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

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

 

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

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

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

The duty to convene and participate in management committee meetings

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]).

Adverse possession of a common part by a stranger to the DMC: BMO s.34I does not defeat the adverse possession claim

In Wong King Lim v Peony House (IO) ([2013] HKEC 828, CA) W had been in adverse possession of a lane behind Peony House since 1987. The lane was a common part of Peony House. W was not an owner of Peony House and so not subject to the terms of the DMC. W brought an adverse possession claim in respect of the lane. The incorporated owners argued that any title thus acquired was subject to the covenant implied by section 34I of the Buildings Management Ordinance (a covenant not to convert common parts to private use). The argument was that this restrictive covenant had priority over W’s possessory title (relying on Re Nisbet and Pott’s Contract).

This argument failed. One reason given by the Court of Appeal looked at the purpose of the covenant:

‘The owners of the Building had covenanted only with one another to possess the Lane in common and not exclusively.’ ([34] Yuen JA)

Once the title of all the owners to the lane had been extinguished then there was (so to speak) no covenantee with an interest in land who could enforce the covenant. ([34]) (see also [43] Lam JA). It seems to make no difference that the owners still had title to the rest of the Building and, in that capacity, still had an interest in the enforcement of the implied covenant.

A second reason is given for the proposition that W was not subject to the implied covenant. This is that the right to enforce the covenant had also been defeated by the Limitation Ordinance:

‘[I]n contrast with the position of the covenantee in that case, the Defendant IO’s right under the DMC (and the deemed obligation under the DMC created by Section 34I) has been infringed from the very beginning of the dispossession by the Plaintiff over the portion of the land in question. Thus, the basis of the judgment of Collins MR in that case (viz time should not start to run until the right of the covenantee is affected) has no application to our case. The extinguishment of the title to the land under section 17 of the Limitation Ordinance Cap 347 encompasses the title to enforce the DMC in respect of that portion of the land.’ ([44] Lam JA)

Michael Lower

Duty of managers and incorporated owners to take proper steps

In Lee Ming Yueh v Broadway-Nassau Investments Ltd ([2012] 5 HKLRD 208, CA) water leaked through the walls and roof of a top floor flat. The managers asked contractors to look at the problem. Initial remedial efforts were not effective but eventually the problem was identified and resolved. The water seepage damaged the walls and floor of the flat. The owner of the flat claimed damages against the managers and the incorporated owners alleging breach of the Deed of Mutual Covenant and section 18 of the Building Management Ordinance (imposing duties on the Manager and the incorporated owners to keep common parts in repair). The claim failed both in the Lands Tribunal and in the Court of Appeal. The duty was one of ‘proper management’. The managers had promptly engaged contractors to investigate and remedy the problems when they received complaints. They could not delegate their duty to contractors but there was nothing to suggest that they had been negligent in their choice of contractor.

Incorporated owners can be compelled to take action to enforce the DMC

In See Wah Fan v Ki Tat Garden (Phase I) (IO) ([2003] 3 HKLRD 1, CA) W owned the ground floor and cock loft in a building covered by a DMC. T owned the first floor and roof and the stairs and landings above (but not at) the cock loft level. In breach of the DMC, T had enclosed the landing at cockloft level and prevented W from obtaining access to the roof for repair purposes or as a means of escape in emergency. The owners corporation had not taken any action. W brought proceedings. Could he do so given that section 16 of the Building Management Ordinance makes the corporation the proper plaintiff? The Court of Appeal held that the Lands Tribunal can compel the corporation to enforce the terms of the DMC.

‘To take an extreme case, if the majority of the owners had decided to act in bad faith in a matter concerning the management of the common parts, is the minority owner precluded from seeking redress in the court? The answer must be no. This cannot be the intention of the legislation. This being the case, if a minority owner can show he has a legitimate complaint regarding the common parts of the building and yet the management committee had chosen to ignore him, we see no reason why he cannot seek relief from the court. This must be one of the means to ensure that the corporation will observe the intention and requirement of the Ordinance in the proper management of a multi-owner building.’ ([25] per Cheung JA).

