YIM TIN FOOK AND ANOTHER v. YU CHOR LAI AND OTHERS

HCA 2613/2006

[2019] HKCFI 2511

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2613 OF 2006

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(By Counterclaim)

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DECISION

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A. INTRODUCTION

1.  There were before me two summonses, each taken out under Order 14A of the Rules of the High Court, namely:

  (1)  A summons dated 21 November 2016 taken out by the 2^nd defendant (by original action)/plaintiff (by counterclaim) (“D2”);

  (2)  A summons dated 27 June 2018 taken out by the 1^st and 2^nd plaintiffs (by original action) / 1^st and 2^nd defendants (by counterclaim) (“Ps”).

2.  The action concerns a long-running dispute over the ownership of parcels of land in the New Territories.

3.  The two summonses seek resolution by the Court of a number of questions said to be of law and/or construction: see further below.

4.  The oral hearing was set down for three days, and lasted two.  I heard submissions from: Ms Audrey Eu SC [1] for Ps; Mr Benjamin Chain for the 1^st defendant (by original action) (“D1”) and D2 [2] ; Mr Roger So, for the 6^th defendant by counterclaim (“DC6”);  and Mr David PH Wong, for the 8^th defendant by counterclaim (“DC8”) [3].

5.  At the conclusion of the hearing I reserved my decision, which I now give.

B.  SUITABILITY FOR ORDER 14A

6.  The principles applicable to an application under Order 14A are well known [4].

7.  At the outset of the hearing, I raised with the parties my reservations as to the suitability of proceeding under Order 14A given that: (i) it was not clear whether the questions framed could be resolved without recourse to disputed facts; (ii) it appeared that at least some issues in the proceedings would/may remain extant notwithstanding determination of the questions framed in the summonses; (iii) it appeared more sensible and efficient to simply proceed to trial and resolve all issues at the same time in the usual way; particularly where witness statements have already been filed.

8.  I received submissions in response to the effect that: (i) at least three major issues or questions (see Questions 1 to 3 below) could be resolved as questions of law or construction and on the basis of undisputed facts; (ii) the parties were keen to have, at the least, these three major questions resolved as soon as possible; and (iii) resolving these questions could result in the partial or entire disposal of the proceedings.  No party submitted that I should not resolve these three questions under Order 14A, nor that the summonses should be dismissed on such a basis.

9.  I must say that I still have reservations as to the use of the Order 14A procedure in this case, for the reasons at §§7(ii) and (iii) above.

10.  However, on balance, I am persuaded to exercise my discretion to resolve under Order 14A the three main questions framed, because:

  (1)  I accept that they raise questions of law and/or construction which can be resolved without recourse to disputed facts.

  (2)  Their resolution should dispose of at least the main issues as between most of the parties (see below).

  (3)  By the time the summonses reached me, much cost would already have been incurred in instructing lawyers and preparing detailed written arguments for the hearing; which cost would have been largely wasted had I then declined to entertain Order 14A.

  (4)  As noted above, the parties were ad idem that I should proceed to resolve at least the three major questions. 

11.  However, I exercise my discretion against the determination under Order 14A of certain additional “minor” questions framed, which relate to D2’s counterclaim against the 7^th defendant by counterclaim (“DC7”) and DC8: see further below.

C.  KEY RELEVANT FACTS

12.  The key relevant facts were undisputed between the parties, at least for present purposes:

  (1)  By a Block Crown Lease dated 1905 (the “Block Lease”), the Remaining Portion of Section A of Lot 1180 in Demarcation District 130 (the “Parent Lot”) was granted to the original Crown lessees.

  (2)  In 1958, ownership of the Parent Lot under the Block Lease devolved to one Madam Tang Yin (“Madam Tang”), an indigenous villager of Nam Wai village.

  (3)  According to D2, in 1975 Madam Tang granted to him an oral yearly tenancy of the Parent Lot [5].

  (4)  Madam Tang and D2 executed an agreement dated 15 November 1983 (the “1983 Lease”) written in Chinese [6].  The 1983 Lease provided (inter alia) that: (i)Madam Tang leased the farm sheds, land and all buildings and structures situated in Demarcation District 130 and registered under her name to D2; (ii) the term of the tenancy was 15 years from 15 November 1983 to 14 November 1998; (ii) the monthly rental was HK$1,500, with the landlord otherwise having a right to recover the land; (iii) three years after the expiry of the term of the tenancy, the method of rental increase would be subject to negotiation and agreement by the parties in accordance with the commodity price; and thereafter rental would be adjusted once according to the aforesaid method in every three years [7].

  (5)  I note at this juncture that Ps and DC6 do not admit that the 1983 Lease was in fact executed, and reserve the right to proceed to trial on this factual point, should I find against them on the other main questions framed.  However, for present purposes only, I assume that the 1983 Lease was validly executed by Madam Tang and D2 [8].

  (6)  The 1983 Lease was never registered at the Land Registry.

  (7)  Madam Tang executed a Deed of Gift dated 25 January 1986 (the “Deed of Gift”), by which she (inter alia) purported to assign to DC8, her adopted son, the Parent Lot and the Block Lease in respect of it, to be held by Madam Tang and DC8 as joint tenants for the residue of the term of years under the Block Lease.  The Deed of Gift was registered at the Land Registry.

  (8)  In 1988, the New Territories Leases (Extension) Ordinance (Cap 150) (the “NTLEO”) was enacted, pursuant to which the term of New Territories leases was extended to 2047: see further below.

  (9)  On 5 January 1990, Madam Tang passed away, leaving DC8 to take as the surviving tenant in respect of any joint tenancy created by the Deed of Gift.

  (10)  In 1997, DC8 purported to sell the Parent Lot to DC7, a property developer, for a consideration of HK$1,100,000.  This was effected by:

  (i)  A sale and purchase agreement dated 1 February 1997, which was registered in the Land Registry.  That agreement expressly provided (inter alia) that the property was sold subject to and with the benefit of the 1983 Lease, and the 1983 Lease was attached thereto; 

  (ii)  An assignment dated 11 April 1997 (the “1997 Assignment”), which was registered in the Land Registry.  That assignment provided for the property sold to be held by DC7 for the residue of the term of years created by the Block Lease subject to (inter alia) the existing tenancy (though the 1983 Lease was not attached thereto) [9].

