THE INCORPORATED OWNERS OF PO HANG BUILDING v. SAM WOO MARINE WORKS LTD

HCMP 415/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 415 OF 2014

(ON AN INTENDED APPEAL FROM DCCJ 2259 OF 2013)

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JUDGEMENT
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Hon Chu JA (giving the decision of the Court):

1.  This is the defendant’s application for leave to appeal the decision of His Honour Judge Kent Yee (“the Judge”) dismissing its application for extension of time to file and serve a defence and counterclaim and entering judgment for the plaintiff with costs. The defendant also applies for a stay of the Judge’s decision pending appeal.

2.  The core issue is whether, as a matter of law, it is reasonably arguable that an owner of a building who has encroached on the common part can rely on adverse possession as a defence to an action by the incorporated owners to enforce the provisions of the deed of mutual covenant and/or the Building Management Ordinance, Cap. 344 (“BMO”).

3.  We consider this is an appropriate case to exercise our powers under Order 59 rule 2A(5)(a) of The Rules of the High Court, Cap. 4A to determine the applications on the basis of written submissions without an oral hearing.

The facts

4.  The plaintiff is the incorporated owners of Po Hang Building (“the Building”).

5.  The defendant is the registered owner of shop no. 1 (“the Shop”) on the ground floor of the Building.  The assignment of the Shop to the defendant is subject to and with the benefit of a Deed of Mutual Covenant (“DMC”).

6.  The subject matter of the plaintiff’s claim is a service lane (“the Lane”) situated outside the Shop. The Lane is part of the common parts of the Building.

7.  The defendant has enclosed the Lane by the erection of iron fences and a metal door. It is the plaintiff’s case that the enclosure started in about 2010.  The defendant however says that this began in 1998. 

8.  The plaintiff commenced proceedings in the District Court against the defendant claiming that the enclosure of the Lane has interfered with the use and enjoyment of the Lane by other co-owners and occupiers of the Building and constitutes breach of the DMC and/or section 34I of the BMO.  The plaintiff seeks primarily a mandatory injunction for the demolition and removal of the iron fences and the reinstatement of the Lane to its original state and condition and damages to be assessed.

9.  Upon the defendant failing to file a defence, the plaintiff applied by summons to enter default judgment.  The defendant then issued a summons to seek an extension of time for filing a defence and counterclaim.

10.  The defendant’s defence to the claim, as appeared by its draft defence and counterclaim, is that it has acquired a possessory title to the Lane by virtue of its adverse possession of the same since 1998.

11.  The two summonses were heard together. The Judge accepted the plaintiff’s argument that even if the defendant could establish adverse possession on the fact, it would not disentitle the plaintiff to enforce the covenants in the DMC and/or the provisions in the BMO, and concluded that the defendant did not have a viable defence to the claim.  He therefore dismissed the defendant’s summons and entered judgment against the defendant on the plaintiff’s application.

12.  The defendant’s applications for leave to appeal to the Court of Appeal and for a stay of execution of the judgment were refused by the Judge.  The defendant renews its applications to this court.

Threshold for granting leave to appeal

13.  Section 63A(2) of the District Court Ordinance, Cap. 336 provides that leave to appeal to the Court of Appeal shall not be granted unless the Court of Appeal is satisfied that the appeal has a reasonable prospect of success, or that there is some other reason in the interests of justice why the appeal should be heard.By reasonable prospect of success, it means the prospect of the appeal succeeding must be more than fanciful without having to be probable: SMSE v. KL [2009] 4 HKLRD 125.

The Judge’s decisions

14.  Before the Judge, the parties proceeded on the assumption that the defendant would be able to make out a case of having been in continuous exclusive possession of the Lane since 1998.[1] The issue, which the parties agreed would be determinative of the two applications, is one of law, namely, whether the plaintiff would be entitled to enforce the relevant provisions in the DMC and/or the BMO, notwithstanding that the defendant has been in exclusive possession of the Lane for the period required to support a possessory title under the Limitation Ordinance, Cap. 347.

15.  The plaintiff relied on three Court of Appeal decisions, namely, Incorporated Owners of Man Hong Apartments v. Kwong Yuk Ching [2001] 3 HKC 116, Incorporated Owners of No 27A Chatham Road, Kowloon v. Lee Kai Kong [2001-2003] HKCLRT 273, and Incorporated Owners of Mountain View Mansion v. Heart Cuisine and Ors [2012] 4 HKLRD 628.

