An abandoned house, a missing owner, a mysterious squatter and an archaic law all add up to a puzzle that could lead to a young banker taking ownership of a million-dollar home without paying a cent.

And neighbours now fear this could cause a free-for-all grab for unoccupied properties, particularly those owned by overseas investors.

The Victorian heritage terrace house in Sydney’s inner city at the centre of this strange squabble has an overseas-based owner who can’t be traced and a squatter who says he’s claiming possession using an arcane real estate law.

The man, who variously identifies himself as Andrew James and Andy Robert, has been seen going in and out of the empty house on Elizabeth Street in Redfern.

He has told neighbours he intends to make a claim of “adverse possession” whereby the long-term open and continuous use of a property by an individual can, in some circumstances, cancel out the rights of the real owner.

“Someone described it to me as ‘legalised theft’ and with thousands of properties in Sydney bought by overseas investors, it could lead to real lawlessness.”Gerard Knapp, Neighbour

The rightful owner is a Chinese-born man named Paul Fuh who bought the house in the middle of a row of late Victorian Filigree terraces in 1991. But he hasn’t been seen for the past nine years after returning to China in 2007, and now Mr James – or Mr Robert – apparently believes he could well succeed in picking up the property for nothing.

“He’s only a young guy, but he’s trying to take the premises,” said the neighbour on one side, Paul Wilton, who reported him to the police for trespassing but was told that only the owner, the victim of any such trespass, could make such a complaint.

“My understanding is that he hired a locksmith and went in through the front door one day and, when I confronted him, he’s now saying he’s taken vacant possession. He told me he’s planning to renovate the property, then will rent it out and, when the time comes, he’ll claim it under the adverse possession law.”

The owner of the house on the other side, Gerard Knapp, says he fears this might create a precedent that could endanger any empty home.

“He said he’s taken possession of it,” Mr Knapp said.

“He gained access and now he’s making a claim of adverse possession. It’s an extraordinary situation. Someone described it to me as ‘legalised theft’ and, with thousands of properties in Sydney bought by overseas investors, it could lead to real lawlessness.”

The term “adverse possession” is sometimes referred to as “squatter’s rights”, a law whereby someone occupies a property for so long, the real owners lose their own rights over it. In NSW, that period is 12 years.

All attempts to speak to Mr James have failed. He told his neighbours he works for a bank and is represented by a legal firm in country NSW. When called by Fairfax Media, the company receptionist said: “We have no comment to make on anything to do with Andrew James,” and put down the phone.

The house has become dilapidated and, in 2008, the City of Sydney council took Mr Fuh to court for neglect of the house.

In his absence, Justice Terence Sheahan of the Land and Environment Court ordered the council to carry out emergency repairs and made an order for legal costs, which totalled $35,580.

The neighbours, fearing the ongoing neglect would damage their adjoining homes, have been urging the council to put up the house for public auction, pay off creditors and leave the balance with the public trustee for Mr Fuh or his relatives.

They hope a new purchaser would rebuild the house, and keep it in good repair.

But a spokesperson for the council says the matter of ownership is between the owner and anyone currently inhabiting the house.

“The City of Sydney has no rights to take occupation of the property. However, if the rates are not paid, the city may consider selling the property to recoup expenses owed.”

Under the Local Government Act, the council can sell any land on which any rate or charge has remained unpaid for more than five years from the date on which it became payable. That would ultimately be a decision of councillors.

The council has just had an independent assessment of the structural integrity of the house carried out – with access provided by Mr James – and is waiting for the report.

“We will review it as soon as possible,” the spokesperson said.

Sachs Gerace Broome lawyer Beverley Hoskinson-Green said adverse possession was an ancient doctrine inherited from old English law, designed to stop someone from being turfed off a piece of paddock they had been farming for 35 years by the gentry owners. “It’s something now that very, very rarely arises,” she said.

“But on our interpretation of the law, we don’t believe any adverse possession can occur unless the owner knows about Mr James taking over. You cannot have ‘adverse possession by stealth’.

“If someone has accessed the house and is doing work without the consent of the owner, and subsequently puts it up for rent, any rent he collects is actually collected on trust for the true owner.”

In the meantime, everyone is in limbo.

“We just want the best outcome for the city,” Mr Knapp said. “So far, council is acknowledging James as the ‘occupant’. Its inactivity is effectively gifting him a house worth $1 million.

“It is only council that has the power to stop this occupation, by selling the property, but it does nothing. Why? This could end up a test case for similar occupations of untenanted buildings. It seems that unoccupied houses and apartments are now fair game for ‘adverse possession’ where the real owners can’t be found.”