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Purely Contractual Lease in Hong Kong: controversy and problems

Author - Sam Kwan Chun Wai


Introduction

The lease is considered a legal estate in Hong Kong (section 2, Conveyancing and Property Ordinance (Cap. 219)), and has long been acknowledged to be both a contract and a proprietary interest in land (Lee & Goo, 2015; Dixon, 2016). Yet, the House of Lords decision in Bruton-v London-&-Quadrant Housing Trust controversially espouses the possibility of a purely contractual lease, by allowing a licensee with no proprietary interest in the premises to grant a lease. This article challenges the decision in Bruton. It also makes the point that the decision has not been incorporated into Hong Kong’s legal system.


The lease is by its very nature proprietary, and any attempt to establish a purely contractual licence muddles the distinction between a lease and a licence, thereby rendering the concept of ‘lease’ under the law of property meaningless. In any event, Bruton has never been, and is unlikely to be, endorsed by Hong Kong’s courts although it was mentioned in the Court of Final Appeal decision in Cheung-Yat-Fuk-v-Tang Tak-Hong.

Bruton rests on the proposition that an agreement that, in substance, offers exclusive possession for a certain term inevitably creates a lease even if the parties declare that this is not their intention. While this is firmly established, Bruton prompts the thought that the time has come to re-consider the proposition.


Background: Bruton-v-London-&-Quadrant-Housing-Trust

In Bruton, a charitable housing trust, London & Quadrant Housing Trust, was granted a licence by the local authority to use some properties acquired by the authority for redevelopment as temporary accommodation for the homeless. This would allow London & Quadrant to use the property until the authority was ready to carry out the redevelopment. London & Quadrant covenanted that it would not grant any tenancies without the authority’s prior consent.


The plaintiff signed an agreement with the trust for the occupation of a self-contained flat in one of the properties on a weekly basis. The agreement described itself as a license and the parties agreed that London & Quadrant could bring it to an end at any time on reasonable notice. The plaintiff later claimed to be a tenant and to have the benefit of the implied repairing covenant imposed on landlords by English legislation. The question, then, was whether the agreement with the plaintiff created a lease or a licence.


The House of Lords held that the agreement created a lease; it gave the plaintiff exclusive possession for a certain term. Controversially, this decision has the far-reaching consequence of acknowledging the possibility of creating a non-proprietary lease, a lease granted by a person with no estate in the premises.


Intrinsic character of lease: Proprietary interest

It is well established that a lease is not merely a contract but also an estate in land (PW & Co v Milton Gate Investments Ltd). This is confirmed by section 2 of the Conveyancing and Property Ordinance. Given the general proposition that one cannot grant a legal interest greater than one has (nemo dat quod non habet), it is only logical that the grantor must have a superior freehold or leasehold estate to grant a lease (Lower, 2011).


By endorsing the existence of a lease without any estate in land, Bruton has trampled on a fundamental concept of the law of property and has gone far beyond Lord Templeman’s judgment in Street. While Bruton may be a convenient decision from the perspective of social welfare (Dixon, 2016), imposing repairing obligations on the local authority for the benefit of underprivileged groups, it is a dangerous one from the legal perspective. It leads to an overlapping of the concepts of lease and contractual licence. This introduces uncertainty and so contravenes one of the underlying principles of the law of property.


Illusory-endorsement-of-Bruton: Cheung-Yat-Fuk-v-Tang-Tak-Hong

Bruton has never been endorsed as part of Hong Kong law although it is referred to in obiter dicta in Cheung-Yat-Fuk-v-Tang Tak-Hong, an adverse possession case. In that case, however, the court was concerned with the question as to whether a squatter retained possession when he granted a lease of the relevant property; the question as to whether someone without an estate in land could create a lease did not arise.


Should the courts give effect to a clear common intention to create a licence?

Bruton could be said to take to its logical limit the idea that a contract that offers exclusive possession for a certain term always creates a lease. As we have seen, however, this logic is irreconcilable with the understanding that a lease is an estate in land. Hong Kong law has not gone so far and still requires the ‘landlord’ to have a reversionary interest.

Labelling the agreement a “licence” is never determinative (Antoniades v Villiers); the question is simply whether the substance of the agreement satisfies the Street criteria. If the criteria are satisfied, the fact that the parties have agreed that they intend to create a personal licence rather than a proprietary interest is irrelevant.


This is the law but is it satisfactory? Why should the parties not be left free to decide whether they intend their agreement to create an interest in land? In National Car Parks v The Trinity Development Co (Banbury) Ltd, the English Court of Appeal decided that a declaration by the parties that they intended to create a licence ought to carry some weight; the court could legitimately take this into account in deciding on whether the parties intended the occupier to have exclusive possession.


It is a short step from this proposition to the idea that the parties should have an ability to form an effective common intention to grant exclusive possession without creating a lease. This might be a desirable development. It would allow bodies such as London & Quadrant to continue their socially useful work in meeting the needs of the homeless without fear of creating a lease with all the legal consequences that would follow from that. This would address the misgivings voiced by Slade LJ in Family Housing Association v Jones as to the impact of strict adherence to the Street criteria on bodies offering shelter to the homeless.


Conclusion

The concept of the ‘purely contractual licence’ suggested by Bruton is a confusing and precarious creature. Bruton does not represent the law in Hong Kong. In any event, there are alternative, and better, justifications for reconciling the outcome in Bruton with the traditional understanding of the lease as an estate in land. These include the doctrine of estoppel by grant and the concept of relativity of title (Routley, 2000; Lower, 2011). While these justifications have their limitations, they are better aligned with the common law’s traditional understanding of the lease than is the concept of the “purely contractual lease”.

It is well-established that the parties cannot opt to create a licence if their agreement satisfies the Street criteria. The decision in Bruton makes it desirable to re-visit this proposition. Why should the parties’ common intention to create a licence be irrelevant? As Bruton illustrates, there may be occasions where it suits the parties, and promotes social welfare, to allow the parties to opt to create a licence even though the Street criteria appear to be satisfied.


References

1. Antoniades v Villiers [1988] 3 WLR 139

2. Bruton v London & Quadrant Housing Trust [2000] 1 AC 406

3. Cheung Yat Fuk v Tang Tak Hong [2004] 2 HKLRD 86

4. Conveyancing and Property Ordinance (Cap 219)

5. Dixon, Martin Modern land law (10th ed) London, Routledge 2016

6. Family Housing Association v Jones [1990] 1 WLR 779

7. Landlord and Tenant Act 1985

8. Lee, Alice, Goo, S.H. Land law in Hong Kong (4th ed) Hong Kong, LexisNexis 2015

9. Lower, Michael Bruton v London and Quadrant Housing Trust: Opening Pandora's Box (2011) 22(3) King’s Law Journal 403-413

10. National Car Parks v The Trinity Development Co (Banbury) Ltd [2001] EWCA Civ 1686

11. PW & Co v Milton Gate Investments Ltd [2003] EWHC 1994

12. Routley, Patrick Tenancies and Estoppel - After Bruton v London & Quadrant Housing Trust (2000) 63 Modern Law Review 424.

13. Street v Mountford [1985] AC 809

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