HCMP344/2009
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO. 344 OF 2009
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IN THE MATTER of THE ESTATE OF LAU KWAI WAH (劉貴華),deceased
and
IN THE MATTER of Lot No. 475 in D.D. 177 Lok Lo Ha Village, Shatin, New Territories
and
IN THE MATTER of Section 45(e) of Trustee Ordinance, Cap. 29
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BETWEEN
LAU KWAI KIU (劉桂嬌)
Plaintiff
and
BIAN XINTIAN (卞欣田),
1st Defendant
BIAN XINTIAN (卞欣田)
2nd Defendant
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Before : Hon Yam J in Court
Date of Hearing : 21–22 and 24 June 2010
Dates of Further Submissions by Letters : 10 and 20 August and 1 September 2010
Date of Receipt of Further Document : 27 September 2010
Date of Judgment : 11 November 2010
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JUDGMENT
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Introduction
1. The means to economise the Small House Policy (丁屋政策) is almost as old as the policy itself. Since its inception, men (in its gender-specific sense) have collaborated with others to maximise the economic potential of the Small House grants. There are 4 types of grants and they are only available to male indigenous villagers descended through the male line from a resident in 1898 of a recognised village.
2. From Appendix F of the Small House Grants in New Territories Report, produced by the Audit Commission in 2002, there are 4 types of small house grant. If the applicant holds private agricultural land of his own, he can apply for Building Licence grant (type 1 ) or Land Exchange grant (type 2 ).
3. If the applicant has no land himself, he can apply for Private Treaty Grant (“PTG”) in the village expansion area scheme (type 3 ) or PTG in other area (type 4 ). The applicant pays two-third of the full market value (i.e. a concessionary rate) for the land granted.
4. This case concerns the property at Lot No. 475 in D.D. 177 Lok Lo Ha Village, Shatin, New Territories (“the Property”). Mr Lau Kwai Wah (“Mr Lau”) and the plaintiff, Ms Lau Kwai Kiu (“Ms Lau”) were first cousins (堂兄妹). The 2nd defendant was the wife of Mr Lau, who passed away on 11 October 2006.
The construction of the small house
5. Mr Lau and Ms Lau are both indigenous villagers. Ms Lau testified that Mr Lau approached her through his sister-in-law. She said Mr Lau wanted to make money from the government grant so he offered to sell the land to be granted by the Government for $100,000. In or around 1985 Mr Lau applied for the grant of a piece of government land for building a small house (丁屋). The government granted a piece of land to Mr Lau in 1989 and a small house was erected therein, which is the Property.
6. There are some disputes as to who paid the fees in applying for the land and building the small house. These issues will be explored more fully herein below.
7. Mr Lau wrote two Letters of Confirmation in Chinese to Ms Lau on 10 May 1989 and 4 March 1992. The 2 Letters of Confirmation states that Mr Lau would bequeath the Property to Ms Lau in the first six months after 5 years. It is uncertain whether the reference to “after 5 years” in the 1992 Letter means “5 years after 1992” or “5 years after 1989”. The relevant parts are the same and they are reproduced herein below :
“本人劉貴華經過慎密考慮，決定將上述地權轉贈予堂妹劉桂嬌……自行興建，並於五年後之頭六個月內，無條件為堂妹劉桂嬌向政府辦理正式轉名手續……”
8. Mr Lau also executed a Power of Attorney on 29 September 1994 in favour of Ms Lau. He also made a will on 19 July 2003. The will specified that the sole beneficiary of the Property should be Ms Lau and if she should predecease him, the Property should be transferred to the sons of Ms Lau. Under this will the cost of transferring the Property was to be paid by Ms Lau and her sons. The effect of these documents will be explored fully herein below.
Ms Bian and Mr Lau
9. Ms Bian was cohabiting with Mr Lau in or around 2004 in the Mainland. She married him on 27 February 2006. By operation of law, Mr Lau’s will on 19 July 2003 became ineffective and Mr Lau died intestacy.