  (11)  DC7 executed a deed poll dated 7 May 1997, to subdivide the Parent Lot into 14 portions [10]. The deed poll was registered in the Land Registry. 

  (12)  Ps, DC6, and also the 3^rd, 4^th, 5^th, and 9^th defendants by counterclaim (respectively “DC3”, DC4”, “DC5” and “DC9”) are persons who purchased the various parcels of land derived from the Parent Lot following its subdivision by the said deed poll.  In particular:

  (i)  Each of these persons purchased sub-section(s) of Section A of Lot 1180 in Demarcation District 130 from DC7 on dates ranging from May to July 1997.  The exception is DC9, who purchased sub-section 10 from DC5 in 2003.

  (ii)  The assignments by which these sales completed, were all registered in the Land Registry.  Hence Ps, DC3, DC4, DC6 and DC9 are, in common parlance, the “registered owners” of the plots derived from the Parent Lot.  I will refer to them collectively as the “Registered Owners”.

  (13)  On 7 September 2005, DC7 was ordered by the Court to be wound up.

D.  THE PARTIES’ PLEADED CASES

13.  The pleadings are reasonably complex.

14.  As noted above Ps—who are brothers—are the “registered owners” of certain sub-sections (“Ps’ Land”) derived from the Parent Lot, having each purchased from DC7 in 1997.

15.  By the original action, Ps claim that D1 and/or D2 at a time unknown entered Ps’ Land and unlawfully built structure(s) thereon.  The main remedies sought are: (i) an order that D1/D2 demolish the structure(s) and deliver vacant possession; and (ii) damages for (inter alia) loss of use of the land.

16.  By its defence, D1 denies occupation/possession of Ps’ Land, alternatively, claims that it occupies as D2’s licensee; and denies that it has power to demolish the structure(s).  It was submitted to me, in essence, that D1’s position adds nothing of substance since D1 is at most D2’s licensee. 

17.  D2’s pleading has been amended numerous times. The heart of D2’s currently pleaded case is that the 1983 Lease, which created a term longer than Madam Tang then held under the Block Lease, operated not as a sub-lease but as an assignment to D2 of Madam Tang’s interest in the Block Lease pursuant to the principle in Milmo v Carreras [1946] KB 306: see below.

18.  As a result, says D2: (i) the 1986 Deed of Gift was void because Madam Tang no longer had any title to the Parent Lot; (ii) all subsequent assignments from DC8 to DC7, and from DC7 onwards, were void and ineffective to transfer any title in the Parent Lot; (iii) accordingly, D2 owns and is in lawful possession of the land.

19.  D2 pleads an alternative case that if, which D2 denies, DC8 ever had any title to the Parent Lot, then DC8 held the legal estate on trust for D2 who remained the beneficial owner [11]. The 1997 Assignment, pleads D2, was a breach of trust by DC8, which is the cause of any loss suffered by D2.  D2 also pleads that DC7 acted dishonestly in assisting this breach of trust, and was in knowing receipt of trust property.

20.  D2 further pleads that Ps (and all the Registered Owners) knew or ought to have known that D2 was the sole legal and beneficial owner of the land; relying on D2’s apparent occupation and references to the 1983 Lease in the 1997 Assignment documents.  D2 pleads that the Registered Owners had actual and/or constructive notice of DC8’s breach of trust, that none is a bona fide purchaser without notice, and that all are knowing recipients of trust property.

21.  D2’s counterclaim seeks (inter alia): (i) declarations that D2 owns and is entitled to exclusive possession of the Parent Lot; (ii) declarations that the Deed of Gift and the 1997 Assignment were void; and (iii) damages against DC8 for breach of trust and against DC7 for knowing assistance.

22.  Importantly, Mr Chain for D2 conceded orally that due to section 4 of the Land Registration Ordinance (Cap 128) (the “LRO”), the question of actual/constructive notice was in fact irrelevant to his client’s position vis-à-vis the Registered Owners, such that I need not deal with the pleaded issues as to notice.

23.  Ps’ main pleaded answers to D2’s case are that: (i) Ps do not admit the 1983 Lease as a matter of fact; (ii) in any event that lease expired at the latest by 1998; (iii) alternatively that lease was repudiated in 2006 and/or by non-payment of rent since 1997; (iv)Ps deny the alleged assignment under Milmo v Carreras; (v) Ps deny actual/constructive notice; (vi) in any event, under the LRO the 1983 Lease is void as against them since it was unregistered and Ps were bona fide purchasers for valuable consideration [12]. 

24.  DC8’s pleaded position is, in summary that: (i) the 1983 Lease did operate as an assignment; (ii) thereafter Madam Tang retained only contractual rights against D2 to a rentcharge and re-entry for breach; (iii) the Deed of Gift and the 1997 Assignment assigned only such contractual rights; (iv) DC8 never owned the legal estate in the Parent Lot, was never a trustee for D2 or in breach of trust, and any damage to D2 was the result of D2’s failure to register the 1983 Lease; (v)due to negotiations between D2 and DC8 in 1996, D2 is estopped from contending that DC8 had no right to sell the land; (vi) D2’s claim against DC8 is time-barred under the Limitation Ordinance(Cap 347); (vii) DC8 counterclaims that, if the 1997 Assignment was void as alleged by D2, then limited contractual rights remain vested in DC8, pursuant to which DC8 claims arrears of rent from D2. 

E.  THE THREE MAIN QUESTIONS

25.  Below, I consider in turn the three main questions of law/construction canvassed orally at the hearing, which I frame as follows [13] :

  (1)  Question 1: the “Milmo Question”.  Did the 1983 Lease (if validly executed) operate as an assignment from Madam Tang to D2 of the leasehold estate held by Madam Tang in the Parent Lot for the residue of the term under the Block Lease?

