Lecture Notes for DMC PDF

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lecture notes for the topic of deeds of mutual covenants...

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DEEDS OF MUTUAL COVENANT AND BUILDING MANAGEMENT (Chapter 1)

PURPOSE OF DMCs ( just background to give you context) To lay out the manner in which buildings in multiple ownership are held and managed. DMC for a building or development: (1) records the division of the land and buildings into shares and allocates units within the buildings to those shares; (2) governs the relationship between the owners of those units and shares; and (3) provides for the management of the buildings (e.g. structural alterations)

CREATION & SALE OF UNITS IN A MULTI-STOREY BUILDING (just know about it) Stages involved in the ownership of new flats in multi-storey buildings: (1) The developer purchases a plot of land on which to build, either from the Government under a Government lease or from a previous owner; the developer then constructs a block or blocks of flats on the land. (2) The developer usually wishes to sell the flats whilst they are in course of construction in order to finance the project. To do so, the developer will almost invariably require  government consent. The government has a detailed set of rules which must be followed if consent to pre-sell is to be given (the ‘Consent Scheme’). These rules include division of the land into shares, pairing of those shares with units and preparation of a DMC with approved clauses. (3) The whole land and building must be notionally divided by the developer as owner into a number of undivided shares reflecting the units intended to be created within the block(s) of flats. Each flat or other unit (eg, parking space) will be allocated to a number of undivided shares. (More shares are allocated to bigger flats.)

It is not necessary for the number of shares allocated to each flat to be equal; so, if there are large penthouse flats, more shares might be allocated to these flats than to the lower smaller flats. Duplexes can be given more shares than single-level flats. In the past it was not the practice for developers to allocate common parts of the building(s) to shares but since 1999 allocations of shares in DMCs have included common parts. (4) The developer enters into a sale and purchase agreement to sell one of the flats together with a specified parking space to a purchaser (`the first purchaser'). Later, once the buildings have been completed, that property is assigned to the first purchaser. By the assignment the first purchaser receives undivided shares of and in the land and buildings (not in the flat), together with the right to exclusive use and occupation of the flat and parking space. In the assignment the developer/vendor reserves for himself and his successors the exclusive right to occupy the rest of the building (other than the common parts) to the exclusion of the first purchaser (5) The developer and the first purchaser will then execute, at the same time as the assignment of the property, the DMC in respect of the whole development. The management company, which may be an associate of the developer, may also be a party to the DMC.

(6) The assignment and DMC will then be registered. Failure to register might render the covenants in the DMC unenforceable by and against successors in title of the parties. (7) Thereafter the developer will assign the remaining flats to other purchasers. Each assignment should be expressly made `together with the benefit of and subject to the burdens and obligations set out in the deed of mutual covenant', which will now have a memorial number by which it can be identified. These assignments will be registered. (8) If the first purchaser - or any other purchaser for that matter - subsequently assigns his flat, he will assign it together with and subject to the benefit and burdens provided for in the DMC, thereby expressly assigning the benefits and burdens of the covenants in the deed. The purpose of this clause in the assignment is to ensure that both the benefits and burdens in the DMC are binding upon successors in title of the covenantor and

SHARES IN LAND Without shares in land, there is no legal proprietary interest in land. ● ●

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Significance: The  landed or proprietary interest of the owner of a flat or unit is in the shares in the land, not in the unit within the building which is attached to those shares. Due to the shares assigned, the owner becomes a joint owner of the whole of the land and buildings. ○ Therefore, he has the theoretical right to use and enjoy the whole of the land and buildings in common with all the other owners of shares. Shares are notional and undivided: there is no  physical division of the land into parts or shares. The shares are in and of the whole of the land.