10. Ms Bian testified that Mr Lau first told her about the ownership of the Property in a rainy night in 2006 when Mr Lau’s elder brother called and requested $70,000 for repairing the front door of the Property (“維修和塘”). Ms Bian asked Mr Lau why he had a property in Hong Kong when previously he told her he had no “house” in Hong Kong (“你都話香港冇屋架”). But Mr Lau replied he certainly had one (“梗係有啦”). Ms Bian also said that Mr Lau told her the Property was rented out and so she could not visit it.
11. She said the rent was collected by the elder brother of Mr Lau and was remitted to Mr Lau, who was living with Ms Bian in the Mainland. Ms Bian said she was unaware of the tenancy agreement, the identity of the tenant or the amount of rent collected from the Property. She said that Mr Lau told her that the rent is $4,000 per floor for the three floors of the Property but Mr Lau only received $5,000 from his elder brother.
The issues
12. The primary issue in this case is whether the Property is part of Mr Lau’s estate or its beneficial interest belongs to Ms Lau. There are two issues that need to be considered : first, whether there was an agreement between Mr Lau and Ms Lau to hold the Property on trust and effect a transfer of the Property to Ms Lau; second, whether the agreement and trust are unenforceable for illegality.
The Agreement
13. Mr Edward T. C. Chan., counsel for the plaintiff, submitted that there is an agreement between Mr Lau and Ms Lau regarding the Property (“the Agreement”). The terms of the Agreement are :
1. Mr Lau would exercise his right to obtain a government grant of a piece of land for building a small house;
2. Ms Lau would pay Mr Lau $100,000;
3. Ms Lau would bear all the construction costs and all other related costs in building the small house (the Property); and
4. Mr Lau would hold the Property on trust until he transferred the legal title to Ms Lau.
14. Mr Billy Ma, for the defendants, submitted that such an agreement does not exist and the documents do not point to such an agreement.
15. The disagreement can be attributed to the vague and ambiguous terms used in the Letters of Confirmation. The relevant part of the Letters of Confirmation had been reproduced above. One can see that there is no mention of trust arrangement or that Mr Lau was holding the Property as nominal owner only.
16. Therefore the literal meaning of the words seems to suggest that Mr Lau had both the legal and beneficial interests and that he merely wanted to bequeath Ms Lau the Property. However, it is common knowledge among legal practitioners that documents relating to small houses are often misleading because of the various government requirements and restrictions in relation to the Small House Policy.
17. As aforesaid, there are 4 types of small house grant. If an applicant holds land of his own he can apply for Building Licence grant (type 1) or Land Exchange grant (type 2). If an applicant does not hold land of his own he can apply for PTG in the village expansion area scheme (type 3) or PTG in other area (type 4). In either types of PTG grant, the applicant obtains a piece of government land at a concessionary rate of two-thirds of the full market premium.
18. The alienation requirement is different between the four types of grants. For type 1 and type 2 grants, the period against alienation is 5 years. If the property is sold within the first 5 years the applicant needs to pay full premium but if it is sold after the first 5 years there is no need to pay anything.
19. For PTG under village expansion area scheme (type 3), the property cannot be sold in the first 3 years and after the first 3 years it can only be sold upon payment of full market value premium. For PTG in other area (type 4), the property can be sold immediately upon payment of full market value.
20. From the evidence, Mr Lau had no land before he applied to the Lands Department. Therefore his application would be for a PTG in the village expansion area scheme, or for a PTG in other area.
21. The alienation requirement seems to be the reason behind the statement regarding the transfer to Ms Lau after 5 years (instead of immediately) in the Letters of Confirmation. For the two types of PTGs the period is 3 years the longest but for the other types of small house grants the period is 5 years (assuming the applicant is unwilling to pay the market value premium). The drafter of these Letters might probably have confused the alienation period of different small house grants, as the land grant to Mr Lau contains no restriction of sale in the first 3 years. For the same misunderstanding, no words of “transfer” and “trust” were used.
Existence of the agreement
22. The plaintiff’s case is that there was an agreement between her and Mr Lau and the existence of such an agreement can be inferred from the bank drafts totalling $100,000, the two Letters of Confirmation and the will made by Mr Lau.
