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the contractual option to renew the 75-year leases was superseded by the New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.