LEAD TRADERS LTD v. LUCKY LAND ENTERPRISE LTD AND ANOTHER

CACV 217/2011 AND CACV 219/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 217 AND 219 OF 2011

(ON APPEAL FROM LDCS NO. 11000 OF 2011)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Kwan JA:

1.  I agree with the Reasons for Judgment of Fok JA.

Hon Fok JA:

Introduction

2.  These appeals concern the viability of a notice of application by which the majority owners in a building seek an order against the minority owners for the compulsory sale of the building under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

3.  The specific issue raised in the appeals concerns the proper construction of the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, Cap. 545A (“the Notice”) and it arises from the background facts set out below.

4.  At the conclusion of the hearing of the appeals, we allowed the appeals with costs, indicating that we would hand down our reasons in due course.  These are those reasons.

Background facts

5.  A six-storey building presently stands at No. 168 Portland Street on the Remaining Portion of Kowloon Inland Lot No. 1152 (“the Building” & “the Lot” respectively).  By an occupation permit (“OP”), issued on 10 March 1980, the Building Authority permitted the occupation of the Building for the following purposes: (i) G/F, shop for non-domestic use; (ii) 1/F and 2/F, offices per floor for non-domestic use; and (iii) 3/F to 5/F, one flat per floor for domestic use.

6.  The DMC for the Building is dated 11 April 1984.  Amongst other provisions, this contains certain prohibitions against structural alterations.

7.  Lead Traders Limited, respondent to these appeals, owns 5 out of 6 units in the Building. These units amount to 83.33% of the undivided shares in the Lot.

8.  Prior to 19 March 2010, Lucky Land Enterprise Limited, 1^st appellant in these appeals, was the registered owner of the 3/F of the building, including the adjoining flat roof.  This unit amounted to 16.67% of the undivided shares in the Lot.

9.  On 8 March 2010, Lucky Land’s architect submitted an application to the Building Department for approval of works to partition the 3/F of the Building into 2 units.  Approval was granted on 25 March 2010.

10.  On 19 March 2010, Lucky Land subdivided its unit on the 3/F into two units, A and B.  It entered into a Sub-DMC and an Assignment with Allied Trend Corporation Limited, 2^nd appellant in these appeals, to whom Unit B on the 3/F of the Building was assigned.  The Sub-DMC and Assignment were both registered with the Land Registry on 31 March 2010.

11.  Following this subdivision and assignment, Lucky Land and Allied Trend appeared on the Land Registry records as at 31 March 2010 as the registered owners of Unit A and Unit B respectively, with each owner holding 8.33% of the undivided shares in the Lot.

12.  For convenience, in this judgment, I shall refer to the respondent Lead Traders as the Majority Owners and to the appellants Lucky Land and Allied Trend, collectively, as the Minority Owners.

The proceedings and context in which the issue on appeal arises

13.  In LDCS No. 11000/2011, the Majority Owners have applied for an order for the compulsory sale of the Building under the Ordinance.

14.  By summonses dated 7 April 2011 and 15 April 2011 respectively, Lucky Land and Allied Trend each sought an order for the determination of a point of law (which is set out in the following paragraph) and, if that question were to be answered in the positive, an order striking out the application in LDCS No. 11000/2011.

15.  The question of law set out in the summons is as follows, namely:

“… whether Unit A on the 3^rd Floor of No.168 Portland Street, Kowloon (‘the Building’) and Unit B on the 3^rd Floor of the Building shall be regarded as two units for the purpose of the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (L.N. 6 of 2010) issued on 12^th January 2010”.

16.  By cross-summons dated 28 April 2011, the Majority Owners sought leave to amend their application in LDCS No. 11000/2011 by adding the following ground, namely:

“7A. Further or alternatively:

a. the purported sub-division involved structural alterations to the Building and/or might create unnecessary noise or disturbance to other occupiers and was therefore in breach of the Deed of Mutual Covenant; and

b. the assignment of Unit B to the 2^nd Respondent dated 19 March 2010 which purported to give rise to the sub-division on that date was carried out before any approval had been obtained from the Buildings Department for the sub-division works.