16.  The defendant, on the other hand, relied on the more recent Court of Appeal case of Wong King Lim v. Incorporated Owners of Peony House [2013] 4 HKC 295 and argued that the Man Hong Apartments case and the Mountain View Mansion case “seems’ to have been overruled.[2]

17.  The Judge disagreed, holding that the Peony House case only distinguished, but did not overrule the Man Hong Apartments case and the Mountain View Mansion case, thatthe Man Hong Apartments case remains binding on him and the present case is on all fours with it.[3] He concluded that the plaintiff is entitled to enforce the provisions in the DMC and/or the BMO against the defendant even if the defendant could establish the required period of continuous exclusive possession.[4]

18.  In the application for leave to appeal before the Judge, counsel for the defendant accepted that the Man Hong Apartments case was indistinguishable and binding, but argued thatleave to appeal should be granted in the interest of justice so that the appellate court could review the relevant law.[5]  It was also said that the judgment of Yuen JA in the Peony House case has thrown doubtson the correctness of the Man Hong Apartments case, which did not give proper consideration to the dicta in Re Nisbet and Potts Contract [1906] 1 Ch 386.[6]

19.  The Judge refused to grant leave, noting that Yuen JA, despite having considered the Man Kong Apartments case in some details, neither suggested that it was incorrectly decided nor criticized the application of Nisbet and Potts’ Contract in that case.[7]  The Judge pointed out that Yuen JA’s discussion on Nisbet and Potts’ Contract should be read in its proper context.  First, it was to deal with Cheung JA’s obiter remark in the Mountain View Mansion case.[8]  Second, the Peony House case was a case of adverse possession by a trespasser who was never a party to the deed of mutual covenant whereas the distinctive feature in the Man Hong Apartments case as well as in the present case is that the party claiming adverse possession was throughout an owner and a party to the deed of mutual covenant.[9]  The Judge did not see any basis for subjecting the Man Hong Apartments case and this area of the law to a review by the Court of Appeal. As he refused to grant leave to appeal, he also dismissed the application for stay of execution.

Grounds of appeal relied on in this application

20.  The grounds of appeal in the draft Notice of Appeal attached to the summons in these proceedings are formulated differently from those articulated before the Judge. They are that:

(1) The legal basis of the Man Hong Apartments case, which was derived from Nisbet and Potts’ Contract, had been reconsidered by Yuen JA in the Peony House case (at §§32 to 34).  In the light of the discussion, once the title of the owners of the Building in the Lane had been extinguished by virtue of the defendant’s adverse possession, they (and the plaintiff) would no longer have any right to the Lane and could not therefore enforce any right against the defendant.

(2) The Judge was wrong to draw a distinction between an encroachment by co-owner and adverse possession by a squatter in that both a co-owner and a squatter can be liable for breach of the covenant in a deed of mutual covenants by reason of the equitable doctrine of Tulk v. Moxhay (1848) 2 Ph 774 as extended by section 41 of the Conveyancing and Property Ordinance, Cap. 219 (“CPO”), in that the restrictive covenants relating to use or enjoyment of land can “run with land” and are bindingon a co-owner as well as a squatter.

Discussions

21.  We do not agree that the defendant’s grounds of appeal are reasonably arguable.

22.  In the Man Hong Apartments case, the incorporated owners claimed against the registered owner of a shop in the building for breach of the deed of mutual covenant and section 34I of the BMO in relation to an unauthorized structure and occupation on a passageway, which is a common part of the building. The owner claimed to have been in adverse possession of the passageway such that the incorporated owners’ title had been extinguished and the incorporated owners had lost all rights to enforce the covenants under the deed of mutual covenant. The trial judge found in favour of the owner. The incorporated owners’ appeal was allowed by the Court of Appeal (Mayo VP, Keith JA and Sakhrani J).

