While small houses may be the dream home for many longing to live in the countryside, the majority are not fully aware of the risks involved in buying them.  This article probes into the potential danger behind the creation of power of attorney by indigenous villagers in favour of developers which may affect the titles of small houses.

Small House Policy Introduction

The Hong Kong Government, since 1972, implemented the Small House Policy (“the Policy”) aiming to allow indigenous villagers aged 18 or above in the New Territories to build village houses for personal occupation (often known as Small Houses or “Ding” Houses).

Types of Grant

Under the Policy, if an indigenous male owns private agricultural land of his own in the village, he is entitled to apply for a building licence to build a small house on his land at nil premium (type 1), or he can apply for a land exchange grant where the Government will grant new land in return for the surrender of his land (type 2).If the male villagers does not own any land in the village, he may apply for a private treaty grant of land in the village expansion area, i.e. lands within village environs which were resumed by the Government (type 3) or a private treaty grant of a siteon government land(type 4) at a concessionary premium.All grants contain a restriction on alienation.

Role of Developer in Sale of Small Houses

The developers play an important role in the development of small houses in the New Territories.Some local developers are experienced in dealing with the District Lands Offices and have the financial resources to finance the construction of the buildings.Therefore, it has become a common practice for grantee under a Conditions of Grant or the grantee of a building licence to create a power of attorney in favour of a developer in respect of the land so that the developer will take care of the complicated process of obtaining the relevant permits and certificates, construction of houses and the ultimate sale of the house to the public.

Restriction on Alienation

In a recent District Court decision Euro King Development Limited v Ho Yu Kuen (“Euro King”), the registered owner (“the Owner”) of a piece of land in the New Territories granted with a building licence (“the Property”) has created a power of attorney in favour of a developer (“the Developer”) before the alienation restriction condition in the building licence was removed.This case raised the question of whether creation of a power of attorney would be in breach of the alienation restriction under the building licence.Condition 4(a) of the building licence (“the Condition”) provides as follows:

“Except as provided in sub-clauses (b), (c) and (d) hereof, the Licensee (…), having obtained this Licence on concessionary terms under the Small House Policy of the Government for indigenous villagers in the New Territories, shall not assign, partition, mortgage, charge, demise, underlet, part with the possession of or otherwise disposes of the lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, whether directly or indirectly, or whether by way of direct or indirect reservation, grant of any right of first refusal, option, power of attorney, building agreement or through a solicitor, agent, contractor, trustee or otherwise howsoever unless –

(i)A period of Five years has elapsed from the date of a letter issued by the District Lands Officer confirming that these Conditions have been complied with to his satisfaction, or

(ii)The Licensee has paid to the Government the premium in accordance with Condition 4(d)(ii) hereof. ”

The Condition in essence prohibits disposition of the licensee’s interest in the land by various direct or indirect means, or grant of power of attorney, unless five years has elapsed from the date the Certificate of Compliance has been issued or the licensee has paid the premium to the Government.

Nature of a Power of Attorney

The Court’s decision turned on two main points.Firstly, the Court decided that the creation of a power of attorney before the removal of the alienation restriction was in breach of the Condition under the building licence because creation of such power of attorney amounted to a disposal of interest in the Property.

The court took into consideration that the power of attorney in question was irrevocable except with the prior written consent of the Developer.It authorised the Developer to let out, create a charge or, mortgage on or sell the Property upon compliance with the conditions contained in the building licence.The rental and the proceeds of sale arising from the Property shall be appropriated by the Developer.

The Judge was of the view that by creating the power of attorney, some interests in the Property have been given to the Developer.While strictly speaking that may not be an assignment, he believed the word “disposal” under the Condition is wide enough to cover the creation of a power of attorney and that is why the words “power of attorney” are inserted in the Condition in the first place.

Real Risk of Enforcement Action

Secondly, the Court departed from the decision in Ng Man Fai Michael and another v Worldpart Industrial Limited and another(“Ng Man Fai”), where it was decided that by creating a power of attorney in favour of the developer and signing an agreement to sell part of the property within 5 years before paying the premium, the grantee of a building licence was only technically in breach of a similar alienation restriction, as he subsequently paid the land premium.Therefore, it is fanciful to assume that there is a real risk that the Government would take enforcement action against the owners of the property.

Likewise, the Defendant in Euro Kingargued that the risk of enforcement action by the Government is small.For one thing, the power of attorney has been registered in the Lands Registry and the Government should have been aware of its existence, but no enforcement action has been taken in the past 9 years.For another, the breach could easily be rectified by a payment of premium to the Government.The Court rejected both arguments.The Court departed from Ng Man Fai’s approach on the ground that there were no third party rights in Euro King, whereas in Ng Man Fai, more than one owner was involved under the same development and hence the chance of re-entry by the Government is low.Furthermore, in Ng Man Fai, the owner did pay to the Government the premium after entering the power of attorney and the sale and purchase agreement and it was at the most a technical breach or “jumping the gun”.

Commentary on Euro King’s decision

The decision in Euro King cannot be said to be entirely satisfactory.The Court did not seem to have addressed on the point that if the attorney wishes to sell, mortgage or lease out the Property, by virtue of the powers granted under the power of attorney, the attorney still has to remove the alienation restriction under the Condition.The power of attorney may be construed as an instrument to secure the proprietary interest of the Developer or the performance of an obligation by the licensee owed to the Developer rather than a disposal of the licensee’s interest.Secondly, the power of attorney had been registered in the Land Registry and no action was taken by the Government to enforce the alienation restriction.However, unless and until the decision in Euro King has been reversed by a higher court’s decision, there is now a distinction between cases where the creation of a power of attorney was followed by the payment of land premium to the Government as in Ng Man Fai’s case and cases where the creation of a power of attorney was not followed by the payment of a premium to the Government as in Euro King’s case.In the former scenario, the breach of the alienation restriction can be treated as a technical breach and the risk of enforcement action by the Government is non-existent.In the latter scenario, the risk of enforcement action by the Government cannot be said to be non-existent and the title to the Property would be rendered defective.