KWOK MEI HA MAY v. CHIU YUNG

HCA 3079/2015

[2020] HKCFI 2405

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3079 OF 2015

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J U D G M E N T

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Introduction

1.  This is the trial of the Plaintiff’s action seeking possession of a residential property in Ping Shan in Yuen Long (the “Property”) and mesne profit against the Defendant who is in physical possession of the Property.  The Defendant counterclaims, inter alia, a declaration in respect of her beneficial interest in the Property and an order for transfer of the Property to her as legal owner.

2.  The Property is the second floor and roof of a three-storey village house (the “House”) situated in Lot 3155 Section C in Demarcation District No. 129 (the “Lot”) in Ping Shan, Yuen Long in the New Territories. The House was built under the government’s small house scheme, commonly called a “ding house” (“丁屋”).

3.  The Plaintiff became the registered owner of the Property, having purchased it from its previous registered owner, Ho Kwok Lun (“Ho”) in November 2015 at a discount of more than 20% off the market price.  At the time of the purchase, she had notice of the fact that the Defendant was in physical possession of the Property and of her claim that the Property was a gift from Tang Chik Kit, Charles, deceased (“Charles”), who put her in possession of the Property in May 2014 before his sudden death five months later on 15 October 2014.  A year later, Ho sold the Property to the Plaintiff on 5 October 2015.

The parties’ case

4.  The Defendant’s case is that she and Charles were lovers.  They cohabited together since 2006.  In 2012, Charles entered into a verbal agreement with Ho under which Charles would apply for building licence for the House, finance its construction and build the House on the Lot for Ho; and in return, upon completion of the House, Ho would transfer ownership of the Property to Charles (the “verbal agreement”).  The House was completed in April 2014 and vacant possession of the Property was delivered to Charles and the Defendant in May 2014.  Since then, the Property was held by Ho on a common intention constructive trust (“CICT”) for Charles (the “Charles/CICT”), pending the transfer of legal title from Ho to Charles. 

5.  All along, Charles had promised to make a gift of the Property to the Defendant and her daughter.  At Charles’ request, the Defendant and her daughter moved in to live in the Property in around May 2014.  The Defendant paid “all decoration expenses of the Property since 2014” in the sum of about $200,000.  Hence, Charles had gifted the beneficial interest in the Property held by Ho under the Charles/CICT for him under a second CICT for the Defendant (the “Chiu/CICT”), pending transfer of the legal title from Ho to Charles under the verbal agreement and then from Charles to the Defendant pursuant to the promise.

6.  The Plaintiff’s case is that she bought the Property at a discount in October 2015 knowing that the Defendant was in physical possession and was claiming that Charles had told her that the Property was a gift from him to her and her daughter.  She denies she had notice of the Defendant’s beneficial interest under the Chiu/CICT.  She claims to be a bona fide purchaser for value without notice.

7.  Having regard to the parties’ pleaded case, I consider the legal burden of proof is on the Defendant to prove the verbal agreement, the Charles/CICT and the Chiu/CICT.  If she succeeds in discharging the burden of proof, it would be up to the Plaintiff to prove that she was a bona fide purchaser without notice of the Defendant’s interest.  Accordingly, I allowed the Defendant to open her case and to have the right to the last word.

The law on common intention constructive trust

8.  CICT was concisely explained by Ribeiro PJ in Luo Xing Juan Angela v Estate of Hui Shui See, Willy, deceased and Ors[1] as follows:

“38. Where a constructive trust is alleged to arise on the basis of the parties’ common intention, it is the intention commonly held by the property owner and the claimant regarding their shared beneficial interests in the property that matters. The trust is constituted by the claimant’s detrimental reliance on their common intention and the unconscionability of the property owner departing therefrom.”

There are three constituents in a CICT: common intention, detrimental reliance and unconscionability.  The intention must be commonly held between the parties; must be detrimentally relied on by one party ie the beneficiary; under circumstances which makes it unconscionable for the other party, ie the trustee, to depart from that intention.   As a result, ownership in property is split into legal ownership and beneficial ownership. The trustee holds the legal title on trust for the beneficiary.

9.  Common intention can be express or implied.  It can be deduced or inferred objectively from the parties’ conduct: see Mo Ying v Brillex Development Ltd[2]; Stack v Dowden[3];and Halsbury’s Laws of England : Trust and Powers[4].  As a matter of common sense, it is easier to infer such an intention prior to the acquisition of property which results in an obvious change in legal ownership than after such acquisition in which there is no change in legal ownership, but just a change in beneficial ownership which is not apparent: see Chan Chui Mee v Mak Chi Choi Nelson and Ors[5]. The burden of proving common intention, detrimental reliance and unconscionability is on the person seeking to show that the beneficial ownership is different from the legal ownership: see Mo Ying.

The issues

10.  The following are the issues raised in this trial as agreed between the parties:

(1)  whether Ho had entered into the verbal agreement with Charles to dispose of the Property to Charles and if so, whether such agreement was made in writing or orally;

(2)  whether Charles had at any material time any beneficial interest in the Property;

(3)  whether Charles could and did (by some voluntary promise or otherwise) create any beneficial interest in the Property in favour of the Defendant;

(4)  whether Charles had promised to make a gift of the Property to the Defendant and if so what expenses had the Defendant spent in making improvements on the Property in reliance on that promise;

(5)  whether such expenses were sufficient to establish an equitable interest of the Defendant in the Property taking into account countervailing benefit;

(6)  if Charles and/or the Defendant had each an equitable interest in the Property one after the other, whether the Plaintiff had constructive notice of such interest under the Charles/CICT and/or Chiu/CICT; and whether such interest is defeated by registration of the assignment of the Property by Ho to the Plaintiff.

11.  The Defendant proposed an additional issue, which is whether Ho had any beneficial interest in the Property after the House was built in pursuance to the verbal agreement.  The Plaintiff disagreed because the proposed issue presupposed that the House was built by Charles.  In my view, whoever was the builder is not material.  At least, the Plaintiff does not challenge the Defendant’s assertion that Charles financed the construction of the House.  However, this proposed issue is superfluous as it is subsumed in Issue (2).  If Issue (2) is resolved in favour of the Defendant, Ho must have parted with his beneficial ownership.  If it is resolved against the Defendant, Ho must have retained his beneficial ownership together with his legal title in the Property at all times until the sale to the Plaintiff.  I therefore disallow the proposed issue.  The Plaintiff also objected to Issue (5), but offered no reason for the objection nor can I see any valid objection.  I would therefore allow that issue.

