Introduction
Under section 20(2)(a) of the Building Management Ordinance (Cap. 344) (“BMO”), an incorporated owners (“IO”) may establish and maintain a contingency fund to provide for any expenditure of an unexpected or urgent nature. Further, under section 21 of the BMO, the management committee of the IO has the power to determine the amount of contribution to be payable by the owners from time to time. The amount so payable by an owner is a debt due and payable from him to the IO. 

In Chi Kit Co Ltd v Lucky Health International Enterprise Ltd [2000] 2 HKLRD 503 (“Chi Kit”), the Court of Final Appeal held, inter alia, that the liability of a unit owner to meet a contribution to the funds maintained by the IO would constitute a defect in title if it was so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser.

While liability could potentially be called for to meet a judgment in a substantial sum of $25.7 million (plus costs) entered against the IO in Chi Kit long before completion, it was held in two recent cases that the principle in Chi Kit is equally applicable to ongoing litigations and where much lesser amounts of damages and/or costs are claimed.

Gigabillion Asia Pacific Limited v Sino Dynamic International Limited

Facts
In Gigabillion Asia Pacific Limited v Sino Dynamic International Limited [2014] 2 HKLRD 922, the IO was involved in five sets of on-going litigations (“Litigations”). After entering into the formal Sale and Purchase Agreement (“SPA”) for the sale of the subject property, the Plaintiff’s solicitors raised requisitions on the Litigations and requested the Defendant’s solicitors to show that all contributions and/or the apportioned shares payable by the owner of the subject property relating to the Litigations had been fully paid and satisfied, or alternatively a certain amount of monies would be deducted from the balance of the purchase price being the contributions pending the full settlement of the Litigations. The Plaintiff’s solicitors also requested the Defendant’s solicitors to provide written confirmations from the IO and the other parties’ solicitors in the Litigations on the exact amounts of legal costs and disbursements payable by the IO and/or the manager of the building.

In answering the requisitions raised by the Plaintiff’s solicitors, the Defendant’s solicitors:-

1.         stated that there was no claim for damages in the Litigations and that they had been advised by the management office that the surplus in the “management funds” was sufficient to meet the liability in legal costs and no contribution was required to be called from the co-owners;

2.         provided a copy of the AGM minutes of the IO and stated that there were “millions of surplus accumulated” and that up to $1 million was allowed for costs of the Litigations without further sanctioning; and

3.         offered to set aside a sum of $25,000 as “security money” from the purchase price on completion and create an indemnity in favour of the Plaintiff undertaking to settle the apportioned sum called for and keep the Plaintiff indemnified against such contribution.

The Plaintiff’s solicitors did not accept the Defendant’s replies and reiterated that the IO’s potential liability in the Litigations amounted to an encumbrance affecting the title of the subject property. They also stated that the offer was not sufficient to remove the encumbrances or potential liabilities involved. As a result, completion did not take place. The Defendant’s solicitors alleged that the Plaintiff had repudiated the SPA and the Defendant was entitled to and did forfeit the deposits.

Application of the Chi Kit Principle
The Plaintiff relied on Chi Kit to argue that the Defendant failed to prove good title. The Defendant sought to distinguish Chi Kit on the basis that the magnitude of the liability of the IO for costs was nowhere close to the extent of liability in Chi Kit, such that such liability was not substantial or extraordinary and the chances of calling contribution from the owners were “slim”; in particular, the Plaintiff was only purchasing 49 out of 4989 shares (0.98%) in the building.

The Court rejected the Defendant’s argument. The Defendant failed to consider the possibility that the orders for costs made against the IO could with leave of the Lands Tribunal be enforced against the individual owners including the Plaintiff once it became the owner. The liability of the IO in the Litigations and the potential liability of the owners to contribute to the funds were by their nature extraordinary, as it was not an ordinary affair of an owners’ corporation to be involved in any litigation; such liabilities constituted an encumbrance. The Court considered that a reasonable purchaser of the subject property would not have expected or even contemplated that the IO had been subject to such liability. 

Further, the Defendant had failed to prove beyond reasonable doubt that the Plaintiff would not be at risk of a successful assertion against it of such an encumbrance. The liability of the IO in the Litigations had never been ascertained, and as the Litigations were on-going at the material times, it was uncertain whether the $1 million would be sufficient to discharge the IO’s own costs.

As for the Defendant’s offer for indemnity, the Court noted that in Chi Kit, the offer for indemnity made by the vendor was reinforced by an offer to set aside a sum of around $33 million out of the purchase price or make available a bank guarantee for the full amount of the liability of the owners’ corporation or any other reasonable amount that the purchaser might nominate. Even in that case, the Court of Final Appeal held that the offer did not resolve all problems which flowed from the existence of the potential liability.

In the present case, the offer for indemnity did not cover the full amount of the liability of the IO in the Litigations. Even if the offer could be construed as covering the full amount of the liability, it was not backed up by any security other than a sum of $25,000 to be set aside and stakeheld by the Defendant’s solicitors. As such, the indemnity could not amount to an answer to the requisitions raised by the Plaintiff.

In the circumstances, the Court held that the Defendant failed to answer the requisitions raised by the Plaintiff relating to the liability of the IO in the Litigations.  There was an incumbrance on the Defendant’s title and the Defendant failed to prove good title to the subject property. An order was made against the Defendant to return the deposits to the Plaintiff with interest.

Lo Yee Man v Si Chuan Property Development Consultants Limited
Similarly, in Lo Yee Man v Si Chuan Property Development Consultants Limited, DCMP 478/2014, the District Court held that a personal injuries claim against the IO could constitute a blot on individual owner’s title of his own property. Even if no judgment had been entered against the IO prior to completion, the potential liabilities of a judgment that might be given against the IO could still constitute a blot on title. Without knowing the particulars of the personal injuries claim including its magnitude and the financial situation of the IO, the vendor’s offer of $50,000 as security money did not eliminate the risks of the purchaser’s potential liabilities to make contribution upon demand by the IO and the risk that the injured person in the personal injuries claim might enforce the judgment against individual owners if the IO failed to pay.

Conclusion
Pursuant to the above two decisions in addition to the authoritative case of Chi Kit, litigations against the IO, be it ongoing or where judgment has already been entered, would very likely render a vendor’s title defective. In order to prevent the purchaser from refusing to complete based on the existence of such litigations, vendors should make a frank disclosure of the litigations that he is aware of involving the IO and take great care in drafting the preliminary and formal sale and purchase agreements before signing, so as to vary or limit his duty to give good title and minimise the risk of an aborted sale because of the existence of such litigations.

For enquiries, please contact our Property Department:

E: property@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.