23. The defendants’ case is that there was never such an agreement and Mr Lau merely intended to give the Property to Ms Lau as a gift. Mr Ma submitted that the documents above do not point to an enforceable agreement. Ms Bian testified that Mr Lau mentioned to her that the Property was his before he passed away.
Bank drafts
24. Ms Lau produced 3 bank drafts in favour of Mr Lau. The 3 bank drafts are of the value of $30,000 (dated 30 June 1987), $50,000 (dated 27 July 1988), and $20,000 (dated 4 April 1989) and each showed Mr Lau as the payee. Only the $50,000 bank draft indicated Ms Lau as the drawer while in the other bank drafts the identity of drawer is uncertain.
25. Mr Ma submitted that “considering the differences in the banks, amounts and dates, it is submitted such evidence is insufficient to prove the alleged HK$100,000 remuneration had been paid to purchase the Deceased’s right”.
26. In relation to the $50,000 bank draft, the Defence was unable to explain why Ms Lau would pay Mr Lau $50,000, which was a significant sum of money in 1988.
27. In relation to the $30,000 and $20,000 bank drafts, although they do not indicate the identity of the drawer, they and the $50,000 bank draft were drawn within 2 years and were of comparable value. Further there is no explanation why the 3 sums added together are exactly $100,000, as mentioned in the 2 Letters of Confirmation. I therefore infer that they were part of a series of payments from the plaintiff.
28. On the balance of probability, I am inclined to believe that Mr Lau received $100,000 from Ms Lau in exchange for his rights in the land to be granted by the Government.
Letters of confirmation
29. In relation to the two Letters of Confirmation, I think the word “bequeath” (轉贈) should not be taken at its literal meaning. It would be very strange for Mr Lau to “bequeath” such a valuable property to his first cousin twice by means of signing a formal document. I infer that the transfer envisaged in the two Letters was actually intended to be binding and enforceable, much like a contractual obligation, otherwise the careful drafting and the signatures would be entirely unnecessary.
30. It should be noted that the provision of transferring the property after 5 years may be compatible with the proposition that the arrangement was a gift, as Mr Lau and the drafter might be mistaken and thought that a transfer within 5 years would require a premium, as in the first two types of small house grant.
31. Mr Ma submitted that according to the wording of the Letters of Confirmation, the Letters do not show that Mr Lau was only a nominal owner, or was holding the Property on trust. They also do not mention anything about Mr Lau receiving $100,000 from Ms Lau or Ms Lau paying for the construction cost of the Property. He said that the court should accept the literal meaning of the words (“轉贈”) which was translated to “bequeath”.
32. I do not accept this argument. First, it says (“本人劉貴華經過慎密考慮，決定將上述地權轉贈予堂妹劉桂嬌……自行興建”), which translates to : “I, Lau Kwai Wah, after careful consideration, decide to bequeath the land interest of the Property to my first cousin, Lau Kwai Kiu for her to construct [a small house] therein”. Therefore Mr Lau contemplated that Ms Lau would build the small house by herself . The words (“自行”, translated: by her own) can only be reasonably interpreted as “paying for the expenses involved in the construction”. There is some supporting evidence here that Ms Lau paid for the construction cost. As Ms Lau paid for the construction cost, which is said to be $1,480,000 approximately, it is difficult to see how Ms Lau would allow Mr Lau to have the beneficial interest of such a valuable property.
33. Therefore, the Letters of Confirmation actually point towards the alleged Agreement and trust.
34. Mr Lau might have, perhaps reluctantly, told Ms Bian that he owned certain properties in Hong Kong. However, even if Mr Lau said the Property was his, that does not per se mean that Mr Lau owned the Property. It may show that there was no common intention that Ms Lau should have the beneficial interest. However, things said after the purported date of the creation of constructive trust have little evidential value in showing the common intention of the parties on that date.
