the intention to benefit the land of covenantee that is demanded by sub-s 41(2)(c)? There is authority in England to suggest that it does in the case of: --■■••■■------------■ Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 WLR 594 FACTS A vendor sold three areas of development land known as the blue, red, and green land respectively. The blue land was sold to the defendant subject to a covenant that in carrying out the development of the blue land the purchaser should not build at a greater density than a total of 300 dwellings so as not to reduce the number of units which the vendor might eventually erect on the retained land under the existing planning consent. The red and green land were also sold and eventually came into the ownership of the plaintiff. The defendants threatened to breach the covenant, and thus a question arose as to whether the plaintiff could enforce the covenant. There was an express assignment of the benefit of the covenant in respect of the green land but not the red land. The covenant was not expressly given for the benefit of the owner from time to time of the red and green land or for the covenantee and its successors and assigns of the red and green land. JUDGMENT The plaintiff was entitled to the benefit in respect of the green land by assignment of the benefit of the covenant, and in respect of the red land 47 388 Even a disjunctive reading of the sub-section, ie 'expressed or intended to benefit', would assist in a statutory passing of the benefit. LAND COVENANTS because s 78 of the .Law of Property Act 1925 automatically annexed the benefit of the covenant to all or any part of the land of the covenantee in spite of the absence of express words of annexation. Three interpretations of s 78 of the Law of Property Act 1925, which is almost identical to s 38, were put forward in the Federated Homes case. First there was the traditional or orthodox view that the section is merely a wordsaving provision to overcome the need to refer to successors and assigns in the document itself. The second view was that the section effected a statutory annexation, provided the land to which the benefit was to be annexed was sufficiently identified in the document by express words or necessary implication. The third interpretation was that the section achieved an automatic statutory annexation of the benefit, provided the covenant touched and concerned the land of the covenantee and that fact could be established either from the document or extrinsic evidence. Brightman LJ rejected the orthodox view and supported automatic statutory annexation, whether on the second or third view. If a covenant related to land in the sense that it touched and concerned the land, then on the wording of the section it was enforceable by (1) a successor in title of the covenantee, (2) a person deriving title from the covenantee or a successor in title, or (3) the owner or occupier of the land intended to be benefited. 48 The decision has been subject to much criticism on two particular grounds. First, it is said that the intention of the parties, upon which annexation is based, is ignored because s 78 does not give way to a contrary intention. However, this criticism cannot be levelled at s 39, which is expressed to be subject to the contrary intention of the parties. Second, the proponents of the traditional view suggest a comparison with s 79 of the Law of Property Act 1925, 49 which is similar in form to s 78 of the Law of Property Act 1925 50 but relates to the running of the burden. This section has been held to be merely a word-saving provision and not a statutory mechanism by which the burden of a covenant may automatically run. 51 The passing of the benefit of a covenant by statute is thus surrounded by uncertainty in Hong Kong. Fortunately, as we have seen, the alternative means by which the benefit can pass are of considerable assistance in Hong Kong. 15.4.3 By Third Parties We have considered the passing of the benefit from the covenantee to the persons who obtain their title from the covenantee, but to what extent can a third party claim the benefit of a covenant? At common law a person intended to take the benefit of a covenant could only do so if they were 48 19 50 51 The predecessor to s 78, s 58(1) of the Conveyancing and Law of Property Act 1881 did not have the same effect. See J Sainsbury Plc v Enfield LBC [1989] 1 WLR 590. See s 40 of the Conveyancing and Property Ordinance. Sees 39. Tophams Ltd v Earl of Sefton [1967] 1 AC 50 389 1 f;· HONG KONG LAND IA W l named as a party to the covenant. This rule has now been altered by s 26 of the Conveyancing and Property Ordinance, which is based upon s 56 of the Law of Property Act 1925 and provides that: I A person may take ... the benefit of any condition, right of entry, covenant or agreement granted to him over or in respect of land, although he may not be named as a party to the instrument. It is clear from the terms of s 26 that the covenant or agreement must relate to land. 52 The difficulty lies in defining who may qualify as 'a person' for the purposes of the section. It is clear that although the reference to person is not qualified in the section itself, it does not permit anyone to take advantage of the covenant. In White v Bijou Mansions Ltd 53 Sir Wilfred Greene MR stated that 'The mere fact that somebody comes along and says "It would be useful to me if I could enforce that covenant" does not make him a person entitled to enforce it under s 56.' The person must be in existence and identifiable at the time the covenant is made, since it must have been possible for him to have been a party to the covenant. I I ;;;• Re Ecclesiastical Commissioners/or England's Conveyance [1936] Ch 430 FACTS In 1887 the