Archive for the ‘Building Management Ordinance’ Category

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

November 22, 2017

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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Each owner potentially liable for owners’ corporation’s entire indebtedness

November 13, 2017

In Wong Tak Man Stephen v Chang Ching Wai ([2017] HKEC 2266) Ps were the liquidators of the Incorporated Owners (‘the IO’) of a building (‘the Building’). The IO was wound up following a petition by a construction company that carried out refurbishment works at the Building. The IO had net liabilities of just over HK$3.64 million.

The first and second defendants (‘the defendants’) were two of the owners of the Building. The defendants were among a substantial number of owners who had failed to make the contributions due from them towards the cost of the refurbishment work.

The liquidators successfully sought a declaration that the defendants were jointly and severally liable for the IO’s debts and obligations. The defendants were ordered to pay the plaintiffs the sum necessary to meet the IO’s liabilities.

The basis of the plaintiffs’ claim was section 34 of the Building Management Ordinance:

‘In the winding up of a corporation under section 33, the owners shall be liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities.’

The court was presented with two rival interpretations of section 34:

  1. The owners were individually liable but only for a proportionate share of the IO’s liabilities calculated by reference to their shares in the Building; or
  2. Each owner was jointly and severally liable for all of the IO’s debts and liabilities but with a right of recovery from co-owners.

The court (Deputy Judge Anson Wong SC giving the judgment) accepted the second interpretation:

  1. The phrase ‘jointly and severally’ was introduced in 1993 when the Building Management Ordinance replaced earlier legislation. The phrase evinces an intention that each owner is liable for all of the IO’s debts and obligations.
  2. The phrase ‘according to their respective shares’ in section 34 refers to the right of recovery from co-owners.
  3. This interpretation of section 34 is consistent with section 17(1) of the Building Management Ordinance which allows the entire indebtedness of an IO to be enforced against an individual owner with a right of recovery from co-owners. There are dicta in the Court of Final Appeal decision in Chi Kit Co Ltd v Lucky Health International Enterprise Ltd ([2000] 2 HKLRD 503) to this effect. It would be strange if this position were not to be mirrored on a winding up.
  4. The first, rival, interpretation would make liquidation expensive and time-consuming. It would pass the risk of non-payment to creditors.

Michael Lower

 

Do owners of sub-divided units count as owners for general meeting purposes?

September 21, 2016

In Chow Chui Chui v Kafull Investment Ltd ([2016] HKEC 1889, CA) the DMC for a building divided the building by allocating 48 shares to a ground floor shop, 12 shares to each of the first to third floors (the ground to third floors being described as the ‘non-domestic accommodation’), one share to each domestic flat on the floors above the non-domestic accommodation and one share to the main roof and external walls. There was a first sub-DMC that sub-divided the ground floor into five units and allocated the 48 ground floor shares amongst these units. There was a second sub-DMC that sub-divided the units on the first and second floors of the building and divided the shares in the main DMC among the sub-divided units. Resolutions were passed at an owners’ meeting. Present at the meeting were fourteen owners from the non-domestic portion and two from the domestic portion. The question was whether the meeting failed to meet the quorum requirements in schedule 3, para. 5(1)(b) of the Building Management Ordinance (requiring that 10% of the owners should be present).

The contention was that only those who were ‘owners’ in accordance with the main DMC could be considered ‘owners’ for this purpose. Thus, there could only be 4 owners from the non-domestic portion (one for each floor). The Court of Appeal  (Kwan JA giving the Court’s judgment) rejected this contention. Section 2 of the Building Management Ordinance defines an ‘owner’ as one who appears from the Land Registry to be the owner of an undivided share of land on which there is a building. Section 39 of the Building Management Ordinance provides that an owner’s share is to be determined in accordance with a DMC registered at the Land Registry. Here, the shares had been attached to the sub-divided units by the terms of a sub-DMC, the owners of the sub-divided units had the right to exclusive possession and the Land Registry records confirmed their ownership ([35]). They were owners and, as a result, the meeting was quorate.

There was nothing to limit the Ordinance’s references to a ‘deed of mutual covenant’ to the main DMC ([39]) especially where, as here, the main DMC contemplated the possibility of sub-division. In fact, it is enough that the main DMC does not prohibit sub-division ([40]).

Michael Lower

 

Can a developer retain exclusive use of the external walls of a building and pass repair costs onto the other owners?

October 14, 2015

In Green & Grace Ltd v Wang Lung Industrial Building ([2015] HKEC 1935, LT) the incorporated owners resolved to repair the external walls of the building. A later general meeting specified the contribution of each owner to the works that had been carried out, including the cost of repairing the external wall.

The DMC of the building retained the exclusive use of the external walls for the developer but provided that the developer would not be required to repair them. The question was whether the resolution to repair the external walls was void in the light of section 34H(1) of the Building Management Ordinance:

‘Where a person who owns any part of a building, has the right to the exclusive possession of any part of a building or has the exclusive right to the use, occupation or enjoyment  of that part as the case may be, but the deed of mutual covenant does not impose an obligation on that person to maintain the part in good repair and condition, that person shall maintain that part in good repair and condition.’

The incorporated owners responded by pointing out, among other things, that the DMC gave the Manager some limited control rights over the external walls and that, therefore, the developer’s rights were not ‘exclusive’. This contention failed as did the argument that the limited repairing and maintenance obligations imposed on the developer by the DMC meant that section 34H did not apply. The external wall, being for the developer’s exclusive use, was clearly not a common part.

