YU FUNG CO LTD v. OLYMPIC CITY PROPERTIES LTD AND ANOTHER

HCMP 1084/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1084 OF 2008

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J U D G M E N T

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1. This is another instance of litigation arising out of the scandalous redevelopment at Fei Fung Street, Kowloon (“the Street”), where Profit Mansion now stands. The property in question is Flat D on the 20^th Floor (“the Property”). The plaintiff (“Yu Fung”), a licensed money lender, commenced this action to enforce a first legal charge in respect of the Property against the defendant (“Olympic”), the registered owner and borrower. The 2^nd defendant (“Lai”) was joined, who resists the claim on the basis that he has a prior equitable interest in and has been in exclusive possession of the Property since 1996-1997.

BACKGROUND

2. On 18 September 1997, Olympic became the registered owner of the Property, and on the same day, executed the first legal charge over the Property to Yu Fung to secure the repayment of a loan (“the Charge”).  Olympic defaulted in repayment.  It was also discovered that Olympic had, in breach of the terms of the Charge, assigned the Property to Hebei Investment Limited (“Hebei”) in the absence of the prior knowledge and consent of Yu Fung.

3. Olympic, which had been struck off the register of the Company Registry since 2004, was reinstated for the purpose of this action.  On 10 June 2008, Yu Fung commenced the originating proceedings herein pursuant to O.88 of the Rules of the High Court (“RHC”).

4. Soon Lai applied ex parte and was joined as a defendant on 10 July 2008.

5. On 29 November 2011, judgment was entered against Olympic for the amount of the outstanding loan with interest under the Charge.  These proceedings for vacant possession of the Property between Yu Fung and Olympic as well as Lai were ordered to continue as if begun by writ.  Consequential directions were given.

6. What happened was that Lai was the owner of a 700-square-feet flat in what used to be Wing Cheong Building, Nos 27-29 of the Street.  Through a Mr Cheng, who held himself out to be representing Full Country Development Limited (“Full Country”), the developer responsible for redeveloping the lot, Lai received an offer of 2 new 400-square-feet flats in the new building to be erected on the redeveloped site in return for his assignment of his old unit.  In addition, Lai was promised compensation for renting temporary accommodation pending the completion of the redevelopment, expenses for moving as well as for decoration of the new flat.  Lai accepted the offer.

7. In September 1992, Lai and Full Country entered into a Chinese agreement (“the Redevelopment Agreement”).  It provided that in exchange for his old flat, Lai would be given ownership of a flat in the new building to be erected and another flat there to be shared with Full Country (clause 1).  It set out the terms in respect of the rental reimbursement, moving expenses and decoration expenses mentioned above (clause 2).  However, the agreement would become void, if Full Country did not succeed in acquiring all the units at Nos 27, 29 and 27A of the Street, but Lai would be entitled to keep the payments (clause 3).  A formal sale and purchase agreement in respect of Lai’s old flat would be entered.  The consideration was HK$2,200,000, of which HK$10,000 would be paid to Lai as deposit and the balance would be settled by the transfer of the new flats.  Upon that, the deposit would have to be returned (clause 4).

8. The parties also signed provisional sale and purchase agreements in respect of the 2 new flats, namely, Flat A on the 10^th Floor and half of Flat A on the 11^th Floor of the new building to be erected[1].  Typed-up provisional sale and purchase agreement were also signed.

9. Following formal sale and purchase agreement as well as assignment by October 1992, Lai transferred his old flat to Full Country.  He moved out by the end of the year. The redevelopment proceeded.

10. In early August 1996, Full Country informed Lai that the Property[2], which is close to 700 square feet in size, would be assigned to him.  By the end of the year, Lai was given the keys to the Property.  After decoration and furnishing of the Property[3], Lai and his family physically moved in in about May or June 1997[4].

11. None of the Redevelopment Agreement and the provisional sale and purchase agreements mentioned above had been registered with the Land Registry.  Nor has Lai ever received any actual assignment of the Property by Full Country.

12. Unbeknown to Lai, Full Country had assigned the Property away in June 1997, in other words, at about the time when Lai’s family moved in.  The legal title in the Property had since changed hands and eventually to Olympic in September 1997, which also executed the Charge.  As mentioned, unbeknown to Yu Fung, Olympic further assigned the Property in breach of the Charge to Hebei in January 1998. As the current registered owner, Hebei further mortgaged the Property.

13. In July 1998, the mortgagee bank of Hebei, through solicitors, issued letter of demand, demanding repayment of the loan or else the Property would be repossessed and sold.  Lai came to realise the situation he is in.

14. It transpires that Lai is only one of some 60 occupiers of various units in the new building who came to be given possession of their respective units under similar swap agreements with Full Country without actual assignment of title to their units.  The scam sparked off series of litigations involving these affected persons, Full Country and various other related parties[5].

15. In the present action, Yu Fung asserts its prior mortgagee’s interest in the Property.  Hebei has not sought to assert otherwise.

16. Olympic remained absent from the trial.

17. The above background is essentially undisputed.

THE PLEADED CASES

18. Lai asserted an equitable interest in the Property to which Yu Fung’s interest as the mortgagee is subject.  On this basis, he was joined as a defendant to defend the claim herein.  By pleading, Lai adds the alternative limitation defence, claiming that he has nevertheless been in adverse possession of the Property, and Yu Fung’s right to recover possession of the Property has thus been extinguished by the time of the claim against him.  He counterclaims for declaratory relief on these bases.