Owners corporation liable under BMO s.16 even in respect of pre-incorporation debts

Hang Yick Properties Management Ltd v Tuen Mun Kar Wah Building ([2005] 2 HKLRD 499, CA) concerned a claim by the managers of a building against an owners corporation for reimbursement of management expenses alleged to have been incurred by them. Such expenses could be recovered by the managers against individual owners under the terms of the Deed of Mutual Covenant. The liability to pay ran with the owners’ undivided shares by virtue of section 41 of the Conveyancing and Property Ordinance. The owners corporation argued that it could not be liable since this was a pre-incorporation debt. The Court of Appeal held that if the alleged liability was a liability of all of the owners  in relation to the common parts of the building then it was enforceable against the owners corporation even though the liability was incurred before incorporation (Building Management Ordinance, s.16 and [40] of the judgment).

Building Management Ordinance only vests a cause of action in the Incorporated Owners where it is one common to all owners

Incorporated owners can bring proceedings under section 16 of the Building Management Ordinance provided the cause of action relates to common parts and is one enjoyed by all owners (and not only some of them).

Incorporated Owners of One Beacon Hill v Match Power Investment Ltd ([2012] HKEC 1338, CA) concerned proceedings brought by incorporated owners against the developer of the building. The proceedings alleged that sub-standard materials had been used and poor workmanship allowed in the construction process. The developer, Match Power, sought to strike out the action on the basis that the incorporated owners had no locus standi. The relevant duty concerned the common parts but it was a contractual duty owed to only some of the original purchasers: different forms of sale contract were used at different stages of development and only some incorporated the relevant duty. Match Power argued that incorporated owners could only bring proceedings where the relevant duty was owed to all of the owners. They sought to strike out the proceedings.

The Court of Appeal held that the cause of action did not vest in the Incorporated Owners: section 16 of the Building Management Ordinance only made the Incorporated Owners the proper party where the cause of action was one that had accrued to all of the owners ([21]). Section 18(2)(g) is a management power that assumes that the cause of action has already vested in the Incorporated Owners. It is not an independent right to sue. Further, it only gives a power to bring proceedings in respect of matters in which all the owners have the same legal interest ([69]).

The Building Management Ordinance aims to facilitate management of multi-storey buildings owned by several people and to avoid multiplicity of suit. It is not permissible, however, to resort to a ‘purposive’ interpretation of section 16 that would do violence to the plain meaning of the text ([17] – [19]).  Further, there were several reasons why a distinction should be drawn between claims where all owners have the same legal interest and those where only some owners have the interest. If the Incorporated Owners could bring proceedings to enforce the rights of only some of the owners concerning common parts, the decision to enforce (or not) contractual rights owed to individuals would be under the control of the majority of the owners meeting ([30]). The costs and risks of litigation to enforce these rights owed only to some would become the common liability of all ([31]). In cases where the owners were the defendants, the contractual liability of some would become the shared liability of all ([32]).

IO’s duty to repair

In 顏小明v 多福大厦業主立案法團 ([2012] HKEC 1202, LT) the applicant owned a flat in Tsim Sha Tsui. Water was leaking from the roof into the flat causing damage to it. This was due to a failure to keep the water tanks on the roof, the water proof roof membrane and the external walls in repair. This was the responsibility of the IO under section 18 of the Building Management Ordinance. This repairing obligation is one of proper management and requires the incorporated owners to do all that is reasonably required in the circumstances ([48]). In this case the incorporated owners had to take adequate steps to discover the cause of the water leakage and the steps needed to deal with it ([54]). Although they had taken some steps, they had not done enough to properly perform this duty ([55]). Although dealing with the problem involved some work that was the flat owner’s responsibility, there was no point in carrying this work out until the incorporated owners had dealt with the problems affecting the common parts. Nor did the appointment of a manager absolve the incorporated owners from their duties under section 18 of the Building Management Ordinance since the manager would be the agent of the incorporated owners. The incorporated owners were ordered to carry out the necessary repair works to the common parts and to pay damages to reflect the cost of repairing the flat and the loss of rental income.