Owner’s liability for management charges – need for adequate legal basis and proper procedure

In San Po Kong Mansion (IO) v On Rich (HK) Investment Ltd ([2017] HKEC 2321) the plaintiffs were the incorporated owners of San Po Kong Mansion comprising four 20-storey blocks for mixed commercial and residential use.

The defendants owned 10% of the shares in San Po Kong Mansion allocated to part of a building originally a cinema but now converted into a shopping mall (‘the Theatre Parts’).

Shine Empire Ltd (‘Shine Empire’) retained the right to exclusive possession of the roofs of the other parts of San Po Kong Mansion (‘the non-Theatre parts’).

The incorporated owners had licensed various telecommunications companies to install equipment and cables on the roofs of the non-Theatre parts and collected licence fees. Shine Empire succeeded in possession proceedings (‘the Trespass Proceedings’) against the incorporated owners and the telecommunications companies. The incorporated owners and the telecommunications companies were ordered, amongst other things, to pay damages and costs to Shine Empire.

The incorporated owners entered into an agreement with the telecommunications companies indemnifying them against all damages, interest and costs arising from the Trespass Proceedings (‘the indemnity agreement’).

In the 2011 annual general meeting, the incorporated owners resolved to levy a charge on each owner as its contribution to the money payable to the telecommunications companies under the indemnity agreement.

Pursuant to this, the incorporated owners demanded HK$1.38 million from the defendants as their share of the sum payable under the indemnity agreements.

The defendants refused to pay arguing that:

  1. the 2011 AGM had not been validly convened;
  2. the DMC did not impose any obligation to meet this payment;
  3. nor did sections 20 – 22 of the Building Management Ordinance entitle the incorporated owners to recover the sum from the defendants.

On the first issue, it was decided that the AGM had not been validly convened. The incorporated owners were not able to show that they had properly served notice of the AGM (or any other notice) on the defendants.

Second, the sum payable under the indemnity agreement did not fall within any of the charging provisions of the DMC.

Third (concerning sections 20 – 22 of the Building Management Ordinance) there was no valid management committee (the incorporated owners were unable to show that any notice of a meeting that might have appointed them had been validly served). Only a validly appointed management committee can fix contributions under sections 20 – 22 of the Building Management Ordinance.

More fundamentally, even a validly appointed management committee could not have required the defendants to contribute to the money payable under the indemnity agreement.

Section 20 of the Building Management Ordinance allows incorporated owners to maintain funds:

(a) to meet the costs of exercising powers and performing duties imposed on them by the DMC and the Ordinance itself;

(b) to pay ground rent, taxes or other outgoings in respect of the building as a whole;

(c) to maintain a contingency fund to meet expenses of an unexpected or urgent nature.

The sums payable under the indemnity agreement did not fall under any of these headings. Sums are only recoverable under (c) if they were expenses that the incorporated owners were empowered to incur. It is not enough for them to be unexpected or urgent ([66]). The incorporated owners had not that they were authorised to enter into the indemnity agreement.

Michael Lower

 

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