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Deed of Mutual Covenant

Significance and Relevance


The shortage of land in Hong Kong has necessitated the building of higher blocks both
for housing and for other uses. Indeed, multi-story buildings are ubiquitous and are
principal features of land development in HK.
What if developers want to convert some parts of grassland into parking lots while the
apartment owners are not happy about it?
What if you, as an apartment owner, want to complain about noise your neighbour made
in middle nights. (party, dog barks)
What if you think the money, monthly charge, you have paid is not worth the value? The
management company has done a sloppy job?
How to change a management company if you are not happy about the service provided
by the current one?
What if the developer wants to rename the building/complex but you are annoyed by the
new name?
Legal devices have, therefore, been developed in order to deal with problems like those
set out above.

Principles of Ownership of Flats


Under the relevant Government Grant, the developer will

need to notionally subdivide the land and the building


into undivided shares.
The effect of this is that all owners of flats in a multi-storey

building are tenants in common.

The concept of an "undivided share" is of particular

relevance in Hong Kong to the unit-owners.

A unit owner in HK is usually described as an owner of:


(i) a certain number of equal undivided shares of and in

the land (and the fixtures annexed to it and


chattels/objects which have become part of land); and
(ii) a right of exclusive possession of the unit.

Comparative Perspective--Strata title system


The Commonwealth:
Special legislation in regulating apartment ownership was first

introduced in New South Wales in Australia in 1961, followed by


the various Canadian provinces in 1960s, South Africa in 1971 and
New Zealand in 1972. Most recently England and Scotland have
also jumped on the bandwagon. England promulgated the
Commonhold and Leasehold Reform Act in 2002.The Act comes
into operation in 2004. Scotland has already enacted the
Tenement (Scotland) Act.
Singapore, Malaysia enacted legistlation of strata title system
Nomenclature
The institution in a multi-unit building has been called by many

names. The most popular names are flat ownership, apartment


ownership, horizontal property, ownership of storeys,
condominium, unit ownership, sectional titles, strata titles and
unit titles.

2 The Procedure for the Sale of Flats in a MUD

(1)Usually flats are sold as soon as the building has been completed and an Occupation Permit and a
Certificate of Compliance issued. Sometimes S&P agreements are entered into before the building has
been completed.

(2) The first assignment of undivided shares and an exclusive use right is completed by assignment after the
issue of an Occupation Permit and a Certificate of Compliance (if necessary).

(3) After the first assignment of undivided shares has been completed, the developer and the first purchaser
will immediately execute a DMC.

The DMC relates to the entire building and the land. After the first assignment has been completed, the
developer and the first purchaser together own the entire building and the land.

The parties to the DMC will be:


(1)
the developer;
(2)
the first purchaser; and sometimes
(3)
the manager and
(4)
the mortgagee (if any).

The DMC is usually dated the SAME date as the first assignment, although technically it is completed after
the first assignment.

(4) The first assignment and the DMC are registered in the Land

Registry.

(5)

The developer then completes the sales of other flats in the building by
executing assignments in favour of OTHER purchasers.

Each assignment is dated after the DMC and is made subject to and with the

benefit of the DMC. (See the sample Assignment in Form 1 of the Third
Schedule to the CPO)

The intention is that each purchaser buys subject to the DMC (containing

covenants that can be enforced against him) and that each owner has the
benefit of the DMC (also containing covenant that he can enforce against
other purchasers) even though he may not be personally party to the DMC.

(6)

Every subsequent sale by those who have bought their flats from the
developer is made subject to and with the benefit of the DMC.

(7)

Each owner of undivided shares and exclusive use rights can further
sub-divide his interest unless this is prohibited by the DMC: a sub-deed
of mutual covenant.

3 The Contents of Deeds of Mutual Covenant


(1) The terms of the DMC are in theory a matter for negotiation between the
developer and the first purchaser. In the past, purchasers have had very little
bargaining power and the DMC has been offered to purchasers on a take it or leave it
basis. As a result, the terms were favourable to the developer

(2) Government Control over the Terms of Deeds of Mutual Covenant


Since 1987, the government has taken some control over the terms of DMCs. For
example, the Conditions from the Government might provide:
(a) that a DMC must be entered into when undivided shares are sold; and
(b) that the terms of the DMC are subject to the approval of the Director of Lands.

The Buildings Management Ordinance, enacted in 1993, provides that certain terms
are implied into all DMCs, whether created before or after the BMO.

(3) Undivided Shares


The allocation of shares is usually made by reference to the floor area

of each flat, although allocation could be based on value.

In modern DMCs, details of the share allocation are usually set out in

full in a Schedule to the DMC.