  (2)  Question 2: the “NTLEO Question”.  What was the effect of the NTLEO and the extension of leasehold term thereunder, on the ownership of the leasehold estate in the Parent Lot?  Who was entitled to the benefit of the extended lease granted by the NTLEO?

  (3)  Question 3: the “LRO Question”.  By virtue of the LRO, is the 1983 Lease, which was registrable but not registered, null and void as against the Registered Owners as bona fide purchasers for value under assignments which were duly registered?  What is the effect of the LRO on the competing claims to title made by D2 and the Registered Owners?

26.  Mr Chain fairly accepted that in order to succeed on his claim to title, D2 needed to succeed on all three of these points.

F.  QUESTION 1:  THE MILMO QUESTION

27.  The principle in Milmo v Carreras [1946] KB 306 (the “Milmo Principle” [14])is that where a tenant (T) purports to grant a sub-lease to a sub-tenant (S) for a term which is equal to or greater than the term remaining in the head lease between T and his own landlord (L), then by operation of law, the sub-lease takes effect as an assignment from T to S of the remainder of T’s term under the head lease, rather than creating a sub-lease between T and S.  The result is that the relationship of tenure ceases to exist between L and T, and arises directly between L and S, although contractual rights apparently remain unaffected.

28.  The Milmo Principle is discussed and explained in a number of texts and authorities.  See eg Megarry & Wade, The Law of Real Property (9^th ed) at §§16-142 to 16-143; Woodfall: Landlord and Tenant at §§16.082, 16.083 and 16.157; S H Goo & Alice Lee, Land Law in Hong Kong (4^th ed) at §9.34; Malcolm Merry, Hong Kong Tenancy Law (6^th ed) at pp 165 and 172; Chan Sang v Choy Yuk [1963] HKLR 476; Leung Hok-shing v Lee Mang-tong HCA 817/1973, Cons J (as he then was), 15 March 1974; Cheung Wah Nin v Land Registry [2016] 5 HKLRD 356; Grosvenor Estates Belgravia v Cochran [1991] 44 EG 169; Neva Holdings v Wilson [1991] 3 NZLR 422; Lee v Ferno Holdings Pty Ltd (1993) 33 NSWLR 405; Parc Battersea Ltd v Hutchinson [1999] 2 EGLR 33 [15].

29.  The Milmo Principle does not apply where, at the time of the purported sub-lease, the term of the head lease may be longer than that of the sub-lease, such as where the head lease is a periodic tenancy or there is an option to renew the head lease [16].

30.  The rationale for the principle, broadly, is that one cannot describe a transaction as a lease unless it creates some lesser estate out of a greater one.  If T retains no reversion, there cannot be privity of estate between T and S [17].

31.  It is the substance of the transaction which matters, not the way it is described by the parties, nor their intentions as to its legal effect.  The substance of an assignment is a disposition of the whole leasehold estate, whilst the substance of a sub-lease is the retention of that estate and the carving out of a lesser estate, with the sub-lessor retaining a reversion [18].  The lessee who demises his whole term divests himself of the leasehold estate and all he has in the land.  He is thereafter a stranger to the land, though the purported sub-lease still has contractual force [19].

32.  As noted above, D2 and DC8 argue that by virtue of the Milmo Principle, the 1983 Lease took effect not as a sub-lease, but as an assignment by Madam Tang to D2 of her leasehold estate.  That is because in 1983, the remaining term under the Block Lease ran up to 27 June 1997, whereas the term of the purported sub-lease granted by 1983 Lease ran, at the least, to 14 November 1998.

33.  In my view, this argument is correct in law.  I accept it.

The plaintiffs’ arguments on Question 1

34.  Ms Eu, for Ps, whose submissions were adopted by Mr So for DC6, resisted the application of the Milmo Principle.

35.  First, Ms Eu drew attention to two academic articles which criticise the Milmo Principle, namely: (i) ‘Where the law went wrong? — Milmo v Carreras’ by Mark Wonnacott QC [20] ; and (ii) ‘The principle in Milmo v Carreras: when the term of a sub-lease equals or exceeds that of the head lease’, by Alexander Hill-Smith [21].

36.  Focusing on the second of these, by Mr Hill-Smith, the criticisms made include that: the rule is artificial since it makes the sub-lessee privy to the head lease, and thereby imposes on the parties a bargain which was never intended; this runs contrary to general principle that the law seeks to uphold the parties’ bargains subject to overriding public policy considerations; the rule often applies only as a result of a conveyancing slip, and leads to numerous legal difficulties and complications; there is no practical need for the rule, and it would be preferable to give the “wait and see” approach (of Oxley v James(supra) and Neva Holdings (supra)) more general effect.

37.  By the “wait and see” approach is meant that the sub-lease is permitted to take effect as a sub-lease, on the assumption that the intermediate tenant will be able to obtain an extension of the head lease.  If that does not occur, the sub-lease simply ceases to have effect when the head lease ends, absent statutory protection.

38.  I have some sympathy for the criticisms made of the Milmo Principle in the said article, for the reasons there stated. Indeed, the present case may provide an illustration of unintended or surprising consequences which can flow from its operation: see §§80 to 87 below.

39.  However, as things stand, the Milmo Principle forms part of the common law applied in Hong Kong and other jurisdictions: see eg the case law referred to above.  I do not see a proper basis for me to depart from the Milmo Principle; and when asked, Ms Eu did not dispute that it forms part of Hong Kong law.  

40.  Second, and related to the first point, Ms Eu invited me to adopt a “wait and see” approach by analogy to Neva Holdings v Wilson (supra).  In that respect, Ms Eu prayed in aid the situation and expectations in Hong Kong in 1983, in respect of Crown leases.  Although at that time the Sino-British Joint Declaration had yet to be signed there was, she submitted, at least a hope or expectation that Crown leases would be extended beyond 1997; and it was beyond imagination that all such leases would end in 1997.

41.  Properly read, I do not think that Neva Holdings assists Ps in this argument.  In that case, the New Zealand Court of Appeal explained the Milmo Principle, and held that it did not apply on the particular facts.  The correct approach, said the Court, is to look at the substance of the contract at the time it was entered into, and determine whether it was at that time certain that no reversion remained in the sub-lessor.