19. Yu Fung denies the alleged equitable interest of Lai in the Property, and avers that it took the Charge bona fide for valuable consideration without notice of any equitable interest or Lai’s occupation of the Property.  It also contends that by his joinder as a party and assertion of a prior equitable interest in the Property, Lai has waived or is estopped from asserting adverse possession of the Property.  In any event, the assertion is denied, and the claim against him, Yu Fung says, is within time.

WITNESSES

20. Yu Fung called its manager[6] to give evidence in respect of the dealings with Olympic at the relevant time.  Lai gave evidence, and called 2 other witnesses[7] to testify in respect of his decoration and moving into the Property at the time.  Their respective evidence is not seriously challenged.

PRIOR INTEREST IN THE PROPERTY

21. By pleading, Lai is asserting equitable interest in the Property, and it is such interest that he asserts to be ranking in priority to that of Yu Fung as the mortgagee.  He is bound by his pleaded case.  If he fails to establish precisely such interest, it matters not whether he has interest of other nature, form or extent which is not asserted by way of pleading.  Nor will there be any basis for considering the issue of priority of interests of the parties if they are not both in the Property itself.

22. Ms Lam appearing for Lai refers to the principle that upon agreement for the sale of land, of which the purchaser is entitled to call for specific performance, the purchaser is said to have acquired a proprietary equitable interest in that land: see Halsbury’s Laws of Hong Kong (2010 Reissue) Vol.16 at §230.095; Gray & Gray on Land Law (5^th ed) at §§8.1.54 – 8.1.55.  Mr Vaughan appearing for Yu Fung has no argument about that as a matter of principle.

23. For the present purpose, I call this the purchaser’s equity.  However the Redevelopment Agreement made no reference to any specific unit, let alone the Property, as the subject matter.  Mr Vaughan submits that any equity arising in favour of Lai pursuant to the Redevelopment Agreement would at most be some form of interest in the land where the new development and building would stand.  I agree. Ms Lam has to concede that whatever interest or claim her client may have against Full Country, it would not necessarily be to the Property itself.

24. In principle, interest of the kind other than specifically in the Property as mentioned above may still be binding on the subsequent purchasers or mortgagees of the Property to the extent of such interest on each and every part of the new development, of which the Property, as and when built, would form part.

25. Mr Vaughan refers to section 3(1) of the Land Registration Ordinance, Cap 128 (“LRO”), which provides that all instruments in writing and registered shall have priority one over the other according to the priority of their respective dates of registration.  The Redevelopment Agreement was never registered.  Pursuant to section 3(2) of the LRO, it shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same interest, be absolutely null and void to all intents and purposes.

26. Yu Fung was admittedly a mortgagee for valuable consideration.  “Bona fide” under section 3(2) requires not only absence of notice of pre-existing interest but also such was genuine and honest: see Midland Bank Trust Co Ltd v Green [1981] AC 513 at 528E, per Lord Wilberforce.  There is nothing in the evidence suggesting that Yu Fung lacked bona fide in taking up the Charge.  Vis-à-vis Full Country, both Lai and Yu Fung are victims.

27. Section 4 of the LRO provides that no notice whatsoever, actual or constructive, of any prior unregistered instrument in writing shall affect the priority of any such instrument as is duly registered.  There is no evidence that Yu Fung has actual notice of the Redevelopment Agreement at the time of the taking of the Charge.

28. If the circumstances were such as to put the mortgagee on enquiry, the failure to carry out the usual or proper enquires, which, if carried out, would have revealed the pre-existing interest in the property concerned, might fix the mortgagee with constructive notice of such interest: see Kingsworth Finance Co v Tizard [1986] 1 WLR 783; Wong Chim Ying v Cheng Kam Wing [1991] 2 HKLR 253; HSCB Finance Limited v Yuen Yi Wan Sandy & Wong Chiu Mui, CACV 355/2005 (1 August 2006).  Suffice it to say that I accept what are pleaded in details in Yu Fung’s pleading in this respect[8], as verified by its witness, as facts, which did not put Yu Fung on such enquiry.  Olympic defaulted 2 months after the mortgage.  Yu Fung came to learn about the occupation of the Property by a third party only in December 1998, and to learn that such occupation was the result of some unit-for-unit swap agreement only in July 2003.

29. Ms Lam acknowledges that the interest her client asserts is arguably subject to sections 3 and 4 of the LRO.  Yet for completeness, she makes submission on the principles of unwritten equity, which is not registrable and therefore outside the ambit of sections 3 and 4 of the LRO: see Financial and Investment Services v Baik Wha International Trading Co Ltd [1985] HKLR 103 at 109-110.

30. All this discussion of the operation of LRO and unwritten equity is academic, because as pointed out from the outset, Lai runs no case on the basis that his alleged interest is anything other than equitable interest in the Property.

31. In this respect, I should also mention Panbillion Finance Company Limited v Full Country Property Development Limited & Ors, HCA 10274/1999 (22 February 2000).  There the 3^rd defendant was one of those affected by this redevelopment scam, and was in a similar situation as Lai.  Suffiad J found (at p.7) that she failed to establish a prior interest in the suit premises or to show lack of bona fide on the part of the plaintiff.  Nor was there registration of the written agreement, if any, between Full Country and her against the suit premises.

