The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 39 of 1995

 

(1) Chung Ping Kwan and Cheung Yuet Han and

(2) Lai Moon Hung Appellants

v.

Lam Island Development Company Limited Respondent

 

FROM

 

THE COURT OF APPEAL OF HONG KONG

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 8th July 1996

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Present at the hearing:-

Lord Keith of Kinkel

Lord Jauncey of Tullichettle

Lord Nicholls of Birkenhead

Lord Steyn

Sir Christopher Slade

  ·[Delivered by Lord Nicholls of Birkenhead]

 

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1. Under the Convention for the Extension of Hong Kong made in Peking between the Emperor of China and the British Crown on 9th June 1898, the New Territories north of the Kowloon peninsula were ceded to the British Crown for a period of 99 years expiring on 30th June 1997.  The New Territories Ordinance (cap 97), section 8, replacing earlier legislation, declared that all land in the New Territories was the property of the Crown. The Crown then granted leases of this land.  Until 1959 the leases were normally for a term of 75 years from 1st July 1898, with the lessee having the right on request to a renewed lease for a further term of 24 years less three days.  Thus the original leases were due to expire on 30th June 1973, and the renewed leases on 27th June 1997. Since late 1959 new Crown leases of land in the New Territories have normally been granted for 99 years from 1st July 1898 less the last three days.  The present case concerns a lease of the pre-1959 type.

 

  In 1969 the contractual option to renew the 75-year leases was superseded by the New Territories (Renewable Crown Leases) Ordinance (cap 152).  This Ordinance (the "Renewable Leases Ordinance") provided that the right of renewal in all Crown leases should be deemed to be exercised and that a new Crown lease, for a period of 24 years less three days from 1st July 1973, should be deemed to be granted on that day. 

 

2. Over the years many people, without any legal right or title, entered upon parts of the New Territories and made homes there for themselves and their families. Sometimes they occupied larger pieces of land, which they used as smallholdings or farms.  Some trespassers or squatters lived in this way, in adverse possession to the holders of the Crown leases, for more than 20 years before the expiry of the original Crown leases in 1973.

 

3. In the early 1990s there was a spate of cases in Hong Kong, in which lessees holding renewed leases sought possession orders against squatters.  The timing of the claims was significant.  At the relevant time (the law has since been changed), the limitation period prescribed for actions to recover land was 20 years.  The lessees claimed that the length of time the squatters had been in possession before 1973 was irrelevant.  In respect of claims brought by lessees under renewed leases, the 20-year period began to run only from 1 July 1973.  The lessees claimed that so long as proceedings were started before 1st July 1993, limitation afforded no defence to those in possession even if they or their predecessors had been in continuous possession and living openly in the same accommodation since, as happened in one case, 1933.

 

4. The present appeal concerns two cases.  Both relate to land in Sheung Shui in the New Territories.  The land was part of the property included in a Block Crown Lease granted in 1905 on the normal terms as sufficiently summarised above. By March 1974 the legal and beneficial interest in the renewed lease deemed to be granted under the Renewable Leases Ordinance from 1 July 1973 was vested in the respondent Lam Island Development Company Limited ("Lam").  On 10th June 1993 Lam issued proceedings against Chung Ping Kwan and Cheung Yuet Han, claiming possession of a portion of lot 2012 in demarcation district 91.  The defendants' evidence was that they had been living there continuously since 1959, without paying any rent to anyone. 

 

5. On the same day Lam issued possession proceedings, in respect of a portion of lot 1978, against Lai Moon Hung and Lai Kam Keung.  The case proceeded against these defendants on the footing that they had been in continuous possession adverse to Lam and its predecessors in title since a date sometime between 1953 and 1973. 

6. Thus in both cases the defendants had been in possession for less than 20 years before the original Crown lease expired in 1973, but more than 20 years overall before the start of proceedings.