42.  In Neva Holdings, a Milmo assignment was held not to have occurred because at the time of the sub-lease there remained a possibility that the sub-lessor retained a reversion.  The key facts were apparently that: both the head lease and the sub-lease were on terms that they were renewable for specified periods; it was possible that the head lease would be renewed but the sub-lease not renewed; such that at the time of the sub-lease the term of the head lease might extend beyond that of the sub-lease.  For these reasons, the sub-lessor had not necessarily divested itself of the entire leasehold tenure.

43.  Accordingly, Neva Holdings — like other scenarios referred to at §29 above — rests on a disapplication of the Milmo Principle where, on the provisions of the head lease and the sub-lease (or under statute), the term of the head lease might exceed that of the sublease.  Contrast the present case: on the terms of the Block Lease and the 1983 Lease as at 1983, the term of the latter must exceed that of the former.

44.  Ps’ argument is that in 1983, it was factually likely that the landlord would extend or renew the head lease; rather than relying (as in Neva Holdings) on a legal possibility or right of extension arising from the legal instruments themselves.  No case was cited to me in which such a factual possibility or likelihood defeated the Milmo Principle.  As Mr Chain submitted, this line of argument could (at least potentially) be applied in every case to defeat Milmo v Carreras. 

45.  In addition, as D2 submitted, a very similar point was considered by Godfrey Lam J in Cheung Wah Nin v Land Registry (supra) at §29.  The plaintiffs there argued that there was no Milmo assignment since (inter alia) they retained a “potential right” to an extension of the relevant Government leases beyond 2047.  The learned Judge rejected this argument since this was a “mere hope” rather than a right.  It could not alter the fact that by the sub-lease the entire residue of the estate had been disposed of such that there was no tenure left in the reversion; and that accordingly, the relevant instruments, by operation of law, effected an assignment of the Government leases.  In the present case, Ps’ second argument is similar, and I reject it for the same reasons.

46.  Third, Ms Eu argued that even if a Milmo assignment occurred in 1983, Madam Tang could only have assigned what she then held, namely an interest in the Block Lease up to 1997, and not any extended term granted under the NTLEO.  I consider this argument as part of Question 2, below.

47.  Fourth, Ms Eu argued orally that even if a Milmo assignment occurred in 1983, thereafter Madam Tang still retained legal title to the Block Lease, and any assignment was only in equity, with Madam Tang holding the reversion on trust for D2.

48.  Ps relied on: (i) the fact that the 1983 Lease was never registered such that Madam Tang (and subsequently DC8) remained the “registered owner(s)” of the Block Lease; and (ii) a provision in the Block Lease that the lessee shall not assign or otherwise part with the demised premises without registering such alienation in the Land Office.

49.  Further, Ms Eu cited the following from Mr Hill-Smith’s article (supra): 

“ Where the head lease is registered at the Land Registry, then the legal title in the head lease will continue to be vested in the intermediate lessor until such time as the title of the sub-lessee to the head lease is registered. For so long time as the intermediate lessor continues to be registered as the proprietor of the intermediatelease, the head lessor will continue to be able to enforce the terms of the head lease against the intermediate lessor. The intermediate lessor will hold the intermediate lease on trust for the sub-lessee. However, the intermediate lessor will be able to claim from the sub-lessee the amount of rent due under the sub-lease as a matter of contract.”

50.  This line of argument is of significance, more for the purposes of Question 2: see further below.  

51.  I do not think that the argument is correct, under Hong Kong law.  In my view, the said principles referred to in Mr Hill-Smith’s article are a consequence of the system of registered land in England, wherein the transfer of a registered lease must be completed by registration, failing which the legal estate remains vested in the transferor who holds it on bare trust for the transferee [22]. 

52.  The position differs in Hong Kong, since a failure to register the 1983 Lease does not per se bar it from operating as an assignment of a legal estate.

53.  As to the provision on registration in the Block Lease, Ms Eu confirmed that it was not Ps’ position that this, of itself, precluded a Milmo assignment [23]. I am unsure how this clause advances argument that any Milmo assignment was effective only in equity [24].

Conclusion on Question 1

54.  Accordingly, I conclude that the answer to Question 1 is “yes”.

G.  THE 1986 DEED OF GIFT

55.  I deal here shortly with the Deed of Gift in 1986, which is the next chronological event.

56.  Mr Chain argued that since in 1983 the leasehold estate was assigned to D2 under Milmo, the 1986 Deed of Gift by which Madam Tang purported to assign her half share to DC8, was void.  He highlighted that as a volunteer, DC8 could not rely on section 3(2) of the LRO.

57.  Mr Wong, for DC8, took the same position, though he argued that the Deed of Gift was still effective to assign to DC8 a share in certain contractual rights retained by Madam Tang against D2: see further below.

58.  Ps did not argue, for example, that in 1986 DC8 could still take title under the Deed of Gift, on the basis of section 3(1) of the LRO (which is available to a volunteer), and given that the deed was registered but the 1983 Lease was not [25].  Rather, Ps argued that whatever the position between D2 and DC8 in 1986, Ps were in 1997 bona fide purchasers for value, and as such entitled to rely on section 3(2) of the LRO to defeat D2’s claim based on the unregistered 1983 Lease.

59.  Accordingly, I proceed on the basis that given my conclusion on Question 1, the Deed of Gift was ineffective (at least as at 1986 and as between D2 and DC8), to transfer to DC8 a half share in the leasehold estate in the Parent Lot.

H.  QUESTION 2:  THE NTLEO QUESTION

60.  The history and effect of the NTLEO were analysed in some detail by the Court of Final Appeal (“CFA”) in Chan Tin Shi & Others v Li Tin Sung& Others (2006) 9 HKCFAR 29.

61.  That case concerned the interaction between the extension of leases effected by the NTLEO, and squatters’ rights acquired by adverse possession.  I will not recite the detail of the CFA’s analysis, but I highlight the following points:

  (1)  The NTLEO came into force on 25 April 1988, at which time existing Block Crown leases in the New Territories generally had approximately nine years to run up to 27 June 1997 (§§4, 14 and 21).