32. It should however be noted that the new unit (to be built), which was promised to the 3^rd defendant in Panbillon Finance Company Limited, was apparently taken to be the suit premises eventually allotted to her (see p.7). There was no issue of identification of the interest that the 3^rd defendant actually acquired as a result of the redevelopment agreement, which one would have thought should be similar to the one that Lai entered into the present case.  The 3^rd defendant was not represented in that case.  The part of the judgment concerning her is short.  These are features that should be noted when reading this part of the judgment.

33. In any event, the identity of the interest in land has undergone drastic change[9], and it has been held that specific enforcement of any agreement, which entails identifying the right undivided share or unit in the re-developed site for attaching Lai’s interest with right to exclusive possession, would meet with insurmountable practical difficulty: see Lau Siu Ying & Anor v Wong Cheung Tai, HCMP 699/1993 (2 August 1993) per Woo J (as he then was) at §§15-17.

34. The claim for an equitable interest in the Property, or what I call the purchaser’s equity, fails.  Hence the focus of the parties on Lai’s alternative defence.

ADVERSE POSSESSION

35. Section 7(2) of the Limitation Ordinance, Cap 347 (“LO”) provides:

“No action shall be brought by any person to recover any land after the expiration of 12 years from the date on which the right of action accrued to him or, if it first accrued to some person through whom he claims to that person……”

Section 17 provides:

“Subject to the provisions of section 10, at the expiration of the period prescribed by this Ordinance for any person to bring an action to recover land (including a redemption action), the title of that person to the land shall be extinguished.”

36. Mr Vaughan accepts that it is not likely that his client could dispute the fact of possession of the Property by Lai.  Lai was given the keys to the Property on 31 December 1996, which symbolised his taking of possession.  This was followed by decoration of the Property and eventually his family’s moving into the Property in June 1997[10]. Mr Vaughan disputes whether such possession has been adverse for the purpose of time limitation of claim.  He also argues that his client’s claim is in any event within time.

Whether Lai’s possession of the Property has been “adverse”

37. In this connection, the following provisions of the LO are relevant:

Section 8(1)

“Where the person bringing an action to recover land, or some person through whom he claims, has been in possession thereof, and has while entitled thereto been dispossessed or discontinued his possession, the right of action shall be deemed to have accrued on the date of the dispossession or discontinuance.”

Section 13(1)

“No right of action to recover land shall be deemed to accrue unless the land is in the possession of some person in whose favour the period of limitation can run (hereafter in this section referred to as adverse possession) and where under the foregoing provisions of this Ordinance any such right of action is deemed to accrue on a certain date and no person is in adverse possession on that date, the right of action shall not be deemed to accrue unless and until adverse possession is taken of the land.”

38. In the Court of Final Appeal decision of Wong Tak Yue v Kung Kwok Wai & Anor (No 2) (1997-98) 1 HKCFAR 55, Li CJ said (at 68H):

“ As Nourse LJ pointed out in Buckinghamshire County Council v Moran [199] Ch 623 at p.644, adverse possession can be described as “possession as of wrong” and with limitation it is the intention of the squatter that is essential.

  The requisite intention to possess has been referred in various authorities under its Latin tag “animus possidendi”.  I shall refer to it simply as the intention to possess.  As Slade J observed in Powell v McFarlane (1979) 38 P&CR 452 at pp.471-472, the intention to possess requisite for adverse possession:

… involves 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 if he be not himself the possessor, so far as is reasonably practicable and so far as the process of the law will allow.”

39. In respect of the equivalent provisions in the UK[11], Lord Browne-Wilkinson in the subsequent leading House of Lords decision of JA Pye (Oxford) Ltd v Graham [2003] 1 AC 419 had this to say:

“35.  ……Paragraph 8(1) of Schedule 1 to the 1980 Act defines what is meant by adverse possession in that paragraph as being the case where the land is in the possession of a person in whose favour time “can run”.  It is directed not to the nature of the possession but to the capacity of the squatter……

36.   ……In my judgment much confusion and complication would be avoided so far as possible and effect given to the clear words of the Acts.  The question is simply whether the defendant squatter has dispossessed the paper owner by going into ordinary possession of the land for the requisite period without the consent of the owner.

37.   It is clearly established that the taking or continuation of possession by a squatter with the actual consent of the paper title owner does not constitute dispossession or possession by the squatter for the purposes of the Act.  Beyond that, as Slade J said, the words possess and dispossess are to be given their ordinary meaning.”

40. Yu Fung indeed takes issue as to whether Lai has been in possession of the Property with consent of the paper owner.  Its pleaded case in this respect[12] shapes the consideration of the arguments advanced by counsel:

(1)   Lai entered into possession of the Property with the permission of Full Country.

(2)   Yu Fung would seek leave to provide further particulars of any permission given by the successive registered owners of the Property for Lai to continue in possession, if such particulars are discovered.

(3)   By his application to be joined as a party, and his claim for a prior equitable interest in the Property, Lai has waived his right to rely on or is estopped from relying on the limitation defence.

41. It is indisputable that Lai was given possession of the Property by Full Country.  Hence consent of the paper owner to his taking of possession.  But Mr Vaughan goes further.  This time it is he who advocates the creation of an equity in the Property in favour of Lai, and submits that Lai’s possession of the Property has been one under a licence coupled with an equity.  Hence no adverse possession.

