LEUNG WAI CHI v. LEUNG LAI CHING

[English Translation – 英譯本]
CACV 29/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 29 OF 2009

(ON APPEAL FROM LDPD NO. 2692 OF 2008)

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JUDGMENT

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Hon Yeung JA (giving the Judgment of the Court):

1. This case involves a flat under the Home Ownership Scheme which is situated at Flat 6, 11/F., Block G, Kwong Sun House, Kwong Ming Court, Tseung Kwan O, Kowloon (“the HOS flat”). Mr. Leung Wai Chi is the owner of the HOS flat.

2. In October 2007, Mr. Leung let the HOS flat to Madam Leung Lai Ching for a term of 2 years from 15 October 2007 to 14 October 2009. The original monthly rent of $6,500 was reduced to $5,000 starting from 15 January 2008. Mr. Leung did not have the written permission of the Housing Authority (“the Authority”) under the Housing Ordinance, Cap. 283 when he let out the HOS flat.

3. Mr. Leung claimed that Madam Leung was in arrear of part of the rent in the sum of $3,350 for the period from 15 January to 14 February 2008, and because of that, he filed an application with the Lands Tribunal on 16 October 2008 for recovery of arrear of rent and vacant possession of the HOS flat from Madam Leung.

4. Madam Leung opposed Mr. Leung’s application and raised the following grounds of opposition:

(1)  Mr. Leung reduced the rent voluntarily and it was effective from the commencing date of the tenancy, namely, 15 October 2007 but not 15 January 2008;

(2)  She had already paid the arrear of rent in full;

(3)  Mr. Leung had promised to cause the tenancy agreement to be stamped but it was not done. As a result, she suffered loss in allowance; and

(4)  Mr. Leung let the HOS flat illegally and was in breach of the tenancy when he cut off the gas supply.

5. On 2 February 2009, Mr. W. K. Lo, Member of the Lands Tribunal, determined and ordered that Madam Leung had to deliver up vacant possession of the HOS flat to Mr. Leung, and to pay arrears of rent /mesne profits calculated up to 14 January 2009 in a total sum of $50,350, and mesne profits calculated from 15 January 2009 in the sum of $5,000 per month, together with costs of $800.

6. Member Lo ruled that Madam Leung could not question Mr. Leung’s title, and that even though before letting out the HOS flat Mr. Leung had not paid the premium which if paid, would have enabled him to get the written permission of the Authority, and the tenancy agreement was not stamped, he was still entitled to receive rent/mesne profits.

7. Member Lo also ruled that the parties had not agreed to make the two matters of payment of premium and the stamping the conditions of the tenancy. And Madam Leung was aware that the HOS flat should not be let out before the premium was paid and written permission was obtained from the Authority and that the tenancy agreement could not be stamped, she therefore could not refuse to pay rent relying on the two grounds.

8. Member Lo emphasized that when entering into the tenancy, both parties agreed that the rent was $6,500 per month and that was why Madam Leung paid a sum of $13,000 as one month’s rent and deposit equivalent to one month’s rent. Member Lo also determined that the parties only agreed to reduce the monthly rent to $5,000 with effect from 15 January 2008, and therefore Madam Leung had failed to pay the full arrears of rent.

9. In the end, Member Lo ruled that all of Madam Leung’s grounds of opposition failed.

Grounds of appeal

10. Madam Leung did not dispute the findings of fact by Member Lo but she argued that Member Lo made a wrong decision when he ruled that Mr. Leung was still entitled to receive rent, even though no premium had been paid in respect of the HOS flat and the tenancy agreement was not stamped. Madam Leung stressed that the illegal letting of HOS flats was against the law and it was contrary to public interest if landlords of HOS flats were allowed to let the flats illegally and to collect rent therefrom.

11. Madam Leung stressed that the letting of the HOS flat by Mr. Leung without first paying the premium and getting the written permission of the Authority was in contravention of the Housing Ordinance, Cap. 283, and that the decision of the Tribunal would enable landlords of HOS flats to let their flats to earn rent without first having to pay the premium in order to get the written permission of the Authority or to cause the tenancy agreement to be stamped.

Mr. Leung’s stance

12. Mr. Leung admitted that he was in breach of the Housing Ordinance when he let the HOS flat and he was prosecuted, convicted and fined $6,000 because of it. But he stressed that Madam Leung was aware of the situation and she rented the HOS flat knowingly. Therefore, she should not be able to benefit from it or be discharged from the duty of paying rent.

Discussion

13. Section 17B of the Housing Ordinance, Cap. 283 stipulates:

“(1) Where –

(a)(i)    land in an estate is sold under section 17A; or

(ii)    land in respect of which the Authority is authorized to nominate purchasers is sold and the person selling the land acts without the written permission of the Authority; and

(b)  the person to whom the land is sold purports to mortgage or otherwise charge the land or to assign or otherwise alienate it; and

(c)  that person acts in breach of -

(i)    any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to the land; or

(ii)   in the case of such a mortgage or other charge, any term authorized under paragraph 4(a) of the Schedule as regards the mortgage or other charge,

the purported mortgage, other charge, assignment or other alienation,

together with any agreement so to mortgage, charge, assign or otherwise alienate, shall be void.

(2) Where -

(a) land described in subsection (1)(a)(ii) is sold with the written permission of the Authority; and

(b)(i)    the person to whom the land is sold purports to mortgage or otherwise charge the land and has not the written permission of the Authority so to mortgage or otherwise charge; or

(ii)    the mortgagee or the person in whose favour the charge is executed acts in breach of any of the terms on which the mortgage or other charge was authorized under paragraph 4 of the Schedule,

the purported mortgage or other charge, together with any agreement so to mortgage or otherwise charge, shall be void.

