Dispute Resolution/Real Estate Beijing/Hong Kong/Shanghai Client Alert Landmark Decision Confirms Voting Rights of Owners of Sub-Divided Flats in Mixed Buildings In the most recent Court of Appeal decision of Chow Chui Chui & others (including the Incorporated Owners of Ka Wing Building) vs Kafull International Limited & others (CACV 33 & 34 of 2015) (the “CA Decision”), the Hong Kong Court of Appeal (“CA”) confirmed that owners of subdivided units in a multi-storey building are owners under the Building Management Ordinance (“BMO”) and shall be counted when determining the quorum and vote at incorporated owners’ meetings. This is an important ruling as it clarifies a previously unclear point of law decided by the Lands Tribunal in relation to the status of owners of such units. Our alert will discuss the CA Decision and its implications. Implications to owners and stakeholders Prior to the CA Decision, the following issues were not very clear, leaving room for argument. They are: (1) whether a sub-deed of mutual covenant falls within the definition of a deed of mutual covenant (“DMC”)under the BMO; (2) whether a sub-divided unit is a flat and whether an owner of a subdivided unit in a mixed commercial and residential building could be regarded as “an owner” under the BMO. These uncertainties meant that these owners’ right to participate in building management decisions was unclear and often subject to disputes. In particular, the quorum of incorporated owners’ meetings shall generally speaking be 10% of the owners in person and when determining how many owners shall be the quorum, it was unclear whether an owner of a sub-divided unit should be treated as an owner. The CA Decision has confirmed that (1) A sub-deed of mutual covenant falls within the definition of DMC under the BMO; (2) where an instrument (e.g. an assignment or a sub-deed of mutual covenant) registered in the Land Registry provides that an owner of a sub-divided unit has undivided shares in the land and building and has exclusive possession to that property to the exclusion of others, such a owner and his sub-divided units fall within the BMO definition of “an owner” and “a flat”. September 2016 www.bakermckenzie.com Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC Tel: +86 10 6535 3800 Fax: +86 10 6505 2309 Hong Kong 14th Floor, Hutchison House 10 Harcourt Road Central, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC Tel: +86 21 6105 8558 Fax: +86 21 5047 0020 2 Baker & McKenzie | September 2016 Accordingly, each owner of a sub-divided shop unit is entitled to receive individual notice of the incorporated owners’ meeting, be counted as an owner when determining what the quorum is and vote individually on resolutions. As a consequence, an owner of sub-divided units will be able to participate in all building management decisions affecting the use and ownership of his property. This ensures that the interests of all owners (commercial or residential, or further sub-divided) can be fully reflected in building management decisions. Background of the case The dispute concerned a multi-storey building comprised of four commercial units across four floors and 70 domestic units across 17 floors. Under a deed of mutual covenant (“Main DMC”), the land and building were divided into 155 equal undivided shares. Years later, two sub-deeds of mutual covenant were created and registered with the Land Registry(“Sub-DMCs”), sub-dividing the four commercial units into smaller shop units and splitting the 84 shares allocated to the four commercial units, among the new sub-divided units. There was separate management of the commercial and residential units provided under the Main DMC. The dispute evolved out of a decision by the residential owners of the building requiring the commercial owners to contribute towards building renovations. In opposition, resolutions were passed at a general meeting of the incorporated owners on 4 August 2012 (the “Meeting”) to invalidate the contribution decision and to replace the existing management committee. 14 owners of commercial units and two owners of residential units (totalling 16) were present and passed the resolutions. Members of the former management committee brought proceedings in the Lands Tribunal (“Tribunal’) to invalidate the Meeting on the ground of insufficient quorum. They contended that the building was governed by the Main DMC and the Sub-DMC is not binding on the original owners. They further contended that under the Main DMC, the 16 owners attending the Meeting could only be counted as four owners from the ground, 1st, 2nd and 3rd floors, being original owners under the Main DMC. Since a total of eight owners were required to constitute a quorum, the Meeting was inquorate. They persuaded the Tribunal that the commercial portion of the building consisted of only four “flats” under the BMO even though they were further sub-divided into many shop units with exclusive possession. The Tribunal therefore declared that the resolutions passed at the Meeting were null and void. Court of Appeal decision Our Firm represented members of the new management committee in their appeal to the CA. Upon appeal, the question of law to be decided was whether each owner of sub-divided units in the commercial part of the building (owning undivided shares in the land and building pursuant to the Sub-DMCs) and each sub-divided unit fell within the definition of “owner” and “flat” under the BMO, for the purpose of determining what the quorum is at a general meeting of the incorporated owners. The CA rejected the argument that there were only four owners from the commercial units and overturned the Tribunal’s decision, ruling that September 2016 | Baker & McKenzie 3 the Meeting was quorate and that the resolutions passed were valid and binding. Some other key observations by the CA include: • It was immaterial that there was no express reference in the Main DMC to the sub-division of undivided shares; all that mattered is that the Main DMC did not prohibit such sub-division. • There is nothing in the statutory definitions that restricts a deed of mutual covenant to an entire building, so the Sub-DMCs could be taken into account. • If under the Sub-DMCs, owners of sub-divided units had undivided shares in the land and building, and they were entitled to exclusive possession of their units and were registered as owners of those undivided shares at Land Registry, they clearly fell within the statutory definition of “owners” and “flats”. To suggest that subdivided unit owners were akin to co-owners of the original unit was to ignore the statutory definition of “flat” and the important fact that each owner had exclusive possession of their unit. Actions to consider Owners of units in multi-storey buildings, owners’ corporations and building managers should be aware of the implications of this case, especially the following points: • A sub-divided unit with exclusive possession could be a “flat” under the BMO. An owner of such a flat is an owner under the BMO and has rights as any other owners in the building under the BMO. • An owner of a sub-divided unit as described above is entitled to individual notice of incorporated owners’ meetings and can attend, and shall be counted as an owner when determining the quorum and vote at incorporated owners’ meetings. • Seek legal advice if such an owner (as described above) has been deprived of the abovementioned rights. • The quorum at incorporated owners’ meetings may change from time to time whenever there is a sub-division of a unit. However, voting and passing of resolutions will still be determined by the number of undivided shares. Conclusion The CA Decision is of great public importance as it clarifies an important point of law under the BMO on the rights of an owner of sub-divided units in a multi-storey building. It will affect hundreds of multi-storey buildings in Hong Kong. Owners of sub-divided units in mixed used buildings will now have unfettered rights to participate in multi-storey building management. Should you wish to obtain further information or want to discuss any issues raised in this alert with us, please contact: Anthony Poon Partner +852 2846 1919 email@example.com Wan Shiu Man Partner +852 2846 2397 firstname.lastname@example.org Roberta Chan Special Counsel +852 2846 2492 email@example.com Gillian Lam Associate +852 2846 1686 firstname.lastname@example.org This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive analysis of the area of law discussed. Baker & McKenzie cannot accept responsibility for any loss incurred by any person acting or refraining from action as a result of the material in this publication. 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