12.  Since the Defendant’s Defence and Counterclaim is founded on the Chiu/CICT and not promissory estoppel, Issue (4) is incomplete without a finding that when the Defendant was led into possession of the Property there was a common intention between her and Charles that she shall become the beneficial owner of the Property pending transfer of the legal title to her pursuant to the promise.  The second part of Issue (4) about the amount of improvement expenses incurred by the Defendant would be more conveniently dealt with under Issue (5).  I shall deal with these two issues as I have redefined them.

13.  Mr Cheng, counsel for the Defendant, concedes, and in my view rightly so, that if the Defendant fails in proving Issue (2), her Defence and Counterclaim fails.  Issue (2) is about the Charles/CICT.  Issues (3), (4) and (5) as I have redefined them are respectively the common intention, detrimental reliance and unconscionability relating to the Chiu/CICT. In my view, the Defendant has to discharge the burden of proving successively each of the first five issues.  The Plaintiff is entitled to judgment if the Defendant fails in any one issue.  It is only when the Defendant succeeds in proving all first five issues will the Plaintiff be called upon to discharge the burden of proving the last one.  

Credibility of witnesses

14.  The Plaintiff testified and called no other witnesses.  There is little to be said about her evidence and her credibility. She said she purchased the Property at a discount of more than 20% off the market price with knowledge of the fact that the Defendant was in possession and claimed to be the owner of the Property by virtue of what Charles had told her.  Her evidence is supported by documentary evidence.  That document is a letter from the Defendant’s solicitors dated 15 January 2015 to the solicitors of the personal representative of the estate of Charles claiming to be the owner of the Property on the basis of what Charles had told her.  The Plaintiff insisted that she had no notice of the Defendant’s beneficial interest.  It is all a matter of construction as to the meaning which the letter would convey to a reasonable reader with knowledge of the surrounding factual matrix and a matter for the court to decide whether on the basis of that meaning the Plaintiff has made adequate inquiry of what she had notice of or whether she was reckless.  I accept her evidence.

15.  Both the Defendant and her daughter testified.  The Defendant impressed me as a very intelligent and crafty person.  She kept her evidence flexible to accommodate any cross-examination.  But when her evidence is tested against contemporaneous documents such as her bank passbook and against common human behaviour, some crucial aspects of her evidence are shown to be inherently incredible.  On her evidence, she kept several hundred thousand dollars in cash in her home instead of depositing the money surplus to her monthly needs in the bank.  She was cross-examined about a deposit of $100,000 cash into her bank account on 30 December 2013.  She explained that she had kept a lot of $1,000 notes at home.  At the time there were rumours about counterfeit $1,000 notes.  Thus, she deposited them in the bank to check if the notes were counterfeits.  True or false?  It is at least strange that she had a crave for $1,000 notes.  She did not feel it unsafe to keep such an amount of cash in the village environment she was living and could offer no explanation why she did so. If her evidence is disbelieved, the overwhelming inference to be drawn from the circumstances surrounding the deposit is that the money was deposited into her account by Charles for the purpose of paying the construction costs of the House.

16.  The Defendant received comprehensive social security assistance (“CSSA”) from April 2007 to January 2011.  Mr Chau, counsel for the Plaintiff, attacked her honesty in knowingly not reporting the monthly maintenance of $30,000 given to her by Charles to the Social Welfare Department when claiming CSSA.  The Defendant’s explanation was that Charles offered her monthly maintenance since 2006, but she did not wish to receive it as Charles had a family and she had not fully accepted Charles in her life.  Then, Charles told her that he would keep the money in his home and set it aside for her whenever she needed it.   The Defendant fully accepted Charles in 2008/2009 and since then she did not claim CSSA, but the money Charles set aside for her was still in his home.  There is an air of incredibility in her assertion that Charles would have kept a million dollar or so accumulated over two to three years for his mistress in his home in a village environment.  It was just a poor attempt to explain away her dishonesty in claiming CSSA.  Her evidence about receipt of Charles’s maintenance was amoeboid.  In any event, her evidence could not explain why she did not stop claiming CSSA until after 31 January 2011.  In the copy of her bank passbook attached to her witness statement, the Defendant whitewashed reference to CSSA in the entries.  When questioned why she did so, she explained that she thought such reference unnecessary.  It may well be a matter of pride rather than dishonesty.  Anyway, her evidence about CSSA demonstrates her propensity to lie.  However, greed is part of human nature.  That blemish in her evidence is not something I would not take into account, but in the context of this case I would not give it too much weight.  I shall focus on inherent probability on the main or crucial aspects of her evidence.  Having so directed myself, I do not find the Defendant credible.

17.  The Defendant’s daughter testified.  Her evidence does not go to the heart of the dispute in issue.  She was not cross-examined. I accept her evidence.

The government’s small house scheme

18.  A peculiar feature in this case is that the Property in question is a storey in a village house or ding house.  The Defendant’s case of verbal agreement has to be understood in and tested against the context of building such a village house under the government’s small house scheme.  The scheme is a privilege for indigenous villagers, meaning descendants through the male line from a person who was in 1898 a resident of an established village in the New Territories.  Such a male indigenous villager is called a “ding” (“丁”).  Under the scheme, a ding has a once in a lifetime right to build a village house without having to comply with the strict building regulations under the Buildings Ordinance.  This right is commonly known as “ding’s right” (“丁權”).  The ding has to undergo certain procedures to obtain a building licence to build.  Upon completion of the house, the Lands Department will issue a certificate of compliance which is equivalent to a certificate of occupation issued by the Building Authority in respect of buildings in the urban area.  A house built under the scheme may not be alienated to another within a period of five years from the date of issue of the certificate of compliance, except to another ding with ding’s right or after first paying a premium equivalent to the difference between the full market value of the land on which the house was built before and after its construction.  One issue raised in this case is about the payment of premium by Charles.