(3) For the avoidance of doubt it is hereby declared that subsection (1) is not to be construed as operating to invalidate a disposition by will (or codicil).”

14. Section 27A of the Housing Ordinance even makes unlawful alienations in breach of section 17B an offence. The unlawful mortgage or charge or assignment or “alienation” or agreement in any other form relating to HOS flats are not only void, the participants also commit an offence and are liable to a maximum fine of $500,000 and to imprisonment for 1 year.

15. Under the Home Ownership Scheme, the government subsidize people who meet certain financial conditions to buy their own home. HOS flats must be for the purchasers’ residential purposes and not for assignment or alienation or other profit-making purposes, or else it is contrary to the government’s policy in subsidizing purchasers of HOS flats to buy their own home. In our view, the clear objective of the Ordinance is to prevent owners of HOS flats from letting their flats without the prior written permission of the Authority. Otherwise, the tenancy shall be void under section 17B of the Housing Ordinance and the persons involved in the tenancy commit an offence under section 27A of the Ordinance. For the same reason, Mr. Leung was convicted and fined $6,000.

16. Although there is no statutory definition of the term ‘alienations’, a covenant restraining assignment or sub-letting is regarded as a covenant against alienations (see Woodfall - Landlord and Tenant, Vol 1, para. 11.116). The author of the book also regards the provision in section 93 of the Housing Act of England stating that “the tenant will not, without the written consent of the landlord, sublet or part with possession of the dwelling-house” as implied covenants against alienation (see Vol 1, para. 11.115).

17. Therefore, the sub-letting of the HOS flat to Madam Leung by Mr. Leung without the written permission of the Authority is an unlawful act of alienation. It is in breach of section 27A of the Housing Ordinance and is an offence in law.

18. Of course, the legal principle is well established in numerous precedents to the effect that a breach of a covenant relating to land does not make a contract of letting or underletting the land illegal.

19. In Parker v Jones [1910] 2 KB 32, Bucknill J. clearly pointed out at page 38 of the judgment:

“A covenant not to underlet without licence does not make an underletting in breach of that covenant illegal; it merely gives the lessor a right to re-enter.”

20. The said principle is also adopted by the Hong Kong courts (see Har Sio-ying v Chung Yau-cheung [1987] HKLR 411).

21. However, not only was Mr. Leung in breach of the terms, covenants and conditions set out in the Schedule to the Housing Ordinance by letting the HOS flat without the prior written permission of the Authority, he also committed an offence.

22. Whether the commission of an offence of illegal letting by a landlord would preclude that landlord from receiving the agreed rent would depend on the circumstances. In Shaw v Groom [1970] 2 QB 504, the landlord had failed to comply with the statutory requirement to issue to the tenant all the information required by the statute and had, therefore, committed an offence. But the court held that the landlord was not precluded from recovering arrears of rent from the tenant. In Best v Glenville [1960] 3 All ER 478, a tenancy for the letting of a property to an unmarried couple for the purposes of cohabitation would not be regarded as illegal for conniving at immoral sexual relationship.

23. But the instant case is much more serious than those mentioned above. The letting of the HOS flat to Madam Leung by Mr. Leung was itself in contravention of the terms, covenants and conditions pertaining to the purchase of HOS flats, and was against the law and deemed void. No one should derive a benefit from an illegal contract, including a tenancy.

24. Where a landlord let the property for a user which was prohibited by statute, such as for the purposes of a brothel, prostitution, an immoral trade or a forum for the desecration of deities, the landlord was precluded from recovering arrears of rent under the tenancy (see Smith v White (1866) L. R. 1 Ex 626, Pearce v Brooks (1866) L. R. 1 Ex 213, etc.). In Alexander v Rayson [1936] 1 K. B. 169, the court held that the action of the two parties in agreeing to split the contract into two for the purposes of defrauding the authority as to the amount of the real estate duties payable would also render the landlord disentitled to receiving rent under the contract.

25. Although Mr. Leung had not let the HOS flat to Madam Leung for conducting any illegal trade, yet the tenancy itself was already void and both contracting parties had broken the law.

26. Knowing that Mr. Leung did not have the right to let the HOS flat, Madam Leung and her husband, Mr. Chan Wai Lin (陳偉連), nevertheless, rented the HOS flat from him. They were not worthy of sympathy. But we have to consider the more important factor of public interest. If the court allowed Mr. Leung to receive rent in respect of the HOS flat in reliance on a void tenancy, the court would be turning a blind eye to the express and clear provisions of the Housing Ordinance. Not only would it be accused of encouraging the breaking of law, it also would be running counter to the policy of the government in subsidizing eligible people to buy homes.

27. In our view, it is necessary to carry out the policy that HOS flats must be for the occupation of the purchasers as their residence and to prevent owners of HOS flats, without the prior written permission of the Authority, from letting the HOS flats or by whatever means of alienation passing the title and/or possession of the HOS flats to others.

28. The tenancy between Mr. Leung and Madam Leung is certainly void and their contracting behaviour is against the law, and as a result, Mr. Leung is disentitled to receiving or recovering the rent under the tenancy or other monetary relief. But it does not mean that Madam Leung is entitled to occupy the HOS flat. Madam Leung must quit and the order against her, requiring her to deliver up vacant possession of the HOS flat, remains valid. And Madam Leung is not entitled to continue to rent or occupy the HOS flat in whatever manner.

29. We allow Madam Leung’s appeal and set aside paragraphs 2, 3, 4 and 5 of the order of Member Lo made on 2 February 2009, but Madam Leung must still deliver up vacant possession of the HOS flat to Mr. Leung immediately in accordance with paragraph 1 of the order.

30. Having considered the background of the case and the course of the litigation, we make no order as to costs of the trial or the appeal.