Introduction

In the recent case of Lead Traders Limited v Lucky Land Enterprise Limited and Allied Trend Corporation Limited, CACV 217/2011 and CACV 219/2011, the Court of Appeal was invited to rule on whether for the purpose of the Land (Compulsory Sale for Redevelopment)(Specification of Lower Percentage) Notice Cap. 545A (“the Notice”) mere assignment of half of the undivided shares of a flat to another party would convert the flat from “one unit” to “two units” and so escape from the provisions under the Notice, despite the fact that there is no physical subdivision of the flat.

Background

Before 1 April 2010, a redeveloper would need to acquire not less than 90% of the undivided shares in a lot before an application pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance Cap. 545 (“the Ordinance”) can be made for an order for the compulsory sale of all the remaining undivided shares in the lot.

However, since the Notice took effect on 1 April 2010, the required threshold of 90% of the total undivided shares of a lot can be lowered to 80%, provided that the lot fits into one of the following classes as specified by s.4(1) of the Notice:

(a)a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot; or

(b)a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date; or

(c)a lot that is not located within an industrial zone and each of the buildings erected on the lot (i) is an industrial building and (ii) was issued with an occupation permit at least 30 years before the relevant date.

The applicant in the present case is a redeveloper seeking an order for compulsory sale against the minority owner, who owns the third floor (“the Flat”) of the 6-storey building on No.168 Portland Street (“the Building”). The redeveloper having acquired the other 5 floors, representing 83.33% of the undivided shares in the Building, was relying on the 80% threshold set out in the Notice to support its application for compulsory sale. What complicates the case was that the minority owner whose Flat represents 16.67% of the undivided shares in the lot, being fully aware of the effect of the Notice when it comes to full effect, subdivided the Flat into two halves and assigned one half to a company that he owns, and he did so on 19 March 2010, some 10 days before the Notice took effect.

It was the minority owner’s case that since the Flat was divided into two distinct units each representing 8.33% of all the undivided shares in the lot, it no longer satisfies the requirement of the Notice that “with each of the units on the lot representing more than 10% of all the undivided shares in the lot”.

The minority owner argued that since the Notice doesn’t apply, and that the redeveloper has yet to acquire the required 90% threshold pursuant to the Ordinance, the application for an order for compulsory sale ought to be dismissed.

The redeveloper objected to the minority owner’s argument claiming that the subdivision of the Flat was not a genuine subdivision, as there was nothing more than documentary subdivision. The Flat is not physically subdivided into two units by any construction. And without any physical work done, it was not a genuine subdivision, but only an attempt by the minority owner to evade the provisions of the Notice.

Furthermore, the redeveloper argued that the subdivision contravenes provisions of the Deed of Mutual Covenant (“DMC”) and Occupation Permit (“OP”) of the building, and so cannot be regarded as a valid one.

Dispute over “Genuine Subdivision”

Hearing in the Lands Tribunal

The case was first heard by the Lands Tribunal in July 2011, which ruled in favour of the redeveloper. The Lands Tribunal found that not only is the subdivision invalid as it contravenes theDMC and OP,the tribunal commented that it would also be absurd to adopt the minority owner’s argument and accept a documentary subdivision without actual physical work done to the Flat.

The Lands Tribunal further explained that the minority owner’s action was a sham subdivision that is contrary to the intention of legislation of the Notice, which “deserved some adverse comment from this court and shall not be condoned.”

Hearing in the Court of Appeal

The minority owner then appealed to the Court of Appeal, and appealed on the ground that s.2 of the Notice only defined the term “unit” by reference to a specific number of undivided shares in a lot in any instrument registered in the Land Registry, without mentioning any requirement of any physical barrier.

The Court of Appeal accepted the minority owner’s argument, emphasized that the DMC and OP are irrelevant to the provisions under the Ordinance, and further commented that so far as this Notice is concerned, where there is an instrument (e.g. deed of assignment) properly executed and registered in the Land Registry, the subdivision shall be valid under the meaning of s.2 of the Notice and effectively converts the Flat into “two units”. The reasons of the Court of Appeal’s decision are as follows: (i) there had never been any requirement under common law that physical barrier of any sort is needed to separate the divided lots of land; and (ii) the Ordinance should also be applicable to cases of which the building had already been demolished, in such cases owners are still regarded as holding their respective undivided shares in the land irrespective of the fact that the physical structures no longer exist.

Conclusion

For the above reasons the Court of Appeal reversed the ruling of the Lands Tribunal and ruled in favour of the minority owners. Yet it should be noted that after 1 April 2010 minority owners can no longer adopt this method of evading the provision of this Notice by sub-dividing their units, because there is express provision in s.4(2)(a) of the Notice that the lower threshold of 80% of all the undivided shares of the lot would still apply if the subdivision is done on or after this date.