The covert deals have been common for a long time in the New Territories, commentators say, even though they involve false declarations that break Lands Department rules.

The developers benefit by illicitly using the villagers' rights to build houses - sidestepping the cost and inconvenience of arranging for rezoning and paying land premiums, which is the normal procedure when developers build on village land.

Political commentators said the covert deals clearly signalled the government's inability to control land policy in the New Territories.

They seem to be a clear abuse of the spirit, if not the letter, of the small-house policy, which was introduced in 1972 as a scheme to provide better housing for rural residents.

Under the deals that have come to light, the villagers apply to the Lands Department for small-house grants on the land they used to own - falsely representing themselves as still the owners. The developer builds houses in villagers' names, later selling them for a profit.

Such deals are not without their legal risks. They directly violate the department's ban on villagers selling or transferring their interests or rights before getting permission to build a house. The risks, however, seem low because the cash-for-rights agreements are normally under-the-table deals known only to the villagers, developers and their lawyers.

A department spokeswoman said villagers found entering into such deals could have their small-house grants revoked or their applications rejected. But in the past two years, no such breaches have come to light.

To further prevent abuse, she said, no small house can be sold within five years of being built without government approval and a land premium payment.

One villager said he was aware of the legal uncertainties when he signed off his rights and property to the developer.

'I am not 100 per cent sure about the legality issue, and there might be some loophole,' he said. 'But this is a practice everyone in the New Territories is doing to develop their land, and this is not unique to our village,' he said. 'After all, we do this to save our vanishing village.'

The 350-year-old Wong Chuk Yeung village is one of the 74 so-called country park enclaves - land encircled by, but not part of, the park. The site is zoned as village housing, green belt and conservation area.

The village has been deserted since Li clan members moved to the city or Europe in the 1960s, after mining on Ma On Shan interrupted the water supply to the once productive paddy fields. Eight men from a branch of the Li clan are among those who have consented to the sale of their land and small-house rights, according to a copy of the private sales agreement seen by the Post.

The agreement was signed by the family head, two representatives from the seven development companies and a senior clan member as a witness. The developers are believed to have acquired most of the land.

Informants familiar with the deal told the Post that the developers' representatives travelled with Hong Kong lawyers to England to seal the deals with villagers in June last year. The agreements were written in Chinese and English.

It is not clear how many villagers have signed the rights agreements and land contracts, but the developers aim to collect the land and rights to about 96 houses. That means up to 32 houses will be given to some villagers in lieu of cash payments, while at least 64 will be kept by the developers.

Some villagers estimated the developers could have spent HK$120 million to acquire the land and would spend another HK$150 million to build the houses, after spending HK$48 million on the villagers' rights.

If all the villagers choose to cash in their rights, and each of the 96 houses fetches HK$10 million in the market, the developer could potentially pocket about HK$642 million net profit.

Audrey Eu Yuet-mee, a Civic Party legislator, said the agreement highlighted a grey area being exploited in the small-house policy, to which the government has turned a blind eye for years. 'When it comes to land issues in the New Territories, the government is hopeless,' she said.

Eu said she did not expect the government to resolve small-house issues because it relied on influential rural figures to retain power. 'They can't even get the job done on the illegal structures. How will they dare touch the small houses?' she asked.

Lam Kwok-cheong, a councillor for the Heung Yee Kuk, which represents indigenous villagers' interests, said while the sale of villagers' house rights was legal, the arrangement might violate the land lease law. 'It is not a black-and-white issue, and it has to be looked at from different viewpoints,' he said.

A planning consultant familiar with such covert deals said their legality was questionable. Even so, he said: 'This is very common, because it is virtually impossible for officials to collect any evidence.'

The consultant said the developers' risks were more financial than legal: they would have to pay out large sums over a long period - with lots of uncertainties - before the houses could be turned into profits. But the potential return could more than compensate for the high risks. 'The high risks also mean that those involved in the game are influential figures who have power over other villagers who are willing to sell their rights' he said.

The agreement contains safeguards for a villager who signs over his small-house rights in return for a flat. If the house is not built by a certain deadline, he will be compensated with HK$400,000.

The developers agree to set aside a bond of at least HK$10 million in a bank account jointly held by them and some villagers. The money cannot be returned to the developer unless the housing project has progressed along a list of performance benchmarks.

The developers also promise to rebuild the ancestral hall and a village hall of a certain size.

Introduced in 1972, the small-house policy aimed to improve the living conditions of villagers at a time when new towns were expanding rapidly into rural areas.

Each qualified male villager is allowed to build a three-storey house of 700 square feet per floor, on private land within the village or land granted by the government. Since 1972, more than 30,000 have been built.