As such, the sub-division was not legally valid for the purposes of s4 of the Notice.”

The Ruling of the Presiding Officer

17.  By her Ruling handed down on 3 August 2011, Deputy Judge Kot answered the question posed in the Minority Owners’ summonses in the negative and therefore dismissed their applications to strike out LDCS No. 11000/2011. She granted leave to the Majority Owners to amend the notice of application and made further ancillary case management directions.

The Ordinance and the Notice

18.  The Ordinance was enacted in 1999 with the purpose of enabling persons owning a specified majority of the undivided shares in a lot to make an application to the Lands Tribunal for an order for the sale of all of the undivided shares in the lot for the purpose of redevelopment. When it was enacted, the requisite majority required as a threshold for obtaining a compulsory sale order was 90%: see s. 3(1). However, pursuant to s. 3(5) of the Ordinance, the Chief Executive in Council is empowered to specify a lower percentage than the 90% threshold.

19.  By the Notice, which came into effect on 1 April 2010, the threshold was lowered to 80% for three classes of land lot: see s. 3.  These appeals are only concerned with the first of those classes, namely “a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot”: see s. 4(1)(a) of the Notice.

20.  Materially, for the purposes of these appeals, s. 4(2) of the Notice provides:

“For the purposes of the class of lot referred to in subsection (1)(a), if –

(a) a unit in a building is subdivided into 2 or more units on or after 1 April 2010; and

(b) the subdivision does not involve –

(i) any alteration to the size of any common area of the building; or

(ii) any change in a person’s liability in relation to the common areas and facilities of the building under the common law or any enactment,

those units are regarded as one single unit.”

21.  As will be seen, under s. 4(1)(a) of the Notice, it is only where every unit of the lot represents more than 10% of the undivided shares in the lot that the lower threshold applies.  In s. 2 of the Notice, “unit” is defined to mean:

“… any premises that are described by reference to a specified number of undivided shares in a lot in any instrument registered in the Land Registry.”

The Minority Owners’ argument on appeal

22.  The Minority Owners’ principal argument on appeal is a simple one.  Having regard to the provisions of the Notice referred to above, it is incontrovertible that the 3/F Unit of the Building was, by the execution of the Assignment and Sub-DMC, divided into two units (Units A and B), each representing 8.33% of the undivided shares in the Lot.  The relevant instruments were registered in the Land Registry on 31 March 2010.  There is nothing in the definition of “unit” in the Notice that requires a unit to be separated from another by any physical barrier.  Therefore, it is contended, it is beyond argument that as of 31 March 2010, there were two units in the Lot, each with 8.33% (i.e. less than 10%) of the undivided shares in the Lot.  Hence, the lower threshold in the Notice simply cannot apply to the Building and, since the Majority Owners do not own 90% of the Building, they are not entitled to a compulsory sale order under the Ordinance.

The Majority Owners’ response

23.  The Majority Owners contend, on appeal, as they did below, that the above argument of the Minority Owners is wrong.

24.  Their primary contention, which was accepted by the Presiding Officer[1], is that there cannot be a valid sub-division within the meaning of s. 4 of the Notice if the sub-division involves a breach of the DMC, the OP or other legal or contractual obligations.  Here, it was submitted, the purported sub-division of the 3/F Unit of the Building into Units A and B involved structural alterations or otherwise affected the structural integrity of the Building and also would cause nuisance, annoyance or inconvenience to other occupiers in breach of the DMC, the OP and/or the Buildings Ordinance.

25.  The second contention advanced by the Majority Owners, also accepted by the Presiding Officer[2], is that there could not have been any valid sub-division of Units A and B of the 3/F Unit of the Building because the sub-division was not genuine and was an attempt by Lucky Land to evade the purpose and provisions of the Notice and the Ordinance.

