Consultation Paper on Proposed Amendments to the Building Management Ordinance (Cap. 344)

INTRODUCTION

1. The Council welcomes the opportunity to provide comments to the Home Affairs Department in relation to proposed amendments to the Building Management Ordinance. The Council has received a number of complaints from the public regarding building management issues, and the suggestions from the Council in this submission are based on the issues raised by complainants over the last three years.
    
2. The complaints have largely been in regard to disputes between a management company and a property owner or owners, and can be broadly classified into three categories of allegations:

•  * unreasonable charges;
•  * poor repair and maintenance service; and
•  * substandard quality of management.

3. The Council's comments in this submission therefore largely focus on the proposals that that relate to complaints about building management companies. The Council's submission follows a format of setting out the Government's objectives and proposals, as outlined in the consultation paper, and Council comments. In addition to providing comments on the Government's proposals, the Council is also taking this opportunity to raise three other related issues; concerning restrictions in unit owners' choices of contractors, a forum for mediating owner/building management disputes, and effecting changes to the Deed of Mutual Covenant.

CONSULTATION PAPER PROPOSALS AND COUNCIL SUGGESTIONS

Objective: To facilitate OCs in their performance of duties and exercise of powers

Proposal: That management committee members of an owners corporation shall not be held personally liable for any collective decisions of the OC, which is neither ultra vires nor tortious, solely on the ground that they are members of the management committee.

Proposal: Empower an OC to borrow money from the Government to achieve compliance with certain statutory notices, orders or other documents.

Proposal: Simplify provisions to enable an OC to terminate the appointment of the Deed of Mutual Covenant Manager (DMC manager) and subsequent managers.

4. The Council gives its in general support to the above proposals.
    
5. Complaints received by the Council reveal that management companies have unilaterally entered into contracts, such as providing for an internet service provider to install broadband facilities in the building without the knowledge of the property owners, and requiring the employment of the developer's affiliated property management company in a specified period.
    
6. The Council therefore welcomes the simplification of procedures to terminate the appointment of the DMC manager and the removal of the provision in the Seventh Schedule that not more than one manager's appointment can be terminated in any three consecutive years.
    
7. This latter proposal should allow an OC more flexibility in its desire to change management companies without having to forebear poor performance of the existing manager.

Objective: To rationalize the appointment procedures of a management committee and its members

Proposal:  That a management committee may be appointed by a resolution of the owners of not less than 30% of the shares, AND the resolution must also be passed by a majority of the votes of the owners voting either personally or by proxy at the same meeting

Proposal:  Requiring a quorum of 10% at an owners' meeting for the appointment of members and holders of office of the first management committee

Proposal: That appointment of members and holders of office of the subsequent management committee can only be achieved by a resolution of the owners at an AGM

8. The Council gives its general support for the above proposals.
    
9. Complaints received by the Council regarding elections to management committees have not been directly related to the above provisions but concerned other types of complaints, for example, that a management company with close connection to existing members of a management committee, has assisted those persons to run for election to a new committee. Thus, it was alleged that the management company interfered with the normal and fair participation of some owners in the operation of building management.
    
10. The circumstances that allow for this form of interference to occur could arise due to owner apathy, particularly since some buildings might not be occupied by a majority of owners, but by tenants. With the passage of time, the owners may not have a high degree of interest in the management of the building, leading to a deterioration in the quality of building management.
     
11. One way to overcome the apathy could be to allow for tenants to be elected to the management committee, upon authorisation by a registered owner. In these circumstances, a tenant who has the confidence of the owner could 'stand in the owner's shoes' and take an active role in building management on behalf of the owner. As for the problem of management companies interfering with the election of persons to the management committee, this is a matter that the Council urges Government to examine, in terms of what legal issues such interference raises; for example, under the Prevention of Bribery Ordinance. The issue could also be addressed in a 'code of practice' for management companies.

Objective: To afford better protection for the interests of building owners

Proposal: That any procurement of supplies, goods or services with a value exceeding the prescribed threshold has to be done through prescribed tendering procedures and various other related amendments.

Proposal: Provide for owners' rights to obtain copies of minutes of meetings of both OCs and management committees upon payment of reasonable copying charges.