19.  A ding who has ding’s right may exercise his right to build a house on a piece of land owned by himself or purchased by him.  As is not uncommon, though illegal, a ding may sell his ding’s right together with his land to a developer.  The sale and purchase would not be registered. The developer would process the formality for obtaining the building licence for the ding, building the house, paying the premium and selling it in the open market on the ding’s behalf.  Alternatively, the ding may sell only his ding’s right to the developer.  The developer would transfer a piece of land to the ding so that the ding may exercise the ding’s right to build a house on that piece of land which the developer would sell upon completion of the house as above.  The above arrangement is commonly known in the New Territories as “tow ding” (“套丁”), meaning “to substitute someone for the ding”. In either case, there are some illegalities involved, primarily with sale of the ding’s right and alienation.  For this reason, such an agreement, even if made in writing, will not be registered.  

20.  Until the sale of the house, the ding is the registered owner of the land on which the house is to be built.  He has received payment for his land and/or ding’s right.  To secure his interest in the transaction, the developer would require the ding to execute a power of attorney, loan receipts, loan documents and even a life insurance policy as security for the price paid to the ding for the land or the land transferred to the ding by the developer and the house that is being built thereon.  The effect of the power of attorney is to divest the ding of his interest in the land and his building right.  The ding disappears from the scene altogether. If the ding reneges on his agreement and exerts his legal title over the land, the loan agreement will be enforced against him resulting in a judgment debt or sale of the land or his bankruptcy.  Hence, the power of attorney gives the developer the authority to receive payments receivable in respect of the house built on the land and to apply such payment to discharge the ding’s indebtedness to the developer as donee of the power under the power of attorney.  The address of the ding and the donee of power, ie the developer, stated in such a power of attorney is usually the same.  That address is usually the address of the developer or such an address under his control. This is to pave the way for a default judgment in case it becomes necessary to enforce the loan agreement. 

21.  The above arrangements are the usual arrangements of building small houses under the small house scheme by property developers known to this court.  These facts are so notoriously known that I am entitled to take judicial notice of such arrangements.  But, I bear in mind that there is also no evidence about the actual arrangement in the present case.  The only available evidence about the arrangement between Ho and Tang is the power of attorney, the sale and purchase agreement, the assignment of the Property, the fact that the last two mentioned documents were executed by Tang as Ho’s attorney and that the address of Ho and Tang as stated in the power of attorney is the same.  In my consideration of the evidence and fact finding, I shall test the Defendant’s evidence against these documents but shall not go beyond them.

The power of attorney

22.  There is no dispute that Ho is an indigenous villager who has ding’s right to build on the Lot.  In evidence is a power of attorney executed by Ho in favour of Tang in respect of the Lot dated 17 July 2012.  The first thing to note is that the address of Ho and Tang is the same. Under the power of attorney, Ho appointed Tang as his attorney “to do and execute all acts deeds matters and things” in connection with the Lot for the purpose of building a three-storey house under the small house scheme.  The power of attorney gave Tang very extensive powers including to take up the government lease of all or any of the said Lot, to mortgage, charge or pledge the Lot, to receive cheques drawn in the name of his attorney, to sign and give valid and effectual receipts and discharges for all or any part of the consideration or mortgage money, and to do practically anything which Ho could do himself in building on the Lot and in disposing of the House built thereon. It is like a blank cheque.

23.  Clause 24 provides that Ho will at all times ratify whatsoever Tang shall lawfully do or cause to be done in the Lot under the power of attorney.  Thus, though not expressly stated as an irrevocable power of attorney, it has that effect.

24.  Most peculiar is clause 25 under which Ho declared, inter alia:

(i)  that the rental or proceeds of sale arising from any money receivable in respect of any part of the Lot shall be appropriated by Tang towards the discharge of Ho’s indebtedness to Tang;

(ii)  that the power conferred upon Tang may be exercised by any director or manager for the time being of Tang or by any other officer of Tang duly authorized or appointed for such purposes;

(iii)  that Tang may appoint and remove at his pleasure any substitute for or agent under him in respect of all or any of the matters aforesaid upon such term as he shall think fit;

(iv)  any notice or certificate required to be given by one party to the other shall be in writing and shall be deemed to have been so given if addressed to the respective addressee and sent by registered post to its address or registered office or any address (as the case may be) in Hong Kong mentioned in the power of attorney or such other address as may from time to time be notified by either party to the other etc.

Practically, Tang as Ho’s attorney can do anything such as building on the Lot, selling the House so built thereon and paying himself towards discharge of Ho’s indebtedness to him.

25.  This power of attorney is not the usual document one would expect to be executed by a landowner in authorizing an agent to handle the formalities and the construction works in building a house on his land.  It is the type of power of attorney which is usually executed in favour of developers of village houses under the small house scheme, which this court is familiar with.   According to the Defendant, it was Tang who gave the key of the Property to Charles.  It was also Tang who sold the Property to the Plaintiff a year after Charles’ death.

The premium

26.  Another important feature in small houses built under the government’s small house scheme is the payment of premium and administration fees.  As mentioned above, all building licences granted to dings in relation to such small houses contain a non-alienation clause under which the licensees covenant not to assign or dispose of or part with possession of the land within five years, otherwise than to an indigenous villager with ding’s right or after payment of a premium.  This non-alienation clause may be removed and the covenant lifted by the payment of a land premium assessed according to the market value of the land.  A clause providing for the obligation of payment of premium is an indispensable term in an agreement between the land owner and the developer.

27.  The verbal agreement as originally pleaded by the Defendant in the Defence and Counterclaim contains no reference to this term.  It was only until the Plaintiff’s request for further and particulars that the Defendant pleaded that she was told by Charles that he would be responsible for paying the premium and administration fees but she does not know the exact amount.  This casts doubts on how much the Defendant knows about the verbal agreement.

28.  Immediately, the defects in the pleading caused by lack of pleading about the premium and when the trust was constituted becomes apparent.  One more condition would have to be performed by Charles before he would be entitled to be transferred ownership of the Property.  He would have to pay the premium which is a condition under the building licence which must be performed before the Property could be assigned.  This defect is not fatal as the pleading could be amended and arguably there is no need to amend because until the premium has been paid, assignment of the legal interest in the Property would still be pending. 

