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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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

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

Uncontroverted claim of breach of DMC: grant of an injunction

In Park Vale (Management) Ltd v Tang Wing Kin ([2013] HKEC 342, LT) Park Vale was the manager of a residential estate and T was the owner of one of the flats on the estate. Park Vale adduced evidence to show that T was in breach of the DMC (through installations T had added to the external walls of the flat and adjoining terraces that formed part of the common parts). Park Vale’s letters to T had not resulted in an end to the breaches. T had not opposed Park Vale’s application. Park Vale was granted the injunctions it sought requiring T to remedy the breaches and not to commit them in the future.