Hong Kong: CFA Rules On HOS Flat Ownership Dispute

Last Updated: 12 December 2012
Article by Keith P.K. Cheung and Connie Yu

Keywords: CFA rules, home ownership scheme, HOS, flat ownership, dispute

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The Court of Final Appeal (CFA) delivered its judgment in the case of Cheuk Shu Yin v. Yip So Wan and Lo King Fai (Cheuk v. Yip case) and the case of Ling Wing Fai Billy, Lam Wa and another v. Ling Shui Fai, Chu Yuen Lun Garmen and others (Ling v. Ling case) on 13 November 2012. The decision has important consequences for the rights of family members who pool their resources together in the purchase of, or repayment of mortgage loans for, Home Ownership Scheme (HOS) flats. The CFA decided that people who contribute to the payment of the purchase price or repayment of the mortgage loan have a beneficial interest in the HOS flats despite the fact that they are not named as the registered owners.

BACKGROUND

Restrictions on alienation

Under the HOS, there are certain restrictions on alienation or parting with possession by the purchasers to prevent purchasers from realizing an immediate profit or income through the sale or letting of the HOS flats. S.17A Housing Ordinance (Cap 283) (the Ordinance) gives the Hong Kong Housing Authority power to sell its flats and s.17B of the Ordinance contains restrictions on the mortgage, charge or alienation of such flats by the purchasers in breach of any term or condition of the agreement for sale and purchase or any covenant in the relevant assignment. Any such proposed mortgage, charge or alienation of the property would be void. S.27A of the Ordinance makes it a criminal offence to purport to make an alienation which is made void by s.17B.

Ling v. Ling case

In this case, the defendants (a son and a daughter-in-law respectively of a Madam Wong) were successful in their application to purchase a HOS flat in 1984. The plaintiffs (another son and another daughter-in-law respectively of Madam Wong) alleged that the deposit for the purchase of that flat and the first few mortgage instalments were paid by Madam Wong whilst all subsequent mortgage instalments were paid by the plaintiffs since the plaintiffs moved into the flat in 1985. It was alleged that the defendants paid neither the initial deposit nor any mortgage instalments. In 1997, however, the defendants entered into a provisional agreement to sell the flat to a third party. The plaintiffs started proceedings to claim a declaration that they were the beneficial owners and for an order to set aside the provisional agreement.

In 2007, Chu J decided that the creation of a beneficial interest as alleged by the plaintiffs would not be a void alienation for the purposes of s.17B of the Ordinance. Her decision was reversed by the Court of Appeal.

Cheuk v. Yip case

Here, the respondents bought a HOS flat in 2000 but the whole purchase price was paid out of a joint account of the respondents' son and his wife, the appellant. The appellant and her husband were divorced in 2006 and the husband died in 2010. Fung J made a declaration to the effect that the appellant and her husband were beneficially entitled to the flat. Although the Court of Appeal upheld the judge's findings of fact, it reversed his decision, following its decision in the Ling v. Ling case.

CFA'S RULING

The CFA heard the two cases together as they were concerned with similar legal issues regarding HOS property ownership.

The CFA held that the "meaning of the word 'alienation' depends on the context in which it was used and on the purpose which the legislation in which it appears was intended to serve". Flats produced under the HOS are intended to provide homes for people eligible for them, not to give opportunities for speculations or provide housing for people who fall outside the eligibility criteria. A 5-year restriction on resale is imposed to discourage speculation on the part of the purchaser under the scheme. The CFA did not agree with the Court of Appeal's view that the creation of equitable interests in the HOS flats could give rise to abuses which s.17B of the Ordinance was intended to prevent.

In the case of a HOS flat, a person for whom the property is held on trust cannot require the trustee to convey the legal estate to him since an assignment of the legal estate would be unlawful under s.17B of the Ordinance. An equitable owner having only a part beneficial interest in a HOS flat also cannot obtain an order to have the flat sold and the proceeds distributed as the sale would be unlawful under s.17B. Neither can an equitable owner require that the property be let to provide him with an income because the statutory terms and conditions in Schedule 4 of the Ordinance contain a covenant against parting with possession of the property. Until the expiration of the restriction period, all the equitable owner's normal means of realizing the value of his interest are barred.

The CFA decided that the creation of an equitable interest, whether by an express declaration or as a consequence of a resulting or constructive trust, does not fall foul of s.17B of the Ordinance as it is not an alienation of the property assigned to the purchaser under the HOS.

CONCLUSION

It is now clear that people who contribute to the payment of the purchase price or repayment of the mortgage loan for a HOS flat have beneficial interests in the property, even though they are not named in the application or purchase documents or are not residents of the property. S.17B of the Ordinance does not outlaw the creation of such equitable interests.

As with other properties in Hong Kong, a purchaser from a HOS flat owner or mortgagee of a HOS flat faces the risk of being fixed with constructive notice of the interests of persons other than the apparent owners. The prospective purchaser or mortgagee should make necessary enquiries to ensure that a spouse, family member or other occupant of the property has no interest in the property and that no third party has any unregistered interest in the property. It would be prudent to require any occupant to make a declaration or confirmation under seal that he has no right or interest in the property and undertakes to release the property from all rights and interests he may have. A mortgagee may also consider requiring the mortgagor to undertake or covenant at the time of entry into the mortgage that no third party has made any financial contribution to the purchase of the property and that the mortgagor will inform the mortgagee should any person make any contribution to the repayment of the mortgage loan during the course of the mortgage.

Originally published 6 December 2012

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© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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