  (2)  The legislative intention was the continuance of an existing state of affairs, not the creation of a new one (§5) [26]. 

  (3)  The Court rejected argument that the NTLEO created new title or new leases.  Rather, the meaning of section 6 was plain: by statute, the term of existing leases was extended from the date upon which they would otherwise expire (27 June 1997) until 30 June 2047.  (§23)

  (4)  The NTLEO was a legislative intervention to alter the character of every existing New Territories leasehold estate by extension of the term; but the extended lease continued to be the same lease, not a new lease.  Section 6 created no new interest and the lessees’ title remained the same.  (§§27, 29 and 35)

62.  The extension of leases effected by the NTLEO took place on the “appointed day”, namely, 25 April 1988: see section 3(1) of the NTLEO and Chan Tin Shi v Li Tin Sung (supra) at §§5 and 8.

63.  There was debate before me as to who was the correct beneficiary or recipient of the extended lease granted by the NTLEO in 1988, assuming that a Milmo assignment had taken place in 1983.

64.  In my view, Question 2 can be disposed of reasonably quickly on the basis of the CFA’s judgment referred to above, and an appreciation of what the NTLEO did and did not do.  It seems to me that to ask to whom the NTLEO granted the extended lease, is to ask the wrong question, since the NTLEO did not grant an extended lease to anyone.  Rather, the NTLEO in 1988 simply extended the term of New Territories leases themselves.  The NTLEO did not make any change to the legal or beneficial ownership of New Territories leases.  Whatever was the legal and beneficial ownership of a particular New Territories lease before 25 April 1988, that position remained unchanged after that date, save that the term of the lease was extended.

65.  For this reason, if I am correct on Question 1 above — that the 1983 Lease took effect as an assignment by Madam Tang of the leasehold estate in the Parent Lot to D2 — then that position was unaffected by the statutory extension of the term of that leasehold estate which occurred in 1988.  The result is that thereafter, the leasehold estate — with term now extended to 2046 — continued to be vested in D2.

The plaintiffs’ arguments on Question 2

66.  Ps (and DC6) made a number of arguments that, even if there had been a Milmo assignment in 1983, D2 could not have taken the benefit of the extended lease under the NTLEO.  I consider that all of those arguments are defeated by the points at §64 above.

67.  First, Ps relied on section 5 of the NTLEO which provides:

“ 5. Option by the lessee

(1) A lessee may exclude from the application of this Ordinance his interest under a lease, other than an undivided share in the land to which the lease relates, by registering in the Land Office register, before the appointed day, a memorandum in a form specified by the Land Officer.

(2) In this section ‘lessee’ (承租人)—

(a) means a person whose name is registered in the Land Office as owner, leaseholder or holder; and

(b) where more than one person is so registered in respect of the same interest or, in addition to any person so registered, any other person has an interest under—

(i) an agreement for sale; or

(ii) a mortgage,

registered in the Land Office, means all of them acting jointly.”

68.  Ms Eu argued that the definition of “lessee” in section 5 — namely the person whose name is registered in the Land Office as owner, leaseholder or holder — tells one the identity of the party entitled to receive the extended lease under the NTLEO.  Since in 1988 Madam Tang and DC8 had registered the instruments from which their interests derived, whilst D2 had not, the extended lease was granted to Madam Tang and DC8.

69.  Whilst there is some initial attraction to the point, I do not think it can be correct, for the reasons identified at §64 above.  Under the general law in Hong Kong, registration is not per se equivalent to title (see further below).  If the effect of the NTLEO was that the extended lease was necessarily granted to the “registered owner”, the result would be that, in at least some cases, the NTLEO would or could in 1988 alter the ownership of leases [27].  But that is not the effect or intention of the NTLEO.

70.  Rather, I accept Mr Chain’s submission that the definition of “lessee” in section 5 of the NTLEO only identifies the party entitled to exercise the “opt out” option provided thereunder.  It does not define the beneficiary or owner of the extended lease[28].  

71.  Second, Ps argued that notwithstanding any Milmo assignment to D2, Madam Tang (and later DC8) retained legal title to the Block Lease, holding it on trust for D2: see discussion above under Question 1.  Accordingly as legal owners, Madam Tang and DC8 were the beneficiaries of the extended lease under the NTLEO.

72.  I consider that this argument fails for the reasons already stated at §§47 – 53 and 64 above.

73.  Third, Ps argued that even if the Milmo Principle applied, the most that could occur in 1983 was an assignment by Madam Tang to D2 of the then remaining term of the Block Lease, namely, up to 27 June 1997.  Madam Tang could not assign more than she had, so could not in 1983 have assigned the extended Block Lease which was subsequently granted by the NTLEO.  In other words, the Milmo assignment could not prevent the head landlord (the Crown) from subsequently granting to Madam Tang an extended term in 1988, nor could it bind the head landlord beyond 1997.

74.  On this line of argument, Ms Eu cited Leung Hok-shing v Lee Mang-tong HCA 817/1973, 15 March 1974.  In that case, a tenant granted a sub-lease for a period longer than extant on the head lease, but subsequently, the head landlord granted a fresh lease to the intermediate tenant.  Cons J held that although the original sub-lease operated as a Milmo assignment, the tenant could not assign more than he had, so that he assigned only the term remaining on the head lease.  Once the head lease expired the estate reverted automatically to the landlord, who was free to grant a fresh lease to the tenant.

75.  However, I do not think that this case assists Ps.  Mr Chain accepted the legal principle in Leung Hok-shing, and that in 1983, Madam Tang could only have assigned what she then had, namely a Crown lease up to 1997.  Leung Hok-shing is distinguishable because the landlord in that case granted a fresh lease, indisputably to the intermediate tenant; and after the expiry of the head lease.  If, in the present case, the Crown and Madam Tang/DC8 had in 1988 executed a fresh or extended head lease for a term beyond 1997, then I could well understand Ps’ argument.  But that is not what the NTLEO did.  As noted above, that ordinance did not grant any fresh lease nor did it grant an extended lease to anyone.  There is in my view no valid basis to assume that the extension was granted to Madam Tang any more than to any of her predecessors or successors in title [29].

