published in the 2018 Yearbook of Hong Kong Institute of Housing
By K.Y. Kwok and Colette Yiu of Li, Kwok & Law, Solicitors
Introduction
In Hong Kong, many people live in buildings or housing estates of multiple ownerships, with common parts and facilities which require proper management and maintenance. Although those buildings and estates would have a Deed of Mutual Covenant (“DMC”) to govern the owners’ respective rights and liabilities over the common parts, most DMCs only provide for the Manager’s powers and duties without a proper framework for management by the owners themselves. As early as in 1970’s, the concept of having the owners incorporated, so that there will be a legal entity operated by representatives elected by the owners responsible for managing the building already emerged. Almost half a century has gone. The statutory framework has developed together with the building management industry. Both serve to provide a fair and efficient system of managing the premises we live and work in, and ultimately a better and safer living and working environment for the people of Hong Kong.
This article aims at providing an overview of the development of the building management legislation in Hong Kong. It should be noted that the discussion below only covers some important amendments made or proposed on various occasions.
1. Multi-storey Buildings (Owners Incorporation) Ordinance
In view of the increasing number of residential estates accompanying the growth of the local economy and population, the Multi-storey Buildings (Owners Incorporation) Ordinance was first promulgated in June 1970 by the Hong Kong Government.
The legislative objective was “to facilitate the incorporation of owners of flats in multi-storey buildings” and “to provide for the management of such buildings and for matters incidental thereto or connected therewith”.
The Ordinance provided for the legal authority of a corporation (i.e. the incorporated owners (“IO”)) formed by the owners of a building or estate to manage the same. It also prescribes the IO’s structure and operation (i.e. having a management committee elected by the owners as the governing body of the IO) and matters like the composition and dissolution of the management committee and the winding up of the IO. Some of these provisions or their amended versions can still be found in the present Building Management Ordinance (Cap. 344) (“BMO”).
2. BMO in 1993
In 1993, the Multi-storey Buildings (Owners’ Incorporation) Ordinance was substantially amended, and the new name of BMO was adopted for the first time. The most important amendments, other than the name of the ordinance itself, are the retrospective incorporation of a number of statutory provisions in Part VIA and Schedule 7 of the BMO which prevail over inconsistent provisions in the DMCs. The amendments had retrospective effect because they apply not only to future DMCs, but also DMCs already in existence when the BMO came into operation.
At that time, it was thought that the DMCs contained some provisions by which the developers had taken unfair advantage of their purchasers and successors in title. For example, some developers reserved for their exclusive use certain portions of the building like the external walls and the roof in the DMC, so that they might license the right to use those areas, say for advertising purpose. However, under the DMC, the developer need not bear any of the management expenses of such reserved areas. It would be the other owners having no right to use the areas concerned who has to pay those expenses. To deal with this unfair situation, section 34H of the BMO was enacted which provides that if an owner is entitled to the exclusive use or enjoyment of a particular portion of the building, he will be solely responsible for all expenses for the repair, maintenance etc. of that portion. Thus, in the famous case of Uniland Investment Enterprises Ltd v The Incorporated Owners of Sea View Estate and Another [1999], the High Court held that since the developer has reserved upon itself the exclusive right to use the external walls of the suit building, it would have to bear solely all its management expenses, including the costs for complying with a building order by virtue of section 34H of the BMO. That would be the position even when the DMC provided otherwise.
Another example is that some old DMCs exempted developers from any obligation to pay management fees for their unsold units. This would create an anomalous situation that a particular unit would not carry any obligation to pay management expenses when it was still retained by the developer, but once it was sold, the developer’s purchaser would be obliged to pay. Also, if many units remained unsold when purchasers started moving in, those purchasers would have to shoulder the entire burden of paying the management expenses of the building for some time, depending on the condition of the property market and whether the developer was anxious to sell the remaining units. In this regard, section 34G of the BMO provides that a developer shall stand in the same position as its purchaser of a unit as far as the obligation to contribute to the management expenses of the building is concerned, so that any provision in the old (and future) DMCs conferring upon the developer the said privilege has become void after the BMO came into operation in 1993. Indeed, the guidelines issued by the Lands Department governing the contents of the DMC (“Guidelines”) have gone further, by providing that the developer has to make contributions to the management deposits and debris removal fees like an individual purchaser, if the units in question have not been sold 3 months after (i) execution of the DMC or (ii) the date when the developer is in a position to validly assign the units, whichever is later, although the deposits (but not the debris removal fee) may well be transferrable and the developer may seek reimbursement from its purchaser when the unit is finally sold.
