Since 1844, land transactions in Hong Kong have been operating on a deeds registration system governed by the Land Registration Ordinance (Cap.128).  Under this regime, a purchaser's solicitor has to review historical title documents to establish good title to land, which process is very complex and costly. Given these difficulties and in view of the number of transactions registered at the Land Registry (an average of about 13,000 per month in the year 2008), the Land Titles Ordinance (Cap. 585) ("LTO") was enacted on 7 July 2004 to try and provide greater certainty on land title and to simplify the conveyancing process.

Land Titles Registration

Pursuant to the registration system under the LTO (the "New System"), title will be established by reference to a Title Register, which will be conclusive evidence of title. The public can establish the registered owner by searching the Title Register and it will not be necessary to review title documents to establish good title like we do currently.

Proposed Amendments to the LTO

The LTO has not yet been implemented and a post-enactment review of its provisions is in progress. On 31 March 2009, the Government has completed the public consultations on the amendments to the existing LTO regarding the conversion mechanism, rectification and indemnity provisions etc. It is now expected that an amendment bill will be prepared for submission to the Legislative Council.

This article focuses on the rectification and indemnity provisions under the LTO in particular to fraud affecting ownership cases when the interests of 2 innocent victims are affected. The victims concerned are the (i) former registered owner ("FRO") and (ii) currently registered owner ("CRO"). The FRO is a former owner of registered land whose title has been lost as a result of fraud (either by a void document or a false entry in the Title Register); whereas the CRO is a person currently named in the Title Register as owner and the one who purchased the said land for good value pursuant to a fraudulent conveyance.

The Rectification Provisions

Based on the current LTO, an innocent FRO may apply to court for a rectification order to be made in his favor. The statute requires the Court to rectify the situation by allowing the innocent FRO to recover the defrauded land and to restore his name in the Title Register provided that he is not a party to the fraud, has no knowledge of the fraud and did not by his act or lack of proper care substantially contributed to the fraud. The CRO who suffers the loss of ownership due to the rectification order may claim indemnity under the LTO subject to certain conditions.

In order to prevent losing land ownership as a result of fraud, the CRO may have to consider instructing lawyers to investigate previous title transactions, thereby defeating one of the main objects of the LTO.

To overcome the uncertainties created by the existing rectification provisions, the Government has proposed an important exception in the public consultations document. An innocent FRO will lose his right to recover the land if (i) the CRO is not the first registered owner after the fraudulent conveyance of the land (i.e. he must be the second or subsequent registered owner); (ii) the CRO is in possession of the land in question; and (iii) the CRO is a bona fide purchaser of the land. The innocent FRO who is unable to recover the land may claim indemnity.

The impact of the proposed amendment is that the second or subsequent registered owner will be protected from losing his land due to any historic fraud and he will no longer be pressured into investigating prior title documents. In addition, as the first registered owner after fraud does not fall into the proposed exception, a prospective purchaser is expected to become more prudent as he will not be protected if the vendor turns out to be a fraudster.

The Indemnity Provisions

Under the existing LTO, any person may claim indemnity if he suffers loss by reason of an entry in or omission of entry from the Title Register as a result of fraud affecting the ownership of the registered land to which a rectification order relates. The amount payable is subject to an upper limit of HK$30million. The LTO also excludes the payment of indemnity for cases involving fraud that occurred before the date of conversion (i.e. the date of first registration under the LTO). The amount of indemnity payable is limited to the value of the interest in the registered land held by the person suffering loss from fraud and does not extend to the actual loss suffered.

With respect to the existing indemnity provisions, the concern is that parties of high value properties in Hong Kong may not be adequately compensated if the cap is not removed or increased. Also, where the above exception to mandatory rectification is adopted, the FRO who is deprived of his land may not be fully compensated.

The proposed amendments are mainly clarifications to the indemnity provisions. The right to indemnity will not cover claims where there has been no loss of ownership.

The Next Step Forward

Land titles registration is a system that has been adopted in most common law jurisdictions today and will change land dealings in Hong Kong in a fundamental way. When effectively implemented, it should simplify the conveyancing procedure and facilitate land transactions by injecting more certainties into the land system in Hong Kong.

The amendment bill is expected to be submitted to the Legislative Council in 2010. As the amendments of the LTO will have major impact on matters regarding the ownership of land, we will update our clients on its development from time to time. Experienced lawyers in our Property Department will be happy to assist with any queries you may have regarding the above article or on any property and tenancy matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.