26.  Both contentions involve a consideration of the proper construction of the Notice.

Relevant assumptions on which the Court is asked to proceed

27.  The Majority Owners rightly contended on appeal that a striking out application should only be acceded to where the case was plain and obvious.  They also submitted, relying on Penny’s Bay Investment Co Ltd v Director of Lands, unrep., LDMR 23/1999, 8.2.06 at §§3-6, that it was only in exceptional circumstances that the Lands Tribunal will exercise its discretion to decide preliminary issues in advance of trial.  Since there were obviously factual questions that arose as to the extent of any sub-division works in respect of the 3/F Unit of the Building, the Majority Owners contended that it would be inappropriate for the court to determine the question of law posed in the Minority Owners’ summonses.

28.  In this regard, it is relevant to note that, before the Tribunal, the Minority Owners had agreed that the Tribunal should proceed to decide the matter on the basis of the following assumptions[3], namely that:

“(a) physical subdivision works undertaken after 1 April 2010 were indeed in breach of the Deed of Mutual Covenant (‘DMC’);

(b) physical subdivision works undertaken after 1 April 2010 were in breach of the Occupation Permit (‘OP’);

(c) the legislative purpose of Section 4(2)(a) of the Notice was to prevent subdivisions on or after 1 April 2010 with the intent of defeating the lowering of threshold effected by the Notice;

(d) the purpose of the creation of the 2 units by the execution and registration of documents completed by 31 March 2010 was indeed to circumvent the anticipated lowering of the threshold effected by the Notice.”

29.  The Majority Owners confirmed through their respective counsel[4] that those assumptions remained valid for the purposes of these appeals.

The proper construction of the Notice

30.  In paragraph 22 of the Ruling, the Presiding Officer said:

“… I accept … that the sub-division mentioned in Section 4(2)(a) of the Notice has to be genuine and valid.”

31.  Whilst that observation is not challenged by the Minority Owners, they rightly submit that s. 4(2)(a) of the Notice, which is expressed to apply where “a unit in a building is subdivided into 2 or more units on or after 1 April 2010” (emphasis added), does not apply to anything done prior to 1 April 2010.  In the present case, Units A and B of the 3/F of the Building were created by instruments registered on 31 March 2010, and so before 1 April 2010 when the Notice came into effect.  Therefore, the concept of sub-division, within the meaning of s. 4(2) of the Notice, is not relevant.

32.  The Presiding Officer, however, accepted the Majority Owners’ argument, which they maintained in this court, that it would be absurd to adopt the Minority Owners’ construction of the Notice and accept a paper sub-division without regard to the actual work done.  She held (in paragraph 23 of the Ruling) that:-

“It would be absurd to adopt the [Minority Owners’] interpretation and accept a paper subdivision without actual work done. It is the physical subdivision which requires the undivided shares to be split. Otherwise, just an assignment of interest will do. So the registration of the instrument with the Lands Registry must be for the purpose of reflecting the fact that there is a split of the undivided shares by way of physical subdivision. If the physical sub-division is something not allowed and in breach of the DMC and OP, the sub-division cannot be regarded as a valid one.”

33.  With respect, I do not agree.  The concept of a “unit” for the purposes of the Notice is defined in s. 2 of the Notice solely by reference to the undivided shares in a lot as allocated by the registered instruments.  Where the instruments so registered identify premises by reference to a specified number of undivided shares those premises constitute a relevant unit under the Notice.  Physical works are not relevant; nor is the fact that the instruments by which the sub-division of the undivided shares in the lot were registered attached plans which showed the physical layout of the proposed sub-divided units.

