Developer retains exclusive right to use the external walls. Are they common parts?

Introduction

In Kong Wai Hsien v Tai Wai Glamour Garden (IO) ([2019] HKCA 1229) the Court of Appeal had to consider whether the external walls of a building were common parts even though the DMC reserved to the developer the exclusive right to use them.

Individual owners claimed that they were not liable to contribute to the cost (of over HK$5 million) of carrying out maintenance works on the external walls and other common parts.

The individual owners argued that these walls were not common parts since the DMC granted the developer exclusive rights over them.

Were the external walls ‘common parts’ in the sense that they were not part of the estate the exclusive use of which had been allocated to an owner? This was a question of contractual interpretation of the DMC.

Relevant DMC provisions

The DMC for the building allocated 20 shares to the common parts, expressly defined to include the external walls. The developer retained the ownership of these 20 shares and the associated rights over the common parts.

The rights given to the owner of the common parts by the DMC included the exclusive rights to use the external walls: (a) by placing pipes, wires, machinery etc on them; and (b) the exclusive right to use, or allow others to use, the external walls for advertising purposes,

The owners argued that the rights granted to the Developer over the external walls were so extensive that there was no use left for other owners.

The decision

The Court of Appeal decided that the walls were common parts despite the DMC’s grant of the exclusive right to make certain types of use of them.

All of the owners derived benefit from the external walls despite the rights granted to the Developer: ‘ the External Walls by providing the external framework to the Building also serve to hold and support the Building and prevent damage to its interior. All the co-owners or occupiers of the Building have the right to enjoy such use’ ([40] Au JA).

The Developer did not have exclusive right to use the external walls. They were common parts and all owners could be made to contribute to the maintenance costs through the management charge.

Michael Lower

 

Advertisement

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

 

Manager’s DMC duty to bring legal proceedings where necessary: enough to act reasonably?

In Long Source Industrial Ltd v Guardian Property Management Ltd ([2015] HKEC 1964, LT) Guardian Property Management (‘GPM’) had been appointed manager of a development at Tai Po Kau. There is no owners’ corporation. The applicant, Long Source Industrial (‘LSI’), was an owner of the development. The owners of several houses had extended their rear gardens to incorporate common parts and a surface channel had been altered. LSI began proceedings in March 2013. At that time, GPM’s view was that the matter was in hand: it was monitoring the progress of rectification works and was liaising with the Buildings Department on the progress of its enforcement action. Subsequently, some owners were prosecuted and the owners of most of the houses had complied with the Building Orders issued by the Buildings Department by the time of the hearing.

The DMC contained the following provisions concerning the responsibility and powers of GPM as manager of the development:

‘the Manager shall be responsible for and shall have full and unrestricted authority to do all such acts and things as may be necessary or requisite for the proper management of the Development’.

For this purpose, it had the power to bring legal proceedings to enforce due observance and performance of the DMC terms by the owners.

LSI sought an order compelling GPM to bring proceedings against the owners in breach. The LT declined to grant this injunction. While the words ‘necessary or requisite’ were not expressly qualified by the word ‘reasonably’, it was enough for GPM to act reasonably here. It had acted reasonably. Even from the perspective of March 2013, GPM was acting reasonably. At that time, many of the owners were taking steps to rectify the breach. It would not have been managing the funds of the development properly, as it owed a fiduciary duty to do ([36]), had it commenced proceedings at that time.

Michael Lower

Liability of Incorporated owners selling items left by residents in common areas

In Desir Anthony C v Knight Frank (Services) Ltd ([2015] HKEC 44) a resident in a building (‘D’) left bicycles in a common area of the building. The building’s DMC allowed the Owners’ Corporation to appoint an agent with a duty, among other things, to prevent people from occupying common areas. The DMC did not authorise the sale of items unlawfully left in common areas. The Management Company issued a series of circulars, followed up by ‘Final Notices’ requiring D to remove the bicycles or accept that the management company would remove and dispose of them. The bicycles were removed and, after a series of further exchanges, sold. The main question was whether this sale was lawful.

It was not lawful. The Incorporated Owners were involuntary bailees of the bicycles ([80]). An involuntary bailee who sells the bailor’s goods is liable in conversion unless the sale is carried out in good faith and with reasonable care ([82]). Further, the bailee was not entitled to dispose of the bicycles merely because they had become a nuisance and the bailor had rejected the opportunity to collect them. A disposal was only lawful where there was an actual commercial necessity, the bailee acts prudently and in good faith and has been unable to communicate with the bailor before the disposal (a sale on these grounds is lawful in the case of goods that are deteriorating or depreciating in value but is unavailable where the disposal is solely for the bailee’s benefit) ([83]). In the absence of a provision in the DMC authorising the disposal, the sale was prima facie an act of conversion for which the Incorporated Owners were liable ([88]). The bicycles could only have been sold if this were in the bailor’s interests but this was not the case here. The sale was motivated by the desire to be rid of the nuisance of storing D’s bicycles. There were no legal grounds for the sale. ([97]). The Incorporated Owners were liable in conversion and were ordered to pay D the value of the bicycles at the time of the sale ([106]).

