Management Corporations can now sue developers – what are the implications?

There have been rapid developments in the judicial determination of housing laws in Malaysia in recent years. From recent cases, the interpretation of housing laws has skewed towards increased protection for homebuyers.

To recap, the common property which formed the subject matter of the suit included construction movement joints as well as the swimming pool and its open deck. In 2008, a purchaser engaged the services of an architect to inspect the unit and the common properties. The purchaser suspected that the salt pool water was accelerating the corrosion of steel pillars around the swimming pool area.

The High Court eventually held that the MC could sue the developer for negligence as there was sufficient proximity between the MC and the developer to find that the developer owed a duty of care to the MC. The decision in Dua Residency raises a novel point of law.

Traditionally, homebuyers would bring an action individually against developers to rectify defects or for failing to construct the condominiums with good workmanship or materials.

The High Court noted that while a contractual remedy existed for the homebuyers, this would be impractical as it would require all the homebuyers to institute a civil action. Instead, the Court accepted that from a practical point of view, the MC represented the collective homebuyers since the management and maintenance of the condominium were directly under the MC’s care.

Developer’s duty of care

The Dua Residency decision now imposes an additional duty of care on developers to an MC of a condominium or stratified property, to ensure that their properties have been constructed with good workmanship and in accordance with the agreed specifications and approved plans in the sale and purchase agreements.

The decision in Dua Residency potentially raises several issues. An MC acts on a majority whereby a motion is made at a general meeting and passed with a majority vote. Should a motion be passed by the majority for the MC to commence legal action against the developer, what then would be the rights of the minority who have opposed the motion? The minority would essentially be brought into a legal suit which they have no intention to commence or without their express consent.

A class action?

The decision in Dua Residency would be binding on all the homebuyers irrespective of whether the homebuyers were part of the majority or minority. The judgement pronounced in a representative capacity was equally binding on all the parties being represented i.e. all the homebuyers which the MC sought to represent. Whilst the decision of Dua Residency did not specifically deal with the issue of class actions, some may argue that the outcome in Dua Residency could be akin to a representative or class action claim.

Contrast this with the traditional approach whereby homebuyers would knowingly and willingly commence an action against a developer directly. The issue of the minority acquiescing or being bound by a judgment they did not intend to seek would not arise at all.

The decision of Dua Residency could also potentially open the floodgates to frivolous civil suits brought against developers by the majority of homebuyers coming together to compel the MC to do so. The majority could also mean only the majority of owners that were present during the general meeting.

Whilst the prospect of a representative action against a developer may seem alluring at first glance, it may not be as sweet as it seems. As with all litigations, it is possible that homebuyers, having succeeded in their claims, would still end up with mere paper judgements. The corporate entities that have developed the stratified properties may be insolvent.

If the outcome were such, the MC, having utilised the collective fund to commence legal action, might end up detrimenting the homebuyers instead. The minority who had opposed the commencement of the civil suit would also have to bear the costs as the MC would have acted as a representative for all the homebuyers.

Nevertheless, how would this decision affect property developers in the future? They would now have to consider not only their contractual obligations to homebuyers but also their duties of care owed to the MCs of the condominiums or stratified properties. 

Leonard Yeoh is a partner, and Caleb Sio is an associate with the law firm, Tay & Partners.

This story first appeared in the EdgeProp.my E-weekly on July 23, 2021. You can access back issues here.

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