12. The Council supports the above requirements relating to prescribed tendering procedures.
     
13. With regard to the proposal that owners be given the right to request copies of minutes of management committee meetings at reasonable charges. The Council also supports this proposal.
     
14. However, a related matter that has come to the Council's attention due to complaints from unit owners is that they have had disputes with their management company regarding their failure to provide a copy of the contract with sub-contractors to substantiate its claim and the cost to be borne by owners. There have also been complaints that management companies have used their subsidiary companies, or related sub contracting firms to undertake work on buildings.
     
15. The Council therefore also suggests an additional provision, i.e., that in the interests of transparency, the right to inspect or obtain copies of documents should also be widened to include such matters as claims for expenses and agreements for subcontracting works, before signing the contract; and other documentation generated by the management company and management committee. Further, management companies should be obliged to declare related interests in any tender exercise.

ADDITIONAL CONSUMER COUNCIL PROPOSALS

Restrictions on owners' choice of contractors

16. The Council has recently raised a concern with the Legal Advisory and Conveyancing Office (LACO) regarding complaints from tenants alleging unreasonable restrictions exercised by building managers on tenants' choices as to the selection of contractors for the carrying out of certain works in buildings.
     
17. The complaints mainly concern the practice of management companies controlling the appointment of contractors on building works, such as water, electricity, alarm systems and fire safety devices, by restricting tenants to the use of a certain contractor or a small number of contractors nominated by building managers from time to time. This has led to allegations that tenants have had to pay higher costs for the work than would otherwise be the case if they had free choice.
     
18. The LACO has guidelines in place regarding the construction of Deeds of Mutual Covenant and the Council has suggested that the guidelines be amended to require, amongst other things, that a sufficient list of contractors be provided to unit owners for works to be carried out in the building where the building management is required to exercise some control over the standard of work. The provision of a selection list of contractors is to avoid allegations that the management company is employing designated contractors for the purpose of obtaining pecuniary interest.
     
19. The Council's recommendations to LACO were as follows:

1. As a matter of principle, managers should not unreasonably restrict tenants' choices as to choosing service providers for carrying out works within a building.
2. Some limited control may be justified over the selection of service providers, to maintain appropriate standards of work for facilities commonly shared by all tenants, and which may be impaired if particular standards are not met.
3. In recognition of the need for limited control, building managers should provide for the provision of a panel of contractors from which tenants can choose.
4. In assembling a panel of contractors, building managers should seek tenders annually to appoint a reasonable number of contractors to be listed on the panel who will be in a position to offer competitive options for tenants with regard to price, choice of services, and quality of service.

20. The complete submission made to LACO is provided as an attachment to this document.
     
21. The response from LACO was to raise a concern with the administrative cost incurred by the managers in inviting tenders, examining the submissions and making a deliberate decision on appointing a panel of contractors on an annual basis. The Council sought clarification from LACO:

• as to what increase in costs LACO considered would be incurred by a building manager due to having to appoint a panel of contractors, as distinct from only one contractor;
• whether the government has figures to indicate the extent to which building managers currently either appoint panels of contractors or stipulate one exclusive contractor.

22. The Council is awaiting a response and would urge the Government to seek a resolution to this issue.

Owner complaints mediation centre

23. While the government's proposals have simplified procedures to terminate the appointment of management companies, some complaints might not be so serious as to warrant such drastic action. In any event, the appointment of another management company might not necessarily rectify what has become an endemic pattern of conduct among management companies in general, requiring an industry wide change in behaviour.
     
24. In some cases, the intervention of a third party that has the confidence of the industry and owners to mediate a dispute might therefore be the quickest and more efficient means of achieving resolution. For example, the Hong Kong Federation of Insurers (HKFI) operates a self regulatory system whereby policy holders dissatisfied with an insurer's conduct can complain to the HKFI for resolution of the complaint.
     
25. The relevant industry association for property management is the Hong Kong Association of Property Management Companies Limited (HKAPMC). However, the Council understands that it only represents, by number of building management companies, about 25% of the industry population  [1]. Moreover, unlike the members of the HKFI who must be licensed to operate in the industry, property management companies are unlicensed and are not therefore under the control of any one association or regulatory body.
     