35. The second issue is that Mr Lau might be referring to another property. Land search record reveals that Mr Lau had full interest in the Property but he also held interest in the Remaining Portion of Lot 440 in D.D. 177. More particularly it shows that Mr Lau had full interest in the Ground Floor of RP Lot 440 from 1980 to 1996. From 1996 to 2003 he was a joint tenant together with one Mr Lau Kim Man. Mr Lau Kim Man became the sole owner since 2003.
36. Although Ms Bian testified that Mr Lau identified the source of rental income as (“177約475 號地段”, translated to 177 approximately Lot 475), her evidence regarding the amount of rent he received does not support this contention.
37. From Ms Bian’s evidence Mr Lau seemed to be receiving rents that were much less than what he was entitled to. If Ms Bian’s evidence is true, then Mr Lau should receive $12,000 ($4,000 per floor x 3 floors) each month but Mr Lau only received $5,000 each month. More than half of the rent was missing and Ms Bian said she did not know if Mr Lau had complained to his elder brother about that.
38. It would be most surprising if Mr Lau would simply give up $7,000 rental income every month, which was a significant sum of money. I infer that the property of Mr Lau did not generate $12,000 rental income at the time when he told Ms Bian about his property in Hong Kong.
39. It should be noted that Ms Bian only learnt of the fact that Mr Lau owned property in Hong Kong in 2006 when his elder brother called and requested $70,000 for repairing the front door of a certain property in Hong Kong. The plaintiff avers that no such repair was needed in the Property in 2006, so it is possible that Mr Lau and his elder brother were referring to a different property that needed repair.
40. It is possible that Mr Lau’s rental income of $5,000 was actually generated from the Remaining Portion of Lot No. 440 in D.D. 177. Although Mr Lau first told Ms Bian about his ownership in certain Hong Kong properties in 2006, that is after the assignment of G/F RP Lot 440 to Mr Lau Kin Man in 2003, it is possible that Mr Lau Kwai Wah continued to receive rent after 2003 until his death.
41. I do not think that the confusing state of Ms Bian’s evidence is caused by Ms Bian. It seems that Mr Lau was not very willing to tell Ms Bian his source of income in Hong Kong and Mr Lau might have deliberately misled Ms Bian about his property in Hong Kong.
Illegality
42. Having found that there was an agreement between Mr Lau and Ms Lau to transfer the property to Ms Lau, it is not difficult to find that Mr Lau was holding the Property on trust for Ms Lau. A constructive trust might arise because of their common intention that Mr Lau would hold the Property as trustee only and the beneficial interest would rest with Ms Lau. A resulting trust would also arise because Ms Lau paid for the premium needed for the land grant and the expenses involved in the construction of the small house.
43. The only issue is whether the Agreement and trust are unenforceable for illegality. Mr Chan’s submission in relation to illegality is quite confusing. He said “the trust arrangement between P and the Deceased [Mr Lau] was thus tainted by illegality”, but he also said “the misconduct of P is trivial”. I think from the authorities cited by Mr Chan, a trust is unenforceable if it is tainted by illegality. Therefore I can only infer that the “illegality” mentioned in his closing submission is not the same thing as illegality as commonly understood by legal practitioners. Perhaps Mr Chan was really saying that the arrangement regarding the property might have breached some legal rules, thus amounting to misconduct but they do not amount to illegality.
44. Mr Ma submitted that the Agreement and/or the trust arrangement are void for illegality for two reasons. The first reason is that they are against public policy. The second reason is that it involves the making of a false representation to the government. I shall deal with the second reason now.
Illegality—representation to the government
45. In the hearing on 21 June 2010 there was some confusion as to whether Ms Lau and/or Mr Lau had to make a false representation to the government in applying for the PTG that eventually led to the grant of the Property. The issue was hotly debated but for the reasons stated in the end of this judgment, it is now settled that no representation was made when Mr Lau applied for the grant. For the sake of completeness it is necessary to deal with the authority cited by Mr Ma for the defendants.