Commissioners sold land and took from the purchaser certain covenants. The covenants were expressed to be made with the Commissioners and their successors in such terms as to annex the benefit of the covenant to the land retained by the Commissioners. A separate covenant was also taken from the purchaser that he would enter into the same covenants with their assigns, the owners for the time being of land adjoining or adjacent to the land sold. The Commissioners had, prior to 1877, sold off various plots near to the land sold. Successors in title to the land sold in 1887 applied for a declaration as to whether the defendants, who were successors in title to the plots sold prior to 1877, were entitled to the benefit of the covenants. JUDGMENT The defendants were entitled to enforce the covenants although their predecessors in title were not parties to the original covenants. The defendants were not in existence at the time the covenant was made and so the benefit could not pass directly to them. But the benefit had passed indirectly through their predecessors in title who were the owners of the adjoining plots at the time the covenant was made. 52 53 390 See by contrast s 56 of the Law of Property Act and Beswick v Beswick [1968] AC 58. [1938] Ch 351 at 365. LAND COVENANTS It also appears that the person must be named in, or at least identifiable from, the covenant itself. For instance, in the Re Ecclesiastical Commissioners case, the defendants: predecessors in title were generically referred to in the covenant as the owners of the adjacent or adjoining land. The covenant must also identify the person as someone who is specifically entitled to its benefit or the section will not help. For instance, it is not enough for A to agree with B to do something that will benefit C. A must agree with both B and C. A case where the section failed to assist .for this reason is: v Bijou Mansions 351 FACTS In 1886 an area was sold for development. The vendors agreed with the developers that they would directly convey or grant leases to the purchasers to whom the. developers sold the houses they built on the land. The leases or conveyances were to contain covenants restricting the use of the houses to private residences. One of the houses was sold to F, and the conveyance contained a covenant from F to use the house only as a private residence. Subsequently N purchased another of the houses and entered into a covenant with the vendors and developers, their heirs, successors, and assigns to use his house only as a private residence. The defendants, who were lessees of N's successors in title, started to use the property as flatlets. The plaintiff, a successor in title of F, sought an injunction to restrain them from doing so. JUDGMENT The plaintiff did not have the benefit of the covenant given by N because F was not within the scope of the benefit of the covenant given by N. The reference to successors in title and assigns in the covenant related to the vendor's subsequent successors and assigns, not those who had already acquired land from the vendors. 15.5 Modification and Extinguishment of Covenants The covenants in a Crown or Government lease or any other deed relating to land, whether between co-owners to regulate their ownership and management of co-owned property, or between adjoining owners to control the use of their respective lots, will prima facie remain enforceable throughout the term of the Crown lease or any renewal of that term. 54 But for a number of reasons it may be desirable to alter the terms of the covenants or get rid of them entirely, For instance, co-owners to a development may wish to modify their relationship in order to deal with 54 Section 15 Crown Leases Ordinance Cap 40 ands 7 New TerritoriesLeases (Extension) Ordinance Cap 150. 391 HONG KONG LAND LAW new situations that arise or to alter existing arrangements to achieve a fairer arrangement, while changes in the character of the area, or the Government's planning proposals for the area, may render user restrictions obsolete. Many areas of Hong Kong change beyond recognition within comparatively short periods of time. The relocation of the airport to Lantau, the extensive reclamation of land within the harbour, and urban renewal proposals contained in the Metroplan will change the face of Hong Kong as it moves into the 21st century. Individual landlords and tenants may also wish to modify the covenants that govern their relationship. There is in Hong Kong no statutory mechanism by which a covenant may be modified or extinguished. Such a mechanism would be welcome because the means presently available under the general law are woefully inadequate, particularly in the case of deeds of mutual covenant between co-owners. By contrast, in England a covenant may be modified or extinguished by statute: first, where it has become obsolete because of a change in use of the land to which the benefit is attached or a change in the character of the neighbourhood; second, where the covenant unreasonably restricts the use of the covenantor's land without providing any practical benefit to the covenantee; third, where the parties entitled to the benefit of the covenant have expressly or implicitly agreed to its modification or extinguishment; and last, where the proposed change will not substantially injure the land of the covenantee. 55 15.5.1 Agreement Those persons for the time being entitled to the benefit and subject to the burden of the covenant may agree to its variation or extinguishment. Where the covenant is created by deed, the variation or extinguishment should also be by deed, although a written or even oral variation may give rise to an estoppel. A Government lease covenant may, however, be varied in writing by a letter of modification. 