23.  The judgment of Mayo VP (with which the other members of the Court agreed) began with a consideration of the nature of the rights attaching to a deed of mutual covenant and the rights exercisable under the BMO.  It said that the right to enforce the covenants in the deed of mutual covenant is an equitable right and that, as set out in section 41 of the CPO, the benefit and burden of the provisions in the deed of mutual covenant run with the land of all the co-owners.  It went on to hold that (at 122I-123G):

“Even if the defendants were able to establish that they had exclusive possession of the suit portion as a consequence of their adverse possession the land would still be subject to the terms and conditions contained in the DMC. The authority for this proposition is derived from p. 402 of the judgment of Collins M.R. in Re Nisbet and Potts’Contract [1906] 1 Ch 386 and his conclusion at p. 404:

‘... What machinery is there in the Statute of Limitations affecting the right of a covenantee who has the benefit of a restrictive covenant? Nothing in the Act has been pointed out to us which touches that right at all. In fact, unless and until the right of the covenantee has been in some way infringed, so that it becomes necessary for him to enforce that right, there is no reason, either in principle or in fairness, why his right should be in any way affected. The person who stands simply with the benefit of a negative easement is certainly not put upon the assertion of his right unless and until that right has been interfered with in some way; and it is a matter of absolute indifference to him what person is the owner of the land over which that right exists until that land is used in some manner incompatible with the assertion of that right on the part of the person entitled to it. It seems to me, therefore, that the principal question before us is whether or not Sir George Jessel was right in the view that he took in London and South Western Ry. Co. v. Gomm, that an obligation created by a restrictive covenant is in the nature of a negative easement, creating a paramount right in the person entitled to it over the land to which it relates. If that is so, then, in the present case, the squatter, by his squatting, simply acquired a right to land subject to this incident. Of course, the burden of that incident must pass to all persons who subsequently become assignees of the land, and the squatter is not entitled to hand it over freed from the obligation that was imposed on the person whose title he has ousted by his possession.

Therefore, it seems to me that the law is clearly established in accordance with Sir George Jessel's view of the subject, and consequently that in this case the burden of the restrictive covenant did remain imposed on the land so as to be binding upon any person who could not shew that he had bought for value and without notice. Consequently it appears to me that the squatter’s title does not in any way assist the appellant in this case.’”

24.  The Peony House case is an action brought by a squatter to claim adverse possession of a scavenger lane that formed part of the common part of a building.  The incorporated owners denied liability and sought a mandatory injunction to evict the plaintiff and also an injunction to retrain him from occupying the lane.  The trial judge found in favour of the plaintiff on the facts, and held that the incorporated owners had ceased to have any right of action to recover possession of the lane.  On appeal, the incorporated owners contended that adverse possession was not a valid defence to the incorporated owners’ action for an injunction under section 34I of the BMO.  It was argued by the incorporated owners that as the lane was a common part, there could not be adverse possession, whether by a co-owner or a stranger to the deed of mutual covenant.

25.  Yuen JA (at §§15.1 and 15.2) was of the view that the incorporated owners’ argument “is a surprising proposition which should not be adopted unless the legislation admits of no other interpretation” and that it would be surprising if section 34I of the BMO, the purpose of which is to enable the incorporated owners to regulate the use of common parts, “has resulted in a change in the law with the surprising consequences set out above.”

26.  Yuen JA then went on to consider three Court of Appeal cases relied upon by the incorporated owners, which were also relied upon by the plaintiff before the Judge (see paragraph 15 above).  In respect of the Man Hong Apartments case, Yuen JA said (at §§17 and 18):

“17. In the Man Hong Apartments case, the owner of a shop in a building occupied a passageway adjacent to the shop. The passageway was a common part. The IO issued proceedings against the shop owner for breach of the DMC and of s.34I of the BMO. The shop owner claimed that he and his predecessors in title had been in adverse possession of the passageway.

18. This court (Mayo VP, Keith JA and Sakhrani J) held that the shop owner (and his predecessors in title) were parties to the DMC and therefore subject to obligations contained therein in respect of the property covered by it (ie the entire building).  That included a covenant that they would only possess the passageway in common with other co-owners, and not exclusively.  The right of the IO to enforce the covenants in the DMC was a right in equity, which right could only be defeated by a person who had bought the land for value and without notice.  Accordingly even if the shop owner (and his predecessors) had exclusive possession of the passageway for the required period of years, he could not defeat the equitable right of the IO to enforce the DMC against him because he had not bought the land for value and without notice.”