A vendor must be able to SHOW how a certain number of

undivided shares have been allocated to the flat he is selling.

Each owners responsibility for management and other charges is

often based on the number of undivided shares owned, but in a


complex development there may be a different division based on
management shares. Voting rights may also be based on the number
of shares owned. Undivided shares are vested in a purchaser by
assignment, not by the DMC.

Without undivided shares, a purchaser would have no proprietary

interest and would not be able to enforce DMC covenants including


exclusive use rights. Jumbo King Ltd v Faithful Properties Ltd
[1993] 3 HKLRD 757

(4) Rights of co-owners


Each owner owns undivided shares in the land and the

building and an exclusive right to use his flat. Each owner


usually has the right to sell or mortgage shares freely but
exclusive use rights should NOT be assigned without
undivided shares.

Each owner has the right to use all parts of the building

because between the owners, they own the WHOLE


building and the land upon which the building stands.

Nevertheless, the DMC usually gives owners:

exclusive use rights over their own flats and car parks;
an express right to use common parts; and
express rights over other parts of the building of which
exclusive use rights have been granted, e.g. access for
repairs.

(5)

Developers Retained Rights

The developer may wish to retain rights such as:


the right to name the building ;
the right to place advertisements on the roof or external walls. These

rights are covenants.

The developer will not be able to enforce these rights/covenants if they

do not relate to land of the covenantor or if the covenantee has not


retained land that can benefit: section 41(2) of the CPO. (Note: The BMO
also contains provisions regarding common areas.)

(6)

The building managers duties might be set out in the DMC

Modern Conditions of Sale often require the Building Manager to join in

the DMC. The owners often delegate their rights to take action under the
DMC to the Building Manager. Sometimes the Building Manager is
appointed an attorney of each owner.

(7)

Duties of each owner

These usually include a duty:

to keep the flat in repair, not to make structural alterations;


not to obstruct common parts;
not to render insurance void;
not to use the flat for illegal purposes;
not to breach the terms of the Government Lease;
not to hang washing on balconies; and
to contribute towards the upkeep of common parts and management
expenses.

Note that some are positive while others are restrictive.


See section 41(6) of the CPO: A positive covenant is a covenant to

expend money, do something or which is otherwise positive in


nature.

The BMO contains provisions requiring owners to keep their exclusive

use areas in good repair: section 34H).

(8)
The Mandatory Implied Terms - 7th Schedule BMO

These include:
-provisions as to the determination of the total amount of the management

expenses for the year and the duty of the manager to prepare a budget (para
1);
-provisions relating to the keeping of proper accounts; the preparation of
income and expenditure account and balance sheet; the maintenance of bank
accounts exclusively in respect of the management of the building (para 2); the
setting up of a special fund for unusual items of expenditure (para 4);
-requirement of the managers compliance with a Code of Practice in ordering
supplies and in connection with certain safety matters (para 5);
-the duty of the manager to give at least 3 months notice on resignation (para
6);
-provisions as to the termination of the managers appointment (para 7); the
Consent of owners of 50% of shares needed and the owners must
incorporate under the BMO. This provision is a considerable improvement
on the position before the BMO was enacted where the owners could only
remove a manager, in the absence of an express provision to do so in the DMC,
upon a fundamental breach by the manager of his duties.

Note section 34E(1) of the BMO the Secretary for Home Affairs can exempt
any building from the terms of the 7th Schedule unless the owners of 50% of
the shares object.

The 8th Schedule to the BMO


This contains terms which are implied in every DMC unless they are
inconsistent with the express terms of the DMC.
(9)

The 8th Schedule includes:


(i)

provisions regulating meetings of the owners committee; and


(ii) provisions regulating meetings of owners.
Note the usefulness of these provisions in relation to the appointment of a

management committee and therefore the incorporation of owners. See


below.
(10) common parts in a DMC. See also section 341 of the BMO which

provides that no one may convert the common parts to his own use or in a
way which may interfere with their use or enjoyment by other owners.

4 Building Management
(1) The Building Management Ordinance
The Multi-Storey Buildings (Owners Incorporation)

Ordinance (MSB(OI)O), which preceded the BMO, provided


for the owners to incorporate. When owners incorporate, there
is an identifiable body which can exercise a management
function.

This is useful if, for example, there is no DMC, or if the

management machinery has broken down.

However, the governments prime purpose in enacting the

MSB(OI)O seems to have been to create an entity which could


sue and be sued.

The BMO provides for the owners to form a management

committee. The management committee replaces the owners


committee appointed under the DMC.