Kot DJ found the reasoning in Uniland Investment Enterprises Ltd v IO of Sea View Estate ([1999] 4 HKC 141) especially helpful. This looked at the combined effect of sections 34H and 34C(2) of the Building Management Ordinance. The latter provision stipulates that section 34H takes priority over the terms of the DMC in the event of inconsistency. The conclusion was that the DMC provision purporting to relieve the developer from any obligation to maintain the common walls was inconsistent with section 34H and was void. It was for the developer, and not the incorporated owners, to repair the external walls or bear the costs of doing so.

Interestingly, Kot DJ commented on the Court of Appeal decision in 鄭惠娟 對 永利中心業主立案法團及另一人 . He found this unhelpful since the Court of Appeal’s attention had not been drawn to Uniland.

Michael Lower

House rules in the DMC

January 12, 2014

In Yuen Long Tin Shing Court (IO) v Wong Mau ([2013] HKEC 2021, LT) a flat owner was alleged to be keeping a dog in the flat in breach of the DMC. This problem was not resolved despite repeated requests to do so. The owners’ corporation sought, and was granted, an injunction to restrain the keeping of the dog. The Tribunal noted that the DMC’s prohibition on keeping dogs was in a schedule of the DMC that constituted the House Rules. This did not deprive it of its normal legal effect.

Michael Lower

Appointment of an administrator where the management committee had ceased to exist

January 4, 2014

In Smart Wealth Asia Pacific Ltd v Kelly Court (IO) ([2013] HKEC 2056, LT) Smart Wealth had acquired 92.5% of the shares in a building. All the members of the management committee had sold their shares and so ceased to be office-holders by operation of law. The owners meeting had resolved to dissolve the management committee and appoint an administrator but there was a serious doubt as to the validity of the resolution since the Building Management Ordinance required the management committee to call the owners meeting to consider such a resolution. This was an application by an owner for the dissolution of the management committee and the appointment of an administrator by the Tribunal under section 31 of the Building Management Ordinance.

The court made the orders sought. It was appropriate to dissolve the management committee to avoid doubts arising in the future as to whether or not one was in existence ([14]). It was also appropriate to appoint an administrator: there had to be a body capable of performing the duties and exercising the powers of the management committee under the terms of the Deed of Mutual Covenant and the Building Management Ordinance ([16]).

Michael Lower

Adverse possession of a common part by a non-owner

September 10, 2013

In Yeung Mau Cheung v Ka Ming Court ([2013] HKEC 1271, CFI) the plaintiffs and their predecessors had used two portions of the common parts of a building as a refreshment store and associated storage area since 1965. The DMC for the building was created in 1970. The question was whether the plaintiffs were entitled to declarations that they had a possessory title and that the defendant’s title had been extinguished by the Limitation Ordinance. The court was satisfied that the plaintiffs had been in adverse possession for the necessary length of time ([29] – [30]).

The next question was whether the adverse possession claim was defeated by the covenant not to convert common parts to private use implied into the DMC by section 34I of the Building Management Ordinance. This defence failed. The court relied on, and regarded itself as being bound by the Court of Appeal decision in Wong Kim Lin v Peony House (IO).

Michael Lower

The duty to convene and participate in management committee meetings

August 15, 2013

In Tzeng Li Wen Judy v Tam Lup Wai Franky ([2013] 2 HKLRD 790, LT) one member of a management committee brought proceedings against the chairman complaining that meetings had not been held every three months as required by schedule 2 of the Building Management Ordinance. The chairman sought to have the proceedings struck out on the grounds that the proceedings should have been brought against the management committee as a whole, that there was no business to discuss and there had been an agreement that no meeting was necessary. This striking out application failed. The management committee was not a separate legal entity capable of being sued ([19]). The chairman had a duty to convene a meeting every three months (though of course he could not compel anyone to attend) ([24]) and on the face of it he was in breach of this duty.

The action against the secretary was struck out. The secretary only had a duty to convene a meeting if requested to do so by two committee members and the secretary had received no such request ([27]).

The action against the corporation was struck out since it had no power to convene a meeting of the committee ([28]).

The members of a management committee are under a duty to participate so far as reasonable in the operation of the corporation and part of this duty is to attend management committee meetings ([24]).

IO asked to reimburse owner the cost of replacing an unauthorised structure that it had removed

June 20, 2013

In Lee Din Chun v Beverly Heights (IO) ([2013] HKEC 924, LT) L owned a parking space at the property. There was a canopy above the parking space. This was an unauthorised structure. The incorporated owners had it removed because it was impeding the progress of works on the sewers and drains beneath the parking space. L replaced the old canopy with a new canopy. The erection of the new canopy amounted to a breach of the DMC. Further, the Building Authority issued a notice requiring the demolition of the new canopy as it was in breach of the Buildings Ordinance. Nevertheless, L now sought compensation from the IO for the cost of erecting the new canopy. L failed. There was no basis on which the IO could be liable for the cost of the new canopy. Further, it was unreasonable to require it to pay for the cost of erecting an unlawful structure; this might expose it to the risk of having committed a criminal offence.

Michael Lower

Breach of DMC: landlord’s liability for tenant’s use of common areas

April 11, 2013

In 海怡閣(成和道) 業主立案法團v 泓璟集團有限公司 ([2013] HKEC 345, LT) L was the registered owner of shops forming part of a building. It permitted its tenant to use the adjoining common parts (though it did not purport to include them in the lease). The landlord and the tenant were each liable to the incorporated owners in trespass ([109] – [111]). The tenant was ordered to pay damages in respect of its use of the common parts assessed by reference to the market value for the rights that it exercised.