MAN MI SANG AND ANOTHER v. MAN SHEK TONG AND OTHERS

HCA 881/2012

[2018] HKCFI 2755

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 881 OF 2012

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(BY ORIGINAL ACTION)

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(BY COUNTERCLAIM)

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JUDGMENT

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1.  This is a claim for breach of trustee’s duty against the managers of a tso.

BACKGROUND

2.  The 1^st and 2^nd Plaintiffs by Original Action, Man Mi Sang (文美生)(“the 1^st Plaintiff”) and Man Luk Sing (文祿星)(“the 2^nd Plaintiff”) respectively, are two members of the Man Wing Sau Tso (文永壽祖 or 文永秀祖), also known as Man Ming Tak Tong (文明德堂) and Ming Tak Tong (明德堂) (“Tso”).

3.  The Tso is a traditional Chinese ancestral land holding institution registered under s 15 of the New Territories Ordinance (Cap 97).

4.  The 1^st and 2^nd Defendants by Original Action, Man Shek Tong (文石堂)(“the 1^st Defendant”) and Man On Sum (文安心)(“the 2^nd Defendant”) respectively, were and are at all material times two of the three managers of the Tso.  The third manager is Man Keen Sing (文健聲)(“Sing”).

5.  The Tso was established about 400 to 500 years ago, and made up of male descendants of three fongs (房), being: -

(i)   亨裕祖 (Hang Yue Tso);

(ii)   良遇祖 (Leung Yue Tso); and

(iii)   乾日祖 (or 權日祖) (Kin Yat Tso).

6.  The Tso now has a total of about 500 to 600 male descendants (members), and Hang Yue Tso has the largest number of members whilst Kin Yat Tso has the least.

7.  The Plaintiffs and the 1^st Defendant are the male descendants of Hang Yue Tso; whilst the 2^nd Defendant is the male descendant of Kin Yat Tso; and Sing belongs to Leung Yue Tso.

8.  Pursuant to the traditional practice of the Tso, three managers, one from each of the three fongs, are appointed with a lifelong tenure to jointly manage the Tso’s assets, finance and affairs.

9.  The appointments of the 1^st and 2^nd Defendants as managers of the Tso were approved on 13 July 1998 and 8 June 2007 respectively.  Sing was approved as a manager of the Tso on 16 August 2011 but his appointment was only registered at the Land Registry on 31 August 2011.

10.  Apart from the three managers, it is also a practice of the Tso that there is a duty manager (值理) appointed from each of the three fongs on a yearly-rotation basis to assist the managers of the Tso in managing the Tso’s finance and affairs.

11.  The duty manager is responsible for, inter alia, collecting rents, keeping and managing the accounts of the Tso.

12.  Man Fu Choi (文富財) (“Choi”) from Hang Yue Tso assumed his role of the duty manager of the Tso on 15 November 2010.  In October 2011, Man Chi Keung (文志強)(“Keung”) from Kin Yat Tso formally succeeded as the duty manager.[1]

13.  The Tso has, pursuant to its traditional practice, convened annual general meetings or descendants’ meetings (子孫大會) (“Annual Meetings”) at least once every year, at which the Tso’s affairs would be discussed amongst members, and new duty manager would be appointed so as to take over the Tso’s accounts from his predecessor.

14.  In the 2009 Annual Meeting, a supervising committee (“the Supervising Committee”) was appointed to supervise and assist the managers in dealing with tenancy matters of the Tso.

15.  The subject matter of this action concerns a tenancy agreement dated 1 January 2012 (“the Tenancy Agreement”), which was signed by only the 1^st and 2^nd Defendants as managers of the Tso, whereby the Tso leased various pieces of land owned by the Tso (“the Land”) to the 3^rd and 4^th Defendants by the Original Action, namely “賴雨泉”(“the 3^rd Defendant”) and “袁偉業”(“the 4^th Defendant”) respectively.

16.  The Land consists of various lots of land, including Lot Nos 1514, 1515, 1516, 1517RP and 3379 in Demarcation District No 102, in San Tin, Yuen Long, with a total area of about 170,000 square feet.

17.  Prior to 2009, the Land had been let to several tenants with a total rental income of less than $43,000 per year.   Under the Tenancy Agreement, the Land was leased at an annual rent of $250,000 for a term of 6 years with an option to renew for another 6 years at a new rent with an increase of no more than 20%.

18.  The 4^th Defendant is the nephew of the 2^nd Defendant.

19.  It is the Plaintiffs’ case that the market value of the Land as at 1 January 2012 should be about $2 million per annum.  Further on or about 15 December 2011, the 1^st Plaintiff’s company, through a letter by its solicitors, offered to rent the Land from the Tso at a rent of no less than $1 million per annum for a term of 5 years, and yet the 1^st and 2^nd Defendants did not give any response to the said offer.

20.  The Plaintiffs also claim that there has all along been a custom that the managers have to obtain the consent of the members of the Tso at the Annual Meetings before disposing or dealing with any interests in Tso’s properties.

21.  As the 1^st and 2^nd Defendants leased the Land to the 3^rd and 4^th Defendants allegedly at undervalue without obtaining the consent of the members, the Plaintiffs commenced the present action against all the 4 Defendants to claim for, inter alia, following relief:

(i) a declaration that the Tenancy Agreement is null and void and the 3^rd and 4^th Defendants are not entitled to possession of the Land;

(ii) alternatively, against the 1^st and 2^nd Defendants for damages for breach of their duties as managers of the Tso; and

(iii) further or alternatively, rescission of the Tenancy Agreement as it was signed pursuant to a conspiracy amongst the 4 Defendants to injure the interests of the members of the Tso.

