Further to our article entitled “Legal Risks in Sale and Purchase of Small Houses in the New Territories” published in February 2010, this article discusses the legal position in relation to the development of land in the New Territories by way of purchase of indigenous villagers’ “Ding Rights”. 

Development Schemes
“Development schemes” (“Schemes”) refer to the prevalent practice where developers contract with indigenous villagers with an object to benefit from the villagers’ eligibilities to apply for a concessionary building licence pursuant to the New Territories Small House Policy (“Ding Rights”). Under such Schemes, developers would purchase land in the New Territories (“NT land”) and assign the NT land to villagers purportedly for considerations. The villagers would become registered owners of the NT land. This serves the purpose of enabling villagers to apply for concessionary building licences pursuant to the New Territories Small House Policy. With the building licences, developers can build small houses on the NT land and sell to third party purchasers. Meanwhile, villagers would execute declarations of trust to the effect the developers would remain as the sole beneficial owners of the NT land. Developers would bear the costs of building the houses, and villagers would have no interest in the land or the house.

Developers’ position in Development Schemes
The legality of such Schemes and the interest of developers in the NT land have recently been considered by the Court of First Instance in Wah Hing Strategy Co Ltd v Tang Wai Hung HCA 16690, 16692 and 16693/1999 (“Wah Hing”).

In this case, Wah Hing Strategy Co Ltd (the “Developer”) entered into agreements with indigenous villagers (the “Villagers”) in Yuen Long for developing a piece of land owned by the Developer (the “Land”) and building small houses thereon (the “Agreement”). Such agreements were in substance akin to the Schemes. Under the Agreement, the Developer was to purchase the Land, and assign it to the Villagers at a “fictitious” consideration which the Villagers never paid. As the registered owner of the Land, the Villagers signed power of attorney (“POAs”) in favour of the Developer who could then make application to the District Land Officer on behalf of the Villagers for building licences in respect of the Land. The Developer also entered into a Deed of Development (the “Deed”) with the Villagers, which was registered at the Land Registry.

Thereafter, building licences were granted. However, the Villagers suddenly wrote to the District Land Office to cancel the building licences granted and the POAs signed by them. The Villagers signed another set of POAs in favour of another developer. After the development of the Land was completed and certificates of compliance were issued, the Developer claimed against the Villagers that under the Agreement, the POAs and the Deed, the Villagers held the legal and beneficial interest in the Land for the Developers. The Villagers counter-claimed that the Deed was void and the registration of the Deed should be vacated.

The issues are (1) whether there was any trust in which the Villagers held the Land for the Developer and (2) whether the Deed and Agreement are illegal and unenforceable.

The Law
The Court considered authorities including Best Sheen Development Ltd v the Official Receiver and Trustee of the Property of Lai Thomas, a Bankrupt HCMP 7250/99, [2001] 1 HKLRD 866, and adopted the applicable legal principles as follows:

1.         A contract that has as its object the deliberate commission of the tort of misrepresentation on the Government as landlord and a contract to commit a civil wrong would be illegal under common law.

2.         The Court would not lend its aid to the performance of an illegal contract which would be contrary to public policy.

3.         Agreements between a developer and villagers to make a misrepresentation to the Government as to the villagers’ sole ownership of the land in order to obtain the Ding Rights are therefore illegal and unenforceable.

4.         However, a declaration that the developer is the beneficial owner of the land does not amount to enforcement of the illegal contract.

a.         To obtain such a declaration, the developer could rely on a declaration of trust.

b.         Even if a declaration of trust is to be invalid, the developer could rely on its beneficial interest under a resulting trust based on facts such as the consideration of the assignment of the land to the villagers is never paid. Such a resulting trust could be implied if an attempted express trust failed.

Applying the above principles, the Court in Wah Hing (1) came to the findings that the Agreement, the Deed and the POAs were entered into or created for the Developer to purchase the Ding Rights of the Villagers and (2) held that this constituted an illegal contract that was unenforceable. Nevertheless, the Court (1) came to the findings that the Villagers never paid the consideration for the Land nor any of the construction costs for the small houses thereon and (2) held that by way of an implied resulting trust, the Developer had throughout retained the beneficial interest in the Land owned by the Villagers who were in fact trustees for the Developer. Accordingly, the court ordered that (1) the Deed is illegal and unenforceable and the registration of the Deed be vacated and (2) the POAs granted to the other developer be void and the Villagers shall refrain from granting any POAs to anyone without consent of the Developer.

Conclusion
The practice of developers purchasing Ding Rights for development of NT land is old news. Yet, the legal positions of different parties involved in such practice are never clear and often paraphrased as “risks”. Wah Hing re-confirms that agreements for such practice are illegal that contractual parties are denied the option to resolve their contractual disputes in courtroom. Yet, developers’ concealed ownerships of the land are still protected to the extent that they may rely on any declaration of trust or resulting trust. It follows that parties dealing with NT land as securities or purchasing NT land should beware of such underlying ownerships which may constitute an encumbrance on the property by way of registered declaration of trust or lis pendens in relation to claims for beneficial interests in the NT land.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.