 

7. On 14th March 1994 Godfrey J.A. gave judgment for Lam in both cases.  He clearly felt unease at this outcome, and encouraged an appeal.  While an appeal was pending, the Court of Appeal gave judgment in another squatter case: Fu Mei Ling Mary v. Yeung Kong, Civil Appeal 47 of 1994.  In that case the squatters had been in possession for more than 20 years before 1973.  The claim for possession failed.  The court held that section 4(4)(c) of the Renewable Leases Ordinance preserved, against the lessee's title under the renewed lease, the accrued limitation defence possessed by the squatters in 1973 against the lessee as lessee under the original lease.  Godfrey J.A., who was a member of the court, went further.  With disarming candour he recanted his decisions given at first instance in the present cases and in an earlier case.  He held that section 4(4)(c) had a similar effect when the 20-year limitation period had started to run but not completed its full course by 1973.

 

8. In October 1994 the Court of Appeal, comprising Penlington J.A., Liu and Keith JJ., dismissed the appeals in the present two cases.  They held that Godfrey J.A.'s first views had been correct.

 

The Limitation Ordinance

Their Lordships will consider first the basic principles applicable in this area of the law, before turning to the provisions of the Renewable Leases Ordinance.  The Limitation Ordinance (cap 347) is closely modelled on the English Limitation Acts: the Limitation Act 1939, since replaced by the Limitation Act 1980.  Section 7(2) of the Ordinance deals with actions brought to recover land.  It provides:-

"No action shall be brought by any ... person to recover any land after the expiration of [20] years from the date on which the right of action accrued to him or, if it first accrued to some person through whom he claims, to that person ..."

 

9. Thus it is essential to identify the date on which the right of action first accrued to the plaintiff or a person through whom he claims.

 

10. Section 7 is followed by sections prescribing when a right of action does or does not accrue.  Section 8 concerns the accrual of  a  right  of action  in  the case  of  present interests in land.

11. Section 8(1) is the only material subsection. It corresponds to paragraph 1 of Schedule 1 to the Limitation Act 1980, and provides:-

"Where the person bringing an action to recover land, or some person through whom he claims, has been in possession thereof, and has while entitled thereto been dispossessed or discontinued his possession, the right of action shall be deemed to have accrued on the date of the dispossession or discontinuance."

 

12. Section 9 concerns the accrual of a right of action in the case of future interests. Subsection (1), which is the only material subsection, corresponds to paragraph 4 of Schedule 1 to the Act of 1980 and provides:-

"... the right of action to recover any land shall, in a case where the estate or interest claimed was an estate or interest in reversion or remainder ... and no person has taken possession of the land by virtue of the estate or interest claimed, be deemed to have accrued on the date on which the estate or interest fell into possession by the determination of the preceding estate or interest."

 

13. The only other relevant section in the Ordinance is section 17, corresponding to section 17 of the Act of 1980.  This provides:-

"... at the expiration of the period prescribed by this Ordinance for any person to bring an action to recover land ... the title of that person to the land shall be extinguished."

 

14. From these provisions several conclusions emerge.  Time begins to run against a lessee when he is dispossessed by a trespasser.  In the present case time ran against Lam's predecessor Mak Yung from the date when the defendants took possession and thereby dispossessed him: section 8(1).  If continued for the prescribed period of 20 years, this adverse possession would have barred the right of Mak Yung to recover possession. It would similarly have barred those claiming under him.

 

15. However, dispossession of a lessee by a squatter does not set time running against the lessee's landlord.  The landlord's right to recover possession from the squatter on the determination of the lease is not barred by a squatter's adverse possession against the lessee, however long this continues.  In the ordinary course the landlord's right of action accrues when, but only when, the lease ends and the landlord's reversionary interest falls into possession: section 9(1).  Only then does time start running against the landlord.

 

 

  The rationale of this provision is that so long as the legal estate created by the lease remains in existence, the landlord has no right to obtain possession of the land from a squatter.  The squatter dispossessed the lessee, not his landlord. If the lessee seeks to recover possession it will be sufficient for him to prove he was in possession and that the squatter dispossessed him.  But if the landlord, not having been dispossessed by the squatter, comes along and seeks to eject the squatter he must set up and rely upon his title.  He has to show a better title to possession than the squatter.  Herein will be his difficulty.   So long as the lease is extant, his title to present possession of the land is deficient. This is so even if the title of the lessee, as between himself and the squatter, has been extinguished by section 17. These established principles are conveniently displayed in Megarry and Wade on The Law of Real Property, 5th edition, (1984), pages 103-109, 1037. 