22.  The 3^rd and 4^th Defendants also brought a counterclaim against the 1^st and 2^nd Plaintiffs and the Tso for wrongful commencement of these proceedings and failure to provide quiet enjoyment of the Land.

23.  At the commencement of the trial, the parties agreed for the dismissal of both the claim against the 3^rd and 4^th Defendants and the counterclaim brought by them.  Hence, the court is only required to deal with the claim in the Original Action by the 1^st and 2^nd Plaintiffs against the 1^st and 2^nd Defendants.

24.  In the following Judgment, I will refer the 1^st and 2^nd Defendants collectively as “the Defendants” and the 3^rd and 4^th Defendants collectively as “the Tenants”.

25.  To complete the picture, there was some complaint about the erection of illegal structures on the Land after the making of the Tenancy Agreement.  By a letter dated 1 November 2016 through their solicitors, the managers of the Tso terminated the Tenancy Agreement with the Tenants.  By a default judgment dated 10 March 2017, the Tso recovered possession of the Land.  Shortly thereafter, the Tso entered into a new tenancy agreement with one Total Nice International Limited of which one Man Wai Chiu (文惠潮) was the sole shareholder and director.  So far as I know, there has been no complaint made against the Defendants relating to this new tenancy agreement.

NATURE OF A TSO AND THE APPLICATION OF TRUST LAW TO A TSO

26.  In respect of the nature of a tso, the Court of Final Appeal in Secretary for Justice v To Kan Chi & Ors[2] cited with approval the dicta of Mills-Owen J in Tang Kai Chung & Aro v Tang Chik Shang & Ors[3] and reiterated that:

“Speaking generally, a Tso may be shortly described as an ancient Chinese institution of ancestral land-holding whereby land derived from a common ancestor is enjoyed by his male descendants for the time being living for their lifetimes and so from generation to generation definitely. Thus every male descendent of the common ancestor automatically becomes entitled at birth to an interest in the land for his life-time; on his death his interest merges so as automatically to enlarge the interests of the surviving male descendants; thus his interest at any given moment during his lifetime depends on the number of male descendants then living and on this death it forms no part of his estate.”

27.  In Leung Kuen Fai v Tang Kwong Yu (or U) T’ong or Tang Kwong Tu Tso[4], DHCJ Lam (as he then was) held that, in the context of Hong Kong law, the concept of trust is applicable to a tso with the managers as trustees and the members as beneficiaries.  However, by reason of the local circumstances, certain principles of English trust law were held to be inapplicable, e.g. the rule as to perpetuity.

28.  The Defendants do not dispute that they are the trustees of the Tso’s properties and the Plaintiffs are two of the beneficiaries of the Tso.  They also agree that, as managers, they have a duty to use due diligence and reasonable care in the management of the Tso’s properties.  However, they dispute the Plaintiffs’ claim on the following grounds:

(i) There was no open market for the Land and the comparables relied on by the Plaintiffs’ valuation expert are not applicable, and as a result the Plaintiffs have failed to prove that the Defendants leased the Land to the Tenants at undervalue.

(ii) The Defendants were not in breach of any trustee’s duties.  Before the making of the Tenancy Agreement, the Defendants had placed the Land in the “market” for rent for a long period of time, but no one had shown any interest in leasing the Land apart from the Tenants.  The rent under the Tenancy Agreement was the best rent that the Tso could have obtained in the circumstances.  Further, there was no custom that the managers had to obtain the consent of the members before dealing with any interests in Tso’s properties.

(iii) The Plaintiffs, as individual members of the Tso, have failed to adduce any evidence on the quantum of their individual losses. Even if they were to succeed in the claim, the damages they suffer would only be nominal.

29.  In my judgment, the Defendants succeed on all these grounds of defence and I will now explain why.

MARKET RENT OF THE LAND

30.  In order to succeed in their claim, the Plaintiffs have to prove that the rent under the Tenancy Agreement was lower than the market rent and as a result the Defendants were in breach of their fiduciary duties owed to the Tso and its members.

31.  The Land is situated in San Tin.  The Land can be accessed from the main road mainly in two ways.  The first access has to pass through the barracks of the Mainland army (“the Barracks”) which is a restricted military site.  For the second access, vehicles have to negotiate round a hairpin corner (“the Hairpin Corner”).  The 1^st Plaintiff agrees that truck with container longer than 40 feet would not be able to negotiate round the Hairpin Corner.  There are other ways to get to the Land from the main road but it takes much longer time for the journey.

32.  The Land is not covered by any approved or draft Outline Zoning Plan.   Accordingly, Lot Nos 1514, 1515, 1516 and 1517RP of the Land, which are held under a Block Government Lease with Description of “dry cultivation and/or waste”, can and could be used for open storage purpose, whilst Lot No 3379 is held under New Grant No 1148 for the purpose of agriculture and is not allowed to remain uncultivated for a period of 6 consecutive months.

(i)   The comparables

33.  For the assessment of the market rent, the Plaintiffs rely on the expert opinion of Mr Keith Siu (“Mr. Siu”).  For Lot Nos 1514-1517RP, Mr. Siu used three comparables.  Such comparables were not tso’s lands.  Unlike the Land, accesses to these three comparables were not restricted by the presence of the Barracks or the Hairpin Corner.

34.  For easy reference, I would refer the Plaintiffs’ comparables as “PC” and the Defendants’ comparables as “DC”.  The Plaintiffs’ first comparable will be referred as “PC-1”, etc. 