29.  Another defect is lack of pleading as to when the Charles/CICT was constituted.  The earliest time one can think of is when the House was completed.  Other possibilities are when the certificate of compliance was issued by the Director of Lands; or when Tang parted possession of the Property to Charles; or when Charles paid the premium but before the assignment was prepared.  The last scenario never saw the light of the day as Charles died before paying the premium.  The Defendant has not identified the time when the Charles/CICT was constituted.  Pleadings aside, the Defendant has to prove that the Charles/CICT was constituted and, to make her case credible, she has to prove the circumstances when it was constituted.  These defects in the pleading, as I have observed above, is evidence of how little the Defendant knows about the verbal agreement, if indeed there is one, and suggests that the Defendant’s case is a half-baked concoction.  As I shall demonstrate below, the issue of premium also creates further problem in the Defendant’s case.

Improbability of the Defendant’s case of the agreement not being in writing

30.  Before dealing with the factual issues in this case, I shall first deal with the Plaintiff’s argument about the improbability of the Defendant’s case by reason of the agreement not being in writing.  It is trite law that an agreement may be made orally, in writing or by conduct. However, agreements relating to interest in land are in a special category for one particular reason.  Under section 3 of the Land Registration Ordinance, all deeds, conveyances, and other instruments in writing shall have priority one over the other according to the priority of their respective dates of registration.  Hence the priority of an unregistered instrument is deferred by the prior registration of a later instrument.  The interest relied on by the Defendant is one created by a verbal agreement which is not registrable.  The Plaintiff argues that it is inherently improbable for an agreement relating to interest in land to be made orally and not evidenced in writing.  Who bears the burden of proving the absence of a written instrument? 

31.  Mr Chau submits that the burden is on the Defendant.  If it is at least equally probable that there was a registrable but unregistered instrument creating any interest in land, such interest would be defeated by sections 3 and 4 of the Land Registration Ordinance irrespective of any notice, actual or constructive.  As the Defendant has to prove the agreement in order to succeed, the legal burden is on the Defendant.  In my view, as the Plaintiff is now seeking to rely on sections 3 and 4 of the Land Registration Ordinance, she has at least the evidential burden of showing that the agreement is in writing.  If she succeeds in discharging that evidential burden, the burden shifts back to the Defendant to show that the agreement was only made orally.

32.  Mr Chau referred to the Defendant’s answer to the further and better particulars requested that she is not aware if there is any written agreement.  In other words, the Defendant cannot exclude the possibility of the existence of a written agreement.  He submits that in a commercial agreement of this kind involving interest in land, it is inherently probable that there was an agreement made or evidenced in writing, but there was no registration because it was an agreement to alienate land in contravention of the non-alienation clause in the building licence.  He cites the Chen Tek Yee & Ors v Chan Moon Shing & Anor[6] in which Yuen JA observed:

“… the parties are in a personal relationship (as contrasted with parties in a commercial transaction), it would be unrealistic to expect written records of assurances.”

He submits that the reverse should also be true.  What Yuen JA observed makes a lot of sense.  However, it is not enough for the Plaintiff to discharge her evidential burden by arguing that by the mere nature of the agreement, it is more probable than not that it is in writing.  Short of producing the written agreement, she has to show at least some independent evidence suggesting the existence of the written agreement, for example, correspondence between the parties referring to or mentioning a written agreement.  Absent such evidence, I would not reject an agreement in relation to interest in land as being improbable by reason only of the fact that it is not in writing.

Issue (1) – the verbal agreement between Ho and Charles

33.  This issue is solely an issue of fact.  The Defendant’s case on the verbal agreement as pleaded in paragraph 7(1) to (3) of her Amended Defence and Counterclaim is that in about 2009 Ho approached Charles about building a house on his land and then verbally agreed with Charles that Charles would finance the construction costs, handle all the application procedures on Ho’s behalf and build the House; then upon completion of the House Ho would transfer the ownership of the Property to Charles.  In the further and better particulars, the Defendant pleaded that Charles was also responsible for paying the premium and administration fee for removing the non-alienation covenant, but she did not know how much.  Pursuant to that verbal agreement, Charles handled all application procedures on Ho’s behalf and paid all the construction costs but without paying the premium.  The House was built on or about mid-2014.

34.  The Defendant has no personal knowledge of the facts pleaded.  All the evidence she gave on these matters is hearsay.  Mr Chau submits that the Defendant’s evidence is evidence against the dead and should be taken with extreme caution.  Properly understood, this aspect of her evidence is hearsay evidence from the dead against the living.  While hearsay evidence is admissible under our law of evidence, the question for the court is one of weight.  In assessing weight, the court takes into account all the circumstances and inherent probability.  The court has to test the hearsay evidence against contemporaneous documents, evidence not in dispute and the context of building a village house under the government’s small house scheme.

35.  One fatal hurdle against the Defendant’s evidence is the power of attorney.  It was not pleaded and not mentioned in the Defendant’s evidence.  But, the power of attorney is an important element in building village houses.  It is in the evidence.  It is part of the factual circumstances in this case against which the Defendant’s case must be tested. This power of attorney shows that the Defendant’s account of the verbal agreement started on the wrong foot.  Ho had an attorney to finance, handle the procedures, build and sell the House built on the Lot.  Under the power of attorney, Ho had divested himself of the power to dispose of the Lot and the House to be built to Tang.  There could be no room for the Defendant’s account of Ho approaching Charles and seeking his help in financing, handling the procedures and building the House and promising him the Property as consideration for his help.  The Defendant’s case would be more inherently probable if Charles were Ho’s attorney instead of Tang or if Charles had entered into the verbal agreement with Tang instead of with Ho; but neither of these is the Defendant’s pleaded case.