Further, paragraph 7 of Schedule 7 of the BMO provides for the right of the IO to terminate the appointment of the DMC Manager who may otherwise stay as long as it wishes under the DMC. It should be noted, however, the statutory provision only applies if the owners have incorporated under the BMO, although the Guidelines have extended its application to many recently developed estates with an Owners’ Committee formed pursuant to the DMC. Nevertheless, the threshold for termination of the Manager’s appointment, namely by a resolution passed by owners having to pay management fees and holding not less than 50% of the shares is quite high and often unattainable.
Retrospective legislation is rarely resorted to in law reform, as the new enactment would have effect on matters occurring before it comes into operation. This may well cause injustice because people usually conduct their affairs according to the current state of the law, and could not predict what the law would be tomorrow. On the other hand, the majority view at the time of the 1993 amendment was that the unfair DMC provisions had caused grave injustice, and extreme measures of having the new BMO applying to old DMCs should be introduced.
Other than re-writing the DMCs and repealing some unfair terms, the BMO contains more detailed provisions relating to the operation, powers and duties of the IO, thus providing clearer guidance to the owners in managing their own buildings.
3. The 1st Major Amendment of the BMO in 2000
After the BMO has adopted its present name and skeleton, the first major amendment was made in 2000.
A significant amendment was to lower the threshold for appointing a management committee. Prior to the amendment, a resolution of the owners of not less than 50% of the shares was required. This was lowered to 30% by the 2000 amendment, making it easier to form an IO. It appears, however, that the Home Affairs Department (“HAD”) is quite reluctant to lower the threshold further, as it considers that the IO ought to be widely recognized by the owners before it can properly represent them in performing its daily functions.
Also, the new section 28 of the Ordinance was enacted in 2000 to require the IO to effect and maintain insurance over third party risks in relation to the common parts. Members of the management committee of the IO who fail to do so may find themselves having committed a criminal offence. The main purpose was to introduce a compulsory insurance scheme into personal injuries claims made by third parties against IO like those in force in employees’ compensation and road traffic accidents. However, it must be noted that this new section 28 did not come into effect until 2011. One reason for the delay was that there were many old or dilapidated buildings in Hong Kong with unlawful structures. Some of them were even not under the management of professional managers. Insurance companies might be reluctant to provide liability insurance to those “high-risk” buildings. Hence, it would be difficult for IO of those buildings to obtain the required insurance at a premium they consider acceptable or affordable or any insurance at all. Some of the management committees might be faced with criminal prosecution as a result. Many such members would quit and the IOs could not operate if the new section 28 were to take immediate effect. At the end, the Building Management (Third Party Risks) Insurance Regulations enacted in 2009 which came into operation at the same time as the new section 28 of the BMO in January 2011 provided that liability arising from unauthorized building structure erected without complying with the Buildings Ordinance would not be covered by the compulsory insurance. Insurers will therefore not be required to indemnify the insured IO from any claims in respect of unauthorized structures in the building. As a result, most third party insurance now taken out by the IO would not cover those claims. It will be for the IO and the owners of the building to shoulder any potential liability arising from unauthorized structures entirely.
