Introduction

Home Ownership Scheme (“HOS” or the “Scheme”) flats are flats sold by the government at a substantial discount to certain qualified persons of modest means.As the primary purpose of the Scheme is to provide qualified purchasers with a permanent home, the Scheme introduced certain restrictions on alienation or parting with possession to deter people from taking advantage of the discount at which the HOS flats are sold and making a quick profit by unauthorised re-sale or transfer of the flats after acquisition.Such restrictions are contained in the Schedule and Sections 17B and 27A of the Housing Ordinance (Cap.283) (the “Ordinance”).The Schedule contains terms and conditions that restrict any unauthorised sale or alienation of the HOS flats.Section 17B provides that any such unauthorised sale or alienation shall be void.Section 27A provides that it is a criminal offence punishable by a fine of HK$500,000 and imprisonment for one year if a person purports to make an unauthorised alienation of a HOS flat in violation of section 17B of the Ordinance.

Recent Case

In the recent case of Cheuk Shu Yin v Yip So Wan and Another FACV 9/2011, the Court of Final Appeal had to determine one issue which arose in two appeals (Lam Wa v Chu Yuen Lun Garmen FACV 11/2011 and Cheuk Shu Yin v Yip So Wan and Lo King Fai FACV 9/2011), that is, whether unqualified persons who made contribution to the purchase of a HOS flat by qualified persons could claim a beneficial interest in the HOS flat.For a detailed discussion of the decision of Cheuk Shu Yin v Yip So Wan and Another in the lower courts, please refer to our newsletter published in March 2012.In both cases, the plaintiffs were family members of the defendants.The plaintiffs claimed to be beneficial owners of the HOS flats which had been brought under the names of the defendants by having made substantial contribution to the purchase price of the HOS flats under family arrangement.

Decision in the Lower Courts

The trial judges in both cases found that the plaintiffs had acquired a beneficial interest in the HOS flats by providing part of the purchase price.Such a creation of beneficial interest was not a result of any positive act by the defendants but by operation of law and therefore there was no “alienation” by the defendants.However, the Court of Appeal reversed the trial judges’ decisions and held a different view that there had been positive acts by the defendants when the parties entered into family arrangement for the funding of the HOS flats and the defendants allowed the plaintiffs to reside in the HOS flats.

The Court of Final Appeal’s Judgment

In the absence of evidence to the contrary, the law will presume a resulting trust of the property in favour of a person who provided all or part of the purchase price.Or the parties may have had a common intention that the person providing the funds was to have a beneficial interest in the property. The question which the Court of Final Appeal has to decide is whether the implied creation of a beneficial interest in a person other than the legal assignee (whether by a common intention constructive or resulting trust) by his payment of all or part of the purchase price is an “alienation” forbidden by Section 17B.The Court of Final Appeal ruled that in order to fall within the Schedule and Sections 17B and 27A, the alienation in question must be a transfer or divesting by the owner of his or her rights and interests in the flat and a positive act by the owner is required. Alienation denoted a juridical act performed by a person who has an interest in the property to transfer all or part of his interest to another.A creation of beneficial interest in favour of someone else by resulting trust or common intention constructive trust is not an “alienation” under Section 17B.

The Court of Final Appeal pointed out that a creation of beneficial interest in favour of unqualified persons in the HOS flats would not give rise to abuse of the Scheme for property speculation.Unlike a normal trust situation, such a beneficial owner of a HOS flat cannot within the restriction period utilize his normal means of realizing the value of his interest such as assignment, sale and letting the property for income. He is barred from interfering with the occupation of the HOS flat by the eligible purchasers who are also the legal owners of the flat.

In light of the fact that Hong Kong property market is a versatile one and property prices can go up and down, the Court of Final Appeal took the view that paying the purchase price of a HOS flat would not be an attractive form of commercial investment because the money subscribed for purchase of HOS flat would be locked up at least for the restriction period for sale of 5 years.As could be seen from the previous cases, only family members were willing to contribute to the purchase price.

The Court of Final Appeal considered it to be too unjust to not only deny a beneficial interest to someone who paid the purchase price and expected that he would get one, but also subject such a person to possible criminal liability under the Ordinance for doing something which is considered to be normal and generous in the eyes of other people.

Appeal Allowed

In view of the above, the Court of Final Appeal allowed the appeals and restored the declarations made by the trial judges that the plaintiffs were the beneficial owners of the HOS flats and the defendants were trustees thereof.

Conclusion

The Court of Final Appeal in this case had made it clear that a beneficial interest can be created in favour of a family member who provided or contributed to the purchase money to the HOS flat even if he or she is not an eligible purchaser.This would arguably seem to be at odds with the rationale of the Scheme that the target buyers of the HOS flats are supposed to be limited to people of certain income levels only.