36.  While this power of attorney does not exclude the possibility of the verbal agreement between Ho and Charles on the terms as pleaded, the existence of the verbal agreement is rendered a step remote by the power of attorney.  More facts have to be pleaded and proved to enable this verbal agreement to blend in with the power of attorney so as to render the pleaded case inherently probable.  For example, that pursuant to the verbal agreement, Charles caused or arranged for Tang to act as Ho’s attorney.  But this is not part of the Defendant’s case.  In the Defendant’s supplemental affirmation introducing the whatsapp messages between her and Charles, she said that Tang knew her and Charles well and she knew Tang was Ho’s attorney. Despite that, all she said was that Tang handed over the key of the Property to Charles and a vague assertion that Tang agreed with “the requests and arrangements made by Charles regarding the Property”.  She mentioned absolutely nothing about what she heard from Tang relating to the verbal agreement.  The whatsapp messages were about Charles’ intention to make a gift of the Property to the Defendant and her daughter.  In that context, “the requests and arrangements” must refer to Charles’ gift of the Property to the Defendant and not the beneficial interest in the Property transferred to Charles under the verbal agreement.  Despite she was familiar with Tang, there was no evidence that she ever enquired from Tang about the verbal agreement.  I can well appreciate the difficulties she had with the hearsay evidence about the verbal agreement, particularly as Tang subsequently sold the Property to the Plaintiff in breach of the alleged verbal agreement.  Had there really been discussions about the verbal agreement between Charles and Tang in her presence during the past two years when the House was being built, she would have heard about it. Maybe there never was.  On the evidence, not only was Tang a total stranger to the verbal agreement, Tang’s incontrovertible status as Ho’s attorney cast real serious doubts on the existence of the verbal agreement.

37.  Charles had knowledge of the building progress of the House.  He had sent a layout plan of the Property to the Defendant and informed her about the progress of the construction via whatsapp.  His involvement was apparently more than building the House only.  The whatsapp messages between him and the Defendant indicated that the construction of the House was part of a building contract for building three houses.  There is no evidence about the terms of the building contract entered into between Charles and the building contractor.  At one stage, Charles also suggested to the Defendant to swap the Property with a second floor unit in another house under construction nearby.  There is no doubt that Charles had some part to play in the building of the House and perhaps two other houses in Ping Shan as mentioned in the whatsapp message.  But apart from the Defendant’s verbal assertion of the terms, there is no independent evidence or evidence in writing evidencing the terms of the verbal agreement.

38.  There is some evidence of payment of the construction costs by Charles.  There was a whatsapp message from Charles to the Defendant on 21 January 2014 instructing her to withdraw $200,000 from her account to pay the workers.  The Defendant’s bank account shows that she withdrew $170,000 on the following day.  There is no evidence what she did with the money.  Presumably, she handed it over to Charles to pay the workers.   Since the payment of the construction costs relating to the House was not seriously disputed, I accept it as having been paid by Charles, pursuant to his obligation under the verbal agreement or some other agreements relating to the construction of the House and perhaps the other two houses as well.  The question is whether the payment, what Charles did and his knowledge about the building progress of the House evidence the verbal agreement.  On the evidence, Charles may be a party to the verbal agreement as the Defendant alleged; or a joint developer with Tang in building the House and perhaps some other houses; or a purchaser who had agreed with Tang to purchase the Property on instalment terms before it was constructed. In my view, of the three possibilities, the inference that Charles was a co-developer with Tang is the most compelling.

39.  A second fatal hurdle is the premium and administration fee.  The Defendant said she had no knowledge of the amount of premium Charles was required to pay under the verbal agreement.  The premium paid by Ho in respect of the Lot was $1,476,200.  Mr Cheng suggests that Charles should be responsible for one-ninth of the premium because there were three houses built, each with three storeys.  The Defendant has to plead and prove the verbal agreement and the terms she relies on, but not to infer an agreement or to imply a term in an agreement. Besides, the inference which Mr Cheng sought to draw is wrong on the facts because as evidenced by a receipt from the Lands Department, the premium mentioned above was in respect of the Lot on which only the House was built. 

40.  The Defendant said that every time Charles visited her, he told her about the progress of the construction of the House and she well knew the existence and details of the verbal agreement between Ho and Charles.  Her failure to mention Charles’s obligation under the verbal agreement to pay premium suggests that she actually knew very little about the verbal agreement, such as the nature of the agreement and the parties to that contractual relationship.  While failure to prove all the terms of the agreement, particularly those which have no bearing on the Charles/CICT, may not necessarily be fatal, such lack of knowledge is evidence that the Defendant does not have full knowledge about the verbal agreement and even casts doubts if the verbal agreement is just a concoction built on some facts known to her.

41.  Another rather belated piece of evidence relied on by the Defendant in support of the verbal agreement is the hearsay evidence contained in her supplemental affirmation.  In that affirmation, the Defendant asserted that Tang knew her and Charles well and fully agreed with the “requests and arrangements made by Charles regarding the Property”.  As already analysed in paragraph 36 above, the “requests and arrangements” were about the gift of the Property to the Defendant and her daughter.  It is not evidence of the verbal agreement.  Furthermore, there is a total absence of particulars and surrounding circumstances as to how Tang had knowledge of the requests and arrangements and agreed with it.   I could give no weight to this piece of hearsay evidence.

42.  There are numerous whatsapp messages between Charles and the Defendant.  These messages were rich in sentiment and affection, but lacking in evidence about the verbal agreement, its terms, its contracting parties etc. The messages show that Charles had a close interest and knowledge about the progress of the construction of the House.  He knew about the issue of building licence, the building contract and the building plans.  He updated the Defendant about the construction progress.  These messages show Charles had something to do with the construction of the House.  But, quite contrary to the Defendant’s argument, these messages suggest that Charles’s involvement is more than the simple picture painted by the Defendant on her hearsay evidence of Charles assisting and financing the building of one house and sharing in one of the storeys of the finished House.  The whatsapp message from the Defendant to Charles on 29 December 2012 indicated that there were three houses to be built under one building contract.  It is more probable that Charles was engaged in a partnership with Tang in building the House and two other houses in Ping Shan. It was unlikely that he was a party to the verbal agreement of building just one house on behalf of Ho.  These surrounding circumstances cast serious doubts on the veracity of the Defendant’s case.