 

16. On the determination of the lease, therefore, the landlord is entitled to oust the squatter however long he may have been on the land.  Those claiming through the landlord are similarly entitled: their right to possession is no better, and no worse, than the right of the landlord from whom they derive their title.  So if the landlord grants a new lease, the lessee of the new lease may eject the squatter.

 

17. In principle the position cannot be different if the lessee under the new lease is the same person as the lessee under the original lease.  There seems to be no sensible reason why the landlord's ability to confer on a new lessee a title as good as his own should be subject to an exception when the new lessee is the original lessee.  Lord Bledisloe Q.C. argued otherwise.  He submitted that the combined effect of sections 7(2) and 8(1) is that once the prescribed period of 20 years has run against a lessee, the lessee is barred from bringing an action to recover the land from the squatter and that he remains barred even if he acquires another source of title he did not have when the 20-year period expired.  It would be extraordinary, so the argument runs, if a lessee whose right to bring possession proceedings against a squatter has become time-barred could set time running anew against the same squatter by obtaining another lease.

 

18. Their Lordships are unable to accept this submission.  A lessee's ability to regain possession in reliance on a new lease is no more than a striking illustration of the principle that dispossession of a lessee sets time running against the lessee and those claiming through him as lessee, but not against the landlord and those claiming through him as reversioner.  A trespasser on leased property is more vulnerable than a trespasser on property  occupied  by the freeholder.  In the latter case the

title which the squatter bars is the freehold title.  In the former case the title which is barred is leasehold only, because that is the extent of the title of the person who has been dispossessed. Adverse possession defeats the rights, whatever they may be, of the person against whom the possession is adverse. It does not defeat the rights of others.

 

19. Their Lordships consider that Taylor v. Twinberrow [1930] 2 K.B. 16 was correctly decided.  It is unnecessary for their Lordships to express a view on the controversial decision in St. Marylebone Property Co. Ltd. v. Fairweather   [1963] AC 510: see the powerful critique by Professor H.W.R. Wade in Landlord, Tenant and Squatter (1962) 78 L.Q.R. 541. The actual decision in that case turned on the effect of the surrender of a lease by a lessee whose title has been barred by a trespasser's adverse possession.  The answer to that conundrum throws no light on the problem arising in the present appeal.

A right to renew

Thus far consideration has been given to the straightforward position of a simple lease for a term of years.  The next step is to consider the case of a lease containing an option for the lessee to renew the lease.  Mr. Nugee Q.C. submitted this makes no difference.  In such a case, just as much as in the case where there is no option to renew, the estate to which the squatter's possession was adverse was the term of years created by the lease.  Only that estate was extinguished.  As between the landlord and the lessee the lease still subsists, and the lessee can still enforce the option.  If he does so, he acquires from the landlord a new legal estate, and in respect of that estate time runs from the determination of the original lease, in accordance with section 9(1).  The lessee's claim for possession is then based on the new lease, not the original lease.  The pre-existing contractual right of renewal is not itself an estate.

 

20. Clearly, until the new lease is granted the lessee does not have a legal estate in the property for the term of years which is the subject of the option.  Equally clearly, in the ordinary course the option will be specifically enforceable.  The lessee has a right in respect of the property which he can enforce against the landlord.  Thus the question to be addressed is whether adverse possession bars the lessee from asserting against the squatter this specifically enforceable right, and the legal estate which flows from this right, as much as it bars the lessee from asserting against the squatter the other rights granted to him by the lease.

Their Lordships consider that an affirmative answer to this question will accord better with the legislative intention inherent in the scheme of the Limitation Act 1980 and the Limitation Ordinance.  The  principle underlying  section  9(1) is  that time

should not run against a reversioner so long as there is a prior estate or interest standing between him and the right to retake the property.  Until the preceding estate or interest determines, and the reversionary estate or interest falls into possession, the reversioner is not sleeping on his rights. 

