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

 

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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

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

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