42. This is essentially proprietary estoppel.  This is where the owner encouraged another to believe that the latter owned the land, and the other person acted, to the knowledge of the owner, in detrimental reliance on this belief.  In that case, that other person may acquire an equity in the land, which is proprietary in nature.  Relevant principles were discussed in Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 and Pascoe v Turner [1979] 1 WLR 431 cited by Ms Lam.  Mr Vaughan illustrates the same by reference to cases such as Inwards v Baker [1965] 2 QB 29 at 39, per Lord Denning MR; Crabb v Arun District Council [1976] Ch 179 at 188, per Lord Denning MR; Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 at 151-152, per Oliver J; and the more recent consideration of the case of Inwards in Yeoman’s Row Management v Cobbe [2008] 4 All ER 713.

43. The equitable principle could also apply in favour of a squatter.  Jourdan QC & Oliver Radley-Gardner, Adverse Possession (2^nd ed) says (at §19-36):

“Proprietary estoppel could also apply in favour of a squatter. If the paper owner allowed or encouraged a squatter to believe that the squatter had or would acquire title to the disputed land, and the squatter improved the land or otherwise altered his position in that belief, and it was unconscionable for the paper owner to deny the squatter that title, the squatter would acquire an equity in the land, which would be satisfied in the way which gave the squatter the minimum interest needed to produce a just result. Depending on the circumstances, it might be that the owner’s conduct would amount to the grant of a licence permitting the squatter to take or remain in possession, which would prevent the squatter’s possession from being adverse……”

44. I need not repeat my observation about the pleaded cases of the parties.  In reply to the pleaded case of Lai, Yu Fung has pleaded that Lai does not have an identifiable equitable interest with the right to exclusive possession in the Property as alleged.  This is what label as the purchaser’s equity for the purpose of discussion.  I found for Yu Fung on that.  The pleaded case of Yu Fung in denial of the adverse possession, as summarised above, is permission or consent of Full Country to Lai’s taking of possession and possibly that of its subsequent assignees to the continuation of Lai’s possession.  As Ms Lam points out, there is no plea of proprietary estoppel or possession by Lai under a licence coupled with an equity.

45. One has to confess that there may be the temptation to adjudge by reference to the reality of the case.  But there is still the consideration of pleadings and fairness.  If Lai cannot properly assert proprietary estoppel on top of his alleged purchaser’s equity as the basis for the constitution of interest in the Property, it will not be fair to allow Yu Fung to assert the same proprietary estoppel as the basis for defeating the limitation defence.  I can therefore understand why Ms Lam complains that Yu Fung could not blow hot and cold.  It is only fair for me to agree.

46. However Ms Lam submits that even in application of the principle of proprietary estoppel, the equity so created is inchoate in that its exact manifestation depends on the minimum interest that the circumstances call for in order to produce a just result.  It could be an order for the transfer of property or a declaration of a licence to occupy, etc: see Jourdan, Adverse Possession (above); Gray & Gray (5^th ed) at §§9.2.88-9.2.91.  Ms Lam adds that the intervention of third party interest also has a bearing on the form and extent of remedy that the court will grant to the person in possession.  It remains unknown, unless and until such declaration or award by the court.

47. Ms Lam continued to submit that unless the equity is manifested by the declaration of ownership or outright transfer of the property in question, possession with the intention to do so to the exclusion of the world at large (as if it was his own) would nevertheless exceed any equity in the form of licence to occupy even for life.  In these circumstances, the possession, she argues, would still be adverse.  She borrows support from JA Pye (above) at §59 and Allen v Matthews [2007] EWCA Civ 26 at §§86-87.

48. In the paragraph of JA Pye cited, Lord Browne-Wilkinson referred to the fact that the defendant’s continuation of the use of the land after the expiration of the previous licence was without permission of the plaintiff paper owner.  It was also knowingly an act directly contrary to the wishes of the plaintiff, who had expressly refused to grant further licence with a view to group all the land in land.  What Lawrence Collins LJ said in the 2 paragraphs of Allen cited by Ms Lam was that whether a person with limited permission to use or occupy land might rely on more extensive activity to claim adverse possession is a question of fact turning on the circumstances of the case.  It is not enough simply to increase use beyond what was permitted or contemplated, but must be change in the nature of the occupation.  What is certain is that use with consent which becomes occupation without consent would result in adverse possession.

49. Except for the last sentence above, my impression is that the 2 cases Ms Lam cited above do not really afford the necessary support to her submission that intention to possess to the exclusion of the world at large would inevitably exceed an equity manifested by a licence to occupy for life.  As it is the possessory title in question, whether the person in possession intends to deal with the property in question as owner is not requisite.  Having said that, I agree that neither party seeks a declaration of such an equity in any form in the present case.

50. So we have to return to the issue of permission or consent, as Yu Fung has pleaded.  Ms Lam submits that even if the taking of possession of the Property was not adverse for being consensual, what happened soon after the family of Lai moved into the Property had changed the status as a matter of fact.  She submits that a licence is liable to revocation and determination by the assignment of the land over which the licence is exercised: see Ho Hang Wan v Ma Ting Cheung [1990] 1 HKLR 649 (at 652), following Terunnanse v Terunnanse [1968] AC 1086 (at 1095G-1096A).  In line with his submission mentioned above, Mr Vaughan’s answer is that a licence coupled with an equity would be different.  I say no further on this.

