In 中紀投資有限公司Centre Chase Investment Limited v 青山道國際工業大廈業主立案法團 The Incorporated Owners of Castle Peak Road International Industrial Building and STL Company Limited [2026] HKCFA 26, the Court of Final Appeal (CFA) was given the opportunity to state authoritatively the law in Hong Kong on waiver and acquiescence in the context of a claim by incorporated owners (IO) for breach of a deed of mutual covenant (DMC) by owners.
The judgment clarifies the legal uncertainties arising from conflicting judgments and provides guidance on the duty of IO in enforcing its rights under the DMC for non-compliance.
Background
The dispute concerns an industrial building at Castle Peak Road (Building). The Applicant (Appellant) is the owner of Unit 2A. The 1st Respondent is the IO of the Building and the 2nd Respondent is the owner of Unit 9A. The Applicant objected to the installation of mock window frames (Window Frames) on the external wall (for feng shui purposes only) by the 2nd Respondent.
A Certificate of compliance was issued for the Window Frames in accordance with Building (Minor Works) Regulation (Cap. 123N), thus there was no issue of illegality. However, the DMC of the Building clearly prohibited the affixing of such Window Frames to the exterior or common parts of the Building. Section 34I(1)(a) of the Building Management Ordinance (Cap. 334) (BMO) further prohibits owners from converting common parts of the Building for their personal use, unless approved by a resolution of the IO.
Over the years, owners of the Building installed various structures on the external wall, for example, supporting frames for air-conditioning units. The IO passed a resolution in accordance with section 34I(1)(a) of the BMO, approving the affixing of these structures until renovation of the external wall in the future, which included the Window Frames.
Under s.18(1)(c) of the BMO, the IO is required to “do all things reasonably necessary for the enforcement of the obligations contained in the [DMC] for the control, management, and administration of the building.” The Applicant thus brought an action to compel the 1st Respondent to enforce the DMC against the 2nd Respondent. Both the Lands Tribunal and Court of Appeal dismissed the Applicant’s action.
The CFA was invited to address the following: in absence of illegality, under what circumstances can waiver or acquiescence curtail the scope and/or excuse the discharge of the statutory duty to enforce the DMC imposed on an IO under the BMO?
Can the IO Acquiesce or Waive a Breach of the DMC?
The CFA acknowledged diverse lines of authorities, but noted that it was not bound by any of them and should examine the question as a matter of principle.
The Applicant argued that it is not open to the IO to decide not to do anything or to approve a breach, given the IO’s statutory duty under s.18(1)(c). Conversely, the Respondents argued that the IO can waive a breach, if they reasonably come to the view that no enforcement is necessary, although the IO would need to exercise such power in good faith, with due consideration of the relevant factors.
The Court first considered the nature of an IO. It affirmed that an IO is not a public authority, but the “corporate embodiment of the co-owners collectively.” It is designed to facilitate exercise and enforcement of owners’ collective rights and liabilities. As the IO’s rights are identical to the rights of individual owners, the court found no logical policy reason to differentiate between the two when it comes to the application of defences like waiver and acquiescence.
The Court then proceeded to examine the corporate governance mechanism under the BMO, and found the majority rule to be an important underlying principle in building management. The Court, taking a practical view, acknowledged that IO do not have unlimited resources and will need to balance priorities when engaging in enforcement actions. Therefore, management of the building is primarily a matter for the management committee of the IO, which makes collective decisions for the owners. The Court will not intervene in such management decisions.
Considering the above, the Court firmly rejected the Applicant’s contention that section 18(1)(c) imposes an absolute, inflexible duty for the IO to enforce the DMC:
- First, the wording of section 18(1)(c) for the IO to “do all things reasonably necessary” gives the IO a margin of discretion in deciding what is reasonably necessary.
- Second, the IO can take into account practical considerations and decide on appropriate responses to breaches, which might include options other than litigation.
- Third, the Court went further, to say sometimes it would be sensible and desirable to reach settlements in relation to a breach, which would inevitably require certain rights of the IO to be waived in the process.
This reading of the BMO is reinforced by section 34I(1)(a), where the Court expressly permits the IO to pass a resolution approving conversion of a common part. The Court considered this not to be a special exception for breaches involving conversion, but rather a manifestation of the wider legislative intent of the BMO. The Court therefore concluded that the management committee of the IO should have full managerial discretion to choose the best way to tackle a breach of the DMC. It follows that the IO has the power to waive or acquiesce all types of breaches of the DMC, save for breaches involving illegality.
Despite the wide managerial discretion afforded to the IO, the Court emphasized that the management committee of the IO still has to consider a complaint of breach of the DMC conscientiously (in good faith) and reasonably. In deciding what actions to take to tackle the breach, they must consider the seriousness of the breach and other related factors.
The Applicant’s appeal was dismissed accordingly.
Implications to Management Committees of Incorporated Owners
The judgment is good news for management committees of IO. The CFA clarified the previously uncertain legal position and affirmed that there is no absolute and rigid duty for the IO to prosecute every DMC breach. In fact, the Court affords the IO a wide managerial discretion to make appropriate responses to breach of the DMC, based on practical considerations, including resource constraints, the effectiveness of legal action, or even neighbourhood harmony. This reduces the burden of members on the management committee, usually comprising laymen working on a part-time and unpaid basis, especially in the absence of any professional support from management companies appointed by the IO.
This, however, by no means suggests that the IO’s power to waive or acquiesce to a breach is unfettered. They must still evaluate complaints of breach carefully, considering relevant factors, such as the seriousness of the breach and whether it involves violation of Building Regulations, posing risk or danger to neighbours. When management committees make decisions to waive or tolerate a particular breach, they must ensure that decision was made reasonably and in good faith. Proper documentation should be kept to pre-empt future challenges to the decision.
For further information, please contact:
Paul Kwan, Partner, Deacons
paul.kwan@deacons.com