46. Mr Ma submitted that Mr Lau had to make a false declaration to the government when he first applied for the land grant and he cited Chung Mui Teck & Others v Hang Tak Buddhist Hall Association & Another [2001] 2 HKLRD 471 to support this proposition. In Chung Mui Teck, Le Pichon JA, after reviewing the evidence from the Director of Lands concluded that “There is therefore simply no scope for an application to be made by applicants to whom sections of the Land are to be assigned without making the declaration.” This appears to be the main thrust of Mr Ma’s argument.
47. However that part of the judgment cannot be taken out of context. The case was concerned with an agreement dated 31 January 2000 to erect small houses for resale purposes. The plaintiff in that action contended that the enforcement of the agreement would necessarily involve the tortious and/or criminal act of misrepresentation to the government by the applicant’s declaration that “[The applicant has] never made and have no intention at present to make any private arrangements for [his] rights under the Small House Policy to be sold to other individual/a developer.”
48. Le Pichon JA concluded that it was impossible to enforce the agreement without making the aforesaid representation, which is untrue, to the government and thus the agreement was unenforceable. It should be noted that that case was concerned of the enforcement of the contract after 2000. The evidence relating to the 3 forms of declaration and the requirement that the applicant must make the aforesaid declaration if the form of declaration does not so provide, are relevant to the period after 2000 only.
49. In fact, the Lands Department has confirmed that Mr Lau did not make any declaration during the application process. The evidence relating to the 3 forms of declaration is totally irrelevant in the instant case, which involves an application in 1985.
Illegality—public policy
50. Is the agreement and trust illegal because they contravene public policy? If one types “Small House policy”, “private arrangement” and “illegality” into a legal research system, one can obtain cases where the private arrangement is enforceable and cases where it is unenforceable. These cases must be analysed carefully and the focus should be directed at the private arrangement involved in those cases. It should again be reminded that there are 4 types of small house grants and there had been attempts to economise these grants by means that are radically different.
51. In Chung Mui Teck and Best Sheen Development Ltd v Official Receiver and Trustee [2001] 3 HKC 79, the private arrangement necessarily involved the making of a false declaration to the government concerning the intention of the applicant (Chung Mui Teck ) or the beneficial interest of the applicant in the land (Best Sheen) . Due to the false declaration, the agreement of that private arrangement was unenforceable. I have already found that enforcing the Agreement in this case does not involve making a false declaration above.
52. In Li Pui Wan v Wong Mei Yin [1998] 1 HKLRD 84, Chan CJHC, as he then was, said at 89I :
“ The purpose of granting of land by the government in accordance with Chinese customary law with additional terms and conditions to New Territories male indigenous villagers is to provide some of the New Territories residents with special care. This situation differs greatly from the principles in the law of contract where the court refuses to make orders to enforce certain contracts because they are against public policy upon formation or performance. The granting of land by the government to indigenous villagers who are male descendents is a measure made under special circumstances. It has nothing to do with the principle under which by virtue of public policy, certain contracts are found illegal by the court. In our view, such measure adopted by the government in the granting of land should not be regarded as a public policy, and is quite different from the principle in common law which requires the court of law to uphold public policy.
In this case, there was insufficient evidence to show that the granting of land by the government to male indigenous villagers was a public policy. The
Even if it was illegal for the parties to agree to proceed with a sale and purchase or completion at a later date without government approval or before paying the premium, this, in our view, does not constitute a breach of public policy. In fact, the sale and purchase or assignment of title and development entitlement of small houses similar to that in this case is also good for the public as the payment of premium brings revenue to the government. It also helps to solve the housing problem because people other than male indigenous villagers can also live in this sort of houses. However, if a male indigenous villager cannot afford to build a small house due to financial constraints but is not allowed to assign his title to somebody else, he will not be able to benefit from the policy and consequently it will not do any good to the general
As can be seen from the contract and agreement produced, the parties did not intend to breach the conditions of grant. It can only be regarded as technically ‘jumping the gun’.”
53. Therefore the breach of condition of grant per se does not amount to a breach of public policy. Applying Li Pui Wan , which is binding on me, the Agreement in this case may also be fairly described as “technically jumping the gun”. The plaintiff, Ms Lau must also pay the premium to effect the transfer. Accordingly, I do not consider that enforcing the Agreement would be contrary to public policy.