27.  Yuen JA went on to consider the decision in the Mountain View Mansion case, in which the incorporated owners sued a registered owner and his licensee for trespass of a service lane that formed part of the common part of the building.  The defence of adverse possession failed on the facts and the owner’s appeal to the Court of Appeal was dismissed.  Notwithstanding this, in deference to arguments of counsel, Yuen JA considered the obiter dictum of Cheung JA in the Mountain View Mansion case (at §§31 to 34) and said:

“31. After referring to Man Hong Apartments in para.19, Cheung JA said (in para.20):

‘Further the principle in Nisbet and Potts’ Contract is clearly applicable because once the service lane is found to be a common part then whoever occupies it, be it another owner from the building or a trespasser who acquired a possessory title by adverse possession, he is bound by the terms of the DMC. The latter cannot be in a stronger position because his paper title is still subject to the covenants in the DMC and he cannot use the service lane to the exclusion of the owners in the building.’

32. I will first examine the judgment in Nisbet and Potts’ Contract on which the above passage in Mountain View Mansion was based. Nisbet and Potts’ Contract was a case where there were two neighbouring pieces of land. There was a covenant restricting the user of one piece of land A (“the covenantor’s land”), with the neighbouring land B (“the covenantee’s land”) enjoying the benefit of that covenant. A squatter dispossessed the covenantor of his land A. Subsequently on a sale of A, the issue arose whether the covenant could still be enforced by the owner of B.

33. It was held that the covenant could still be enforced by the owner of B, the covenantee’s land, against any subsequent owner of A, the covenantor’s land, as the owner of A was not a bona fide purchaser for value of the legal estate without notice of the covenant. A restrictive covenant was binding in equity upon land to which a squatter had subsequently acquired a statutory title by adverse possession against the owner and covenantor, as the statutory extinguishment of the title of the dispossessed owner of the land did not have the effect of destroying the covenant, the equitable right of the covenantee not being in any way affected by the statute of limitations which had barred the original owner from recovering his land.

33.2 It is important not to confuse land with title. Land A remained subject to the covenant in favour of land B, even though the title of the owner of land A had been extinguished by the squatter’s adverse possession. Thus Collins MR held at p.402 that the whole (meaning the entirety of the) right the squatter acquires under the statute of limitations is the extinguishment of a title adverse to his own, and nothing else. Put another way, the statute of limitations affects the right of the original owner and covenantor to sue the squatter to recover possession of land A. However the statute does not affect the right of the covenantee (the owner of land B), unless and until his right to enforce the covenant has been infringed. Unless and until that happens, “it is a matter of absolute indifference to him [the covenantee, owner of land B] what person is the owner of the land over which that right exists [land A] until that land is used in some way incompatible with the assertion of that right [the covenant] on the part of the person entitled to it [the covenantee, owner of B]”.

34. When Nisbet and Potts’s Contract is so understood, I do not see how it assists the IO in this case.  The owners of the Building had covenanted only with one another to possess the Lane in common and not exclusively.  The plaintiff was not a party to the DMC.  The learned judge found that as far as possession of the Lane was concerned, the plaintiff’ intention was to exclude all the owners (and the IO) of the Building.  Accordingly at the end of the relevant period under the Limitation Ordinance, the plaintiff extinguished the title to the Lane which was adverse to his own, ie the title of all the owners of the Building (and the IO).  By then it did not matter what were the restrictions imposed on the use of the Lane by the owners under the express provisions in a deed of mutual covenant, or by the IO under the incorporated provisions of s.34I BMO.  Once their title to the Lane was extinguished, the owners (and the IO) no longer had any right to it which they could enforce against the plaintiff, unlike in Nisbet v Potts where the statute of limitations had no effect on the covenantee (the owner of land B) who therefore retained his right to enforce the covenant binding land A, which was separate and distinct from the original owner and covenantor’s adverse title against the squatter.  It is important to note that in LLC v Allen [1914] 3 KB 642, at 660 the English Court of Appeal held: ‘the doctrine in Tulk v Moxhay does not extend to the case where the covenantee has no land capable of enjoying, as against the land of the covenantor, the benefit of the restrictive covenant’.”