76.  In addition, Ps’ proposition that the Milmo Principle cannot bind the head landlord, goes too far.  The effect of Milmo, as I understand it, is that the assignment does create tenure (privity of estate) between the head landlord and the purported sub-tenant (assignee).  What was said in Leung Hok-shing is that a Milmo assignment cannot operate as against the head landlord beyond the original term of the head lease; which as noted above, is uncontroversial and does not assist Ps in this case.

77.  Fourth, Ps relied on the provision in the Block Lease on registration of assignments (§48 above) and D2’s failure to register the 1983 Lease.  Ps argued that: (i) whatever was the position in respect of privity of estate, there remained after 1983 privity of contract between Madam Tang and the Crown such that it was to Madam Tang that the Crown would look for performance of leasehold covenants; and (ii) this supported a conclusion that Madam Tang was the beneficiary/recipient of the extended lease granted by the NTLEO.

78.  However, I do not think this line of argument advances Ps’ position or alters the conclusions set out above in respect of the NTLEO.

Conclusion on Question 2

79.  On Question 2, I conclude that the statutory extension of the term of the Block Lease which was effected by the NTLEO in 1988, did not alter the legal or beneficial ownership of the leasehold estate in the Parent Lot, which remained with D2.

80.  I would comment, at this juncture, that I reach my conclusions on Questions 1 and 2, with some hesitation.

81.  The result — that following the 1983 Lease D2 took as an assignee of the leasehold estate, and subsequently had the benefit of the extended term under the NTLEO — seems surprising.

82.  As Ms Eu pointed out, the witness statements filed make quite clear that it was never the intention of the parties to the 1983 Lease that Madam Tang’s interest in the Block Lease be assigned to D2.

83.  On the contrary.  D2’s witness statement filed in 2013 includes evidence that: (i) in 1985 Madam Tang promised D2 that if he continued as her tenant he could purchase the Parent Lot at market value in the future, in accordance with village custom; (ii) D2 relied on that promise including by making improvements to the land; (iii) in 1996, D2 and DC8 instructed solicitors and negotiated for the sale of Parent Lot from DC8 to D2 for a price slightly over HK$1 million, but that sale was never completed; (iv) up to 2006, D2 continued to use the lot as previously, regarding himself as owner, waiting to complete the purchase that had been agreed and promised by Madam Tang according to village tradition [30].

84.  DC8’s witness statement filed in 2013 includes evidence which: (i) denies D2’s assertion of an oral promise by Madam Tang; (ii) confirms that in 1996, D2 and DC8 negotiated, unsuccessfully, for sale of the Parent Lot.

85.  As Ms Eu noted, it is surprising that in such circumstances D2 could have obtained a claim to title to the leasehold estate in the Parent Lot.  The parties to the 1983 Lease intended it only as a sub-lease.  D2 only ever paid periodic rent, never paid a purchase price for the Parent Lot, and in 1996 negotiated (unsuccessfully) to purchase that lot for a substantial sum which was never paid.

86.  Notwithstanding these points, I do not see any valid answer to D2’s legal arguments on Questions 1 and 2; and indeed these factual points do not appear to have been relied on by Ps as providing legal answers per se.

87.  To the extent that the outcome seems anomalous or to result in a windfall to D2 at Madam Tang’s expense, that may simply be a consequence of the Milmo Principle: see comments at §§36 and 38 above.

I.  QUESTION 3:  THE LRO QUESTION

88.  Sections 3 and 4 of the LRO provide as follows:

“ 3. Priority of registered instruments; effect of non-registration

(1) Subject to this Ordinance, all such deeds, conveyances,and other instruments in writing, and judgments, made,executed, or obtained, and registered in pursuance hereof,shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing,and judgments, as last aforesaid, which are not registered shall,as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground,tenements, or premises, be absolutely null and void to all intents and purposes:

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.

4. Notice of unregistered instrument not to affect registered instrument

No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.”

89.  Ps and DC6 rely on sections 3(2) and 4 to argue that whatever the effect of the 1983 Lease — and even assuming that it operated as a Milmo assignment — since that lease was a registrable instrument which was not registered, they take free of its effects as bona fide purchasers for value.  Accordingly, even if they fail on Questions 1 and 2, Ps and DC6 have good title to the plots derived from the Parent Lot.

90.  I accept this argument.

91.  It is common ground that the 1983 Lease was an instrument registrable under the LRO, which was not registered.  It is also, apparently, undisputed that the Registered Owners took under assignments which were duly registered.

92.  In my view, the effect of section 3(2) of the LRO, is that in determining the competing claims to title and priority as between the Registered Owners and D2, the 1983 Lease is treated as “absolutely null and void to all intents and purposes”; such that the Registered Owners succeed and D2 fails.  Pursuant to section 4 of the LRO, even if the Registered Owners had actual or constructive notice of the 1983 Lease, the result would be unaffected (absent fraud, which was not alleged) [31].

Authorities cited by the plaintiffs

93.  Ps cited a number of authorities. 

94.  In Markfaith Investment Ltd v Chiap Hua Flashlights Ltd[1990] 2 HKLR 84, the Privy Council considered in some detail the meaning of section 3(2) of the LRO.  Their Lordships concluded that the provision’s effect was to render void, as against a bona fide purchaser of the reversion of a registered Crown lease who registered his sale and purchase agreement, options to renew tenancy agreements in respect of the premises; since the tenancy agreements were registrable but not registered.  That was so despite express provision that the sale was subject to the tenancy agreements [32].