Conclusion
54. I hold that by paying Mr Lau $100,000 in exchange of his rights in the land granted, and by paying for the construction cost of the small house now known as the Property, Ms Lau has, by way of resulting trust , obtained the beneficial interest in the Property. Ms Lau can also obtain the beneficial interest in the Property by way of constructive trust because of the Agreement with Mr Lau.
55. The defence argues that Mr Lau had referred to the Property as his own property before he passed away and they contend that this shows that Mr Lau had both the legal title and beneficial interest in the Property. However, Ms Bian’s evidence in relation to the amount of rent Mr Lau received from his property in Hong Kong is confusing, so I do not believe Mr Lau referred the Property as his own. It is possible that Mr Lau was referring to some other property in Hong Kong.
56. In any event this case does not turn on Mr Lau’s view on, or what he barely said about the ownership of the Property. The existence and effect of the Agreement are indisputable and the only issue is whether it is tainted with illegality.
57. The defence is unable to establish any wrongful conduct on the part of Ms Lau or show that the Agreement is illegal in its performance. There is no evidence that Mr Lau had to and did make a misrepresentation to the Government or the Agreement contravenes any public policy.
58. The plaintiff is entitled to have a declaration that she owns the beneficial interest in the Property. I would also grant the specific performance of the Agreement as sought by the plaintiff.
Epilogue
59. On 6 August 2010, I inquired both parties as to whether a letter should be sent to the Lands Department to determine the content of the declaration that Mr Lau had to make in the application process. Messrs T.C. Lau & Co., solicitors representing the defendants, were the first to reply on 10 August 2010.
60. Surprisingly they were able to provide the answer to the query to the Lands Department before the Lands Department could have replied this court. As it turned out, they had providently raised the very same query on 20 October 2009 and received a reply (“the Reply”) on 16 November 2009 but they had improvidently failed to produce the Reply during the trial.
61. The Reply was unfavourable to the defendants, as follows :
“According to office record, no declaration by the grantee was found in related to the application for small house in respect of the captioned lot.” [T heir emphasis ]
62. Messrs T.C. Lau & Co. explained that by the time the Reply was received, the defendants had filed their witness statements on 11 November 2009 so the reply “did not particularly arrest [their] attention”. They also blamed the lack of any formal discovery process or preparation of List of Documents for their failure to put their mind on the Reply. They also said that Mr Ma was not informed of the Reply and denied any intention to conceal its existence.
63. Messrs Lawrence K.Y. Lo & Co. replied on 20 August 2010. They doubted the explanation provided above and accused Messrs T.C. Lau & Co. of deliberately concealing the Reply. They think it is inconceivable that such an important letter could have escaped the attention of Messrs T.C. Lau & Co. when the issue was hotly debated during the trial. By a letter dated 1 September, they drew this court’s attention to the fact that Mr Ma hinted that the plaintiff was concealing documents that contained the declaration made by Mr Lau.
64. In my judgment, it is inconceivable that Messrs T.C. Lau & Co. could have forgotten such an important letter. I cannot see how the making of the defendants’ witness statement could have caused the Reply to “not particularly arrest [their] attention”. It is even more difficult to believe that despite the vigorous debate at the trial on the issue of illegality and the submission on Chung Mui Teck , they could still have forgotten about this letter.
65. The Lands Department eventually replied to this court on 27 September 2010 to the same effect as their aforesaid reply much earlier on 16 November 2009.
66. There is a prima facie case that there was concealment of the letter from the Lands Department dated 16 November 2009. The fairer course is to refer this matter to the Law Society for further investigation and action, if any.
Costs
67. There shall be an order nisi for costs to the plaintiff. I also reserve the question of further order in respect of costs as a result of the aforesaid investigation of the Law Society.
(D. Yam)
Judge of the court of First Instance
Mr Edward T.C. Chan, instructed by Messrs Lawrence K.Y. Lo & Co,for the Plaintiff
Mr Billy N.P. Ma, instructed by Messrs T.C. Lau & Co., 1st and 2nd Defendants