35.  Two of the Plaintiffs’ comparables, namely PC-1 near Tong Yan San Tsuen (唐人新村) and PC-3 near Wang Toi Shan (橫台山), were about 15 km away from the Land.  Though these two comparables were also located in Yuen Long, they were of a nature very different from the Land and the other lands within San Tin.  It is clear from DC-1, 3, 4a-4c produced by the Defendants’ valuation expert, Mr. Denys Kwan (“Mr. Kwan”), which were just adjacent to the Land, that the lands within San Tin were of quite a different specie.  There were great differences in the rents of the lands in the locality of San Tin and those which were situated 15 km away in other parts of Yuen Long.  As I will further elaborate in the latter part of this Judgment, it is difficult to compare the Tso’s lands within San Tin with other lands in the general market at large.

36.  Coupled with the facts that these lands were not tso’s lands and their accesses were not restricted by the Hairpin Corner or the Barracks, I agree that PC-1 and PC-3 are not good comparables at all.

37.  PC-2 was used by both experts, whose opinion differed in the adjustment.  Mr. Kwan opined that the unit rate should be adjusted downwards to a much greater extent as this piece of land was not affected by the Barracks or the Hairpin Corner.[5]

38.  Both experts made adjustment for the fact that the date of the relevant tenancy agreement was 5 March 2013, which was about one and a half year later than the making of the Tenancy Agreement in the present case.  This time gap is significant.  As shown in the history of the “market”, the lands in San Tin were not valuable for a long period of time.  It was only when the logistics business picked up and the lands were used for open storage purpose that the lands became more valuable.

39.  The Land itself is a classic example.  Though it could be used for open storage at all material times, the annual rent of the Land was only $43,000 at 2009.  The Plaintiffs then claim that the annual rent was as high as $2,000,000 in 2011.  What caused the sudden increase in the rent?  It must have been the result of the development of the open storage business in San Tin.

40.  In making adjustment for the time factor, the experts used the data in the Basic Rate for Agricultural Land for Resumed Land in Ex Gratia Compensation in making the adjustment.  But the problem is that I have no idea as to exactly when the open storage business suddenly started to pick up in San Tin.  Without more reliable information in this regard, the adjustments made by the respective experts are very arbitrary.  Even the experts themselves agreed that their adjustments were no more than estimations on their parts.

41.  Another factor is that access to PC-2 was not affected by the Hairpin Corner or the Barracks.  It is not disputed that registration was required when one wished to pass through the Barracks.  According to Mr. Kwan and the 2^nd Defendants, the Barracks had absolute discretion to prohibit vehicles from passing through.  The 1^st Plaintiff also accepted that, on some occasions such as during training and manoeuvring sessions, vehicles would be unable to pass through the Barracks.  Technically, a permit had to be applied for and obtained before one could drive through the Barracks.

42.  For the Hairpin Corner, the 1^st Plaintiff accepted that larger vehicles, in particular 40-feet container trucks, would not be able to pass through.  It is true that trucks of a smaller size might still be able to pass through, but that would no doubt add to the transportation and time costs and inconvenience of any tenant intending to use the Land for open storage business.   I agree that access would be an important factor in the operation of an open storage site.  If not, I wonder why no one was interested in leasing the Land for such a long period of time after 2009.  Under such circumstances, a significant discount should be made in assessing the “market rent” of the Land.

43.  Taking into account the aforesaid considerations, despite that it was used by the Defendants’ expert, I do not accept that PC-2 is a reliable comparable.  Even if such comparable is to be used, I would prefer to accept Mr Kwan’s evidence that, as access would be an important consideration for operating an open storage site, a substantial discount should be made.

44.  As to Lot No 3379, the condition of the New Grant provided that it had to be cultivated continuously for 6 months each year and this was stated to be the condition precedent for the continuation of the grant.  The only use was therefore agriculture.  Even gardening and nursery were not allowed on Lot No 3379.

45.  In such circumstances, the comparables chosen by the experts are not helpful at all.  The Plaintiffs’ comparables involved short-term government tenancies where the tenants used the leased land for gardening and nursery purposes.  The Grant for Lot No 3379 actually imposed a duty to continue agricultural activities on the land at least 6 months a year, whereas there was no such condition in the cases of the other comparables.

46.  For the above reasons, the Plaintiffs’ comparables are of limited assistance.

(ii)   The relevance of local factors

47.  During cross-examination, Mr Siu admitted that it was difficult to find suitable comparables for the Land. According to his observation, in the New Territories, it is not uncommon that lands would be let at undervalues to tenants who are related to the landlords.  This is particularly the case where tso’s lands are involved, as a large number of such lands are let to the tso’s own members or at least someone related to the tso.

48.  Such observation is supported by the evidence of the 1^st Plaintiff himself.  According to him, there has been a custom that members of the Tso would have the first priority in leasing a piece of Tso’s land.  The evidence also shows that he was able to rent two pieces of land from the Tso at very low rents.

49.  Given the lack of market transparency, depth and activity, Mr Siu was only able to obtain information in relation to a small part of the market when conducting valuation in the present case.  He had no information as to the amount of lands owned and let out by tsos, or the rent under those tenancies.  When looking for comparables, Mr. Siu considered it appropriate to disregard the lands let out by the Tso or other tsos as the tenants were usually related parties.