(2)

Duties of the Corporation


The incorporated owners have duties to maintain common parts and enforce the
terms of the DMC.
Upon the registration of the corporation under section 16 of the BMO, the rights and
powers of the owners in relation to the common parts of the building must be
exercised and performed by the corporation. Furthermore, the liabilities of the
owners in relation to the common parts will be exercisable against the corporation.

The corporation is given the duty of:


maintaining the common parts under section 18 of the BMO;
carrying out all work required by public officers;
enforcing the DMC;
engaging staff;
employing and remunerating the manager; and
insuring the building, etc.

A corporation can distrain for contributions from owners:

section 24 of the BMO. Distraint is governed by Part III of the


Landlord and Tenant (Consolidation) Ordinance (Cap 7).

Under section 19 of the BMO, if the DMC provides that an

owners interest can be sold or charged in respect of unpaid


contributions, then the corporation can exercise this right.

The incorporated owners can dismiss the building manager

under the 7th Schedule to the BMO.

(3) Management without Incorporation


Modern DMCs often include an appointment of a professional

manager. Sometimes the appointment is in a separate Management


Agreement.

The DMC should also contain provisions about owners meetings. Even

if there is a professional manager, the owners may still incorporate.

5 Action against an Owner for breach of the DMC


(1)

Action under the DMC may be taken, where appropriate, by:

(i) the manager, if delegated under the DMC; (ii) the incorporated owners; or

(iii) individual owners although their powers might be restricted by the DMC.

(2)

The remedies sought are:


(i) injunction: including mandatory injunctions or other equitable relief; (ii)
damages recovered. See John So v Lai Hon Man [1993] 2 HKC 356; water leaking
into the flat below: damages awarded. (iii) Some older DMCs purport to allow
the Building Manager to cut off services to the flat of an owner who fails to pay
management charges. This cannot be done because contracts for the provision
of services are made with the utility companies.

(iv) Management charge deposits equivalent to two or three

times the monthly management charges are usually paid to the


Building Manager. Many DMCs provide that the management
charge deposit will not be repaid to an owner. Instead he will
seek reimbursement for it from the purchaser.
(v) Some DMCs permit the manager to register a memorial of

a charge against the property in respect of unpaid management


charges. See Beacon Heights (Management) Ltd v Leung Ping
Hung Antonio [1995] 1 HKLR 181 in which such a charge was held
effective even though not by deed executed by the owner in
accordance with section 44 of the CPO. Such a charge is an
encumbrance on the title.

The BMO also permits the owners incorporation to sell or

register a charge on an owners interest if the manager is so


empowered under the DMC section 19 of the BMO. In this case
only the owners corporation through the management
committee can sell or impose the charge NOT the manager.

6 Enforcing DMC Against the Successors in Title to the


Original Parties
(1)

Only the developer and the first purchaser are parties to


and execute the DMC. When the DMC is executed, the
developer and first purchaser together own all the undivided
shares.

Every other purchaser is, therefore, a successor in title to one of

the parties to the DMC.


The DMC must be enforceable by and against the owners of all

flats in a multi-unit development even though they are not


parties. For the most part, the covenants in a DMC are mutual that is, the parties are both covenantor and covenantee.
The enforceability of covenants is governed by the CPO but this

is not a complete codification of the law. For example, the


common law relating to building schemes applies in Hong Kong.

(2) Enforcement of covenants by and against the parties to the DMC

Under section 41(8) of the CPO, parties are not bound after they have

ceased to have an interest in the land except in respect of breaches


committed before they ceased to have an interest. Section 41(8) affects
covenants contained in the DMC and the Government Lease as well as other
covenants.

(3)

Enforcement of DMC covenants BY the successors in title of the


covenantee and persons deriving title through them e.g. tenants and
mortgagees

Section 41 2 of the CPO applies to express and implied covenants and

positive or restrictive covenants.

Section 41(3) provides that covenants can be enforced by the successors in

title of the covenantee and persons deriving title under or through them.

Under section 41(3), the benefit of a covenant (that is, the right to sue for

breach of covenant) passes provided that: the covenant relates to land of


the covenantor: section 41(2)(a)

Case law
A covenant giving the right to name a building has been held not to relate to the land:
see Supreme Honour Development Ltd v Lamaya Ltd [1991] 1 HKC 198 CA:

Facts:
(1) D bought a unit in "Fung House", Central, from the original developer of the
building, together with the exclusive right to use the top floor and roof of the building.
(2) In the assignment to D, the owner transferred to the developer the right to name the
building. This right had been expressly reserved unto the developer under the DMC.
(3) The developer wanted to rename the building as "Seapower Centre", but P, who were
the owners or tenants of some of the other units of the building, objected.
(4) P claimed that they were not bound by the defendant's right to rename the building
because such a right, although contained in the DMC of the building, was only a personal
right to be enjoyed by the developer only. In other words, P argued that their undivided
shares in the land and the building could NOT be burdened under section 41(2) of the
CPO by D's right to rename the building.