NATURE OF OWNERSHIP IN MULTI – STOREY BUILDINGS Tenancy in common with the other co-owners Tenancy in common is co-ownership where each owner has a number of undivided shares in land and building. Undivided Shares ● Each owner will receive a number of undivided shares in the land and building, and each co-owner and his successor in title becomes a co-owner with the other owners. ● Meaning and effect of `undivided shares’ (Building Management in Hong Kong (3rd ed, p. 17) ) : the property in which the shares subsist, that is the whole of the land and buildings erected on the land, has not been physically divided up and distributed amongst the co-owners. Tenancy In Common ● Nature of co-ownership is a tenancy in common with the other co-owners, who will include the developer until the latter has disposed of all the flats and other parts and all shares and hence all its interest in the building. ● It is a legal interest which can be assigned and mortgaged  . ○ Cf. joint tenancy: the right of survivorship (principle of jus accrescendi) does not apply in tenancy in common. ○ Relationship between co-owners is not of trust/fiduciary: T  ang Tak Sum v Tang Kai Fong [2015] CA. ● The co-owner holds his interest subject to  the terms of the DMC and government lease/conditions of grant. ● The number of shares each co-owner holds will normally determine his responsibility for contributing towards the Government rent and management charges.

Exclusive Use of Unit Refer to the DMC for exclusive use and restrictions, the exclusive use arises like a contractual undertaking between co-owners party to the DMC What is exclusive use of unit ● The following is underpinned by rules in CPO, therefore enforceable by and against successors-in-title. ○ Terms of DMC provide for right to exclusive use of particular unit(s) (e.g. flat/parking space). ○ The inherent right to use the whole building can be modified by operation of covenants contained in the DMC. ● Generally, each owner will covenant that the other owners will have the right to exclusive use, occupation and enjoyment of the part of the building to which his shares relate as set out in the DMC.

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So each co-owner has a number of undivided shares in the building + right to exclusive use of a specified floor, flat, shop, office, workshop, roof, parking space, etc.

How does exclusive use of unit arise/work? ● Refer to CFA in Jumbo King ( 1999) and Kung Ming Tak Tong Co Ltd v Park Solid Enterprises Ltd [2008] ● The right of exclusive use of a unit an incident of ownership of shares in the land and is the product of the mutual covenants in the DMC ○ It is not an interest in land). ● The relevant covenants amount to an undertaking by every owner not to exercise the rights of occupation and enjoyment over other units which he would otherwise be able to do as co-owner.

Common Parts Common parts are defined in DMC, and owners have certain entitlements to them. What are common parts? ● Defined in the DMC, but if not provided, fall back position is BMO s2 and sch 1 ● Generally includes areas such as lobbies, passages, stairs, landings, access roads, loading bays, management office, external walls, roofs and facilities such as lifts, pipes, drains, public toilets, refuse collection points, plant rooms, gardens and recreational complexes. ● Modern DMCs contain a plan of the common parts. ● Section 2 and sch 1 of the Building Management Ordinance, Cap 344, (BMO) provide that the whole building including external walls and other listed features are common parts unless specifically designated as being for the exclusive use of an owner in a registered document (e.g, DMC).  nauthorised structures which had been ○ Application: Snowland Ltd v Topland Holdings Ltd [2006] u constructed on an outside (aka external) wall were held to be on a common part of the building since the DMC had not specifically delineated the external walls as being within the exclusive occupation or enjoyment by any particular owner. ● Test for whether a particular part is for common use: a question of intention involving interpretation of the DMC in context of circumstances at time of deed: Jumbo King; Leung Po Kwan v Tung Kam Sheung [2011] CA (YY Mansion). Common Part ● ● ●

Inside of a roof parapet wall (Kau Ching Wing v Main Shine Development [2011] CA) Part of a car parking space covered by a wall (Leung Po Kwan) Waterproof membrane within floor slab of roof (Wing Ming Garment Factory Ltd v IO of Wing Ming Industrial Centre [2014]) (always a common part, even if there is private ownership)

Not Common Part ●

Door in internal wall present from outset: Wong Kwan Yee v IO of Diamond Mansion [2012] CA

Owners’ Entitlement to Common Parts ● Right of Access ○ If no express covenant, co-owners have an implied right (NOT an easement) to pass along the common parts: Chiu Shu Choi v Merrilong Dyeing Works Ltd [1990] CA. ■ This was said to arise by necessary implication but it is really inherent in tenancy-in-common. ○ Owners’ right of access to common parts was confirmed by CA in Silver Triumph Holdings Ltd v Guardian Property Management Ltd [2012] despite wording in the DMC which appeared to give manager power to restrict access: question of balancing rights → determine what is reasonable. ● No exclusive user or assignment to particular owner ○ A developer does not own the common parts and therefore is not entitled to use them exclusively or assign part of them to individual owner(s): C  how Sai Ping v Chan Yam King [2013] (blocking off of corridor outside flat). ○ Developer cannot rent out common parts for the benefit of itself/individual owner: J ikan Development Ltd v IO of Million Fortune Industrial Centre (2003); Tai Fat Development v IO of Gold King Industrial Building ( parking spaces on common parts). ● No right to sell or dispose ○ Individual co-owners have no right to sell or dispose of the common parts of the building - IO of Chungking Mansions v Shamdasani Murli Pessumal (1993) ● No right to place signs or other objects in the common parts