Michael Lower

Closure of basement parking area during renovation works

In Tung Lo Court (IO) v Leung May Chun Alison Aliance ([2014] HKEC 2104, CA) the basement of the building (which included the car parking spaces) had become dilapidated and the incorporated owners decided to have repair and renovation works carried out. Once the work had begun there was an unanticipated problem when the basement was flooded with underground water. The contractors took advice and they were told that safety demanded that the basement be completely closed for four months. The incorporated owners followed this advice. L contended that this closure amounted to a breach of the DMC and also constituted a nuisance. The Court of Appeal rejected this. Given the strong advice that they had received about the risk to safety, it was reasonable for them to have closed down the basement ([31.1]). It was also legitimate to bear in mind the complicated legal issues that might have arisen if someone had been harmed or suffered damage to their property had the basement remained open; it would not have been clear whether the liability was that of the contractor or of the incorporated owners ([31.2]). It was also legitimate to base the decision on financial considerations; closing down the basement meant that the work could be done more quickly and at a lower cost that would otherwise have been the case ([38.4]).

Michael Lower

Construction of DMC: were parking spaces common parts?

In Tai Fat Development (Holding) Co Ltd v Gold King Industrial Building (IO) ([2014] HKEC 2130, CA) the question was whether 13 car parking spaces in a building in multiple ownership were common areas or whether they had been retained by the first owner of the entire building. Barma JA referred to the principles of contractual interpretation in Jumbo King ([15]). Commercial common sense can be an aid to construction where the words used are capable of differing, but equally plausible, meanings ([16]). Here the relevant documents were the first assignment of a unit in the building, the DMC, the Special Conditions of Grant and the Approved Building Plans ([17]). The wording of the first assignment gave primacy to the DMC  when it came to defining the common areas. The DMC identified the car parking spaces in question as common areas ([23]). A number of other factors supported this conclusion. First, the DMC did not attach ownership shares to the spaces in question ([25]). Second, the DMC referred to ‘Parking Spaces’ (which were not common areas) as being spaces to be allocated to individual buyers; that these spaces had never been assigned was telling ([26]). If the spaces were in private ownership there would be no loading or unloading areas available to non-owners and the accessway would have to be used for this purpose ([27]).

Michael Lower

House rules in the DMC

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

Adverse possession of a common part by a non-owner

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

Owners’ meeting: validity of decision to dissolve the meeting and of the proceedings of a ‘break-away’ meeting

Discovery Bay Services Management Ltd v Hannon Ltd ([2013] HKEC 958, LT) concerned the validity of a decision to dissolve a meeting of the Headland Village Owners’ Committee and of the proceedings of a break-away group of owners who purported to continue the meeting after the chairman had attempted to dissolve it.

There is a DMC for Discovery Bay as a whole and sub-DMCs for the villages within it. There is no owners’ corporation. CM is the manager under the DMC.

CM convened a meeting of the owners of Headland Village to elect the officers of the village owners’ committee for the coming year. The meeting began but was dissolved by the chairman. He dissolved the meeting because he disputed the validity of the appointment of the representative of CM (which was entitled to be present at the meeting and count as part of the quorum  but not to vote). He also contended that the sub-DMC only allowed owners or their spouses or family members to attend and vote. There was no scope to appoint anyone else as a proxy. He contended that the meeting was inquorate if one left ineffective proxies out of account.

A group of owners then went to another room and continued the meeting. They elected new officers. The chairman protested that the meeting was inquorate and its proceedings invalid.

DB sought, and obtained, declarations that the chairman had been wrong to dissolve the first meeting and that the second part of the meeting, and the resolutions passed there, were valid.

The chairman disputed the effectiveness of the letter by which CM appointed an individual to act as its representative at the meeting. The letter had been signed by a director of CM but did not bear CM’s chop or seal. This failed: as a matter of construction, the sub-DMC did not require the company’s chop to be effective. The normal rules for the appointment of an agent were all that mattered and they had been adhered to. In any event, CM had later formally ratified the appointment. This came after the village owners’ meeting but the ratification cured any potential defect in the original appointment.

The chairman contended that the sub-DMC only allowed owners or their spouses or family members to attend and vote. Thus, proxies given to other parties (such as CM) should be ignored. The result was that the meeting was inquorate. The Tribunal confirmed the chairman’s reading of the relevant provisions of the sub-DMC. Even allowing this, however, the meeting was still quorate. (There is an interesting comment at [56] on the idea of a ‘family member’).

Finally, there was the question as to whether the second meeting (or the second stage of the meeting) was quorate. It was. The chairman counted as part of the quorum since he was present even while he vociferously denied the validity of the proceedings. The same was true of the other owners who were of the same view as the chairman.

It was clearly a very lively meeting and there was a police presence nearby for part of it ([72]).

Michael Lower

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

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