LETTER OF THE LAW

A Hongkonger's home is his corporate entity

There is an elegance to the legal magic behind the governance of our towering estates

PUBLISHED : Tuesday, 20 August, 2013, 12:00am
UPDATED : Tuesday, 20 August, 2013, 5:10am

Visitors to Hong Kong are struck by how densely packed together we are. A single residential estate, occupying a relatively small area of ground, provides homes for thousands of families. Each estate is, effectively, a district, often with its own leisure facilities, gardens and links to the transport network.

The property lawyer who visits Hong Kong would also be impressed by the elegance of the legal arrangements for the governance of these estates.

It can be surprising to learn that the buyer of one of these flats does not exactly own the flat. Rather, he buys a share of the government lease for the whole estate.

In addition, he buys a legally binding promise from the co-owners (the owners of the other flats on the estate) that they will not exercise their right to enter his flat. In other words, I won't come into your flat and you won't come into mine.

When it comes to governance and management, there is a need to create a system that allows agreement to be reached on matters of common concern, such as repairs to external walls, roofs or the drainage system. The system also has to ensure everyone pays their share of the common expenses, and impose obligations and restrictions that all owners agree to observe for the sake of the common good. These include keeping one's own property in some minimum standard of repair and restrictions on alterations.

A management body, akin to a board of directors, takes executive decisions concerning the running of the estate, and a system has to be put in place to inform the owners of the decisions and allow them to hold the executive to account.

Hong Kong has a system that achieves all these goals. The developer and the buyer of the first flat enter into a deed of mutual covenant (DMC) containing what amounts to a set of local laws for the running of the estate.

By a piece of legal magic, the effect of this set of promises expands so as to impose rights and duties on all owners and, in a limited way, any other tenants and occupiers.

The DMC is backed up by the Building Management Ordinance. Among other things, this allows the owners to incorporate; they can turn themselves into a company, but with unlimited liability for the individuals should the corporation be wound up.

Incorporation makes collective action by and against the owners easier. It also brings with it a system of governance that is very like that of a "normal" company, a model that many people here feel comfortable with.

The importance of a DMC cannot be overstated. The decaying exteriors of buildings that lack one show just how vital a tool it is. If everyone's consent is needed to carry out works to common parts, a building could soon go to wrack and ruin.

Professor Michael Lower specialises in land law at Chinese University