 

21. This principle applies to a prior legal estate such as a lease.  This principle seems apt to be applied also to a specifically enforceable prior right to call for a legal estate, such as a lessee's renewal option, when the person having the right is already lawfully in possession. In the latter case, as much as the former, the reversioner has no right to enter and eject the trespasser.  If the lessee validly exercises the option the landlord is bound to renew the lease.  He can be compelled to do so.  He is not entitled to eject the lessee at the expiration of the lease. This is the crucial feature.  The landlord is not entitled to possession. This pre-existing interest of the lessee, precluding the landlord from ejecting the lessee, would be a fatal flaw in a claim by the landlord to oust a trespasser.  The trespasser is as much entitled to set up and rely upon this interest as a deficiency in the landlord's right to possession as he is entitled to set up and rely upon a lease for this purpose.

 

22. Conversely, and unlike the reversioner, the lessee has slept on his rights.  There seems to be no compelling reason why, as between him and the trespasser, his rights under the renewal option in the lease should not be defeated just as much as his other rights under the lease. It is true that when he exercises the option the lessee obtains a new legal estate, but this is no more than implementation of a pre-existing contract.  He acquires a new legal estate by virtue only of a right included in the lease whose title has been extinguished as against the trespasser.  To ignore the legal source of the lessee's entitlement to his new legal estate would be to exalt form (a new legal estate) over substance (a pre-existing right to the estate).

 

23. There seems to be no authority on this point.  The point was not raised clearly in the recent Hong Kong cases until the present one.  Some assistance can be derived from considering the closely analogous situation which arose in the Australian case of Bree v. Scott (1904) 29 V.L.R. 692.  There the defendant squatted from 1878 upon land allotted to her mother as Crown licensee.  A Crown licensee was entitled to acquire the fee upon performance of obligations in the licence.  In 1885 a Crown grant was duly issued to the mother in consideration of a payment then made.  A mortgagee sought to eject the defendant.  The question which arose was whether the 15-year limitation period had run its course by 1899. If the period ran from 1878 the claim  was  barred. If the period ran only from 1885, being

the date of the grant of the legal estate through which the mortgagee claimed title, the claim was not barred.  Madden C.J., in the Supreme Court of Victoria, held that time ran from the earlier date.  At page 700, he described the licence under the Land Act 1869 as the seed of which the subsequent grant was the fruition of title.  The Full Court upheld his decision on appeal.  A'Beckett J. said, at pages 713-714:-

"Stated generally, the policy of the [limitation legislation] was to require a person having a right to land to exercise it as against a person illegally occupying at the peril of losing the land if the illegal occupation continued undisturbed for fifteen years.   Here we have an occupation such as the Statute contemplated continuing undisturbed, and when it commenced, and up to the time of the issue of the grant, a person having legal title from the Crown who could have recovered the land against the occupant ... This inactive licensee and lessee afterwards acquired a legal estate in the fee, not by virtue of any new right unconnected with her prior interest, but by the maturing of a right which had its inception in the licence.  No doubt, up to the issue of the grant, there was no certainty that the fee would be acquired: the right to the land was inchoate, and might have been lost, but it was in fact perfected, and we have to say whether the nature of this new title is such as to wipe out all the consequences of past inaction, and to give a new term of fifteen years within which inaction must continue before the illegal occupant could acquire title ... I should say that since the Judicature Act, if not before, the mere difference between legal and equitable estates would be insufficient.  Take the case of omission to proceed against an illegal occupant by a purchaser under a contract of sale ... there is no reason for saying that a conveyance by the vendor ... would give this new start in the owner's favour ... The changes in the legal interest of the person who might have brought the action against the defendant in the present case made no changes in her rights as against the defendant; the right to turn her out was as good in the licensee as in the grantee." 

 

24. Their Lordships agree with this conclusion.  In their Lordships' view, where a new lease is granted pursuant to a lessee's option in the original lease the right to bring an action to recover the land from a trespasser within the meaning of section 7(2) accrues to the lessee on the date of the dispossession.  Section 8(1) is applicable in such a case, and as against the trespasser section 17 operates to extinguish his title to the new lease as much as the original lease.  Conversely, in such a case section 9(1) is inapplicable and does not operate to set a new limitation period running in favour of the lessee.  The  lessee's claim  in right of the new lease is not a claim

to an estate or interest in reversion within the meaning of section 9(1), because the lessee's right to the new lease, subject to satisfying any prescribed conditions, was a right he already had as lessee.