34.  In this regard, I accept the submission of the Minority Owners that this conclusion is consistent with the proposition that, for the purposes of division of land, it was never the common law that any physical barrier was necessary to separate the divided lots of land.  It is also consistent with the scheme of the Ordinance, which focuses on the number or percentage of undivided shares held by an applicant seeking a compulsory order for sale, rather than the number or percentage of physical units in the building.  Hence, it has been held that the Ordinance can apply even to a building which has been demolished and is therefore no longer physically extant: see Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578 at §§25-27.  If the definition of a unit in the Notice imported a physical division, then it would follow that all the units in a demolished building would cease to exist.

35.  The Majority Owners pray in aid the principle of statutory construction that the courts will seek to avoid a construction that produces an absurd result (which the Presiding Officer also purported to apply in rejecting the Minority Owners’ construction).  However, in my judgment, there is nothing inherently absurd in adopting the construction that looks only to the undivided shares in a lot as allocated by the registered instruments, rather than physical works, in order to determine what is or is not a unit for the purposes of the Notice.

36.  Once one reaches the above conclusion, it follows that there is no justification for reading into the Notice a requirement that any sub-division before 1 April 2010 must be genuine and valid.  That, however, is what the Presiding Officer did (see Ruling §§24 to 27) and is what the Majority Owners contend is the proper construction of the Notice.

37.  There is certainly nothing in the wording of the Notice that supports the reading in of such a requirement and no such wording was referred to by the Presiding Officer or in the submissions of the Majority Owners.

38.  Instead, the Majority Owners rely upon paragraphs 12 and 13 of the Legislative Council Brief in respect of the Notice, which addressed the first class of property for which the threshold was being lowered to 80% ownership and which read as follows:

“12.  In defining this class of lot, we have taken care to prevent abuse by the owner of the un-acquired “last but one” unit who sub-divides his unit into smaller units which will then each account for less than 10% of the undivided shares of the lot, thus relegating the lot outside the definition of this class of lot.  We cannot simply exclude all sub-divided units registered with the Land Registry after the commencement of the Notice from this class of lot because there are genuine sub-division of units that will continue to take place after the commencement of the Notice and these genuinely sub-divided units should be considered units in their own right for the purpose of this class of lot.  The most common genuine sub-divisions happen with commercial premises such as arcades.  An investor may purchase a whole floor of commercial premises or an arcade and arrange the sub-division over time.  This kind of genuine sub-division will continue to take place after the commencement of the Notice.  This is very different from the internal sub-divisions which we would like to exclude.  To prevent abuse without inadvertently affecting cases of genuine sub-divisions as described above, we will rely on the modern day property management framework to differentiate genuine sub-divided units from those that are internally sub-divided.  We understand that for the substantial majority of all multiple ownership buildings completed in recent years, they have a Deed or Sub-deed of Mutual Covenant that governs responsibility for the management of common areas and apportions payment of charges for these common areas to individual units according to the number of undivided shares held.  If a sub-divided unit does not take responsibility for its share of the management of common areas of the building, which will be the case with those internally sub-divided units, then this unit will not be considered a genuine unit for the purpose of this class of lot.  In some cases of genuine sub-division, the sub-division will also cause alteration to the size of common areas of the building.  This will not happen with internal sub-divisions.  Thus, these two tests are provided for in the Notice for determining if the sub-division is genuine.

13.  While we aim to prevent abuse by owners who choose to sub-divide existing units internally to undermine the proposed relaxation, we take the view that those sub-divided units that are already in the records of the Land Registry before the commencement of the Notice should be recognized for the purpose of application under this class of lot.  As these sub-divided units pre-date the Notice, there must be a genuine reason for the sub-division.  Hence, it is not equitable to exclude them from this class of lot.”

39.  It was submitted by the Majority Owners that this demonstrates that the policy objective of the Notice emphasised the need for a sub-division to be “genuine” and that the purpose of the Notice was to address a deadlock situation where a majority owner could not proceed to a compulsory sale because the remaining unit accounted for more than 10% of the undivided shares in the lot.  It was the clear purpose of the Notice, it was submitted, that the compulsory sale application by the majority owner should not be defeated by the artificial or non-genuine sub-division of the remaining unit.  This argument was accepted by the Presiding Officer (see Ruling §§24 to 27).