43.  There is no doubt that Charles had entered into an agreement of some sort with Tang or Ho about, among other things, building the House.  But the Defendant bears the burden of proving the verbal agreement and its terms as pleaded and on which to infer the CICTs.  Her case has to be tested against the context of building a small house under the government’s small house scheme in the New Territories.  Her major failure is that her case does not fit in with that context and with the power of attorney.  By that power of attorney, Ho had divested himself of the power to dispose of the Property.  Though what Tang did as Ho’s attorney was binding on Ho, his appointment as Ho’s attorney casts grave doubts on the inherent probability of the existence of the verbal agreement.  I am conscious of the difficulties the Defendant as a non-party has in adducing evidence about the verbal agreement and should not take too strict a view on her evidence.  But apart from the difficulties caused by the power of attorney and the premium, the whatsapp messages are more consistent with Charles being a co-developer with Tang in developing small houses in Ping Shan than with the Defendant’s case of verbal agreement to build the House for Ho.  When tested against the factual circumstances, the Defendant’s case of verbal agreement is inherently improbable.  She does not know about the premium and its effect on the verbal agreement.  She cannot even satisfy this court that Ho was a party to the verbal agreement, let alone the terms of that verbal agreement.  Given these inadequacies and my adverse finding on her credibility, I find that the verbal agreement is just her concoction based on some facts known to her.  The Defendant has failed even in overcoming this first hurdle.  However, given its importance to the Defendant’s case, I shall consider the second issue assuming she has succeeded in proving the verbal agreement on the terms she pleaded.

Issue (2) - Whether Charles had beneficial interest in the Property

44.  This issue is about proving the Charles/CICT.  The Defendant’s case is that Charles was the beneficial owner of the Property under a CICT which arose from the terms of the verbal agreement and the conduct of Charles and Ho.  Thus, while originally Ho held both the legal and beneficial interest of the Property on his own behalf, at some stage since the verbal agreement he held the beneficial interest for Charles pending the transfer of legal title.  The difficulties caused by the deficiency in pleading a proper verbal agreement or failure to deal with the power of attorney in evidence becomes immediately apparent if one asks with whom did Charles share the intention about his being given the beneficial ownership in the Property, Ho or Tang; and when was the beneficial interest transferred?

45.  Putting the above difficulties aside, it is generally accepted that proving common intention in relation to property already held beneficially by the trustee is more difficult than proving the requisite intention at the time of acquisition: see Austin v Keele and Others[7]. This is because there is a conceptual distinction between pre-acquisition common intention and post-acquisition common intention.  The rationale was explained by Lam J (as he then was) in Chan Chui Mee v Mak Chi Choi[8].   He said,

“If the common understanding was arrived at prior to the acquisition of the property, the beneficial ownership had not yet been crystallized and one may infer a common intention more readily. On the other hand, if the common understanding were only formed after the acquisition of the property, this would imply a change in the beneficial ownership of the property. The evidence must support an inference that there was a fresh agreement as to beneficial ownership before the court can give effect to the common understanding. In other words in that situation, there must be some evidence to infer that the original beneficial owner has agreed to give up some of his interest in the property in favour of the other party.”

Thus, in the case of post-acquisition constructive trust over property, of which this case is one, compelling evidence is required to warrant an inference of a change in beneficial ownership. 

46.  The Defendant relied on the terms of the verbal agreement, Charles’s conducts and Tang’s conducts as evidence on which the common intention in support of the Charles/CICT may be inferred.  The terms of the agreement pleaded by the Defendant were that Charles would finance the construction costs and handle the application procedures; then upon completion of the development, Ho would transfer the ownership of the Property to Charles.  What brought about or created the trust was Charles’s performance of the verbal agreement and Tang’s delivery of possession of the Property to Charles on Ho’s behalf.  Presumably, the construction costs were fully paid.  There is no argument that those costs were not paid by Charles. Except for payment of the premium, Charles had performed his obligations under the verbal agreement.  The Defendant’s case is that that partial performance of Charles’ contractual obligation was detrimental reliance which made it unconscionable for Ho to renege from the verbal agreement.  That does not sound quite right, though Charles may have a claim in quantum merit.

47.  The Defendant has not pleaded any express or implied term under which Ho has agreed to transfer the beneficial interest separately from the legal interest and when to transfer.  Mr Chau submits that the terms of the verbal agreement as pleaded are at best equivocal as to whether there was any agreement or intention to transfer the beneficial interest in the Property to Charles separately from the legal interest.  I agree.  In accordance with the verbal agreement, upon Charles’s complete performance of his obligations, it would be Ho’s obligation to transfer legal title to the Property to Charles.  Prima facie, beneficial ownership goes hand in hand with legal ownership: see Lee Tso Fong v Kwok Wai Sun and Another[9]. Thus, Ho’s obligation was to transfer both legal and beneficial ownership to Charles upon he performed all his obligation under the verbal agreement.  Absent any express or implied term in the verbal agreement or an express declaration of trust, it is difficult to see how a common intention could be inferred from the terms of the verbal agreement.

48.  As for Charles’s conducts in handling the application for building licence, financing the construction of the House and paying the premium, these were nothing other doing what he was obliged to do under the verbal agreement.  However, Charles’s obligation to pay the premium was still outstanding.  In the absence of any express or implied terms about his partial entitlements upon part performance under the verbal agreement, he was not entitled to be transferred the beneficial interest of the Property.  The Property was sold for $3,000,000 at a discount of about 20%.  The premium paid by Ho was $1,476,200.  In monetary terms, Charles’ outstanding obligation to pay premium was about 40% of his obligation under the verbal agreement[10].  It is difficult to infer any intention that Tang or Ho would hold in common with Charles that Charles should be transferred 100% of the beneficial interest in the Property together with physical possession when 40% of Charles’ obligation was still outstanding.  There is no evidence, let alone compelling evidence, on which such common intention could be inferred.

49.  Delivery of possession of property without payment of the purchase price or full performance of the obligation by the transferee as in this case is unusual.  But, there is not a scintilla of evidence about a common intention to transfer the beneficial interest in the Property to Charles.  The inference one could readily draw from such delivery of possession is that Tang gave Charles a licence to occupy the Property for all that he had performed hitherto under the verbal agreement and in anticipation of his complete performance of all his outstanding obligations before legal title of the Property would be transferred to him under that agreement. 