 

The Renewable Leases Ordinance

It is against this background that the Renewable Leases Ordinance has to be construed.  Had this Ordinance not been passed, the position of squatters in the New Territories would have been that the grant of a new Crown lease from 1st July 1973, pursuant to the right of renewal in an existing Crown lease, would not have set a fresh limitation period running in favour of the lessee.  As between the lessee and the squatter, the grant of a new Crown lease would have been neutral in its effect.  As between them the position would have been the same as if the term originally granted had been 99 years.  The 20-year limitation period would have run from the date of dispossession.  If the period had wholly run before 1st July 1973, the grant of a new Crown lease would not have assisted the lessee.  If less than 20 years had run, the limitation clock would have continued to tick: the grant of a new Crown lease would not have interrupted this.

 

25. Have the provisions in the Renewable Leases Ordinance changed this position, to the detriment of squatters?  The purpose of the Ordinance seems to have been twofold: first, to avoid the administrative inconvenience of multiple renewal notices and multiple grants of new leases; secondly, to provide that the renewed leases should be on more favourable rent terms for the lessees than the terms set out in the leases.  Typically a 75-year Crown lease provided that the rent of the new lease would be a fair and reasonable rental assessed at the date of renewal.  Under the Ordinance the rent payable for the deemed new Crown lease was to be, in short, the same rent as the rent payable by the lessee in 1973.  Usually that amount had remained unchanged for a very long time, and was far less than the current rental value of the property.

 

26. Thus the Ordinance was essentially administrative machinery designed to facilitate the implementation of existing rights and obligations under Crown leases, with a rent alteration in favour of lessees.  This being the legislative purpose, the Ordinance should be approached on the footing that, save as otherwise provided, the Ordinance was intended to achieve the same result as would have occurred if a new lease had been granted pursuant to the right of renewal.  The deemed new lease is to be regarded as having the like consequences in law as would have followed from an actual exercise of the renewal option and an actual grant of a new lease. 

27. Their Lordships are unable to discern in the Ordinance any expression or implication of a relevant contrary intention.  There are some differences.  For instance, where the existing Crown lease was divided into sections by a portion of a lot being assigned separately, separate new Crown leases were deemed to be granted instead of one new Crown lease of the whole.  None of the differences bears on the issue now under consideration.  In particular, there is nothing to suggest that the legislation was intended to alter the position of squatters and make it better, or worse, under the new deemed Crown lease than it would have been had a new Crown lease actually been granted. Mr. Nugee Q.C. did not contend otherwise.

 

28. From this it follows that when a squatter is sued and pleads a limitation defence, the lessee is unable to respond by relying upon the (deemed) new lease as a new title setting time running afresh from 1st July 1973.  To achieve this result the squatter does not need to bring himself within an express saving provision in the Ordinance.  It is sufficient for his purposes that on the application of the limitation provisions as considered above, the deemed new lease is legislative mechanism replacing, but having the same legal consequences as, the actual new lease to which the lessee had a right under the 75-year lease.

Section 4(4)(c)

Their Lordships must take this point a little further.  In the recent cases in Hong Kong, and not having had the benefit of the fuller arguments addressed to their Lordships, the courts have approached the Renewable Leases Ordinance from a different starting point. 

 

29. With certain exceptions the Ordinance applies to every Crown lease existing on 30th June 1973 whereby land in the New Territories was demised for a term of 75 years from 1st July 1898 and which contained a right of renewal for a further term of 24 years less three days (section 3).  In all these cases the right of renewal "shall be deemed to have been exercised" by the persons entitled to the right, and on 1st July 1973 a new Crown lease, or separate Crown leases in some instances as already mentioned, "shall be deemed to be granted" to those persons of the land held by them immediately before that date (section 4(1) and (2)). 