51. According to Lai, he had requested Full Country to formally assign the Property to him after moving in, but only to be told that that the Property was subject to mortgage, which was then yet to be discharged.  The fact was that Full Country assigned the Property away at about the time when Lai’s family moved into the Property. By that, Full Country has rendered itself no longer in a position to continue any consent or licence to Lai’s possession of the Property.  Full Country was even wound up in November 1998.

52. As mentioned, Yu Fung suggests by pleading the possibility that Lai’s continued possession of the Property was under the permission of the successive owners after Full Country.  Though indicated, no further particulars have been provided since the pleading.  There is no actual evidence that the assignment by Full Country, or the subsequent assignments and charges, in respect of the Property were effected upon the terms or understanding that any licence to Lai to possess the Property would remain intact.

53. Yu Fung seeks to rely on what was said to be implied permission of the successive owners of the Property to Lai’s continued possession of the Property.  Mr Vaughan asks me to find the implied permission or licence to occupy the Property by inference, on the basis that the owners subsequent to Full Country were probably related and the transactions were staged for financing purpose.  In other words, these subsequent owners must have granted such permission or licence as Full Country did.

54. Ms Lam submits that finding of implied licence must be fully justified on the basis of evidence of substance, which must be probative of a grant of permission, not merely consistent with it.  Something more than merely letting the previous situation continue would be necessary.  Continuation without objection or comment shows acquiescence but not, as a matter of principle, an implied licence: see J Alston & Sons Ltd v BOCM Pauls Ltd [2009] 1 EGLR 93 at §§115-116.  In principle, I agree.

55. These parties were on their face separate.  Mr Vaughan accepts that.  Yu Fung’s witness gave evidence in respect how she formed the impression that they were related.  But to take it further as the basis for finding the grant of licence by these parties to Lai’s continued possession of the Property will be more than inference.  Further, Yu Fung’s case is that delivery of vacant possession was acknowledged in the successive sales.  Its witness gave evidence that Olympic’s representative represented to her in December 1998 that various properties, including the Property, had been rented out without Olympic’s knowledge; and in June 2004, the same representative represented to Yu Fung that the occupiers of the let properties, including the Property, refused to move out or to pay rent. Olympic was even struck off the Companies Register in 2004.

56. These representations by the representative of Olympic, if made, only suggest that Olympic, which became the owner in September 1997, had not given any permission or licence in respect of the occupation of the Property by third party.  These representations might be false.  But it is exactly such state of the evidence in this respect which does not suffice to establish permission or licence from the owners subsequent to Full Country to Lai’s possession of the Property.

57. Lai was given vacant possession of the Property, and in that sense, his taking possession of the Property was with the consent of Full Country, the paper owner at the time.  Whilst it might be understood that formalities should follow, there should be no doubt whatsoever that Lai intended to possess the Property as his family’s home to the exclusion of even Full Country.  He believed in his entitlement, which might well be wrong as a matter of fact.  The requisite intention to possess relevant to the limitation defence nevertheless was there.

58. Upon discovering the development scam, Lai, through his then solicitors, wrote to the mortgagee bank of Hebei in November 1998, putting on record that he is the beneficial owner of the Property as a result of the dealings between him and Full Country as well as the default of Full Country.  Lai also reported the matter to the police, asserting the same position.  Upon receipt of the originating summons herein, Lai, through another solicitors’ firm, wrote to the solicitors for Yu Fung in June 2008, asserting that he is the beneficial owner of the Property.

59. Lai then applied to be joined as a defendant on the ground that he has an equitable interest of and in the Property to which any subsequent purchaser and mortgagee would be subject.  In the defence, Lai maintains his claim that he has a prior equitable interest in the Property to which Yu Fung is subject, alternatively for adverse possession of the Property.  Yu Fung contends that Lai has thus waived or is estopped from asserting adverse possession.

60. Ms Lam argues that where the parties are operating under some mistakes as to the proper legal relationship between them pertaining to the land, time can nonetheless run in favour of the person in possession for limitation purpose. She cites Purbrick v Hackney LBC [2004] 1 P&CR 553 at §21, but the part of it, I believe, that caught her attention is what the learned judge said as follows:

“……After all, as some of the various passages I have quoted emphasise, unless the squatter believes, mistakenly, that he owns the property, which at least until the Land Registration Act 2002 comes into force is an irrelevant factor, he is unlikely to carry out much in the way of improvement because he knows that, at any time, he is liable to be ejected.”

61. That goes to the squatter’s belief that he owns the property, which may as a matter of fact be wrong.  As to this, that the requisite intention is that to possess the land to the exclusion of the world, neither intention to own nor intention to acquire ownership. Lord Browne-Wilkinson made this clear in JA Pye (at §§42-43)[13].