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Signs erected in entrance hall; ‘trespass’ committed; injunction granted: I O of Golden Crown Court v Chow Shun Yung (1987) ○ Sign advertising pre-school on external wall of building; injunction for removal: I O of KK Mansion v Jade Water Group Ltd (2010) ○ Surveillance camera: IO of Nan Fung Court v Ho Mei Tak (2010) There is a covenant against obstruction of common parts in modern DMCs. ○ s 34I BMO implies a term that no person may convert the common parts to his own use or so use the common parts unreasonably as to interfere with their use or enjoyment by the other co-owners, unless such conversion is approved by a resolution of the owners' committee. ○ Gallium Development Ltd v Len Tong Holdings Ltd (2004): ■ Facts: one co-owner converted part of common areas of building into a shop and installed a large vending machine in other common parts (depending on how big the machine is and how small the common part is); ■ Held: a breach of the covenant implied by s 34I. ○ Part 6A of the BMO is implied into every DMC, regardless of any building of any time.

Note: In exam, pay attention to this trick – if shares are allocated to the external wall, then the analysis is not the common parts analysis.

Developers Reserving Rights to Parts of a Building No shares attached to the rights means no rights Where a developer has reserved for himself rights in relation to the building (such as the right to use the roof) and no shares are attached to these rights... ● Generally: the rights devolve upon all the co-owners as common rights upon the dissolution of the developer or following the sale of all the developer’s shares in the building: IO of Cheong Wang and Cheong Wai Mansion v HKSAR [2001]; ○ South China Amusement Co Ltd v IO of Sun Hing Building (2000) ( developer retained use of outside walls; upon liquidation of developer, right to use of outside walls fell into the common parts). ● Exception: If the developer expressly had assigned such rights (along with undivided shares) then there would not devolution. ● Argument: Silver   Carnival Ltd v Longbase Investments Ltd [2005]: CA accepted that it was arguable (not settled) that such rights might pass to the assignee of the last shares sold by the developer by operation of s 16 CPO (which creates a rebuttable presumption that an assignment includes all rights and interests enjoyed with the land conveyed) as rights enjoyed with those shares

ADVERSE POSSESSION Hard to prove in co-ownership Who can be adverse possessor? ● A co-owner in a multi-storey building cannot claim adverse possession. ○ Since a co-owner as a tenant-in-common is entitled to use the whole of the land and buildings, s/he may not successfully claim a possessory title by long exclusive usage of any part of the land. ○ Usage of the land cannot be adverse to other owners because they (and the claimant as co-owner) have consented to the claimant’s use of the land: IO of Kwan Sen Mansion v So Kwai Chor. ● IO can be the squatter ○ IO of San Po Kong Mansion v Shine Empire (2007) CFA: no adverse possession in this case but theoretically IO can be squatter if they have physical control and exclusion of the owner. ● Stranger, i.e. trespasser, can be a squatter. ○ Where squatters occupied the side lane of a building for many years, the IO was statute-barred from obtaining an order for possession: K  am To Pui v IO of Lux Theatre Building (2000); Wong King Lim v IO of Peony House [2013] CA. ○ There can be adverse possession where non-owners had long occupied two portions of the ground floor of a building: Y  eung Mau Cheung v IO of Ka Ming Court, Castle Peak Road [2013]. ○ This is despite s  34I (1) BMO implying a term that “No person may … convert any part of the common parts ... to his own use” and that a person who contravenes this shall be deemed to be in breach of DMC. The “person” is confined to those who are bound by the DMC. Where co-owner tries to prove adverse possession, ouster of all other co-owners is required ● To assert adverse possession successfully, a co-owner has to oust all other co-owners entirely from possession of the whole of the land: Tang Tak Sum v Tang Kai Fong [2015] CA ( many wives). → rare ○ Where it is presumed that there is actual ouster, the presumption can be rebutted by the slightest act.