56 Where land affected by a covenant remains in the ownership of only a small number, obtaining a variation by agreement creates little practical problem. But it will often be impossible to effect the variation or extinguishment of a deed of mutual covenant between co-owners by agreement. All the current owners of the building and their tenants, mortgagees, or others deriving title from the owners will need to be parties to the deed of variation and there will often just be too many of them to make any agreement realistic. Some deeds of mutual covenant seek to overcome the problem by incorporating a provision empowering an owners' committee, comprising a number of elected representatives of the owners, to agree to a modification of the terms of the deed on behalf of all the owners. At common law a licence or permission to perform an act in breach of covenant was not severable and had the effect of extinguishing the covenant entirely. 57 It was thus not possible to grant a temporary modification 55 56 392 57 See sub-s 84(1) of the Law of Property Act 1925. There has been suggestion that this provision could be incorporated into Hong Kong law by the Land Titles Bill. Section 14A of the Conveyancing and Property Ordinance Cap 219 Dumpor's case (1603) 4 Co Rep 119b LAND COVENAM of a covenant to sanction a particular breach. For instance, if a landlord agreed that a tenant could sublet part of the premises despite a covenant against subletting in the lease, the landlord could then not prevent the tenant from subsequently subletting the premises to another sub-tenant. The covenant was extinguished by his first variation. This rule is amended bys 29 of the Conveyancing and Property Ordinance, 58 which provides that the permission will only approve the particular breach actually sanctioned. 15.5.2 Estoppel or Acquiescence We have already seen in the context of leasehold covenants that a landlord may waive his exercise of a right of re-,entry for breach of covenant. In the context of other deeds of covenant, equity may also intervene to deprive a covenantee of an effective means of redress. The enforcement of covenants is usually dependent upon the availability of injunctive relief. The grant of such relief is within the discretion of the courts, who may decide that there are circumstances that do not justify the exercise of their discretion in favour of enforcement: for instance, if the covenantee has delayed in seeking redress or has in some other way indicated that he will accept the breach. Peter and Angeli Wong Co Ltd v Silverera Ltd [1995] 3 HKC 411 FACTS A Crown lease included a covenant that no buildings were to be erected on the land 'except one detached or semi-detached private residence of European type'. Before proceeding with plans to redevelop the site with the erection of a low-rise block of flats, the developer entered into extensive correspondence with the Government to confirm that they would not object to the development or to the selling off of the individual flats. The Government acting through the District Land Office confirmed that under the current policy flatted development was allowed in the area notwithstanding the restriction in the lease. Acting in reliance on this assurance the developer obtained approval of the plans for the block of flats, which was subsequently built. Almost ten years later, a prospective purchaser of a flat within the block queried the title of the seller on the basis that there had been a breach of the Crown lease. JUDGMENT There was clear evidence to suggest that the Government would be estopped from taking action to enforce the covenant. The Government had represented that they would not take action, which the developer had relied on by proceeding with the development. 58 See s 143 of the Law of Property Act 1925. 393 HONG KONG LAND LAW This case is to be contrasted with the case of CitiwardLtd v Tai Ping Wing 59 in which a developer had already constructed a block of flats on a site, the Crown lease of which contained a covenant to build no more than one detached or semi-detached private residence, before they obtained an assurance from government that it was not their current policy to enforce the covenant. The vital change of position thus was not made in reliance on the assurance and no estoppel arose. An estoppel also may be implied from inactivity on the covenantee's part, although it is clear that the circumstances must be extreme. 60 J-i■l-~~llllfll',~!i:fl!f~ ___ '. Fairfax Ltd v AG [1995] 2 HKC 401 & 617 .,,~.---~= ... --·~·-•---0 ~- .• , .. FACTS The Crown lease granted in 1862 contained a covenant requiring the lessee to erect one or more villa residences on the site. Over the years a number of buildings had been erected on the site ranging from three to 26 storeys. In 1957 a six-storey building was erected on part of the site and between 1992 and 1993 the plaintiff gradually acquired all the units in this building at a cost of almost HK$60 million. It then sought permission to redevelop that part of the site but was informed by the District Lands Office that the proposed development was in breach of the Crown lease. JUDGMENT The Government's failure to take any action to enforce the covenant for almost 40 years constituted a clear case of 'notorious and avowed acquiescence' and would be presumed to have intended to release the covenant. 15.5.3 Unity of Ownership If the land of the covenantor and covenantee becomes vested in the same person, the covenant will be suspended until separate ownership of the two tenements is restored or unless the tenements form part of a building scheme. 