Third party's interests under divorce proceeding in Hong Kong ... a series of case studies

Article Experience

如欲閱讀繁體中文版,請點擊這裡
如欲阅读简体中文版,请点击这里

Mr and Mrs Wong’s Story

Mr and Mrs Wong have been married for 20 years with one daughter studying in university and one son studying in high school. Mr Wong’s parents contributed an initial down payment to buy them a bigger house in Pukfulam after Mrs Wong gave birth to their second child and quit her job as a teacher. The new house was purchased in 2007 with a mortgage loan tenure for 20 years. Mr and Mrs Wong’s relationship started to deteriorate and they were both contemplating getting a divorce. Third party interest when it comes to the discussion of asset allocation, such as the interests of their children, their parents, mortgagee and their investment partners in their companies, cannot be ignored.

Issues for consideration:

Scenario 1: Funds provided by third party to buy property

Pukfulam Property in Hong Kong is registered in the name of Mr and Mrs Wong as joint tenants. Mr Wong’s parents who contributed the initial down payment now claim a beneficial interest in the property by way of resulting trust in accordance with their respective contributions. Mrs Wong argues that the down payment money was a gift to them from the parents pursuant to a presumption of advancement.

A resulting trust generally arises when one party pays the purchase price for the property, resulting in the title to be taken in another party’s name. Given a resulting trust usually infringes upon the express language of a written document, Mr Wong’s parents would need to provide clear and convincing evidence to prove the establishment of such resulting trust.

Mrs Wong may have an advantage because Hong Kong courts have noted a presumption of advancement if a parent funded the purchase of property for his/her child as a gift and thus the property is not held on trust for the parent.

In determining the existence of a resulting trust, the court will look into all circumstances and available evidence, such as the age of the parents and child, reason for making a gift or a formal declaration of trust, means and extent of financial dependence on the parent, the closeness of the parent child relationship, the parent’s moral and equitable obligations to the child and others, etc.

Scenario 2: Trustee

Mrs Wong recently discovered that Mr Wong bought another property in Tseung Kwan O, New Territories a few years ago through a trust arrangement with Mr. Wong as the trustee and their children as beneficiaries. Mrs Wong’s friend told her the property in Tseung Kwan O cannot be subject to allocation under divorce proceeding because the property is owned by a trust and not under Mr Wong’s name personally.

It is a common misconception that assets owned by a trust will not form part of the matrimonial pot for division between spouses. Indeed, whether a trust will form part of the property pool will depend on the nature of a spouse’s interest and their degree of control over the trust. The court will have to examine several factors, such as the terms of the trust deed, who is the trustee and appointer, whether the trustee or appointer is a spouse, the degree of influence a spouse has over them, who are the beneficiaries, the history of trust distributions, how the assets of the trust were acquired, contributions by spouses to the property owned by the trust, what benefits the spouses derive from the trust, etc.

Depending on the circumstances of a case, a trust might be considered part of a necessary financial income for a spouse and therefore may be included in the overall matrimonial pot. While it might or might not affect the trust itself, the value considered and the eventuality of ordering a payment may be made out of that trust if this results in the finding of a fair solution for all parties involved. Alternatively, the court can set aside a trust if it is a “sham” avoiding division or payment to a divorcing spouse.

Scenario 3: Cohabitees or LGBT couple and Constructive Trust

After investigation, Mrs Wong further discovers that Mr Wong was in a romantic relationship with a Mr Chan and they had cohabited together in the Tseung Kwan O Property before they broke up a few months ago. Mrs Wong was deeply hurt by Mr. Wong’s unfaithfulness and is also surprised about her husband’s same-sex extra-marital relationship. Mr. Wong had set up a joint business with Mr Chan of which the dividend out of the profits generated from the business was used to pay the purchase price of the Tseung Kwan O Property. Mrs Wong fears that Mr Chan might claim that he is the beneficial owner of the Tseung Kwan O Property.

In general, there is no direct right under matrimonial legislation in Hong Kong for a cohabitee or LGBT couple to make a financial claim in Hong Kong if they separate. The party seeking for remedies must fall back on the remedies available to those arising out of the civil law e.g. contract – if any contract has been entered into to govern the parties’ rights, or property – if contribution to the purchase price or loan repayments on a property may give rise to a beneficial interest and/or right to live in the property.