62. As much as intention to own the land in question is not necessary, belief that he owns the land, albeit mistakenly, does not negative the requisite intention to possess the land to the exclusion of the world and thus adversely as a matter of fact.  In the case of Taylor v Lawrence [2001] EWCA Civ 119, the Court of Appeal had this to say (at §12, per Peter Gibson LJ):

“……Rather the intention has to be ascertained from the overt actions of the person claiming adverse possession. The actions of the paper title owner are only likely to be of assistance insofar as they constitute some of the factual circumstances against which the acts of the dispossessor are to be assessed. If the dispossessor believes that he has the right to exclusive possession, it matters not that that belief is wrong. Thus, if Mr Griffiths thought he owned the land in question (and that seems likely in view of the belief of his teenage son) then he would be likely to believe that he had the right to exclusive possession. He could not hold that belief if his actions were done because of the permission of the true owner. In such a case there would be no adverse possession. But the difference of Mr Moore as to what was being done on the other side of the screen does not mean that Mr Griffiths’ actions were done with the permission of Mr Moore. The requisite intention is ordinarily established as a matter of inference.”

63. It is not the law that the person in possession has to know or understand that he is a squatter or trespasser either.  In Roberts v Swangrove Estates Ltd [2008] 2 WLR 1111, Mummery LJ said (at §87):

“……As Saville LJ explained in Hughes v Cork [1994] EGCS 25; Court of Appeal (Civil Division) Transcript No 217 of 1994 it is obvious that it is possible for a person who (albeit mistakenly) believes himself to be the true owner to have the requisite intention to exclude others and to acquire title by adverse possession. Adverse possession is not confined only to those who think or know that they are trespassing on some else’s land. All that matters for limitation purposes is that the person claiming adverse possession is in factual possession together with an intention to exclude everyone else. There is no sensible reason why a person who mistakenly believes that he is the true owner of land and behaves accordingly should be denied the benefit of a limitation defence, which is available to a person who commits the wrong of taking and retaining possession of land which he knows belongs to another person.”

64. The relevant text of Saville LJ’s decision in Hughes v Cork , which Mummery LJ cited above, actually read:

“The learned Judge appears to have held that it is impossible for someone who believes himself to be the true owner to acquire title by adverse possession since such a person cannot, ex hypothesi, have an intention to exclude or oust the true owner. If this were the law then only those who knew they were trespassing, that is to say doing something illegal, could acquire such a title, while those who did not realise that they were doing anything wrong would acquire no rights at all. I can see no reason why, as a matter of justice and common sense, the former but not the latter should be able to acquire title in this way. What the law requires is factual possession ie, an exclusive dealing with the land as an occupying owner might be expected to deal with it, together with a manifested intention to treat the land as belonging to the possessor to the exclusion of everyone else.

Obviously if the possessor knows or believes someone else has the paper title to the land he must intend to exclude that person along with everyone else.  But in the absence of such knowledge or belief it is in my judgment sufficient for this part of the second requirement simply to establish a manifest intention to exclude everyone.”

65. In the same case, Beldam LJ also commented that the fallacy of the argument (that Saville LJ rejected) lies in the failure to distinguish between an intention to possess, which is required, and an intention to dispossess, which is not.

66. Mr Vaughan relies on Hyde v Pearce [1982] 1 All ER 1029, where the plaintiff purchaser entered into possession of the property before completion. The conveyancing was never completed but the purchaser remained in possession in 14 years.  The vendor subsequently conveyed the property to a third party.  The purchaser claimed title to the property by adverse possession.  Templeman LJ had this to say (at 1038):

“ In my judgment, the Plaintiff, having in effect been able to go in and stay under the contract, cannot now repudiate the contract with hindsight. As I have said, if, at any time, he made it clear that he was no longer bound by the contract, the different considerations would apply. Equally, no doubt, if he had made that clear, then the vendors would have taken action against him. It is only the fact that he was there as a purchaser pending completion which has enabled time to run in his favour, as he says, and which enables him to claim a title by adverse possession. Accordingly, in my judgment although the full period required by the 1939 Act had elapsed, the Plaintiff has not shown that he was in adverse possession.

For my part, not only can I see no date by which the vendors ought to have realised the changed status of the plaintiff but, in addition, it seems to me that, having entered the property under a claim of right, albeit on the terms of the undertaking, and having then continued in possession ostensibly and as far as he himself was saying at the time, or implying by his conduct at the time, as a purchaser pending completion, if he was to throw off that capacity and appear in the full light as a person in adverse possession acquiring a title, it was at least necessary that he should have repudiated the contract, thus marking his change of status.

   In any event, he never did change his status and, as I have indicated, at the end of the day he is really seeking to have the best of both worlds.  He was able to stay there because of the contract; now he says, in effect, he was there the whole of the time in spite of the contract.  I do not think he has shown that he was in adverse possession and, accordingly, I would allow the appeal.”

67. The above was applied in the Hong Kong case of Country Rich Development Ltd v Ma Chan Fuk-kiu & Ors [1995]1 HKLR 265.  There the 1^st defendant contended that she had purchased the property from the former registered owner, only that the relevant deed was never registered.  In 1992, she commenced action seeking a declaration that the property was held by the former owner on trust for her and for specific performance of the agreement for sale.  In 1993, the former owner assigned the property to the plaintiff, who commenced action in the same year against, among others, the 1^st defendant.  The plaintiff managed to obtain order for possession against the 1^st defendant, and execution was completed subsequently.  The 1^st defendant now sought leave to appeal out of time on the ground of change of law.