61 59 [1995] 2 HKC 181 6 Contrast Citiward Ltd v Tai Ping Wing [1995] 2 HKC 181 61 See for example Wong Kam Lan v Well Win Investment Ltd [1995] 3 HKC 381. ° 394 Multi-Unit Developments 16.1 Introduction Hong Kong is renowned the world over for its dramatic skyline dominated by clusters of skyscrapers. The steep terrain of much of the Territory and an ever-growing population has made it imperative that Hong Kong makes the very most of the building land it does have. These demands have taxed the engineers and architects to design ever-higher buildings on ever-steeper slopes and even to create more land by reclamation. The lawyers too have been called upon to create legal frameworks to provide for the ownership and management of these 'castles in the air'. The common law has always approached with suspicion the conceptof ownership of an air space. The basic principle, as we saw in Chapter 1, is that an owner of a piece of land owns everything beneath, on and above the land. This principle is based not just on an abstract desire to support the absolute nature of ownership but also on practical considerations, A piece of air space is little use on its own-,- how would you get to it, what would you do with it? It is dependent on the ground and air space beneath for support and the provision of access and supply of services and on what is above for shelter. Multiple ownership of a piece of land thus calls for careful regulation of reciprocal rights and obligations. A further important consideration is an effective mechanism for the repair and management of a building that is owned and occupied by more than one person. In addition to obvious health considerations, it makes little economic sense to expend large sums in maximising land use only to let the buildings erected fall into disrepair. It must be dear who is responsible for repairing what part of the building and who bears the cost of doing so, particularlywhere a part of the building is used by more than one person so that these obligations need to be shared. To be effective, these regulations and mechanisms must be enforceable against all the owners and.other occupiers for the time being of the building, and yet flexible enough to be able to adapt and cater for a change of circumstances. All this adds up to quite a tall order - at least as demanding in legal terms as it is for the engineer and architect to design a building 40 storeys high on a steep slope in an area renowned for typhoons and land slips. 16.2 Multi-ownership Structures • Skyscrapers are by no means unique to Hong Kong; across the world lawyers have had to provide formulti-unit ownership and occupation. They have developed a number of legal structures to do so. 395 J HONG KONG LAND LAW 16.2.1 Leases In England, lawyers have adapted the lease to provide for the ownership of buildings in multi-ownership, whether they be flats or office blocks. The owner of a unit is granted a lease of the unit of which they are to have sole use - remember exclusive possession is an essential requirement of a lease. The landlord will retain ownership of the common parts of the building but grant the unit lessees rights by way of easements over the common parts to provide support and shelter and access to the unit, both for the unit lessees and for the services which are required for use in the unit. Often the landlord will not wish to retain any interest in the development. In this situation the unit owners may take over the ownership collectively by forming a company, in which they all own shares. The company will act as landlord and hold the freehold reversion of their units and the ownership of the common parts. A separation of the ownership and occupation of the units and common parts is necessary in order to create the dominant and servient tenements that are essential for the support of the easements over the common parts. Occasionally, where there are only a small number of unit lessees, they may hold the freehold reversion of the units and the common parts as trustees for themselves in order to achieve the same separation of ownership, albeit nominal. The covenants in the unit leases provide a mechanism for the control and repair of the units and the common parts. These leasehold covenants will be enforceable against subsequent unit owners through the doctrine of privity of estate, which as we have seen allows for the running of the benefit and burden of both positive and negative obligations, provided the covenants relate to the land. The limitation of the unit owners' interest to a leasehold estate is somewhat artificial. There is ofteri no real intention to limit the extent of the unit owners' ownership to a certain duration. Where the unit owners control the management company, they are able to exercise the company's powers, as landlord for instance, to extend the leases of units when the initial grant expires, to collect the rent and management charges and to exercise of the right to forfeit or to take other action to enforce leasehold covenants. The lease does, however, facilitate the enforcement and running of the essential positive obligations, for instance of repair and payment of management charges, which freehold covenants have failed in England to achieve, and it regulates the use of the common areas by creating the nominal separation of dominant and servient tenements that is necessary to support the easements and covenants that govern the use of the common areas. In Hong Kong, leases are used where the developer wishes to obtain their return not from the sale of the building but from the rental that is produced when the building is let on short-term tenancy agreements. For instance, many of the premier office developments in Central are leased by developers in this way. The developer lets the units on tenancy agreements for terms that rarely exceed five years and are often for much shorter periods. Ownership of the common parts is retained by the developer who will grant the tenant easements, often by way of implied grant of necessity 396 MULTI-UNIT DEVELOPMENTS or through the operation of the rule in Wheeldon v Burrows, for instance to provide for access to the unit or for the supply of services and the provision of support and shelter. The use of the unit is regulated by the covenants contained in the tenancy agreement, which usually also provide for the payment of a portion of the developer's costs in repairing and maintaining the common parts through the payment,of a management charge. 