In addition, section 5B and Schedule 11 regarding the enumeration of the percentage of owners were introduced in 2000. These made it clear that the relevant percentages of owners mentioned in some of the provisions (e.g. the 10% requirement to constitute the quorum of IO’s general meetings, owners’ meetings convened to form IO and the 5% requirement for compelling the chairman of the management committee to convene a general meeting) refer to number of owners and not the shares they held in aggregate. Of course, there are other provisions in the BMO in which the percentage of the owners required is expressly stated to be by reference to the shares they hold. Examples include owners holding not less than 5% of the shares may convene a meeting to consider and resolve for the formation of IO, and owners holding not less than 50% of the shares which carry obligation to pay management charges may resolve for the termination of appointment of the DMC manager.
4. The 2nd Major Amendment in 2007
The 2007 amendments were implemented after persistent hard work of the HAD who had conducted lengthy and in-depth consultations and studies. The amendments cleared lots of ambiguities of the BMO arising due to poor drafting of the previous versions and conflict of judicial opinion expressed in interpreting the provisions. It has, in the authors’ respectful opinion, contributed a lot to improving the quality of the BMO and has been the best exercise so far conducted of reviewing and proposing amendments to the BMO.
For example, prior to the 2007 amendment, section 3(2) of the BMO which laid down the requirement for appointing a management committee to form IO provides that “a management committee may be appointed by a resolution of the owners of not less than 30% of the shares”. In the case Kwan & Pun Co Ltd v Chan Lai Yee & Others [2002], question arose as to the precise meaning of the phrase quoted above. In the Lands Tribunal, the Presiding Officer construed the provision to mean that there was no need to have owners holding not less than 30% voting in support of forming IO. It would be sufficient if there was not less than 30% of the owners casting vote on the motion, and out of the votes cast, there was more vote in support of forming IO than against it (i.e. the denominator must be not less than 30% but the numerator need not). When the case went to the Court of Appeal, out of the three presiding judges, one of them agreed with the observations of the Lands Tribunal while another disagreed. The latter judge took the view that the resolution must be passed by owners holding not less than 30% of the shares voting in support of the motion (i.e. the numerator must be not less than 30%). The 3rd judge did not express any clear opinion on this issue. This has created much uncertainty and doubts in the precise requirement for forming IO, which is the very first step for setting the scene for the implementation of the mechanism prescribed by the BMO for the owners’ managing their own buildings.
The 2007 amendment removed all doubts by providing that the resolution must be passed by “a resolution supported by the owners of not less than 30% of the shares in aggregate”. Since then, it has become clear that IO could only be validly formed when there are owners holding not less than 30% of the shares voting in support of its formation.
In addition, in the well-known case of Incorporated Owners of Tsuen Wan Garden v Prime Light Ltd. [2005], both the Lands Tribunal and the Court of Appeal held that the meaning of “majority vote” in the BMO should mean not only that the proposal had received the greatest number of votes out of those cast, it must also have the support of more than half of the total number of valid votes. In that case, three renovation plans of different scales were put to vote at a IO general meeting. One of the plans received the highest number of votes but it was less than half of the total votes cast. When the IO brought action in court against some owners for payment of their share of the renovation expenses, the court held that the resolution was invalid because it failed to attain more than half of the votes cast. The 2007 amendments in fact confirmed the correctness of the court decisions by amending the Chinese version of the BMO of “majority vote” from “多數票” to ”過半數票”.
Where the owners are given more than two choices, the proposal receiving most votes may, as in Tsuen Wan Garden’s case, not have received “majority vote” imperative for passing a valid resolution, thus triggering the need to have a second or subsequent rounds of vote. Similar problem could happen in the election of members of the management committees, when owners might be asked to choose say, 9 members out of 15 candidates. If any of the 9 candidates receiving the highest number of votes has not received a “majority vote” (i.e. more than half of the valid votes cast), they might not have been validly appointed. The election process would become rather complicated and time-consuming. Indeed, it is not known whether there might have been any defect going to the validity in the appointment of some members of management committee of some buildings made before the 2007 amendments when the “majority vote” might not have been attained.
The 2007 amendment introduced the “first-past-the-post” voting system for appointment of members of the management committee, which means that the candidate who receives the most votes wins, whether or not he attains “majority vote”.