68. Besides asserting her interest as aforesaid, the 1^st defendant now contended that any claim against her remaining in possession of the property was statute-barred.  The plaintiff referred to Hyde (above).  The court considered that the 1^st defendant entered into possession of the land by virtue of an agreement for sale evidenced by the unregistered deed. She has not repudiated the contract, but pursued her claim against the former owner for effectively specific performance of the agreement.  By such conduct, the 1^st defendant’s occupation of the land was always based on the contract and not on adverse possession.  Also taking into account the completed execution of the order for possession by then, it would be unfair to grant leave to appeal out of time.

69. The decisions in English case of Hyde and the Hong Kong case of Country Rich Development do not sit well with the what the English court said in Hughes (above) and reiterated in Roberts (above).  This was noted by Cheung J (as he then was) in the Hong Kong case of Tsun Wai Man, the sole executor of the estate of Tsang Kam Chuen v Cheung Yung & Ors, HCA 14202/1999 (9 August 2001).  In Tsun Wai Man, the plaintiff claimed title to the property in question pursuant to a sale, and alternatively on the basis of adverse possession.  Cheung J found for the plaintiff on ownership.  Nevertheless His Lordship proceeded to consider the argument by the defendant that the plaintiff could not rely on adverse possession because the plaintiff had claimed to be the owner of the property in question.  His Lordship had this to say (at §39):

“Huges v Cork was applied in the Hong Kong cases of Wong Luen Chun & Anor v Secretary for Justice [1998] 4 HKC 122. It should be noted that Hyde v Pearce was not cited either in Hughes v Cork or in Wong Luen Chun. Without finally deciding on this topic because counsel had not provided me with full arguments, my view is that the reasoning of Hughes v Cork is sound. The decision of Hydes v Pearce should now be read subject to this later decision. Accordingly, insofar as may be necessary, by reason of adverse possession of the plaintiff and his family of Lot 1120, the title of Cheung Ying and Cheung Ah Tau had been extinguished.”

70. In Wong Luen Chun, which Cheung J cited above, the defendant also argued that the 2^nd plaintiff there acted on the assumption that he or his family owned the land and he could not at the same time have had  an intention to dispossess the owners.  Such argument, Barnett J held (at §§40-42), was disposed of by the English Court of Appeal in Hughes.

71. Where a person is in factual possession of the land with the requisite intention to possess it to the exclusion of the world, the paper owner included, it is the fact that he has no right that entitles him to do so that characterises his such possession as that as of wrong and thus adverse.  What he might have believed to be his entitlement, including that to possess the land, is relevant to whether he had the requisite intention to possess as a matter of fact, but not necessarily whether the possession was as of right or as of wrong.

72. In the context of a purchaser in possession pursuant to a sale, I am of the view that he may assert adverse possession of the property once he continues his possession with the requisite intention to do so to the exclusion of the world, including the vendor who has failed to tender the assignment.  Time for limitation purpose starts to run from that moment in favour of the purchaser in possession towards extinguishing the vendor’s title.

73. With the benefit of argument in the present case, which Cheung J did not find in Tsun Wai Man (above), I with respect agree with His Lordship’s observation.  My conclusion is that there is no conflict of position in Lai in his pleaded case.  The contention that Lai has waived or is estopped from asserting adverse possession fails.

74. I also find that Lai has been adverse possession of the Property vis-à-vis the assignees and mortgagees subsequent to Full Country, and certainly against Olympic.

Whether Yu Fung’s right of action has been time-barred

75. It follows from the above that limitation period for recovering possession from Lai started to run at the latest from the time when Full Country assigned away the Property behind Lai’s back.  This happened in June 1997 and predated the Charge, which was 18 September 1997.  The time continues to run against the mortgagee, as the mortgagor is a person through whom the mortgagee claims: see sections 7(2) and 8(2) of the LO; Jourdan, Adverse Possession at §26-53.

76. Lai contends that the claim against him for possession of the Property was not put forward until the notice of appointment to hear the originating summons (“the Notice”) and the notice to occupiers, both dated 10 October 2011.  By then, the 12-year limitation period under section 7(2) of the LO (even counting from the time of the Charge) had expired.  Therefore Yu Fung’s right of action against him was extinguished pursuant to section 17 of the LO.

77. Mr Vaughan disagrees.  The originating proceedings were commenced on 10 June 2008.  Lai sought to be joined to resist the claim for possession and was so joined on 10 July 2008.  The proceedings continued, including those against Lai, which were deemed to have been commenced on 10 June 2008 pursuant to the relation back rule under section 35(1)(b) of the LO.  It follows, he argues, that the claim against Lai is within time.

78. Section 35 of the LO provides that:

“(1) For the purpose of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced:-

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means any claim by way of set-off or counterclaim, and any claim involving either-

(a) the addition or substitution of a new cause of action; or

(b) the addition or substitution of a new party,

and “third party proceedings”…means any proceedings brought in the course of any action by any party to the action against a person not previously a party to the action, other than proceedings brought by joining any such person as defendant to any claim already made in the original action by the party bringing the proceedings.

(3) Except as provided by section 30 or by the rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim

……”

79. Section 35(5) and (6) then set out the basis on which rules of the court may provide for allowing a new claim which is outside the time limit under the LO.  On this basis, we have O.15, RHC on the joinder of causes of action and parties.

80. Joinder of a party who is in possession of the property in an action for possession may be sought pursuant to O.15 of the Rules of the High Court under either r.6 or r.10.  As mentioned, Lai applied and was granted ex parte the order to be joined.  This had to be under r.10, whereby r.10(2) permits such an application to be made ex parte by the party in possession to be joined in an action for possession of land.  But the operation of r.10 is expressly stated to be without prejudice to r.6.  R.6(2)(b) sets out the following basis for joining a party:

(1)   any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(2)   any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.