16.2.2 Strata Titles An alternative to the rather artificial use of the lease is to recognise by statute the ownership of a piece of air space. Several common law jurisdictions have taken this step, including Australia and Singapore, with the introduction of a system of strata titles. 1 The concept behind a strata or commonhold title is that the unit holder should own their unit in perpetuity, as opposed to a limited leasehold term, and that the common parts of the development are held by the unit holders as co-owners or by a corporate body in which each owner of a unit is a member and has a share. The strata ownership by the unit holder and the ownership of the common parts are regulated by a network of statutory rights and obligations and the responsibility for the management of the development is vested in the owners' corporation. Proposals have been made in England to move to a concept of strata title through the introduction of commonhold title. Although these proposals have been considered for some time it is only now that they appear to have captured the attention of the Parliament and seem likely to become a reality. 2 There is nothing inherent in the Hong Kong system of leasehold title which contradicts the principles behind strata title; there is no reason why the perpetual nature of a strata title could not be adapted to operate within the framework of a Government lease. Common codes of rights and obligations within a multi-unit development are structures with which conveyancers in Hong Kong are becoming increasingly familiar and could be painlessly converted to a statutory form. The concept of an owners' corporation in relation to the common parts of a development is also not new to Hong Kong; it has existed for some time in a voluntary form. The stage could thus easily be set for the introduction of a concept of strata title in Hong Kong- a development which could be encouraged by the current consideration of title registration. 16.2.3 Co-ownership In Hong Kong, lawyers have adapted co-ownership to provide a structure for the ownership of multi-storey buildings. This structure has proved so popular that it is also used to provide for the ownership of housing See the New South Wales, Strata Titles Act 1973 and the Singapore, Land Titles (Strata) Act5 No 2 of 1976 & No 23 of 1982 The Law Commission Command Paper, Commonhold:Freehold Flats and the freehold ownership of other interdependent buildings (Cm 179) was published in July 1987. There have been reports that their proposals may be enacted by Parliament by the end of 1996. 397 HONG KONG LAND LAW developments where a number of units, often of a high-class character, are built on their own individual plot within a larger site which may provide common facilities in the form of estate roads, or even a swimming pool or other recreational facilities. 3 All the owners of a multi-unit development in Hong Kong are _co-owners of the whole of the land and the buildings erected on the land, which they hold as tenants in common in shares which usually bear some relationship to the size of individual units within the development. The essential unity of co-ownership, namely unity of possession, gives each co-owner the right to use all parts of the development including the common parts, for instance, the driveway, entrance hall and lifts. However, the co-owners do not want to occupy each other's units - they want individual occupation of their own units. This exclusive possession, which would at first sight appear repugnant to the idea of unity of possession, is achieved by an agreement binding on each co-owner granting individual owners the right to exclusive occupation of 'their unit'. By this agreement a de facto partition is achieved. Thus, if we take a six-storey building with two flats per floor, each flat owner will hold a 1/12 share as a tenant in common of the whole of the land and the building and will be granted the exclusive right to hold, use, occupy and enjoy the flat of which they are 'the owner'. Fig 16.1 Multi-storey Buildings 1/12 1/12 1/12 1/12 1/12 1/12 1/12 1/12. 1/12 1/12 1/12 1/12 It is also necessary to have an agreement binding on all the owners to cater for the use, maintenance and repair of the common parts and facilities. For instance, the common entrance hall might be used by one of the coowners in such a way that it would interfere with the other co-owners' access to their units; it might be obstructed by the co-owner's belongings. The unit owners would have difficulty in suing the offending owner in trespass, since they are all entitled to possession of the common parts, but they can agree between themselves that the entrance hall will only be used for access and will not be obstructed. Perhaps the most extensive and dramatic example is Discovery Bay on Lantau Island. 398 MULTI-UNIT DEVELOPMENTS The ~greement between the co-owners to regulate their co-ownership of the building and provide for the building's effective management is known as a deed of mutual covenant, commonly known as the 'DMC'. We must now consider in a little more detail how this deed regulates the c