50.  Mr. Siu explained that he did not use DC-1 and DC-3 because such tenancy agreements were undated, unregistered or unstamped, the rents were too low and the tenant was also surnamed “Man”.  The tenant was actually the 1^st Plaintiff himself.  It is also interesting to note that DC-1 and DC-3 were not affected by the access problems facing the Land.

51.  Mr. Siu also chose not to use comparable DC-4a as the rent was way too low.  Since DC-4b and DC-4c involved the same lot of land, the same landlord and the same rental period as DC-4a, these comparables were also rejected by Mr. Siu.

52.  In my judgment, this is not the right approach. In rejecting these comparables, Mr Siu had failed to take into account the peculiar features relating to transactions involving Tso’s lands (or indeed any tso’s lands), one of which was that the tenants were usually related to the families of the Tso.  In discarding these comparables, Mr Siu had ignored what actually happened in the “market” in San Tin.

53.  As compared with the Plaintiffs’ comparables, I find that the Defendants’ comparables are more reliable as these lands were close to the Land itself.  There were subject to same access problems.  More importantly, these comparables would be more realistic in reflecting the peculiar features of transactions involving Tso’s lands.  Mr Kwan had chosen DC-4b as the most appropriate comparable and I accept that the methodology adopted by him in arriving at the “market” rent is more reliable than that used by Mr Siu.

(iii)   Whether there was indeed an open market for the Land?

54.  According to Mr Kwan, who had worked as an Assistant District Officer (Lands) before, tso’s lands are quite different from other lands.  Each village or tso may have their own customs and different ways of doing things.  Commercial factors may not be the prime consideration in dealing with tso’s properties, and different tsos may have different reasons to lease out a piece of land at lower rent.  As both experts have agreed, these lands are sometimes rented out at lower rents as the landlords do not want them to be left vacant and be occupied by trespassers or adverse possessors.  Further, a lot of tenancy agreements were not stamped or made in the formal way.

55.  One of the peculiar features in this case is that the tenants of the Tso’s lands had strong ties with the Tso itself.  This supports the evidence of the 2^nd Defendant that it would be difficult for an outsider with no connection with the Tso to lease a piece of Tso’s land.

56.  Obviously, members of the Tso would not welcome outsiders to rent the Tso’s lands.  It would drive up the rents and as a result the members would not be able to lease the lands at lower rents.  This may explain the incident in September 2011, when the Tenants were prevented from entering the Land and as a result the police was summoned to the scene for investigation.  Further, the rent of the Land had all along been low and yet no one was interested in leasing the Land for a long period of time.  It is also interesting to note that, given the complaint about the amount of rent under the Tenancy Agreement, the Land was still leased to someone with the surname “Man” in 2017.[6] All these show that the “market” of the Tso’s lands in San Tin was a narrow one and very different from the general market at large.

57.  For these reasons, I do not find that there was an open perfect “market” for such lands in the locality of San Tin.  In fact, the wide fluctuation in the rents of DC-4a, DC-4b and DC-4c, and indeed DC-1 and DC-3 which were rented by the 1^st Plaintiff himself, reflects the fact that there was no such market.  Borrowing the words of Litton NPJ in Man Ping Nam and Another v. Man Fong Hang^[7], the expression “market”, used generally to denote a place of multiple transactions, would seem wholly inappropriate for the lease of the Land.

58.  At one stage during his testimony, even the 1^st Plaintiff accepted that there was no “market rent” for any piece of Tso’s land, as different people would have different views about the development potential of a particular piece of Tso’s land.

59.  Without a readily open market, it would be extremely difficult for the Plaintiffs to prove that that the Defendants leased the Land to the Tenants at a value below “market rent”.   The Plaintiffs’ claim for breach of fiduciary duty must therefore fail.

BREACH OF DUTY AS TRUSTEES

60.  Even if there was an open market rent for the Land at the material time and that the Land had been leased to the Tenants at undervalue, which I do not accept it to be the case, I do find that the Defendants were not in breach of any fiduciary duty owed to the beneficiaries of the Tso.

61.  The mere fact that the Land was let at an undervalue per se may not constitute a breach of fiduciary duty on the Defendants’ part.  The duty as trustee is not an absolute one, and whether the Defendants were in breach of such duty depends on all the circumstances of the case.

62.  As observed by Lam J, as he then was, in the first instance judgment in Man Fong Hang v Man Ping Nam[8]:

“ … … … It is common ground that the Defendants were under a duty to get a proper price for the sale of the land. It may be more precise to say that the proper price should represent the true market value of the land (see Cuckmere Brick v Mutual Finance [1971] 1 Ch 949 at p. 966F). The duty is not an absolute one. It is a duty to use due diligence and reasonable care in the management of the trust property which an ordinary prudent man of business would exercise. Hence, if the sale were eventually found to be at undervalue despite due diligence and reasonable case, the trustee would not be liable. That is an objective standard. The court would test the conducts of the trustee against that of an ordinary prudent man of business instead of the standard actually adopted by the trustee in the conduct of his affairs. However, the court would apply that test against the facts and circumstances at the time when the trustee had to act and with reference to matters known or ought to have been known to the trustee at that time. Hence, the duty is not discharged merely by showing that the trustee acted in good faith and with sincerity (see Medforth v Blake [2000] Ch 86). The duty is a duty in equity rather than a common law duty (see Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349).”

(i)   Efforts made by the Defendants to lease the Land

63.  The Defendants testified at the trial.  In particular, they told the court about the efforts that they had made to find tenants for the Land.

64.  According to them, prior to 2009, the Land had been let to several tenants with a total rental income of less than $43,000 per year.  Despite that the Land could be used for open storage purpose, the Land was, by that time, only used for agriculture and poultry raising purposes.