50.  There is also no evidence as to when the beneficial interest was intended to be transferred.  There are many points in time at which the beneficial interest may be transferred.  It may be transferred upon the workers laying the first brick; or upon completion of all building works; or upon the issuance of certificate of compliance; or upon delivery of possession to Charles; or upon Charles’ payment of the premium pending assignment of the legal interest.  As mentioned above, it would be absurd for Ho or Tang to agree to transfer 100% of the beneficial interest in the Property when Charles still had 40% of his obligation in monetary terms to perform.  Absent any express terms or special circumstances supporting a particular inference, I would have thought the last inference the most reasonable and compelling one to draw.   The failure to plead and show when the transfer was intended to take place also suggests the absence of such common intention.

51.  Not only has the Defendant failed to raise an inference of a common intention to transfer the beneficial interest in the Property to Charles, there is also no evidence of detrimental reliance and unconscionability.  The Defendant has to show that Charles has acted to his detriment or significantly altered his position in reliance on the common intention (assuming one is proved).  The classic case of detrimental reliance is where someone is led into possession of property and induced to incur expenses on the property or to change his position under a common intention that he has or will have a beneficial interest in the property.  Here, what Charles did in constructing the House could not be detrimental reliance on any common intention.  The so-called “detriments” were incurred before he was led into possession of the Property under the alleged common intention.  He was in fact doing no more than what he was contractually obliged to do for good consideration under the verbal agreement.  He suffered no detriment nor did he change his position in reliance on the common intention.  For the same reason, there could be nothing unconscionable for Ho or Tang to resile from that common intention (which I am unable to infer).

52.  In conclusion, even assuming that the Defendant were able to prove the verbal agreement on the terms as she pleaded, she is unable to prove a common intention between Charles and Tang or Ho that he shall be transferred the beneficial interest of the Property upon his partial performance of his obligation under the verbal agreement and when the possession of the Property was delivered to him.  She has utterly failed to prove the Charles/CICT.  The above conclusion is also sufficient to dispose of the Defendant’s Defence and Counterclaim.  Hereunder, I shall briefly deal with the other issues just for completeness, on the premise that the verbal agreement is proved. 

Issue (3) - Whether Charles could and did create any beneficial interest in favour of the Defendant

53.  Having found against the Defendant on the second issues, the inescapable conclusion must be that Charles had no beneficial interest in the Property which he could create and pass to the Defendant.  What Charles had when possession of the Property was delivered to him was a licence.  That being a personal licence must have expired upon his death.

Issue (4) - whether Charles had promised to gift the Property to the Defendant; whether the Defendant was led into possession of the Property with the common intention that she shall be its beneficial owner

54.  As conceded by Mr Cheng, once Issue (2) is determined against the Defendant, the Defendant’s Defence and Counterclaim fails. The subsequent issues become non-issues.  The Defendant’s case is that Charles had promised to make a gift of the Property to her and her daughter.  As evidenced by the numerous whatsapp messages, Charles’ intention could not be doubted.  Likewise, it would not be difficult to infer a common intention between Charles and the Defendant that she shall be the beneficial owner of the Property pending the transfer of the legal interest in the Property by Ho to Charles or at Charles’ direction to the Defendant.

55.  However, at no time could the Defendant be the beneficial owner of the Property because that common intention was never carried into effect.  Firstly, Ho or Tang was not a party to that common intention. Secondly, Charles had not paid the premium and the ownership of the Property was never transferred to him.  There was no common intention between him and Ho or Tang that he shall be given the beneficial interest in the Property by reason of his construction of the House.  Both the legal and beneficial interests in the Property remained with Ho until the sale to the Plaintiff.  Those interests had never been transferred to Charles.  Charles was only led into possession of the Property under a personal licence. The gift was an imperfect gift.  Whatever remedies the Defendant may have are personal remedies and not proprietary remedies against the Property.

Issue (5) - improvement expenses and detrimental reliance

56.  In view of the conclusions reached in respect of Issue (4), this issue becomes a non-issue.  The Defendant’s case is that she contributed $200,000 in construction costs for the House and spent another $200,000 in decorating and improving the Property.  As mentioned above, on 21 January 2014 Charles instructed the Defendant to withdraw $200,000 from her account to pay the workers and the Defendant withdrew $170,000 from her account the following day, presumably for that purpose.  Presumably, she topped up by cash to make up $200,000 and paid the workers.  That was before she was led into possession of the Property.  The Defendant also produced receipts of $146,755.50 for decoration, furniture and electrical appliances[11].  These two sums added up to $346,755.50. 

57.  Mr Chau advanced a proposition that these sums were actually paid by Charles.  There are two basis for that proposition. First, during the period of construction of the House between 21 October 2013 and 3 April 2014, Charles made eight deposits into the Defendant’s bank account, comprising of six deposits of $32,000, one deposit of $64,000 (which is a double of the usual deposit of $32,000) and one deposit of $100,000 totalling $356,000.  That was about $9,000 in excess of the sum of $346,755.50 mentioned in the preceding paragraph.  Second, the Defendant accepts, as evidenced by the whatsapp messages, that there was a practice that the Defendant would first inform Charles about the prices of furniture and decoration works and seek his approval before incurring the expenses.

58.  The Defendant’s evidence about the eight deposits is that the sums of $32,000 were maintenance given to her by Charles. Presumably, that includes the deposit of $64,000 representing maintenance for two months.  These deposits were all made by cheques.  It should be recalled that it was the Defendant’s evidence that the deposit of $100,000 was made by her when she wanted to test if her collection of one hundred $1,000 notes were genuine.  As for the other seven deposits, the Defendant’s evidence is that Charles gave her about $30,000 per month, sometimes in cash and sometimes by cheque.  Be that as it may, what is remarkable is that her bank passbook for the period from 4 April 2007 to 30 August 2015 shows that except for these seven cheques and another one for $30,000 deposited on 8 August 2011, there were no cheque or cash deposits of around $30,000 or more than $10,000.  This casts doubts on her evidence of Charles paying her on average about $30,000 maintenance every month. 