28.  We agree with the Judge that the above passages should be considered in its proper context.  Yuen JA was addressing the part of Cheung JA’s obiter remark in the Mountain View Mansion case that a trespasser who acquired a possessory title by adverse possession would be bound by the terms of the deed of mutual covenant by reason of the principle in Nisbet and Potts’ Contract.  Her Ladyship pointed out that the ratio in Nisbet and Potts’ Contract is that the statute of limitations only affects the right of the original owner to sue the squatter to recover possession; where the original owner is at the same time the covenantor to a covenant that runs with the land, the statute of limitations will not affect the right of the covenantee to enforce the covenant, unless and until his right to do so has been infringed.  Yuen JA concluded that in the Peony House case, unlike the facts in Nisbet and Potts’ Contract, the co-owners (represented by the incorporated owners) have lost their right to enforce the covenant against the squatter because the squatter has extinguished their title to the lane by being in adverse possession.

29.  Reading the judgment in its proper context, it is clear that Yuen JA was only referring to the position of a squatter who has trespassed the common part of a building, and the issue being considered is whether a stranger to a deed of mutual covenant can establish possessory title to the common part of a building by reason of being in adverse possession.  The judgment and the discussion on Nisbet and Potts’ Contract do not affect the legal basis of the Man Hong Apartments case.

30.  This is clearly set out in the judgment of Lam JA (as the Vice-President then was) at §§43-46:

“43. Applying that in the present context, upon adverse possession by the Plaintiff being established over the Lane, the Defendant IO ceased to have any interest over the dispossessed land to be protected by the covenants in the DMC. In this connection, I respectfully agree with the analysis of my Lady that the DMC was made to govern how the co-owners of the Building were to exercise their right of possession (as an incidence of their co-ownership), including the possession of the common parts. Unlike what happened in Re Nisbet and Potts Contract, the covenants in the DMC was not made by an owner of an adjoining piece of land in favour of his neighbour. The land intended to be affected by the DMC is the land subject to co-ownership. The Plaintiff has never been a co-owner. As explained, upon dispossession for the requisite period of time, the Plaintiff acquired an independent title whilst the Defendant IO ceased to have any right to enforce any claims, including claims based on the covenants, in respect of that portion of land.

44. My Lady has already explained the rationale of Re Nisbet and Potts Contract. I would only add that in contrast with the position of the covenantee in that case, the Defendant IO’s right under the DMC (and the deemed obligation under the DMC created by Section 34I) has been infringed from the very beginning of the dispossession by the Plaintiff over the portion of the land in question. Thus, the basis of the judgment of Collins MR in that case (viz time should not start to run until the right of the covenantee is affected) has no application to our case. The extinguishment of the title to the land under section 17 of the Limitation Ordinance Cap 347 encompasses the title to enforce the DMC in respect of that portion of the land.

45. Section 34I of the BMO has to be construed against such common law background. Section 34I(2) stipulates the legal consequence for a contravention of sub-section (1): the person in contravention shall be deemed to be in breach of an obligation imposed on him by the DMC in respect of the building. If the DMC cannot be enforced against a squatter (by reason of the extinguishment of title on the part of the IO), Section 34I does not confer upon the IO any additional right of action.

46. Insofar as the dicta at para 20 in the judgment of IO of Mountain View Mansion v Heart Cuisine [2012] 5 HKC 361 suggests otherwise, I respectfully beg to differ.  That paragraph fails to take account of the different nature of the covenants in Re Nisbet and Potts Contract and the covenants in a DMC.  It also fails to take account of the independent nature of the title of a squatter.  Further, as explained by Yuen JA, that was a case of encroachment by a co-owner as opposed to dispossession by a squatter.”

31.  The preceding part of Lam JA’s judgment (at §§36 to 41) has also made it abundantly clear that the Peony House case and the legal discussions are in relation to the position of a squatter, who has never been an owner and a party to the deed of mutual covenant vis-à-vis incorporated owners.

Disposition

32.  For the above reasons, we are not satisfied the threshold criterion for giving leave to appeal is met.  We refuse leave to appeal. As we refuse leave to appeal, the application for stay of execution is also dismissed. We further make an order nisi that the defendant pays the plaintiff the costs of these proceedings, to be taxed if not agreed.

[1] Decision §§5 and 6.

[2] Decision §8.

[3] Decision §§17 to 23, 27 and 32.

[4] Decision §§33 and 34.

[5] Decision on the leave application §8.

[6] Decision on the leave application §11.

[7] Decision on the leave application §16.

[8] Decision on the leave application §§17 and 18.

[9] Decision on the leave application §§19 to 21.