65.  After the termination of the tenancies with these tenants in about 2009, the Defendants removed the temporary structures on the Land and at the same time made various efforts to look for new tenants.  Apparently, the removal of the temporary structures was made with a view to lease the Land for open storage purpose.  The 1^st Defendant had brought 3 to 4 persons who were involved in the trade to inspect the Land but they expressed no interest. They considered that the access to the Land was too inconvenient.  The 2^nd Defendant also sought the assistance of a few members of the Tso in looking for new tenants as they had more experience in the trade of running open storage sites.

66.  The Defendants had great difficulties in looking for potential tenants for the Land.  As being agricultural land, the surface of the Land was uneven. It was also far from the highway with restricted access.  The 2^nd Defendant did seek assistance from one of the members of the Supervising Committee.  Apart from that, no assistance had been provided by the Supervising Committee to the Defendants.

67.  As mentioned above[9], it was also difficult to find outsiders who had no connection with the Tso to lease the Land.  The leasing market in San Tin was simply too narrow.

68.  Finally, in 2011, the Tenants expressed interest in renting the Land.  The Defendants at first offered to let the Land at an annual rent of $300,000.  The 2^nd Defendant explained that they came up with that figure with reference to the tenancy with the 1^st Plaintiff dated 29 November 2011 which was a renewal of tenancy.  They had also taken into account the minimum monthly rent agreed in the 2009 Annual Meeting for Lot No 1517RP which was $18,000.  However, the Tenants indicated that they had to incur cost to improve the Land and hence asked for a lower rent of $150,000.  In the end, the parties agreed the annual rent to be $250,000.

69.  In the Defendants’ view, leasing the Land out would be more beneficial to the Tso rather than leaving it vacant.  Further, there was a substantial increase in rent as compared with the previous annual rent of $43,000.  The Defendants therefore decided to lease the Land to the Tenants by entering into the Tenancy Agreement.

70.  There is nothing for me to doubt the credibility of the Defendants’ evidence.  There is no basis to suggest that the rent was not the best that the managers could have obtained in the circumstances.

71.  At the trial, Mr Koo, counsel for the Plaintiffs, tried to attack the credibility of the Defendants’ evidence on, inter alia, the following grounds:

(i) the Defendants have failed to produce all the minutes of the Annual Meetings;

(ii) the Defendants’ explanation about asking Keung to be a witness for the execution of the Tenancy Agreement is incredible;

(iii) the Defendants’ explanation as to why they had not asked the Tenants to pay the deposit earlier is unbelievable;

(iv) the Defendants offered inconsistent evidence as to whether Keung was physically present at the time of the signing of the Tenancy Agreement;

(v) it does not make sense that the Tenancy Agreement did mention the rent-free period prior to 1 January 2012;

(vi) there is no reasonable explanation as to why Choi, who was the then duty manager, was not given a copy of the Tenancy Agreement or informed about the execution of the Tenancy Agreement;

(vii) it is odd that the Defendants did not bring the Tenancy Agreement for discussion in the 2011 Annual Meeting;

(viii) it is wrong for the 1^st Defendant to say at one stage of his testimony that the Land could only be for agricultural use; and

(ix) it is unbelievable that the 2^nd Defendant had not discussed the complaint about the illegal structures on the Land with the Tenants before the granting of the default judgment on 10 March 2017.

72.  I do not accept that these are legitimate criticisms.  As the Tenancy Agreement was signed quite some time ago, one cannot expect the Defendants to remember every detail of the execution of the Tenancy Agreement including whether certain person was present when the document was signed.

73.  The Defendants also explained clearly why, though Keung only became the duty manager in October 2011, he signed on the Tenancy Agreement as witness.  According to the 1^st Defendant, any member of the Tso could be a witness to a tenancy agreement.  The Defendants considered that by the time the rental period formally commenced, Keung would be the duty manager.  At the time they already knew that Keung would be the next duty manager as it was Kin Yat Tso’s turn to nominate the same, and being the representative of Kin Yat Tso, the 2^nd Defendant knew that Keung would take up the post.  By the time when the payment of $500,000 was made by the Tenants on 24 October 2011, Keung had already become the duty manager.

74.  It was therefore reasonable for the Defendants not to have informed Choi of the Tenancy Agreement as the rental period was not to commence until 1 January 2012 and the deposit and rent were not paid until 24 October 2011, by which time Choi would have left office as duty manager.

75.  The Defendants testified that as the managers were responsible for the tenancy matters of the Tso, all tenancy agreements were in their possession.  The duty manager, who was usually in office for only a year, was only responsible for collecting rents and managing the accounts of the Tso.  As tenancies usually lasted for several years, the managers would not pass the tenancy agreements to the duty manager.  The managers would only notify the duty manager after a new tenancy agreement had been signed.

76.  The Plaintiffs alleged that the managers had to hand over all tenancy agreements to the duty manager so that he could collect the rents, and that the Defendants had failed to do so.  Choi alleged that the managers had made an attempt to hide the Tenancy Agreement.  However, according to Choi’s own evidence, he had never seen the tenancy agreement signed between the Tso and the 1^st Plaintiff on 5 January 2008, even though the rental period lasted until 31 December 2013 and Choi had to collect rent under this tenancy during his office as duty manager.  There was no reason for the Defendants to hide such tenancy agreement which was very much in favour of the 1^st Plaintiff.  It was therefore not the case that the managers had to hand over all tenancy agreements to the duty manager.

