Unpaid management charges – a defect in title?

Where there are large unpaid management charges due under the terms of a DMC and a purchaser would be liable to pay them, this is a defect in title unless the liability was clearly within the contemplation of the parties at the time of the contract. Where a DMC provides for unpaid management charges to be a charge on the share of the defaulting owner this is an attempt to create an equitable charge. It must comply with CPO s.5(1)(a) and be in writing signed by the chargor. The charge must be in writing and does not arise automatically. If the defaulting owner will not sign the charge (despite an obligation to do so imposed by the DMC) then equity will dispense with the need for the signature. The charge must be registered in accordance with the Land Registration Ordinance.

In Wise Wave Investments Ltd v TKF Services Ltd ([2007] 4 HKLRD 762) W had agreed to buy a shop unit from T. because of a dispute between T and the management company, there was a very large amount of unpaid management fees and contributions. W found out about these after the agreement had been entered into but before completion. They argued that T had failed in its duty to show a good title. The court agreed: the unpaid fees were extraordinarily substantial and beyond the contemplation of the purchaser. On a proper construction of the DMC, the purchaser would be liable to pay them. This was a sufficient ground for holding that there was a defect in title (Chi Kit Co Ltd v Lucky Health International Enterprise Ltd). W had also argued that there was an encumbrance because the DMC charged the share of the owner with any unpaid fees. This argument of W’s failed. The DMC did not create a charge but imposed an obligation to grant a charge in certain circumstances. The equitable charge would only arise when a written charge complying with CPO s.5(1)(a) had been produced. Equity could dispense with the need for a signature. The charge would need to be registered in accordance with the Land Registration Ordinance.

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