95.  The reasoning of Lord Templeman included the following at 91D–G:

“ … s. 3(2) of the Ordinance is a special provision of legislation which rendered the options to renew contained in the unregistered tenancy agreements void against the purchasers as soon as the purchasers registered their sale agreement …. As a general rule s. 3(2) of the Ordinance renders void a registrable and unregistered tenancy agreement against a bona fide purchaser of a head lease who registers and completes his contract for assignment. The terms of the assignment agreed between vendor and purchaser are irrelevant. The assignment may be drafted so that it does not mention the tenancy agreement. Alternatively, the assignment may be expressed to be subject to the tenancy agreement. …”

96.  Markfaith was followed by the Court of Appeal in Wellmake Investments Ltd v Chan Yiu Tong [1996] 2 HKLR 44, in a similar factual scenario.  The Court of Appeal again held that the purchaser of a head lease took free from a tenant’s option to renew where the tenancy was registrable but unregistered, by reason of section 3(2).  This was so notwithstanding that the sale was expressly subject to the tenancy and the option.  Even the purchaser’s actual notice of the of the option, was insufficient to defeat section 3(2), and it was not fraudulent for the purchaser to rely on its statutory rights thereunder [33].

97.  See also Mak Him v Chan Hung-pak [1965] HKLR 87, where the Full Court held that section 4 of the LRO precluded a registered purchaser of land from being affected by an unregistered prior tenancy, unless his conduct amounted to actual fraud.  Mere notice of the tenancy was insufficient.

D2’s and DC8’s arguments on Question 3

98.  Ps’ arguments on Question 3 were strenuously resisted by Mr Chain (for D2) and Mr Wong (for DC8).

99.  Mr Chain and Mr Wong argued, broadly, as follows: (i) the system of registration in Hong Kong is one of registration of deeds and not title [34] ; (ii) registration under the LRO concerns priority not validity, and registration cannot create title from nothing; (iii) due to the Milmo Principle, following the 1983 Lease, Madam Tang had disposed of her title to the Block Lease and could not assign more than she had (ie the nemo dat rule); (iv) DC8 purported to take under the 1986 Deed of Gift as a volunteer, but could receive no more than Madam Tang had (ie nothing); (v) similarly, DC8’s successors in title (ie DC7, and subsequently, the Registered Owners) could receive no more than Madam Tang (and DC8) had to give; (vi) section 3(2) of the LRO does not avail the Registered Owners since it does not permit something to be created from nothing.

100.  Mr Chain relied heavily on Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd [1985] HKLR 103.  In that case, Hunter J (as he then was) considered the question of priority as between the plaintiffs’ and defendants’ interests in a property where: (i) the plaintiffs became equitable assignees of a mortgage over the property; (ii) the defendants subsequently obtained and registered a charging order against the property; (iii) the plaintiffs thereafter entered into and registered an assignment of the mortgage over the property in their favour.

101.  Hunter J analysed the position at common law and equity, and under the LRO, concluding for the plaintiffs.  In the course of so doing, the learned judge made statements of principle upon which Mr Chain relied, especially at 112H – 113B, 113H–I [35].

102.  However, the context of these dicta was, apparently, the defendants’ argument that the test of ownership was registration, so that the timing of registration of the assignment of mortgage was conclusive in their favour.  Second, and importantly, the Court’s analysis related to section 3(1) and not section 3(2) of the LRO.  Section 3(2) was expressly held to be inapplicable since the defendants, as beneficiaries of a charging order, were not bona fide purchasers for value (110J – 111F).  Third, the main basis for the outcome was that that prior to the defendants’ charge, the plaintiffs had acquired an unwritten equity which was not registrable and therefore not caught by the provisions of the LRO. 

103.  Accordingly, whilst the dicta of Hunter J regarding the nature of land registration in Hong Kong are notable, I consider the case to be of more limited assistance on the meaning and effect of section 3(2) [36].

104.  Mr Chain also cited dicta of Lam J (as he then was) in Hong Kong Kam Lan Koon Ltd v Realray Investment Ltd (No 5) [2007] 5 HKC 122 at §32 [37].  However, the context of those dicta was a discussion of the nature of land registration in Hong Kong, in the course of determining the compatibility of the law of adverse possession with the Basic Law.  Again, the Court’s comments were not directed to section 3(2) of the LRO itself[38].

105.  I consider that the authorities cited by Ps — which concern section 3(2) specifically — are more directly on point, and support the position of Ps and DC6, by parity of reasoning.

106.  Mr Chain and Mr Wong sought to distinguish those authorities.  During oral submissions, they discussed the following hypothetical scenario: (i) A sells land to B; (ii) A subsequently sells the same land to C; (iii) the second assignment (A to C) is registered before the first assignment (A to B).  It is assumed that both B and C are bona fide purchasers for value.

107.  Mr Chain argued that in such a scenario, C cannot rely on section 3(2) to take good title, because by the time of the assignment to C, A has already disposed of everything he had.  Section 3(2) cannot assist C, because the approach is validity first, priority second, and the provision cannot create rights or title from nothing.  Mr Chain argued that the position differs where B takes an charge over or a sub-lease of the land, since A then still has some title to convey to C, such that C can invoke section 3(2) to take free from B’s interest created by an unregistered instrument [39].

108.  The nub of Mr Chain’s submission, therefore, was that a line  fell to be drawn in the operation of section 3(2), such that it could not cure a situation in which, but for its operation, there was no title to convey at all.  On this point, I was told that there was no direct authority either way. 

109.  I do not accept Mr Chain’s argument.  One must examine the text of section 3(2).  First, the provision is directed to “… all such deeds, conveyances, and other instruments in writing …”.  I do not think that this wording warrants a distinction between an instrument conveying the entirety of an estate and one which carves out a lesser interest or encumbrance; but such a distinction seems to be required by D2’s argument.  Second, the wording is wide, directing that the deed, conveyance or instrument shall, as against a bona fide purchaser for value, be “absolutely null and void to all intents and purposes”.  Applying this wording to the hypothetical scenario, C should be entitled to treat the conveyance to B as absolutely null and void for all intents and purposes.  In short, I do not see the textual basis for the limitations which Mr Chain places on section 3(2).

110.  On the hypothetical scenario referred to above, Mr Wong’s position differed to Mr Chain’s.  Mr Wong accepted that in such a scenario, C is entitled to invoke section 3(2) to take good title.  Mr Wong explained this in terms that under section 3(2), the power of disposal is treated (from C’s perspective) as restored to A; though that is a legal fiction.