77.  The 2^nd Defendant testified that during the meeting on 16 October 2011, they did not mention the Tenancy Agreement as it was unnecessary for them to do so.  Since the Defendants as managers had full power to deal with tenancy matters of the Tso, they did not need to consult or notify the members.  In any event, it had already been resolved in the Annual Meeting in 2009 that the rent for Lot No 1517RP was to be $18,000 per month and two managers could execute the tenancy agreement.  Further according to the Defendants, no assistance had been provided by the Supervising Committee which had been set up allegedly to “supervise or assist” in the tenancy matters of the Tso.

78.  There is no dispute that the Tenants were obstructed when they attempted to take possession of the Land in about September 2011, which resulted in the police being summoned to the scene to resolve the dispute.  As San Tin is not a big area and most of the residents living in the vicinity of the Land belong to the same original family, members of the Tso should have had known about such incident and the fact that the Land had been let out.  In particular, some of the members were involved in the same open storage business and they must have had knowledge about what happened in their neighbourhood. Under such circumstances, the Tenancy Agreement was not a secret and the members could have raised the matter for discussion in the 2011 Annual Meeting if they so wished.

79.  As to the alleged delay in the stamping of the Tenancy Agreement, the 2^nd Defendant explained that since the rental period was stated to commence on 1 January 2012, the Tenancy Agreement could not be stamped prior to this date.

80.  The Plaintiffs criticized the Defendants for not including the rent-free period in the Tenancy Agreement and for stating Keung as the duty manager instead of “duty manager designate”.  These criticisms are unfair to the Defendants, who were non-professional trustees and only had education up to primary school level.  Their ignorance about the law and the proper procedure is perfectly understandable.  Further, the 1^st Plaintiff accepted that there was no established or rigid rule in the Tso to follow, and the affairs of the Tso were usually conducted in an informal manner.  Under such kind of circumstances, it is not surprising that the managers had lost most of the minutes of the Annual Meetings.

81.  I also do not find it odd that the 2^nd Defendant had not discussed the issue about the illegal structures with the Tenants prior to March 2017.  In my judgment, this only reinforces the fact that the 2^nd Defendant had taken his job as manager seriously.  Bearing in mind that there was already complaint about the propriety of the Tenancy Agreement in the Tso, it would not have been appropriate for the managers to resolve such issue privately.  Hence, I do not accept that Mr Koo’s submissions can in any way undermine the credibility of the Defendants’ evidence.

82.  In fact, the Defendants were put in a very difficult position when trying to lease out a piece of Tso’s land.  On the one hand, the 1^st Plaintiff accepted that members of the Tso would have priority to rent the Tso’s lands, the rationale being that Tso’s lands are for the benefit of the descendants.  On the other hand, the managers would have to obtain the best possible rent when leasing out the lands.  According to the evidence of all factual and expert witnesses, Tso’s lands, and indeed any tso’s lands, are very often let out at lower rents to members of the Tso.  According to the 2^nd Defendant, most lands within San Tin are let to members of the “Man” family.  Therefore, in respect of the Tso’s lands, willing tenants can hardly be found as there is in fact no real market.

83.  One must also bear in mind that, despite its availability, no one was interested in leasing the Land and the same had been left vacant for a significant period of time.  Under such circumstances, it would have been difficult for the Defendants to ask for more favourable terms from the potential tenants such as earlier payment of deposit or higher rent.

84.  It actually lies ill in the mouth of the 1^st Plaintiff to make the breach of fiduciary complaint against the Defendants as he himself had been renting the Tso’s lands at much lower rents.  Since 2009, the 1^st Plaintiff had been renting Lot Nos 630, 631, 632 and 704 in D.D. 102 at a rent of only $12,000 per year.  When this tenancy was renewed in 2011, Lot No 698 was added and the rent was increased to $15,000 per year.  Since 2008, the 1^st Plaintiff had also been renting Lot Nos 178, 181 and 182 in D.D. 105 at a rent of $4,000 per month.  According to him, although he did not know the actual sizes of these lands, he was of the view that the rent under each of such tenancy agreements was reasonable.  He also agreed that the rents under these tenancies were much lower than the rent under the Tenancy Agreement.

85.  For the above reasons, even if the “market rent” of the Land might have been higher at the time of the making of the Tenancy Agreement, the Defendants were not in breach of any fiduciary duty owed to the Tso or its members.

(ii)   Refusal of the offer made by the 1^st Plaintiff’s company

86.  On or about 15 December 2011, the 1^st Plaintiff’s company, through his solicitors, made an offer to rent the Land at an annual rent of about $1 million.  By refusing to lease the Land to him at a higher rent, the 1^st Plaintiff complains that the Defendants were in breach of fiduciary duty.

87.  In this regard, I have to make a finding as to when the Defendants made a binding agreement with the Tenants to lease the Land. If the Tenancy Agreement was made on 26 August 2011 as alleged by the Defendants, the offer made by the 1^st Plaintiff was too late.

88.  I make such finding in favour of the Defendants.

89.  At the trial, both Defendants explained clearly why the Tenancy Agreement, though signed on 26 August 2011, was post-dated 1 January 2012.  It was because they granted a rent-free period to the Tenants who required time to improve the Land.  The 1^st Defendant stated that after signing the Tenancy Agreement, he repeatedly demanded the Tenants to pay the deposit and rent.  On 24^th October 2011, the Tenants paid into the Tso’s account a sum of $500,000 being the deposit and rent for the first year.  It would be absurd for the Tenants to make such payment if they had not already signed the Tenancy Agreement.