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Re-occupation by one co-owner of common parts of a building is rebuttal of the presumption. In principle it should also apply to occupation by one co-owner of (part of) the unit of another co-owner, yet there have been instances of courts allowing one co-owner to assert adverse possession of another co-owner’s exclusive use area. E.g. F  oremost Hill Ltd v Bank of China (HK) Ltd where the wall of P’s shop encroached on part of D’s shop. ○ The idea is that since a unit is possessed exclusively by one co-owner, and therefore can be adversely possessed, every part of it can be adversely possessed.

FUTURE DIVISION OF SHARES Who can further divide up the shares ● The developer and each assignee from the developer can further divide up its/his undivided shares unless this is prohibited in the DMC: Kwong Ka Hung v Lai Wah Development Co Ltd (1996); ● Any subsequent assignee: H  inex Universal Design Consultants Co Ltd v Chan Lai Hing [1998]. ● Division will be effected by deed poll. How to divide up the shares Where a co-owner divides up his shares, for example where the owner of a floor of a building wishes to divide up that floor into several distinct units and sell them, he must (a) draw up a new floor plan showing new units; (b) allocate undivided shares to those new units; and (c) draw up a sub-deed of mutual covenant, at least where new common parts (i.e. common to the new owners of the divided floor) are to be created.

Sub-deeds of mutual covenant Generally: ● Mere DMC cannot allow one to manage the subdivisions of a unit/floor in a building ● First look at DMC to see if there are any terms against owners having a sub-DMC. ○ Owners of sub-division is liable to observe the head DMC. ○ Parties of the sub-DMC are jointly and severally liable to observe the head DMC ● The sub-DMC should, inter alia, deal with the new co-owners’ liability under the head DMC: eg identify their share of management fees. ● The new co-owners are liable to observe the covenants in the head DMC. ○ IO of San Po Kong Mansion v Island Management Services Ltd [2007] ■ Issue: whether the new co-owners under the sub-DMC were bound by the covenants in the head DMC; ■ Held: the parties to the sub-DMC were jointly and severally bound to observe and perform the covenants in the head DMC, with a corresponding right of indemnity between them if only one new co-owner were sued on a covenant in the head DMC. ● However, the owners of other parts of the building and the manager of the building have no right to interfere in matters which solely concern the property which is the subject of the sub-DMC. ○ IO of Po Lok Building v Leung Koon [2006]: held that the owner of the 3 floors had the right to draw up a sub-DMC for his floors and its terms were valid, provided they did not conflict with the provisions in the head DMC; the new common areas were only common parts qua the owners of the shops on the 3 floors and fell outside the jurisdiction of the manager of the building who was responsible only for the common areas identified in the head DMC; the owners’ corporation therefore had no right to interfere and could not dismiss the manager of the 3 floors. Note: Sub-DMCs are also used where an estate is developed in phases, each phase being governed by its own sub-deed as well as by the head deed for the whole estate.

MANAGING A BUILDING Manager

Service Company providing building management services including security, cleaning etc. ● Paid around 10% of the annual budget.

Management Committee

“Board of directors” of the IO ● Owners who are elected by all owners and paid at max. $2000 per year

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They don’t do much. They outsource most work to the manager, so they are like the manager’s boss.

Owner’s Committee (or similar name)

A committee (not legal body) established per DMC, but defunct after IO. ● If no IO, then some DMCs would refer to a body which can make certain decisions as provided by the DMC on behalf of all owners. ● Power is derived from the DMC and some parts of BMO. ● If there is an IO, even if DMC provides for Owner’s Committee, it will have no power at all.

IO (“IO”)

Separate legal personality (see s  .8 BMO for setting up of IO) (rarely have) It is a limited company and can sign contracts on behalf of all the owners.

DIFFERENT “TYPES” OF BUILDINGS How to make decisions in the following types of buildings?

Where there is no DMC: ●

Everybody must agree (theoretically).

Where there is DMC and Owner’s Committee (but no IO) ● ●

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Usually under DMC there would be references to some committee that can be set up.  he OC would exercise powers as stipulated in DMC Focus: T ○ BMO implied mandatory covenants ○ Some other provisions which refer to OC apply: Part VIA of the BMO (s.34C-34L) OC resolutions/decision...