26. In view of the mounting complaints received from property owners about the poor performance of their management companies, the Council considers that some form of mediation forum should be created to provide redress for owners dissatisfied with the management of their buildings by management companies.
     
27. The creation of a specialist mediation forum, similar to the Labour Tribunal for example, may therefore be more appropriate precedent to follow that is conducive to providing redress to property owners, and maintaining high standards of conduct among management companies.

Changing the DMC

28. This Council received complaints from owners of two flats regarding the swap of their respective undivided shares and management shares in their building's deed of mutual covenant and management agreement. One complainant (the "Smaller Unit Owners") purchased a unit in a housing development. Another couple, (the "Bigger Unit Owners") purchased another unit in the same development which is bigger in size than that of the Smaller Unit Owners.
     
29. In the DMC of the housing development the respective undivided shares of both owners and management shares were swapped. It appeared that the cause of the swap was the Architect's Certificate wrongly stated their respective number of undivided shares and management shares.
     
30. One of the proposals suggested by the developer was that it would reduce the management shares of the Smaller Unit Owners and re-distribute them among some other unsold unit in the development. (At that time, the Bigger Unit Owners had not yet come forward.) The Director of Lands stated that the proposal seemed reasonable and practical in the circumstances but it was his personal view and not formal LACO approval to the proposal. Without LACO's approval, the developer was then hesitant to proceed with the proposal.
     
31. When the Bigger Unit Owners also realized the problem they approached the Council for help. Despite attempts at mediation no satisfactory resolution of the problem could be reached.
     
32. It seemed to the Council that the logical way to resolve the problem would be to rectify the swapping of the two units' undivided shares and management shares in the DMC. However, for this to occur a number of obstacles arose.

1. rectifying a mistaken swap of shares set out in the DMC requires consent of the LACO
2. any change of the terms of the DMC requires consent of all the current owners
3. current mortgages of the two units and other units are affected
4. the land office record is affected.

33. The Council considers that the Government should consider what rectification action can be taken to change the terms of the DMC without having to seek the consent of all current owners. For example, whether the court or the Director of Lands could be vested with the power to rectify genuine mistakes on condition that owners of the affected units accepted the rectification action and that interest of all other owners would not be affected.

Attachment
Consumer Council submission to Legal Advisory and Conveyancing Office

Consumer Council
Restrictions in Tenant Choices for Installation and Maintenance Works in Buildings

Introduction

1. The Council has over the years received complaints from tenants regarding unreasonable restrictions exercised by building managers on tenants' choices as to the selection of contractors for the carrying out of certain works in buildings.
    
2. The complaints mainly concern the practice of management companies controlling the appointment of contractors on building works, such as water, electricity, alarm systems and fire safety devices, by restricting tenants to the use of a certain contractor or a small number of contractors nominated by building managers from time to time. This has led to allegations that tenants have had to pay higher costs for the work than would otherwise be the case if they had free choice.

Rationale for Restriction of Choice

3. Restrictive terms on the use of contractors appear common in many Deed of Mutual Covenant in Hong Kong. The usual rationale for the restrictions, employed by building managers, is that

1. because any change in one part of a linked system might affect the overall system; and
2. to ensure consistency and safety in the whole system,
3. maintenance and engineering works on the systems should be carried out by contractors appointed or approved by the landlord or building management company.

4. While at face value this seems acceptable, repair and maintenance contractors for water, electricity, and fire safety system are registered under legislation and are issued with licenses by relevant authorities. They are therefore deemed to be competent by virtue of the regulatory system that controls them. Moreover, there are various regulations that require the adherence to uniform standards in relation to infrastructure layout and design, and landlords or building managers are free to stipulate specific local standards to be applied within the boundaries of the subject property.
    
5. As a result, there would not seem to be a justifiable reason for building management to restrict a tenant's choice of contractor.

Government Policy

6. There are two aspects to current Government policy that relate to the concerns of building tenants. The Independent Commission Against Corruption (ICAC) has produced a guide for owners incorporations on tendering and accounting procedures in building management. Second, the Legal Advisory and Conveyancing Office (LACO) has guidelines in place regarding the construction of Deeds of Mutual Covenant.