90.  In the judgment above, I have already explained why I find the Defendants to be honest and reliable witnesses.  On the contrary, I have great reservation about the credibility of the 1^st Plaintiff’s evidence, and I do not accept that his offer was a genuine one.

91.  The evidence shows that the 1^st Plaintiff was an opportunist.  He rented lands from the Tso at very low values: he rented Lot Nos 630, 631, 698, 704 in D.D. 102 at $0.097 per square foot; and he rented Lot Nos 178, 181 and 182 in D.D. 105 at $0.019 per square foot.  Yet he left those lands vacant.  Obviously, he was waiting for the rental market to go up so that he could benefit from the leases he made with the Tso.  The 1^st Plaintiff was the one who benefitted from the previous leases, and yet he made the complaint against the Defendants for leasing the Land at undervalue.

92.  The 1^st Plaintiff had engaged in the transportation business for a long period of time and he should have had a perfect knowledge of the landholdings of the Tso at the material time.  Yet he did not make any offer to rent the Land after 2009.  It was only after he knew about the Tenancy Agreement in August or September 2011 that he made an offer in the name of his company to rent the Land at a higher value.  The timing cannot be a matter of coincidence.

93.  When he was asked about why he only made an attempt to rent the Land in October 2011 and not before, the 1^st Plaintiff explained that it was his “boss” who asked him to rent.  Upon further questioning, the 1^st Plaintiff was evasive and refused to provide any further details about his “boss”.  It is also difficult to explain why the 1^st Plaintiff was prepared to make such a high bid to rent the Land when he left most of the lands he previously leased from the Tso vacant.

94.  Based on the aforesaid, I have reason to believe that the lodging of the present claim is simply a revenge against the Defendants after he lost the opportunity to lease the Land at a low rent, and making a bogus offer was only an attempt to find something to substantiate his otherwise unmeritorious breach of duty claim against the Defendants.

95.  Apart from the 1^st Plaintiff, the 2^nd Plaintiff and Choi also testified at the trial.  Whilst the latter two are not subject to the same criticism as against the 1^st Plaintiff about their credibility, I would still prefer to accept the evidence of the Defendants as I consider them to be more reliable witnesses.  On the contrary, the conflicting evidence between the 1^st and 2^nd Plaintiffs about the details of the alleged custom, which I will further elaborate in the latter part of this Judgment[10], undermines the reliability of the 2^nd Plaintiff’s evidence.  Choi’s allegation about the Defendants’ attempt to hide the Tenancy Agreement is also lacking proper basis, which in turn affects the reliability of his evidence.[11]

96.  There is a side issue that the Tenancy Agreement was only signed by two instead of three managers on behalf of the Tso.  The Defendants explained that as Sing had yet been registered as manager of the Tso on 26^th August 2011, it was unnecessary for him to sign on the Tenancy Agreement.  It had also been resolved in the Annual Meeting in 2009 that tenancy agreements signed by two managers on behalf of the Tso would be effective.  In fact, two tenancy agreements in favour of the 1^st Plaintiff ^[12] were only signed by two managers, though at the relevant times there were three managers in office.  Finally, the Defendants had consulted Sing who agreed the execution of the Tenancy Agreement by the Defendants.  He also signed a confirmation (確認租約契約) on 25^th February 2014 confirming the same, against which there has been no challenge by the Defendants.  Hence, the fact that the Tenancy Agreement was signed by two managers does not affect the validity of the Tenancy Agreement.  

(iii)   Duty to obtain consent of the members of the Tso

97.  The Plaintiffs also complain that the Defendants had not consulted other members before leasing out the Land or brought up the Tenancy Agreement for discussion at the Annual Meeting on 16^th October 2011.  The Plaintiffs claim that there was a customary duty on the part of the managers to do so.

98.  Under the law, managers have the power to deal with the lands of a tso under s 15 of the New Territories Ordinance.  As confirmed by the various authorities^[13], the managers have no obligation to seek the consent of other members before leasing out any piece of tso’s lands.

99.  The burden is therefore on the Plaintiffs to prove that there was in fact a traditional custom, practice or convention of the Tso to obtain such consent or approval of its majority members.  I agree with the Defendants that the Plaintiffs have failed to discharge such burden.

100.  According to the Defendants, the purposes of the Annual Meetings were for reporting the accounts to the members and for the new duty manager to take office.  Other matters, such as the conditions and tenancy matters relating to various Tso’s lands, would only be discussed if they were raised by any of the members.  There was no custom or practice that all tenancy agreements had to be discussed or approved by the members during these meetings.

101.  There is no reason for me to doubt the Defendants’ evidence in this regard.  On the contrary, the Plaintiffs’ evidence on the alleged custom is far from satisfactory. Whilst the 1^st Plaintiff said that there was no need to seek the members’ consent or approval for the renewals of tenancy (as that was the case in respect of some of the tenancies he entered into with the Tso), the 2^nd Plaintiff stated that the members had to be informed of any renewals of tenancy agreement.  According to the 2^nd Plaintiff, if a tenancy agreement was renewed in favour of the 1^st Plaintiff without the knowledge of other members, the 1^st Plaintiff was also in breach of such rule.

102.  If there was indeed an established custom to seek the consent of the members and that custom applied to renewals of tenancy, I wonder why both Plaintiffs were giving conflicting evidence on this issue.  In fact, both Plaintiffs alleged that they had no knowledge as to the tenancies of the Land prior to 2009, and Choi admitted that he had never seen the tenancy agreement with the 1^st Plaintiff dated 5 January 2008.  That should not have been the case if the managers were required to seek the consent of all the members before leasing out any piece of Tso’s lands.  In my judgment, all these only show that there was indeed no such custom.

