Oon Hooi Lin and Melody Ngai discuss a noteworthy case on stratified developments.
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This article was first published in Issue 2/2018 of Legal Insights, a Skrine Newsletter. Reproduced with permission of Skrine.
In the case of 3 Two Square Sdn Bhd v Perbadanan Pengurusan 3 Two Square & Ors; Yong Shang Ming (Third Party) [2018] 4 CLJ 458, the High Court had the opportunity to consider the categorisation of common property in a stratified development and the duties of council members of a management corporation of such a development.
BACKGROUND FACTS
The plaintiff, 3 Two Square Sdn Bhd, was the developer of a commercial development called 3TwoSquare (“the Development”). The first defendant was the management corporation of the Development (“Management Corporation”), established pursuant to the Strata Titles Act 1985 (“STA”) and the second to ninth defendants were council members of the Management Corporation.
The Development comprised six blocks of shop and office lots. The plaintiff remained the proprietor of all the parcels in one of the six blocks (“Crest Tower”), while the remaining parcels in the Development had been sold.
Disputes arose as to the party who was responsible for the maintenance of certain areas and facilities within the Development, including the cooling tower located on the roof of Crest Tower and the toilets and lifts located in Crest Tower (“Disputed Facilities”).
The plaintiff contended that the aforesaid responsibility lay with the Management Corporation as the Disputed Facilities formed part of the common property of the Development. The plaintiff sought a mandatory injunction to compel the Management Corporation to maintain the Disputed Facilities. It further sought to make the second to ninth defendants personally liable for what it alleged was a breach of duty by the Management Corporation.
The first to eighth defendants contended that the Disputed Facilities did not form part of the common property of the Development whilst the ninth defendant denied liability on grounds that he had not been involved in the decisions by the Management Corporation.
CATEGORISATION OF COMMON PROPERTY
The first to eighth defendants submitted that the Disputed Facilities did not form part of the common property of the Development as those facilities had not been specifically identified as common property in the strata plan. They relied on sections 10(3) and 10(4) of the STA which specifically required common property to be clearly identified in a proposed strata plan.
The learned judge, referring to section 4 of the STA which defines “common property” as “so much of the lot as is not comprised in any parcel (including any accessory parcel), or any provisional block as shown in an approved strata plan”, opined that the STA defines “common property” by exclusion: common property is simply that which is not a parcel. Hence, there is no requirement for labels to be affixed to the Disputed Facilities in order for them to be designated as common property; all the areas that are not identified as parcels will automatically be regarded as common property.
His Lordship further held that sections 10(3) and 10(4) of the STA did not impose a requirement for common property to be specifically labelled in a strata plan in order to be considered as common property. Instead, the labelling requirements in those sections only applied to proposed strata plans to be submitted to the relevant authority in connection with an application for approval for subdivision of a building.
The Court also rejected the defendants’ contention that the Disputed Facilities were not part of the common property due to the special or exclusive use of those facilities by the plaintiff. According to the Judge, this contention is not supported by the provisions of the STA nor that of other relevant statutes applicable at the material time and is not a concept which is provided for in the relevant legislation.
The Judge also referred to JMB Silverpark Sdn Bhd v Silverpark Sdn Bhd [2013] 9 MLJ 714 where it was held that two requirements had to be fulfilled in order for an area to be considered as “common property” under the Building and Common Property (Maintenance and Management) Act 2007 (“BCPA”): the area must be outside a parcel, and must be used or capable of being used or enjoyed in common by all occupiers of the building.
The High Court in the present case noted that the definition in the BCPA refers to “occupiers” rather than “proprietor”. Thus, the Disputed Facilities would comprise “common property” so long as they are capable of being enjoyed by the employees and tenants of the plaintiff in Crest Tower, notwithstanding that the plaintiff was the sole proprietor of all the parcels in the tower. The Court further added that the proper categorisation of a facility as common property cannot depend on the identity of the proprietor as it could give rise to an absurd result if a facility is not considered as common property on one day (and thus need not be maintained by the management corporation) but would be considered common property once the proprietor sells one of his parcels to a third party.
The Judge emphasised that the BCPA does not apply to the case before him as the management corporation had already been formed (thereby bringing the matter outside the scope of the BCPA and into that of the STA) and added that the reference to the BCPA was to show that the definition of “common property” therein supports his conclusion that the Disputed Facilities ought to be considered as common property.
Accordingly, the Court held that the responsibility for the maintenance and upkeep of the Disputed Facilities fell on the Management Corporation and issued the mandatory injunction requiring the Management Corporation and the council members for the time being to maintain and manage the Disputed Facilities.
DUTIES OF COUNCIL MEMBERS
The plaintiff also sought to make the second to ninth defendants personally liable in their capacity as council members of the Management Corporation for the latter’s breach of duty on the basis that individual council members owed a statutory and fiduciary duty to the plaintiff.