81. Read in conjunction, r.10 operates in the case of an action for possession to enable a person claiming to be in possession to be joined as a party.  This must be consistent with the basis for joinder of party generally under r.6.

82. Whilst Lai became a defendant, the claim, which was still directed against Olympic only, is not deemed to have been served on him.  It was not necessary for him to acknowledge service of the originating summons, obviously because he, being a non-party to the original action, would not have had it: see Hong Kong Civil Procedure 2015 at §15/10/2.  The claim directed against Lai as the person claiming to be in possession was first made in the Notice, which was supported by affidavit required by O.88, r.4.  The Notice and the affidavit in support were dated October 2011, which was some 3 years after the joinder of Lai.  By then, the time limitation for action for possession of the Property against Lai had expired.

83. Ms Lam takes issue that Yu Fung did so without amending the originating summons to name Lai as the 2^nd defendant and serving the amended originating summons on Lai as such.  Such amendment would have required leave: see O.20, r.1, RHC.  I suppose had Yu Fung sought leave to do so, Lai could have opposed on the basis that the claim for possession against him, which was put forward only then, would be time-barred by then.

84. Lai indeed could have taken issue and applied to strike out the Notice and the supporting affidavit and thus the proceedings against him for abuse of process at that juncture.  That did not happen.  The action proceeded, which were directed to continue as if the matter has been begun by writ.  The effect is that Lai allowed himself to be deprived of a potential limitation defence because the claim against Lai is deemed to have been part of the action from the outset by virtue of section 35(1)(b) of the LO: see Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738 at §§7, 10-16.

85. I can only take it to have been the conscious decision of Lai, who was legally represented at all times, not to take issue at the time when the effect of the operation of the relation back rule must be known.  This remained to be the position, even when the statement of claim was filed.  Ms Lam acknowledged the Court of Appeal decision of Sun Focus Investment Ltd in this respect.  But she pleads for consideration that the views on when the limitation issue should be taken were divided prior to that decision in 2012: see Welsh Development Agency v Redpath Dormna Long Ltd [1994] 4 All ER 10; Extramoney Ltd v Chan Lai Pang & Co [1992] 1 HKJLR 244.  Whether immediate objection on the basis of limitation should be taken upon receipt of the Notice and the affidavit in support, she argues, was uncertain at the time.  This argument, in my view, does not work, in view of the lack of discretion in considering whether section 35(1)(b) of the LO applies.

86. Ms Lam argues that the court will not permit a party to use the rules of the court to circumvent the provisions of section 35(3), (5) and (6), which restricts the introduction of new claim that is time-barred.  She cites Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2012] 4 HKLRD 263 at §§62-67 in support, which was upheld by the appellate court [2013] 1 HKLRD 744 at §§63-66[14].  There the plaintiff introduced a new cause of action, which was time-barred, by way of amendment of pleading without leave under O.20, r.3.  The defendant failed to apply for disallowance of the amendment pursuant to O.20, r.4 within the prescribed time.  In question was whether the defendant could nevertheless do so by application to strike out taken out subsequently.  It was in this context that the court (which the Court of Appeal endorsed) stated that the court will not allow a party to make use of the rule under O.20, rr.3 and 4 to circumvent the provisions of section 35 of LO[15]. By relying on the relation back provision under section 35(1)(b) of the LO, Yu Fung does not fall into such category.

87. By these proceedings, when commenced, Yu Fung claims, among other things, vacant possession of the Property from Olympic.  Lai was joined as the person in possession of the Property.  The claim against him was put forward Lai as such, which has been deemed to have been commenced on the same date on which these proceedings were commenced pursuant to section 35(1)(b).  That the originating proceedings were subsequently directed to continue as if they had been begun by writ merely reinforced the effect of it.  The claim against Lai is thus within time.

88. In the circumstances, the limitation defence on the basis of adverse possession still does not assist Lai.

CONCLUSION

89. For the above reasons, much as I feel sympathetic towards what happened to Lai, I have to give judgment in favour of Yu Fung.

90. The reliefs sought are set out in the amended statement of claim under the prayer specifically from (1) to (9).  Subject to the following, I will give an order in those terms:

(1)   As to the delivery of vacant possession by Olympic and Lai under prayer (1) there, the time I give will be within 60 days from the date hereof.

(2)   Order sought under prayer (5) and (6) concerning Lai is granted on the basis only insofar as it is necessary to involve Lai.

(3)   The claim for mesne profit against Lai under prayer (7) is devoid of particulars and evidence, and was not even debated during the trial.  None is allowed.  The same is the case regarding interest under prayer (8).

(4)   Costs are claimed under prayer (9).  Clause 24(iii) of the Charge provides the contractual basis for costs of this action between Yu Fung and Olympic to be awarded on an indemnity basis.  The case for claiming for costs against Lai on similar basis, however, is not made out during the trial.  The usual basis applies.  Costs include any costs reserved, and shall be taxed, if not agreed.

ORDER

91. There be judgment and order against Olympic and Lai in terms of §90 above.  The costs order is nisi and shall become absolute, in the absence of application in 14 days for variation.

92. I thank counsel for their assistance.