* ICAC Guideline

7. ICAC's Corruption Prevention Guide on Building Management to Owners Incorporations points to the need for open tendering and accounting procedures in building management. However, the Guide only requires building management to follow the Building Management Ordinance (Cap.344) in the procurement of any supplies, goods or services required by building management.
    
8. Section 20A of the Building Management Ordinance requires that:

1. The procurement of all supplies, goods or services required by a corporation in the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) or this Ordinance shall comply with such standards and guidelines as may be specified in a Code of Practice relating to such procurement.
2. Any supplies, goods or services referred to in subsection (1) the value of which exceeds or is likely to exceed:

   1. the sum of $100,000 or such other sum in substitution therefor as the Authority may specify by notice in the Gazette; or
   2. a sum which is equivalent to 20% of the annual budget of the corporation or such other percentage in substitution therefor as may be approved by the corporation by a resolution passed at a general meeting,

   whichever is the lesser, shall be procured by invitation to tender.

3. The procurement by invitation to tender of any supplies, goods or services under subsection (2) and the tender procedure in respect thereof shall comply with such standards and guidelines as may be specified in a Code of Practice relating to such procurement and tender procedures.
4. All tender documents, copies of contracts, accounts and invoices and any other documents in the possession of a corporation and relating to the procurement of supplies, goods and services shall be kept by the corporation for such period, being not less than 6 years, as the corporation may determine.

9. The Ordinance, and the ICAC guideline only cover situations where building corporations are engaged in the organisation of repair and maintenance work for the building as a whole. While they provide a safeguard for tenants in relation to that work, the safeguards do not apply to the issue at hand, i.e. the control of building management over tenants' choice of contractor.

* LACO guidelines

10. The Council notes that the revised DMC guidelines issued by the Legal Advisory and Conveyancing Office on 29 June 1999 and the Checklist for Submission of Deed of Mutual Covenant and Management Agreement published on 9 August 1999, contain the following guidelines as to the construction of DMCs in relation to management works:

"The Manager may appoint or employ agents, contractors or sub-managers, who may include professional property management companies, to carry out certain aspects of the management works or management works in respect of certain area(s) of the development but the Manager shall not transfer or assign his rights or obligations under the DMC to any such persons: such persons must remain answerable to the Manager. The Manager shall at all times be responsible for the management and control of the whole development (including any part thereof) and no provision shall attempt to take away or reduce such responsibility."

11. The cases reported to the Council on restricted or no choice as to repair and maintenance contractors, are related to the above clause in the DMC guideline that provides for the building management to appoint contractors.

Council Recommendations

12. In view of the complaints received, and that any restriction of choice on tenants may lead to unreasonable and costly restrictions on tenants, the Council suggests that the Guidelines should be amended at the next opportunity to attempt to rectify the situation.
     
13. The Council can appreciate that notwithstanding the fact that all registered contractors should in theory be able to undertake relevant work, building management might have justifiable reasons to maintain some restrictions on the range of service providers employed by tenants. For example, familiarity with the particular systems in place, a satisfactory level of experience in working on the systems, and other attributes as to financial and security credentials.
     
14. Accordingly, some control could still be justifiably exercised by building management. However, the control should be balanced against a recognition of the interests of building tenants. For example, the following could be included in the DMC guidelines:

1. As a matter of principle, managers should not unreasonably restrict tenants' choices as to choosing service providers for carrying out works within a building.
2. Some limited control may be justified over the selection of service providers, to maintain appropriate standards of work for facilities commonly shared by all tenants, and which may be impaired if particular standards are not met.
3. In recognition of the need for limited control, building managers should provide for the provision of a panel of contractors from which tenants can choose.
4. In assembling a panel of contractors, building managers should seek tenders annually to appoint a reasonable number of contractors to be listed on the panel who will be in a position to offer competitive options for tenants with regard to price, choice of services, and quality of service.

Notes: 
1.      A record of HKAPMC membership is available at Home Affairs Department for public viewing. The search was conducted in 2001.