111.  However, argued Mr Wong, the present case differed as the chain of title was broken since: (i) by the 1986 Deed of Gift DC8 took as a volunteer; and/or (ii) the 1997 Assignment documents (DC7 to DC8) made specific reference to and attached the 1983 Lease: see §12(10) above.

112.  As to the second of these points, I am unsure how this assists, given that DC7 was presumably a bona fide purchaser for value entitled to rely on sections 3(2) and 4 of the LRO.

113.  In any event, the correct approach is in my view to examine title and priority as a relative matter [40], from the viewpoint of the competing claims made by D2 and the Registered Owners.  D2’s claim to title arises squarely from the 1983 Lease.  D2 and DC8 allege historic defects in the chain of title above the Registered Owners, which defects arise solely from the 1983 Lease.  The effect of section 3(2) is to render, for the purposes of resolving these completing claims, the 1983 Lease null and void to all intents and purposes.  This entitles the Registered Owners to claim title, from the moment they registered their assignments, on the basis that the 1983 Lease is and was null and void; with the result that they take good title and defeat D2’s rival claim [41].

114.  Compare, for example, Markfaith (supra) at 89H–I:

“ In the present case the tenants and the purchasers claim and compete for the same parcel of ground; the tenants claim under an unregistered instrument which is void against the purchasers. Any other conclusion is inconsistent both with the language and the obvious purpose of the Ordinance.”

115.  I consider the last sentence pertinent.  The effect of D2 and DC8’s argument is that a bona fide purchaser of land is vulnerable to an historic defect in title in form of an assignment of that land to a third party which breaks the chain of title of his predecessors — no matter how distant in time and no matter that that assignment was registrable but unregistered.  In my view, such a position would be inconsistent with the wording and purpose of section 3(2)[42].

116.  D2 could have registered the 1983 Lease, but did not.  It is consistent with the wording, purpose and scheme of the LRO that as against bona fide purchasers for value, whatever interest D2 derived from the 1983 Lease is defeated [43].

Conclusion on Question 3

117.  On Question 3, I conclude that the answer is “yes”.  By virtue of section 3(2) of the LRO, Ps, DC6 and the Registered Owners took good title to their respective portions of land deriving from the Parent Lot, and D2’s rival claim based on the unregistered 1983 Lease is defeated.

J.  OTHER QUESTIONS RAISED

118.  The parties’ oral submissions dealt, almost exclusively, with the three Questions which I have considered and determined above.  At the conclusion of the hearing, I sought clarification as to which, if any, of the other questions framed in the summonses, I was still being asked to determine.

119.  This culminated in a direction that the parties seek to agree, by post-hearing correspondence, a revised list of questions sought to be determined. 

120.  Unfortunately, the parties were unable to reach agreement, and I received differing revised lists of questions, though I do not consider the differences to be very substantial.

121.  The extant questions from the revised lists are relevant to D2’s alternative claims against DC8 (and DC7) for breach of trust (see §19 above [44]); and not to the lis between D2 and the Registered Owners.  There is a dispute between D2 and DC8 — on the assumption that there was a Milmo assignment — as to the nature of any rights to charge rent and re-entry nonetheless retained by Madam Tang against D2, and whether these were passed on to Madam Tang’s successors in title [45].  Mr Chain invited me to resolve this issue if so minded; whilst indicating that it was a comparatively minor point between D2 and DC8, not required to be presently resolved, and that the focus was on the major Questions 1 to 3.  Mr Chain submitted that if I chose to deal with this minor issue also, D2 and DC8 would be in a position to work out the consequences of my answer. 

122.  I am not prepared to proceed in this way.  I was not asked to resolve the breach of trust claim itself, various aspects of which were said to be unsuitable for resolution under Order 14A [46].  I consider it unworkable for me to attempt to lift out certain sub-issues of the (potential) breach of trust claim against DC8 (and DC8’s counterclaim against D2), and to resolve such sub-issues piecemeal and in a vacuum.

123.  Accordingly I decline, in the exercise of my discretion, to resolve the any further question(s) under Order 14A[47].

K.  CONCLUSIONS

124.  I conclude as follows:

  (1)  Question 1:  Did the 1983 Lease (if validly executed) operate as an assignment from Madam Tang to D2 of the leasehold estate held by Madam Tang in the Parent Lot for the residue of the term under the Block Lease?

Answer:  Yes.

  (2)  Question 2:  What was the effect of the NTLEO and the extension of the leasehold term thereunder, on the ownership of the leasehold estate in the Parent Lot?  Who was entitled to the benefit of the extended lease granted by the NTLEO?

Answer:  The statutory extension of the term of the Block Lease which was effected by the NTLEO in 1988, did not alter the legal or beneficial ownership of the leasehold estate in the Parent Lot, which remained with D2.

  (3)  Question 3:  By virtue of the LRO, is the 1983 Lease, which was registrable but not registered, null and void as against the Registered Owners as bona fide purchasers for value under assignments which were duly registered?  What is the effect of the LRO on the competing claims to title made by D2 and the Registered Owners?

Answer:  Yes.  Pursuant to section 3(2) of the LRO, the Registered Owners took good title to their respective portions of land deriving from the Parent Lot, and D2’s rival claim based on the unregistered 1983 Lease is defeated.

L.  RELIEF

125.  Given the above conclusions, on the central issue of title in these proceedings, Ps, DC6 and the other Registered Owners succeed and D2 fails.

126.  However, I consider that the parties should have an opportunity to make additional submissions as to the precise form of judgment to be entered and/or order(s) made, in light of the determinations set out above.   

127.  I therefore direct that the parties do within 14 days herefrom lodge written submissions (not exceeding 5 pages) on the said points together with costs, with a right of reply submissions (not exceeding 5 pages) within 7 days thereafter.

128.  The said submissions should be limited to such matters, rather than requesting the resolution of additional substantive questions. 

129.  Finally, I thank all of the parties’ representatives who appeared for their helpful submissions.