40.  In my judgment, there are a number of flaws in this argument.  First, I do not consider that the relevant circumstances that would permit reference to legislative materials (viz. those circumstances set out in Pepper v Hart [1993] AC 593 at 640B-C) pertain in the present case.  Secondly, the Legislative Council Brief does not in any event support the Majority Owners’ construction of the Notice since the genuineness of sub-divisions before 1 April 2010 was assumed (see esp. §13 of the Brief set out above).  Whether or not that assumption was correct, this demonstrates that the Notice was not intended to apply to pre-1 April 2010 sub-divisions.  Thirdly, even if one does have regard to s. 4(2) of the Notice, it is clear that the test or criterion for the creation of new units is determined by reference to whether the sub-division alters the common area or a person’s liability in relation to the common area.  That is the touchstone by which the Legislature sought to distinguish between genuine and non-genuine sub-divisions and not by reference to a separate requirement that the sub-division be genuine and valid, for example, by having regard to any physical sub-division or the provisions of the DMC, OP or Buildings Ordinance.

41.  In this regard, in support of the contention that the sub-division must not involve breaches of legal or contractual obligations, the Majority Owners pray in aid the principle of statutory interpretation that ancillary rules of law and other rules of law (such as the laws of contract and property) are presumed to apply: see Bennion on Statutory Interpretation (5^th Ed.) Sections 327, 331 and 332 at pp. 1033, 1069 and 1071 and Wisely v John Fulton (Plumbers) Ltd, Wadey v Surrey County Council [2000] 2 All ER 545 at 548.

42.  I do not think that principle assists the Majority Owners here.  The principle relates to the application of general principles of common law and not to particular contractual arrangements between individuals or other particular legal relations and undertakings entered into by them.

43.  I would also accept the Minority Owners’ submission that the DMC and OP are not relevant here.  The DMC is a private agreement between the owners of the Building and its enforcement is not the objective of the Ordinance or the Notice.  Similarly, the OP is a permit issued under the Buildings Ordinance and there is no provision in the Buildings Ordinance specifying any adverse consequence arising from a departure from the state of affairs referred to in the OP.  But, in any event, the OP and the Buildings Ordinance are concerned with building regulation and there is nothing in the Ordinance or Notice to suggest that they are concerned with that subject matter or that breach of the OP or contravention of the Buildings Ordinance would invalidate the creation of a unit under the Notice.  For these reasons, the Minority Owners’ concessions in assumptions (a) and (b) above, which were made for the purposes of these appeals only, do not assist the Majority Owners and simply mean that any factual uncertainties as regards the physical sub-division that might have been relevant to whether the case was plain and obvious for the purposes of a strike-out application are removed.

44.  Finally, as regards the Majority Owners’ submission that it is necessary to apply a purposive approach in interpreting the Notice (HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at §§11-14), this does not mean that one can ignore the plain meaning of the language used.  As Sir Anthony Mason NPJ observed, in HKSAR v Lam Kwong Wai & Anor (2006) 9 HKCFAR 574 at §63:

“Nevertheless it is generally accepted that the principles of common law interpretation do not allow a court to attribute to a statutory provision a meaning which the language, understood in the light of its context and the statutory purpose, is incapable of bearing.”

Here, notwithstanding the application of a purposive approach to construction, the meaning of the language used in the Notice cannot, in my opinion, bear the meaning which the Majority Owners would attribute to it.

Conclusions

45.  In the light of my conclusions on the proper construction of the Notice set out above, I would further conclude that the Presiding Officer was, with respect, wrong to regard the sub-division of the 3/F of the Building into Units A and B as not creating two separate units for the purposes of the Notice.

