Introduction

The Deed of Mutual Covenant (“the DMC”) entered into by the developer of the land, the manager appointed by the developer and the first party to purchase a unit in the development has a binding effect to all successors in title.

By registering the DMC under the Land Registration Ordinance (LRO), all subsequent purchasers and mortgagees are bound by its terms because the parties would be deemed to have the notice of the terms of the DMC. Therefore, subsequent purchasers must observe the terms set out in the DMC, any breach of which would give rise to liability being enforced against such owner.

While it is true that the DMC binds all owners, chargees and lessees, it is still doubtful whether its terms are enforceable if it violates the general principles regarding priority.

This article is purported to examine the enforceability of some of the terms in the DMC and whether they have any effect on priorities for management charges.

The Function of DMC

The DMC is a tri-party contract between the developer, the manager appointed by the developer, and the first party to purchase a unit in the development. In most cases, the manager is a subsidiary of the developer. The DMC also provides for the making of House Rules to facilitate the carrying out of the manager’s duties and sets out details for the management and regulation of the multi-storey building etc.

The owner is required to observe the terms of the DMC and to ensure that he does not breach the terms of the Government lease, any relevant legislative obligations and that he does not cause occasion for his charger or any other owner to take action against him.

The DMC also covers all aspects of co-ownership of the development and contains various restrictive and positive covenants, personal rights and other matters relevant to the management of land owned by many parties.

The DMC will also recite the covenants in the Government lease to which all owners are subject to. Default in compliance with these covenants will render the land liable to forfeiture to the Government without compensation.

Enforceability of the terms of DMCs

A DMC’s terms bind all owners who are parties to the DMC; however, for terms such as the following, which affect the rights of a third party, their enforceability is doubtful:

"4. In the event of any Owner failing to pay any sum due and payable by him accordance with the provisions of this Deed of Mutual Covenant or failing to pay any damages awarded by any court for breach of any of the terms or conditions of this Deed of Mutual Covenant within 30 days of the date on which the same became payable, the amount thereof together with interest as aforesaid and the said collection charge and all costs and expenses which may be incurred in recovering or attempting to recover the same including the legal expenses referred to in Clause 3 of this Sub-Section and in registering the charge hereinafter referred to, shall stand charged on the share or shares of the defaulting Owner and the Manager shall be entitled without prejudice to any other remedy hereunder to register a Memorial of such charge in the Land Office against the share or shares of the defaulting Owner. Such charge shall remain valid and enforceable as hereinafter mentioned notwithstanding that judgment has been obtained for the amount hereof unless and until such judgment has been satisfied.

5.Any charge registered in accordance with the last preceding paragraph shall be enforceable as an equitable charge by action at the suite of the Manager for an Order for sale of the share or shares of the defaulting Owner together with the right to the exclusive use, occupation and enjoyment of the Unit held therewith and the provisions of Clause 3 of this Sub-Section¹ shall apply equally to any such action. Any such equitable charge shall rank in priority to any legal or equitable charge given or made by the Owner in respect of such share or shares and the Unit held therewith notwithstanding that such other charge shall have been created and registered prior to such equitable charge."²

These provisions are basically saying that the management charges over the property have the first and foremost priority over any other charges regardless their nature and their dates of creation.  

Recovery of unpaid fees and charges

The manager is usually given extensive powers to take action to recover unpaid charges duly levied against the owners. Some of these powers are statutory and others derive from the terms of the DMC. In most cases, the ultimate remedy is to effect a charge against the title of the defaulting owner.

The Building Management Ordinance empowers the manager, in respect of an incorporated building, to register a charge or seek a charging order against the unit or to demand payment of arrears from the tenant or other occupier of that unit.

However, these powers will not be allowed to go so far as to violate the provisions under LRO which governs the priority of the registered instruments.  

Effect of the Land Registration Ordinance (LRO)

The functions of the LRO are to provide for the registration of deeds, conveyances, judgments and other instruments affecting real or immovable property, the keeping of Land Registry records, and for other matters relating to land registration.

Section 3 of the LRO states that all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under the Ordinance.

Section 4 reads that no notice whatsoever, whether actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.

Priority under the LRO

These sections provide that the priority of the registered instruments is based on their dates of registration. Notice of unregistered instruments will not affect the priority of the registered instruments. Nothing in this ordinance says that these sections can be contracted out by parties; thus, the terms under the DMC regarding priorities would have no effect to third parties even if they had either actual or constructive notice of the DMC if their instruments were registered under the LRO. Therefore, if the management charge was registered, say, after one duly registered judgment charge, then the judgment charge would accordingly have the priority over the management charge.

The situation would still be the same even if the charge was an equitable charge. Section 20B (3) of the High Court Ordinance, Cap 4 says that a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor.

An equitable charge on land is a security which does not create a legal estate, but only confers an equitable interest in the land upon the creditor. Its priority could only be maintained if it was created before a later charge and was duly registered.

In Kai Sun Investments Ltd v Dah Sing Bank [1983] HKCFI 40, the judge commented that where there were two or more conflicting interests in land, the first to be registered would take priority regardless of the date of acquisition, otherwise the purpose of the Ordinance, namely the LRO, would be defeated. Subsequently it was held that the sales agreement ranked after the charging order which was registered according to section 3 of the LRO.

Priority under Common law principles

In the case of unwritten equity, it might prevail over the subsequent unwritten or registered equity only if it is created first in time.

In Financial and Investment Services for Asia Ltd v Baik Wha International Co. Ltd [1984] HKCFI 190, it was held that unwritten equity being first in time prevailed over the defendants' subsequent registered equity.

This principle was echoed upon in Wong Chim Ying v Cheng Kam Wing [1991] 2 HKLR 253, in which it was held that unwritten equities might be enforceable against the registered party if the prior unregistered interest had priority on general principles.

Conclusions

The terms of a DMC bind all successors in title as well as chargees and lessees. However, when its terms are in violation of the provisions of the LRO and the general principles of law, they are not enforceable, and accordingly, should not have been included in the DMC.

Angel Mak 
Barrister-at-law
Baskerville Chambers

1. This section deals with all amount payable by owner
2. Section E4 and E5 of the Deed of Mutual Covenant of Braemar Hill Mansion which was erected on The Remaining Portion of Inland Lot No.8398