Section 4(3) sets out the terms deemed to be contained in the new lease: the lease is for 24 years less three days from 1st July 1973, at the same rent as was payable for the year up to 30th June 1973 in respect of the land to which the new lease relates, with a covenant by the lessee to pay the rent, and otherwise the same covenants and conditions as appeared in the original lease regarding the land in the new lease, save for the right of renewal.  Section 4(4) provides:-

"Every new Crown lease and the land thereby deemed to be demised shall be deemed to be subject to such of the following encumbrances and interests as the land and the existing Crown lease relating thereto were subject to immediately before the 1st day of July 1973 -

(a)any mortgage, whether legal or equitable, and whether registered in a District Land Registry or not;

(b)any public rights; and

(c)any other rights, easements, tenancies or other burdens or encumbrances of whatsoever kind or nature, except such as were created by an instrument and were not thereby expressed to continue after the 30th day of June 1973."

 

30. This subsection is widely drawn and shows a broad intention that there should be a seamless transition from the old to the new.  In general, what applied to the old on 30th June 1973 should continue and apply to the new.  Section 5(2) pursues the same theme, by providing that a breach of covenant existing immediately before 1st July 1973 in respect of an existing Crown lease should be deemed to be a breach of covenant in respect of the new Crown lease.

 

31. Section 4(4)(c) has been much considered by the Hong Kong courts in connection with squatter cases.  The view which has found most favour is that a squatter who had not been in adverse possession for 20 years by 30th June 1973 (a "post-1953 squatter") does not have a "right" within the meaning of this subsection.  A post-1953 squatter has no rights against the lessee at all.  He is a trespasser, pure and simple, and can be ejected at any time. 

32. Their Lordships would have considerable sympathy with this view if the legal position were that time would have run afresh from 1973 had there actually been a renewed Crown lease.  If that were the legal position, no squatter however long in possession had a right which could survive the determination of the original lease.  If that were so, there would be much force in this interpretation of the Ordinance.  The context requires that rights in section 4(4)(c) should be given a wide and flexible meaning.  So also does the language: "... any ... rights ... or ... burdens or encumbrances of whatsoever kind or nature ...".  But this "carry forward" provision cannot have been intended to give a squatter, in respect of the deemed new lease, a right he would not have enjoyed in respect of an actual new lease.

 

33. As already explained, however, this is not the legal position.  Thus this is not a correct starting point.  The true position is that  had  a new  lease  actually been granted in 1973, a pre-1953

squatter could not thereafter have been ejected by the lessee in reliance on the new lease. This being so, their Lordships consider that such a squatter has a right within section 4(4)(c).

 

34. The position of a post-1953 squatter is not so obvious.  By 1973 he had not barred the title of the lessee to the original lease. But to some extent the Limitation Ordinance had already started to operate in favour of a squatter on 30th June 1973.  Under the Limitation Ordinance the lessee's right of action had deemed to accrue on the date when the squatter moved in.  Further, an actual new lease granted pursuant to the right of renewal would not have affected this.  Their Lordships incline to the view that these potential benefits can be regarded as a right within paragraph (c). 

35. However, even if this is not so, and even if no squatter had a right within section 4(4)(c), the lessee would still not succeed.  Their Lordships return to the point, already noted, that the squatter does not need to bring himself within an express saving provision in the Ordinance. Their Lordships do not consider that section 4(4) should be read as an exhaustive list of the incidents attaching to the new deemed lease, having the effect of freeing a lessee from all other adverse incidents which would have flowed had there been an actual lease. Given the underlying purpose of the Ordinance, paragraph (c) cannot reasonably be read as, by implication, depriving a squatter of the ability to point to the lessee's option as the source of the deemed new lease and rely upon this in possession proceedings brought against him.  The legislation cannot have been intended to prejudice the position of squatters in this way.

 

36. Their Lordships will humbly advise Her Majesty that this appeal should be allowed.  The orders of the Court of Appeal and Godfrey J.A. will be set aside and the originating summonses dismissed.  The respondent must pay the appellants' costs before their Lordships' Board and in both courts below.

 

© CROWN COPYRIGHT as at the date of judgment.