46.  I reach that further conclusion without reference to the argument advanced by Mr Edward Chan SC that the Notice amounts to expropriatory legislation such that, insofar as the words of the Notice are not sufficiently clear, one should apply the canon of statutory interpretation that expropriatory legislation should be strictly construed and, if there is any doubt, it should be resolved against the party seeking to expropriate private property: see Methuen-Campbell v Walters [1979] 1 QB 525 at 529E-H, 541F-H and 542F.  The characterisation of the Notice as expropriatory legislation may be open to debate but, more importantly, I do not consider there is the necessary ambiguity present to bring that rule of interpretation into play.

47.  Instead, it seems to me that the Presiding Officer’s acceptance of the Majority Owners’ construction arguments in the present case was an exercise of the type deprecated by Lord Millett NPJ in China Field v Appeal Tribunal (Buildings) (No. 2) (2009) 12 HKCFAR 342 at §36:

“There can be no quarrel with the principle that statutory provisions should be given a purposive interpretation, but there has been a distressing development by the courts which allows them to distort or even ignore the plain meaning of the text and construe the statute in whatever manner achieves a result which they consider desirable. It cannot be said too often that this is not permissible. Purposive construction means only that statutory provisions are to be interpreted to give effect to the intention of the legislature, and that intention must be ascertained by a proper application of the interpretative process. This does not permit the Court to attribute to a statutory provision a meaning which the language of the statute, understood in the light of its context and the statutory purpose, is incapable of bearing.”

48.  The Majority Owners complain that the motive of the Minority Owners in sub-dividing the 3/F Unit of the Building was to circumvent the effect of the Notice by beating the deadline of 31 March 2010 (and this much is accepted by the Minority Owners: see assumptions (c) and (d) above).  The Majority Owners say, probably justifiably, that this was for the purpose of achieving a higher purchase price from the Majority Owners for the 3/F Unit of the Building.

49.  Be that as it may, the Notice, properly construed, does not in my view permit the court to ignore the sub-division of the 3/F Unit with the result that Units A and B on the 3/F of the Building are to be regarded as two separate units so that the Building is not a lot in which each of the units on the lot represent more than 10% of all the undivided shares in the lot.

50.  Given the proper construction of the Notice, as I have held it to be, it follows that the Minority Owners are entitled to meet that criticism by reference to the principle enunciated by Romer LJ in In re George Inglefield Limited [1933] Ch 1 at 26, namely:

“If a man so conducts his affairs that he places himself outside the operation of an Act of Parliament, he cannot be said to be either evading it, or defeating it. He has done nothing that is unlawful, and he has done nothing that calls for adverse comment from the Court.”

51.  Accordingly, the Minority Owners’ contention that the Presiding Officer was wrong to say that the sub-division “deserved some adverse comment from this court and should not be condoned” (Ruling §29) must be accepted.

52.  I would also add that the Presiding Officer was, with respect, wrong to describe the sub-division of the 3/F Unit of the Building as a “sham sub-division” (Ruling §28).  As usually understood, in law, a sham means:

“… acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a ‘sham,’ with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

(per Diplock LJ in Snook v London and West Riding Investments Ltd. [1967] 2 QB 786 at 802C-E.)

There would not appear to be any basis for saying that the Minority Owners did not intend the instruments by which the sub-division of the 3/F Unit of the Building was effected to have the legal rights and obligations which those instruments gave the appearance of creating.  The position here would seem to be quite to the contrary.

Disposition

53.  For these reasons, I would therefore answer the question of law posed in the Minority Owners’ summonses in the positive and, it therefore follows, allow the appeals and accede to their applications to strike out the Majority Owners’ application in LDCS No. 11000/2011.

Hon Chu JA:

54.  I agree with the judgment of Fok JA and have nothing to add.

[1]       Ruling §23.

[2]       Ruling §§22, 27 & 29.

[3]       Recorded in §12 of the Ruling.

[4]       Mr Edward Chan SC, leading Mr Bernard Man, for Lucky Land and Mr Keith Lam for Allied Trend.