Deed of Mutual Covenants (“DMC“) is a deed that signed by purchaser(s) together with the Sale & Purchase Agreement (“SPA“) during which the said purchaser agreed to purchase a property with a Developer in the primary market sector which involving a gated and guarded property or a stratified property. It would bind the purchaser with the terms and conditions as stipulated in the said DMC. In stratified development such as service apartment or condominium, DMC provides the rules that regulate the use and enjoyment of the parcels and common property.
WHETHER THE DMC IS STILL RELEVANT AFTER THE STATUTORY BY-LAWS CAME INTO FORC
The Strata Management Act, 2013 (SMA) came into force in June 2015 with a set of rules, known as statutory by-laws, prescribed in the Third Schedule of the Strata Management (Maintenance and Management) Regulations, 2015. The enforcement of SMA may cause the DMC signed before no longer has any effect.
According to Section 148 of SMA, on the coming into operation of this Act, the provisions of any written law, contracts and deeds relating to the maintenance and management of buildings and common property in as far as they are contrary to the provisions of this Act shall cease to have effect.
Literally, it may appear that any DMC signed before the enforcement of SMA no longer has any effect. Referring to Section 148 of SMA, it is not the DMC that ceases to have effect but only the provisions in it that are contrary to the provisions of the SMA which can be rendered invalid. Therefore, any provisions in the DMC which are not contrary to the provisions of the SMA remain valid. It is possible for the DMC to have additional rules for the maintenance and management in addition to those in the statutory by-laws. Such rules agreed in the DMC apply as a contract between the purchasers and the developer.
Upon delivery of vacant possession, a developer can impose those additional rules stated in the DMC as additional by-laws with the consent of the Commissioner of Buildings, as provided under Section 32(2) of SMA. Once a Joint Management Body or Management Corporation has been established, they can also implement further laws to be inserted through a special resolution in accordance with Section 32(3) and Section 70(2) of SMA respectively. Again, those additional by-laws made cannot go against the statutory by-laws under SMA.
In the case of Prestaharta Sdn Bhd vs Ahmad Kamal Md Alif & Ors, the purchaser made a claim of ownership for common property against the developer. The purchaser assumed 13 facilities to be public property. However, the developer argued that all the 13 facilities were comprised of ‘additional facilities’ outside the common property which could be used by the parcel owners, but the developer continued to be the proprietor. The court ruled in favour of developer as DMC with clear indication that the additional facilities are expressly excluded from the common property and the ownership thereof remain solely with the developer had been signed between the property purchaser and the developer. A question arises whether the DMC in the Prestaharta case can be implemented after the SMA came into effect, the results are possibly distinct. But, Prestaharta case clearly shows that the DMC may still be important in implicating contractual law.
WHETHER THE DEED OF MUTUAL COVENANTS BOUNDS SUBSEQUENT PURCHASERS IN A GATED & GUARDED COMMUNITY?
The question arises if the property is then sold by the first purchaser to a different party as subsequent buyer, would the subsequent buyer as the new owner still be subject to the same DMC even if they refuse to execute the DMC.
Based on the privity of contract principle, agreement does not bind a non-signatory. Thus, the new house owner may argue that they would not be bound by the terms and conditions of the DMC since they are not privy to the DMC. However, the Malaysian Court have determined that a DMC would still apply to the subsequent buyer of a property when it comes to gated and guarded communities, even the DMC was not signed by the subsequent purchaser.
According to Dr. Christian Jurgen Kaul & Anor v. Meru Valley Resort Bhd, the Plaintiffs refused to execute DMC as the new owners. The High Court held that the Plaintiffs impliedly agree to abide by the existing contractual duties of the former owner since they bought into a concept of resort living. The Court believed that subsequent purchaser in a gated and guarded community would have impliedly agreed to sign a DMC to regulate the use, maintenance, and payments for common areas and facilities. By the time the new purchasers enter into the sale and purchase of property, they are assumed to accept the terms and condition stated in the DMC. Therefore, they are bound to the DMC and must pay for maintenance fee.
In the case of Leisure Farm Corporation Sdn Bhd v. Loh Yuen Seng & Ors, even if the first purchaser did not execute the DMC, the Court determined that subsequent purchasers were bound by the terms of the DMC. In this case, the subsequent purchasers refused to execute the Master Deed and DMC which are essential for the further development of Leisure Farm Resort. The developers argued that the subsequent purchasers should have done so because they had bought into the concept of resort living. The developer claimed against the purchasers for non-payment of maintenance fees and failure to maintain the lawn. During the trial, the first purchaser counterclaimed that he had never been asked to sign the Master Deed and DMC therefore it is unenforceable. Later, the subsequent purchasers claimed that they have no obligation to pay for maintenance as they had no contract with the developer and the Master Deed and DMC was not signed during the time they execute the sub-sale agreement.
The Court held that the subsequent purchasers were also bound to the terms of the original SPA between the developer and the first purchaser, who believed to have known those terms. The subsequent purchasers ought to know what they were committing themselves to after purchasing the property, such as the payment of the maintenance fees and other hidden charges. Their action of purchasing the property binds them through their express and implied acceptance or acquiescence of the terms of the original SPA and cause them to abide by the existing terms, conditions and by-laws.
The subsequent purchasers must also abide by the DMC even they are not the one who execute the DMC in the firsthand. The subsequent purchasers do not have to worry about the terms and conditions of the DMC since it was for the overall benefit and interests of all the owners and residents including the subsequent purchasers. They would also rely on the developers to provide services and regulate the conduct of other residents. As they are living in the same community, they should be subject to the same impositions contained in the Master Deed and DMC as the other owners and residents.
In a nutshell, Section 148 of the SMA does not invalidate all provisions of a DMC. The developers are still allowed to make provisions that govern the community of the stratified development as designed by them for a particular project. It forms a contract upon signing by all purchasers that may be enforced by the courts. In a subsale transaction, it is the seller’s obligation to disclose material information about the property to the purchaser. The purchaser should also exercise due diligence to verify and review the sale and purchase documents before buying a property. It is also pertinent to note that subsequent purchasers are bound by the terms of DMC in a Gated & Guarded Community, even though they have not signed any DMC with the developer. This means that when a property is sold to a new owner, that owner is still obligated to follow the rules and regulations set out in the original DMC.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
About the author
Racheal Ling Jia Qi
Halim Hong & Quek