In the 2007 amendment, it was also made clear that all members of the management committee, except the tenants’ representatives, must be registered owners of the building. Further, a person is not eligible if he is an undischarged bankrupt, discharged within the previous 5 years without paying the creditors in full or convicted of an offence for which he has been sentenced to imprisonment for a term exceeding 3 months within the previous 5 years.
In determining whether the resolution is passed by a majority of votes, section 2B introduced in 2007 provides that for meetings convened under the BMO, owners who are not present, owners who are present but do not vote, blank or invalid votes and abstentions will be disregarded. The amendment was made to repeal the decision of Fung Yuet Hing v Incorporated Owners of Hing Wong Mansion & Others[2005]. In that case, the Applicant argued that the resolutions passed at a general meeting were void, claiming there was no majority vote. The Lands Tribunal upheld the claim on the basis that owners who were present in person or by proxy in the meeting but did not vote or cast an “abstention” vote should be counted (i.e. as the denominator) in deciding whether there was a majority vote and hence a valid resolution.
Another important amendment introduced in 2007 is that where IO procured supplies, good and services for the estate without tendering or having the supplier or service-provider selected by a resolution passed in IO’s general meeting in breach of section 20A of the BMO, the court will have discretion to decide whether the contract is void or voidable after taking into account all the circumstances including the factors set out in section 20A(7). Those factors include whether the Code of Practice has been complied with, whether the supplies, goods or services were urgently required, the progress of any activities or works in relation to the supplies, goods or services, whether the owners have benefited from the contract, etc.. Before the amendment, the consequence of failing to observe section 20A was not entirely clear and there were conflicting decided cases on the issue.
5. Some Important Individual Amendments
Other than the amendments in 2000 and 2007, there were amendments made to individual sections throughout these years. For example, in 1998, an interesting and important amendment was made to section 14(1) of the BMO. This is an extremely important provision because it enables the majority view to prevail for performing works on the common parts of the building. Had it not been this provision, the consent of all owners in the building might have been necessary for performing the work. Obviously, it would be impractical for IO to obtain the unanimous consent in each case.
The present section 14(1) provides that at an IO general meeting, “any resolution may be passed with respect to the control, management and administration of the common parts or the renovation, improvement or decoration of those parts and any such resolution shall be binding on the management committee and all the owners”. However, the words underlined were only introduced in 1998. Without those subsequently added words, the High Court held in Incorporated Owners of Bayview Mansion v Chan Cheung Kit Mui [1995] that IO had no power under the BMO to renovate or improve the common parts of buildings by majority resolution passed under section 14(1). In that case, a resolution was passed in a general meeting that various parts of the common areas and common facilities were to be renovated. It was also resolved that each owner was to contribute to the costs of such works. One of the owners refused to pay the contribution and was sued in court. The court held that the claim for contribution against the owner was without lawful authority, as neither the DMC nor the then section 14(1) provided for any power or authority for the management committee to improve the amenities or upgrade the condition of the building (as opposed to conducting repair and maintenance). Such improvement or upgrading works, including the replacement of the main iron gate by a grand-looking electrically operated aluminium gate, the installation of an electronic communication system at the entrance and a magnificent counter at the management office, could only be done with the consent of all owners.
The implication brought by the decision was of course highly undesirable, not only because the owners might well want to carry out some improvement works on the common parts, but rather the distinction between repair and maintenance on one hand and improvement and renovation on the other may not be entirely clear in some cases. The addition of the underlined words makes it clear that the IO may in its general meetings pass any majority resolution for the improvement, upgrading and renovation of the common parts which would be binding on all owners.
6. Proposed Amendments of the BMO
HAD published a Consultation Paper in 2014 for various proposed amendments of the BMO. After gathering opinion from both the property management industry and the public, the proposals for amendments have been adjusted on several occasions. Some of the latest proposals are highlighted below.