103.  Obviously, renewals of tenancy would affect the interests of the Tso as much as a new tenancy, and so it is very difficult for me to understand, if there was such a custom as alleged by the Plaintiffs, why such custom did not apply to renewals of tenancy.  This again shows that the 1^st Plaintiff was prepared to tailor his evidence for the purpose of advancing his own personal interests.  

104.  Furthermore, if the alleged custom were to exist, it would be important for the Tso to give notice to all its members about the Annual Meetings, otherwise members who have not received the notice would complain that their views have not been sought on the matter.  Yet the evidence shows that notices of the Annual Meetings were not given to all members.  There is no dispute that notices of the Annual Meetings were only posted in the ancestral hall, and the overseas members, who represented a significant portion of the membership of the Tso, would not know about the Annual Meetings.  In fact, not many members had attended the Annual Meetings throughout the years.

105.  For the reasons given above, I do not find that there was a custom that the managers of the Tso had to obtain the consent of the members before leasing out any piece of Tso’s lands.

106.  The Supervising Committee had no status in the management of Tso’s affairs.  Further according to the Defendants, the Supervising Committee had not provided any assistance to them in finding a potential tenant for the Land.  Under such circumstances, it was only natural that the Defendants had not sought their consent before entering into the Tenancy Agreement.  There was in fact no such obligation for the Defendants to do so.  In any event, it was resolved in 2009 Annual Meeting that the rent for Lot No 1517RP was to be $18,000 per month, and so one should not criticize the Defendants if they genuinely considered that $250,000 was a fair annual rent for the Land when no one had expressed interest to lease the Land for a significant period of time.

107.  Hence, I also find that, even if the Defendants had leased out the Land at a rent below “market rent”, they were not in breach of any fiduciary duty owed to the Tso or its members.

QUANTUM OF THE PLAINTIFFS’ CLAIM

108.  By reason of the aforesaid, it is not necessary for me to consider the question of quantum.  However, if this case goes elsewhere and a contrary view is taken about the issue of liability, I also find that the damages awarded to the Plaintiffs would only be nominal.

109.  It is trite law that, for a claim for breach of trust, it is for the party alleging loss to prove that the wrong caused the loss.[14]

110.  In the present case, no application has been made by the Plaintiffs to represent the other members of the Tso.  They have neither sought the consent of the other members nor notified them of the present proceedings. There is no information regarding the views of the other members.  If the Plaintiffs claim to be suing on behalf of the Tso, it is also arguable that Sing, being the other manager and trustee, should be joined as a party to these proceedings.  Under such circumstances, the Plaintiffs are only suing in their own personal capacity as two beneficiaries of the Tso.

111.  No evidence has been adduced at the trial as to the quantum of their individual losses.  There is no evidence that the rental income of the Tso’s lands would be distributed amongst all members, and if so, when and how it would be distributed.  Even if there would be such distribution, the exact number of all members of the Tso would have to be ascertained in order to determine the Plaintiffs’ shares.  Yet there is no evidence as to such precise number of members.  Hence, even if the Land was let at a gross undervalue and there was breach of fiduciary duty on the part of the Defendants, which I do not find it to be the case, the losses suffered by the individual Plaintiffs would be nominal.

112.  In his final submissions, Mr Koo concedes such issue.

113.  The claim for equitable compensation is even weaker in the case of the 1^st Plaintiff.  If the Defendants were in breach of any fiduciary duty in leasing out the Land at gross undervalue, it is clear that the 1^st Plaintiff had also exploited the Tso as he had similarly rented two pieces of land at very low values from the Tso.  As the 1^st Plaintiff is not coming to the court with clean hands, he should not be allowed to make any claim for equitable compensation.

MATTERS FOR CONSIDERATION

114.  This case has highlighted some of the problems regarding the management of tso’s properties and affairs.  Under the English common law, a trustee has a duty to protect the interests of the beneficiaries of a trust.  When dealing with trust properties, a trustee has the duty to maximize the financial gain associated with the dealing of trust properties.  How does such rule apply in respect of tso’s lands in the New Territories?  The evidence of the present case shows that tso’s properties are often leased out to members of the tso or someone related to the family.  In the absence of a clear market, how can one guard against abuses by managers?  Further, should the managers be subject to some kind of supervision by members?  Should there be something like formal annual meetings for the members to express their views regarding the management of the affairs of the tso?  How should the managers be appointed?  Should they enjoy life tenure to manage the affairs of the tso?

115.  Though the Plaintiffs have failed to establish their claim against the Defendants in the present case, it does not mean that managers can conduct the affairs of a tso without any supervision.  But how should the court set the standard for the proper discharge of managers’ duty?  As mentioned by Mr Kwan, different villages or tsos may have different ways of doing things, and so it would be very difficult for the court to set the proper standard in each case.  If more cases of this nature are coming before the courts, Government authority must seriously look into this matter and to consider whether there should be legislations to regulate the management of tso’s affairs.  I appreciate that these are sensitive and tricky issues, but I see no other option if more similar litigations require the adjudication by the courts.

116.  Despite these observations, the Plaintiffs have failed to prove their case against the Defendants and the claim is therefore dismissed.

117.  I also make an order nisi that the costs of the action be paid by the 1^st and 2^nd Plaintiffs to the 1^st and 2^nd Defendants in the Original Action, which shall be made absolute 14 days after the date of the handing down of this Judgment.