In the absence of legal precedent in Malaysia on the aforesaid issue, counsel for the plaintiff cited the legal position in other jurisdictions, such as Australia, Sri Lanka and Ontario, Canada, where the fiduciary duty of the office bearers in a corporation that manages stratified property has been considered. After examining the authorities submitted by the plaintiff’s counsel, the Judge cautioned that authorities from other jurisdictions are at best only of persuasive value, and that the legal position in Malaysia must take into account local circumstances and be consonant with the context of local legislation.
The Court noted that section 43(1) of the STA, inter alia, requires the management corporation to maintain the common property in good and serviceable repair whilst section 34(1)(b) confers the right of user on every proprietor in relation to the common property “which he would have if he and the other proprietors were co-proprietors” of such property. According to the Judge, when these provisions are read together, the duty of the management corporation under section 43(1) is owed to all proprietors collectively as they have the right of use of the common property as though they were co-proprietors of such property.
The Judge opined that the duty of a council member is not co-extensive as the duty that is owed by a director to the company of which he is a director. A council member should not be held to the same high standard of care as would be owed by a professional director in a company for the following reasons:
(a) a management corporation established pursuant to the STA differs from a company incorporated under the Companies Act 2016: the former exists simply as a repository of rights that are common to all the proprietors in a development whereas the latter is formed for the purposes of pursuing a particular venture or economic activity;
(b) council members are elected from a much smaller pool of candidates, i.e. proprietors of the parcels in a particular development whereas a for-profit company may select and appoint its directors based on their skill and experience; and
(c) the requirement under the STA that a council member must be a proprietor of a parcel in the development means that a council member would always have a personal interest to advance as he must necessarily be a proprietor.
His Lordship then set out the applicable principles, which may be summarised as follows:
(1) A council member of a management corporation owes a fiduciary duty to act bona fide in the interests of the management corporation;
(2) The duty is owed to the management corporation and to the proprietors as a whole but not to individual proprietors;
(3) The nature of the fiduciary duty includes:
(a) a duty to exercise due care and skill, having regard to the skill and experience of the council member in question; and
(b) a duty of fidelity or loyalty that requires the council member (i) not to exercise a delegated power to advance a personal interest to the detriment of the management corporation or the proprietors as a whole; and (ii) to disclose any personal interest that he may have in any transaction or undertaking proposed to be carried out by the management corporation;
(4) Once the interest is disclosed, a council member is at liberty to exercise his right to vote in any way he deems fit at any council meeting or general meeting of the management corporation, including advancing a personal interest that he may have in his capacity as a proprietor, and to suborn the interest of the collective to his personal interests.
In light of the Judge’s view that council members owe a fiduciary duty to the management corporation and to the proprietors as a whole but not to individual proprietors, His Lordship held that the plaintiff’s claim against the second to ninth defendants for breach of fiduciary duty failed on a point of law. The Court was also satisfied that there was insufficient evidence to show that the council members had acted otherwise than in good faith and in what they considered to be in the best interests of the proprietors as a whole.
CONCLUSION
This decision is noteworthy as it sheds light on the basis for determining whether certain areas or facilities in a stratified development are to be categorised as common property.
It is also significant as it is the first reported decision in Malaysia which considers and sets out the nature and extent of the duties of the council members of a management corporation of a stratified development.
As the plaintiff’s action was commenced prior to the coming into force of the Strata Management Act 2013 (“SMA”), the provisions of the SMA did not apply to this case and were not considered by the Court (except in relation to the issue of costs). It is submitted that the duties of council members of a management corporation expounded by the learned Judge in this case would be applicable under the regime of the SMA.
Although the definition of “common property” under the SMA differs from that in the STA, it is submitted that the principles laid down in 3 Two Square on the categorisation of common property would apply under the SMA provided that the area or facility in question is used, or capable of being used or enjoyed, by the occupiers of two or more parcels.
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About the Authors
Oon Hooi Lin graduated from Queen Mary College, University of London in 1992 with an LLB (Hons). She was admitted as a member of the Honourable Society of Lincoln’s Inn and was called to the English Bar in 1993. She was called to the Malaysian Bar in 1995. Her main areas of practice are conveyancing matters, corporate share sales, transfers of ownership in businesses, joint venture schemes, licensing and franchising agreements, housing and corporate financing.
Email: oon.hooi.lin@skrine.com
Melody Ngai Shi Yun graduated from the University of Leeds in 2013. She was admitted to the Honourable Society of Lincoln’s Inn, London, as a Barrister-at-Law in July 2014 and was admitted to practice as an Advocate and Solicitor of the High Court of Malaya in September 2015. Her areas of practice are Acquisition, Real Estate, Banking and Finance, Trust and Probate.
Email: melody.ngai@skrine.com