For “Large-scale Maintenance Projects”, it was proposed to increase the requisite quorum of the general meeting from the usual 10% to 20% of the number of owners. Further, in view of the concern about potential manipulation of proxies, the HAD further proposed that of the 20% of owners required for forming the quorum, at least 10% of the owners must attend the IO meeting in person when resolutions on large-scale maintenance projects are passed. For developments consisting of more than 4000 flats, at least 10% of the owners, or 400 owners, whichever is less, should attend the meeting and vote in person for passing the said resolutions.
For the definition of “Large-scale Maintenance Projects”, to remove the risk that the estimated budget may be artificially inflated, it was proposed to adopt the average audited annual expenditure for the past three years immediately before the maintenance proposal is voted upon. The proposal of HAD in defining whether a repair or renovation contract shall be for a “Large-scale Maintenance Project” as published in their November 2017 paper is as follows (whichever shall be the less out of the contract sum and the percentage set out below): –
Further, the minimum notice period for convening the meeting would be extended from 14 to 21 days. There shall be included in the notice a conspicuous 「alert」 that any decision in the meeting may result in the contribution of funds by each owner and such notice shall be displayed in a prominent place of the building
Recently, a new set of Code of Practice for Procurement was published by the HAD to take effect as from September 2018. Under the new Code, individuals involved in the procurement process, like the members of the management committee, the Manager and its employees would have to declare their interest and refrain from participating in the selection process if, for example, there is any actual or potential conflict of interest. The time for signing the contract of “large-scale maintenance projects” should be delayed to one month after the passing of the resolution in the general meeting. In the past, there has been case when IO had already committed the owners to a valuable renovation contract when another meeting was sought to be convened by some owners to reconsider and revoke the original resolution. It should be remembered that the Manager is required to follow the Code of Practice under paragraph 5 of Schedule 7 of the BMO as if the same were requirements provided in the DMC.
As far as termination of the DMC Manager’s appointment is concerned, while the existing threshold of a resolution passed by owners holding of 50% of the shares as provided in paragraph 7 of Schedule 7 of the BMO may now be retained (despite the initial suggestion to lower it to 30%), it was proposed that the appointment of DMC managers would be automatically terminated five years after the formation of IO, who may enter into a new contract with the existing DMC manager or engage a new manager through open tender.
In the 2014 Consultation Paper, it was proposed to reduce the ceiling remuneration rate of DMC Managers by a specified percentage each year. This was said to be objected by the property management industry but supported by members of the public. Instead of pushing for amendment of the BMO, HAD proposed to ask the Lands Department to amend the Guidelines to increase the transparency for calculating the remuneration, so that the DMC managers would be required to: –
(i) Provide the owners with a detailed breakdown on how the service fee of the headquarters is apportioned among the developments they serve;
(ii) Exclude a specified list of expenditure items which do not involve any value-added services by the DMC Manager (e.g. electricity and water charges) from the computation;
(iii) For developments with not more than 20 residential units and parking spaces, reduce the ceiling on the remuneration rate of DMC managers by 0.5% per year to 16% ultimately;
(iv) For developments with 21 to 100 residential units and parking spaces, reduce the ceiling on the remuneration rate of DMC managers by 0.5% per year to 12% ultimately; and
(v) For developments with more than 100 residential units and parking spaces, reduce the ceiling on the remuneration rate of DMC managers by 0.5% per year to 8% ultimately.
If only the Guidelines instead of the BMO are amended, the above provisions may only appear in DMC approved by the Lands Department after the new Guidelines are in force, and not to buildings having their DMC executed before then.
Looking Forward
Compared with other areas of laws like contract and land laws which have developed for about 300 years with plenty of decided cases on various issues, the law of building management in Hong Kong has a relatively short history. Also, its development has derived virtually no assistance from the decided cases of other common law jurisdictions like England. Indeed, there are quite some features in the BMO which may be peculiar to Hong Kong. We believe that HAD would, under the guidance of capable and experienced lawyers and personnel, and after consulting the public and members of the profession, work towards the proper direction for the continuous development of the law of building management which affects the daily lives of many people in Hong Kong.
“This article is for general reference only and should not be acted upon in any actual case. Further, the information contained in the article may not be updated. The readers should consult their solicitors for legal opinion.”