Judgment:

(1)The court held that the plaintiffs were not bound by D's right to rename the building.
(2)The right to rename a building in this case was only a personal right and did not
satisfy the requirements of section 41(2) of the CPO because it did NOT affect D's
undivided shares and right to the exclusive use of the top floor and roof of the building.

Statutes
Covenants to pay rent and to guarantee payment of rent are land covenants.
Presumably a covenant to pay management expenses is also a land covenant.

Covenants concerned with user are usually land covenants.

The test in P & A Swift Investment Ltd v Combined English Stores Group PLL [1989] 1
AC 633, 642 is: does the covenant affect the nature, quality, mode of user or value of
the Land? Lord Oliver.

See Incorporated Owners of Mirador Mansion v Tecowin Development Ltd [1999] 4


HKC 113 a restrictive covenant not to use roof otherwise than for erecting signs was
held by the court to relate to land.

According to section 41(2)(c): the covenant must be both expressed and intended to
benefit land of the covenantee.

An expression of benefit may be under an express annexation of the benefit of


covenants in the DMC. For example, the DMC usually provides that the covenants

are made for the benefit of the land of the covenantee and his successors in title.

There is implied annexation under section 39(1) of the CPO which states that a
covenant relating to any land of the covenantee will be deemed, unless the contrary
intention is expressed, to be made with the covenantee and his successors in title.

If the covenant relates to land, it is likely to actually benefit the

land. This was the view expressed in Supreme Honour


Development Ltd v Lamaya Ltd (mentioned above). The
intention to benefit the land may be inferred if the covenant is
annexed to land.

It follows from section 41(2)(c) of the CPO that the covenantee or

his successors (the person seeking to sue) must have an interest


in land (that is, undivided shares) which benefits from the
covenant in order to be able to enforce the covenant.

In Sky Heart Ltd. v. Lee Hysan Co. Ltd. (1999) 1 HKLRD 100, Lord

Hoffman opined that the term "covenantee" in section 41(3)


meant a covenantee who still had an interest in the land for the
benefit of which the covenant in issue was taken.

The benefit of a covenant can be assigned.


In Hong Kong, an assignment of a flat usually contains an

express assignment of the benefit of covenants in the DMC with


the benefit of the DMC. See the sample Assignment in Form 1 of
the Third Schedule to the CPO.

(4) Enforcing DMC covenants AGAINST occupiers, the

covenantor and his successors in title and persons deriving title


through them

Section 41(3) of the CPO, which is subject to section 41(5), provides

that covenants can be enforced against occupiers of land, the


covenantor and his successors in title and persons deriving title
under or through him or them provided, amongst other things:

(i)
the covenant relates to land of the covenantor:
section 41(2)(a); and

(ii)
the burden must be expressed or intended to run with
land of the covenantor: section 41(2)(b).

-section 40 of the CPO implies an intention that a covenant relating

to land is to BIND the covenantor as well as his successors in title, e.g.


*
his personal representatives and beneficiaries;
*
persons to whom the covenantor may assign the land; or
*
persons deriving title from him, e.g. a mortgagee or lessee.

-Under section 41(5) of the CPO, the burden of positive covenants cannot be enforced
against tenants or occupiers.
Discovery Bay Services Management Ltd v David Buxbaum [1995] HKDCLR 7:

Facts:
(1) The defendant stayed in a flat at Discovery Bay as a tenant and then as a licensee from
1987 until 7th December 1990 when he became the owner of the flat.
(2) The plaintiff, the manager of Discovery Bay, sued the defendant for the arrears of
management and other charges and claimed that he was liable for all arrears as from
1987.

Judgment:
(1) The court held that, owing to sections 41(3) and 41(5) of the CPO, the defendant was
only liable for the arrears of management charges due after he had become the owner of
the flat.
(2) The court held that the defendant was not liable for the arrears of management
charges due while he was a tenant or licensee.

-BUT, under section 23 of the BMO, the Incorporated Owners can demand payment of
management charges from an occupier. In these circumstances, the occupier can deduct
any charges paid under this section from the rent payable. Note, however, that the
occupier might, under the terms of his tenancy agreement, be liable for management
charges. See also section 25 of the BMO regarding mortgagees.