In a recent Hong Kong case(1) dealing with a similar situation, the plaintiff succeeded in establishing her beneficial interest ownership in assets on the basis of a common intention constructive trust. The court held that those assets under the name of her ex-boyfriend were purchased for the purpose of the business. The applicant satisfied the two elements of a successful claim based on a common intention constructive trust: (i) whether an agreement, arrangement or understanding between the parties on how the asset is to be held beneficially is in place and whether the court would be able to infer the same by relying on the conduct of the parties and the factual circumstances; and (ii) whether there is any detrimental reliance by the claimant on the agreement, arrangement or understanding and whether it would be unconscionable for the other party to depart from the same.

Scenario 4: Occupation Right

To take better care of their children, Mr and Mrs Wong agree to live together in the Pokfulam Property with their children after the divorce until their children graduated from university. They also agree that the Property will be sold thereafter at a certain price so that the sale proceeds after repayment of the mortgage could be shared between them. How should such an arrangement be implemented?

There is a new trend in Hong Kong that more couples are choosing to stay and live together in their family home after the divorce. Some couples like Mr and Mrs Wong choose to do this for the best interests of their children while others are doing this out of financial necessity, particular as rents in Hong Kong and running two separate households can be expensive. To deal with such arrangement, clear delineation of occupation rights and the use and control of the space have to be considered such as how will common areas be divided or used, who will pay the household expense, mortgage (if any), maintenance or repair, or how to split the rental income (if any) etc.

It is also important to agree on how such occupation rights be terminated upon the expiry of certain date or happening of certain event such as when the children attain the age of 18 or having completed their tertiary education. It is also prudent to set out how the sale of the property is conducted, and how the sale proceeds are to be distributed such as the minimum sale price, the division after repayment of mortgage, legal costs and other liabilities etc.

To regulate those rights, a separation agreement in writing is always essential and couples are advised to enter into a Deed of Separation to be signed after they have obtained independent legal advice. Sometimes, couples may agree to sever the joint tenancy of a property into tenancy in common or to sign a Power of Attorney in case a couple always needs to travel for ease of property management and securing such occupation right.

Scenario 5: Mortgagee/Lender/Creditor

The Pokfulam Property is still under a mortgage loan in favour of HSBC. Mrs Wong wishes to discuss with Mr Wong to transfer the Pokfulam Property under her sole name in her divorce settlement proposal.

This is another misconception that a divorcing couple is not required to enquire the right of existing mortgagee/lender/creditor of a property when dividing or transferring their property. Our first article in this series provides a detailed discussion on how couples deal with their property with an existing mortgage. In short, the parties are generally required to discharge their interest before or upon completion of property transfer, they also need to decide responsibilities on repayment of mortgage loan, and whether the new owner has financial capability to meet the stress tests required by the bank.

Scenario 6: Overseas Properties

Apart from Hong Kong property, Mrs Wong has a house with her mother in Ning Bor, China prior to her marriage. Her mother is a PRC resident and now lives in the property. Mr and Mrs Wong occasionally take their children there during the holidays. Mr Wong also bought a vacation house in Shenzhen, close to a golf course under his sole name soon after marriage. How should these properties be dealt?

Unlike Hong Kong, property acquired and owned by the couple unless otherwise agreed is considered a common property even though it is registered under the name of one party. Any property acquired before the marriage will be considered to be Mrs. Wong’s personal property and a pre-marital asset. Thus, Mr Wong will not be able to claim any interests on Ning Bor’s property while Mrs Wong will be able to claim her interests under the common property principle in the PRC for the vacation house in Shenzhen as this was purchased using marital funds despite being registered in his sole name.

The complication of the rights and issues in handling overseas properties will be covered in the next series. For those who are interested to understand the property laws generally in PRC and other popular Asia Pacific regions such as Singapore and Japan, please view our Asia commercial real estate investment guide.

Conclusion

Mr and Mrs Wong’s story is not uncommon in Hong Kong. Indeed, their story only sets forth a few examples involving third party’s interests that divorcing couples or couples experiencing problems in their marriage and contemplating a divorce should consider. Without proper consideration, such third party’s interest can turn a separation into a family crisis and make unrecoverable damage to a family’s harmony and relationships – emotionally and financially.

Should you have any enquiry, our teams of matrimonial and conveyancing lawyers are ready to share more details on this topic. Seeking proper legal advice and a consultation with one of our experienced lawyers is recommended before planning the petition for divorce.

(1) Chan Suk Yee Bonnie v The Estate of Chan Sau Yiu and Others [2022] HKCFI 633

Disclaimer: The example people, places, and events depicted herein are fictitious. No association with any real person, places, or events is intended or should be inferred.

Authors