59.  It is also very noteworthy that every time these eight deposits were made, they were almost immediately withdrawn in large round sums of $40,000, $50,000, $60,000 and $170,000.  There is no reason why a woman and child would spend such large sums of money every month or keep such large sums at home when her rent was paid by Charles.  This patent of payment in and payment out suggests that the money was deposited for a particular purpose. The most likely purpose in the circumstances of this case was payment of construction costs of the House. 

60.  Not only that, these deposits of $32,000 ceased altogether after 3 April 2014 when the House was completed.  Since then, there were no deposits other than dividend payments and one deposit of $29,500 on 30 August 2015.  That last deposit could not have been made by Charles as he had died on 15 October 2014.  May be coincidentally, since completion of the House, Charles paid the Defendant by cash.  But, given my finding of the Defendant’s credibility and the overall impression of these payments and withdrawals, I discount such possibilities.

61.  The overall impression given by the transactions I have outlined above supports Mr Chau’s proposition that these eight deposits made by Charles were for the purpose of paying the building costs and furnishing a home for his mistress.  The Defendant has suffered no detriment. 

62.  Even if I were to accept that the costs of decoration and furniture paid by the Defendant was $146,755.50 as evidence by the receipts produced, the amount spent on chattels, such as electrical appliances, sofa, etc, was more than $139,693.  These chattels are for the Defendant’s own use and comfort and could not be treated as money incurred on detrimental reliance. The balance of $7,462.5 is only de minimis compared with the value of the Property.  It is not sufficient to raise an equitable interest.

Issue (6) - Plaintiff’s constructive notice of the Defendant’s interest

63.  Having reached the above conclusion, a determination of this issue is unnecessary.  A determination on the assumption that the earlier issues are all determined in the Defendant’s favour is going to be extremely artificial.  I shall deal with this issue very briefly.

64.  The Plaintiff has notice that the Defendant was in physical possession of the Property.  Prior to entering into the sale and purchase agreement of the Property with Ho, the Plaintiff was provided with a copy of letter from the Defendant’s solicitors dated 15 January 2015 to the personal representative of the estate of Charles.  The letter alleged that Charles had put the Defendant in possession of the Property and had told her that the Property was a gift for her and her daughter.

65.  The Plaintiff’s case is that she learned about the Property from her sister and knew that it was to be sold with someone in occupation.  She entrusted her sister who engaged solicitors to make the necessary enquiries.  Her sister obtained legal advice on her behalf.  On the basis of the aforesaid letter from the Defendant’s solicitors, she was advised that the occupier had no ownership interest in the Property.  Then the Plaintiff proceeded with the purchase.  The Property was purchased at a discount of about 20% off the market price. 

66.  The Plaintiff argues that the thrust of the letter was to seek relief under the Inheritance (Provision for Family and Dependants) Ordinance against the estate of Charles.  It only asserted that Charles had told the Defendant that the Property was a gift for her and her daughter and did not go further to assert any equitable interest in the Property.  In addition, Ho was the registered owner of the Property and the Defendant’s interest has not been registered.

67.  Be that as it may, the Defendant is in occupation of the Property.  In Wong Chim Ying v Cheng Kam Wing[12], the Court of Appeal adopted the following principle on constructive notice as stated by Lord Kingsdown in the Privy Council case in Barnhart v Greenshield (1853) 9 Moo. P.C. 18 at pp 32-4:

“… that the possession of the tenant is notice that he has some interest in the land, and that purchaser having notice of that fact is bound, according to the ordinary rule, either to inquire what that interest is, or to give effect to it, whatever it may be.

…

The rule is stated in the same way by Sir James Wigram, in his most elaborate judgment in the case of Jones v Smith (1 Hare, 60).  ‘If a person purchases an estate which he knows to be in occupation of another than the vendor, he is bound by all the equities which the party in such occupation may have in the land; …”

68.  Though the land search record did not show that Charles had any interest in the land, the Defendant is in physical occupation. The Property was a newly built property which the registered owner was prepared to sell at a substantial discount.  This is something which calls for enquiries. It was not impossible to make enquiries.  Had enquiries been made with the Defendant’s solicitors, the Plaintiff would have been advised of the nature of the Defendant’s claim.  In not doing so and acting on the legal advice based on inadequate enquiries, the Plaintiff was turning a blind eye and should be bound by the Defendant’s interest.

69.  However, as I have said, such a determination is going to be very artificial.  The equitable interest relied on by the Defendant, which as I have found does not exist, is extremely doubtful.  It is based on a trust of a dubious equitable interest held under yet another doubtful trust.  Even if it were found to be good, notice of such doubtful interest does not necessarily amount to notice of the equity as could bind a purchaser: see Lewin on Trusts[13]. In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd[14], the Court of Appeal held:

“104. … In my opinion, once a person knows certain facts, he should only be treated as appreciating the legal consequences if he actually knew of those consequences, or if, in all the circumstances, he ought reasonably have appreciated those consequences.”

The Defendant’s claim of equitable interest is built on extremely doubtful grounds.  The Plaintiff should not be treated as having knowledge of the legal consequences by reason only of her notice of such a doubtful claim.  The Defendant’s interest, even if it exists, would be defeated by registration of the assignment of the Property by Ho to the Plaintiff.

Conclusion

70.  The Plaintiff is entitled to possession of the Property on the strength of her paper title.  The burden is on the Defendant to prove her prior beneficial interest in the Property.  The Defendant’s Defence and Counterclaim is founded on the verbal agreement to build the House, an equitable interest arising from the construction of the House by reason of a common intention constructive trust held by Ho in favour of Charles and a second common intention constructive trust of that interest held by Charles in favour of the Defendant.  The Defendant has failed to discharge that burden. Accordingly, I enter judgment for the Plaintiff on her claim for possession and dismiss the Defendant’s Counterclaim.  I invite the parties to agree to terms of the possession order to be made.

71.  No evidence on mesne profits has been filed by either parties.  I am not aware of any order for separate trial on quantum.  I therefore grant liberty to apply and invite the parties for written submission on quantum or submission for directions for the further conduct of this case within 14 days.

72.  I make a costs order nisi that the Defendant shall pay the Plaintiff’s costs of this action.  Such costs are to be taxed, if not agreed.  The Defendant’s own costs shall be taxed in accordance with Legal Aid Regulations.