Court of Appeal Ruling: Cash Calls, Sinking Fund Beyond 10%, Differential rates and MC legal fees indemnity
The Court of Appeal’s decision in Yong Kein Sin & Anor v Perbadanan Pengurusan Springtide Residences and other appeals is said to be a landmark in Malaysian strata law. It examines vital questions about the powers of management corporations (MCs) under the Strata Management Act 2013 (SMA), regarding fundraising, sinking fund contributions, recovery of legal costs and the use of differential rates of maintenance charges. The case illustrates that MCs are strictly bound by the SMA and unable to expand their powers through bylaws or resolutions.
Case Background
Springtide Residences is a residential strata development comprising 74 apartments and 3 villas. Disputes arose between parcel owners and the MC over the maintenance charge and the scope of bylaws.
In 2013, the MC passed a bylaw allowing the MC to recover legal costs incurred in enforcing bylaws. In 2019, a claim was filed at the Strata Management Tribunal (SMT) to challenge the maintenance charge rate. The claim was dismissed as it was against the wrong parties. The parcel owner who filed the claim was asked to pay the legal fees (incurred by the MC to defend the claim) under the bylaw approved in 2013. The owner then challenged the validity of the bylaw in the High Court. The suit was dismissed by the court (ref 1).
Different rates were imposed on the apartment and villa owners. A suit was filed in the High Court to invalidate the differential rates and recover the shortfall from the villa owners. The suit was dismissed. The High Court decided that the claim was barred by res judicata, delay and acquiescence (ref 1).
In 2021, the MC passed a resolution to raise RM1.45 million from all owners for capital works. A suit was filed to challenge this resolution. Pending a court decision, the MC reclassified the cash call as a sinking fund contribution at an EGM in 2022. The High Court sided with the MC, upholding that the resolutions were valid under sections 51(2)(c,) (e), 59(1)(a), (c) and 61(3) of the SMA (ref 1).
Court of Appeal Ruling
The Court of Appeal overturned the earlier decisions, sending a clear message about the limits of MC powers. The key rulings were:
1. Legal Costs Cannot Be Recovered via Bylaw
The Court held that the MC’s bylaw requiring parcel owners to pay the MC’s legal expenses was invalid and unenforceable. The SMA does not empower MCs to pass such bylaws, and any attempt is ultra vires of Section 70(2) SMA 2013 (ref 1). Legal costs must be borne by the MC.
2. Differential Rates Not Allowed
The Court pointed out that using different rates for apartments and villas was unlawful. Different rates of charges under 60(3)(b) SMA 2013 can only be used if the parcels are used for significantly different purposes (ref 1 & 2).
The parcels in the development, whether apartments or villas, have the same use for residential purposes. Therefore, the apartments and villas in this case cannot be deemed to be used for “significantly different purposes”, in order to justify the different rates imposed by the MC under Section 60(3)(b) of the SMA (ref 2). This matter is pending an appeal in the Federal Court (ref 2).
3. Sinking Fund Contributions Capped at 10%
The SMA sets sinking fund contributions at 10% of maintenance charges. The Court confirmed that MCs cannot increase this percentage through resolutions or bylaws (ref 1). Any attempt is invalid. This protects owners from excessively costly liabilities.
Going by this ruling, cash calls would not be permitted either, as such levies are outside the scope of the SMA. MCs must raise funds through the mechanisms provided in the Act.
Personal Commentary
The Court of Appeal’s decision in this case acts as a reminder to ensure that management practices are aligned with statutory requirements. By invalidating cash calls, extra sinking fund contributions, bylaws on legal costs and the use of differential rates, the Court has reaffirmed the principle that MCs must act strictly within the powers granted by the SMA. Although MCs often face monetary strains and difficulties in managing the development, the Court of Appeal has emphasised that solutions must remain within the limits of the SMA.
In reality, the court’s decisions have wider consequences and highlight the tension between practical management needs and statutory limits. While it is fair that the management corporation cannot pass the legal costs incurred to the parcel owner, there may be instances in which uninformed owners repeatedly initiate unnecessary legal actions, placing a burden on the management corporation. Although every owner has the right to bring an issue to court if they disagree with it, they should also consider the legal costs borne by the management corporation. Such monies might be better utilised for upkeeping the common property. In my view, owners should avoid frivolous and petty lawsuits.
The use of differential maintenance charges has been a controversial matter. While it makes sense to pay for what is exclusively yours to use, not everyone supports it because of the potential for abuse. Although these rates are approved at the general meeting, some owners have questioned the large disparity in charges across different components. Dominant groups could easily use their large share votes to approve these rates and also sway the election of committee members.
I do not oppose the use of differential rates, but to prevent potential abuse, each component should be managed by its own committee. Sections 63 to 69 of the SMA 2013 provide for the functions of the subsidiary management corporation and limited common property to oversee the application of different rates. Please read my article “Big Fish and Ikan Bilis” to understand the effects of using differential rates in a development. The link to the article is provided below (ref 3). I do not oppose the usage of uniform rates either, as the different components in a mixed development complement each other. On a “give and take” basis, everyone can be on the same boat.
Rejecting ad hoc cash calls from owners and limiting sinking fund charges to the statutory 10% safeguard owners from extra monetary pressures. Property managers and committee members are required to carefully plan and accurately forecast future income and expenditure to avoid shortages. Currently, a developer is unable to properly hand over the management of a completed project due to bankruptcy. Owners are left uncertain while they establish the committee and begin collecting maintenance charges and sinking fund contributions. Some parts of the common areas are not furnished as they should be. Unfortunately, a cash call is urgently needed, and following this court decision, the committee had to increase the maintenance charge instead (so that the corresponding 10% sinking fund is more) to raise the necessary funds.
The SMA 2013 requires enhancements to address more issues. One size does not suit all, and different situations call for different approaches. Overall, I think it is good that this case clearly confirms that management corporations cannot exceed their powers beyond what the law permits, and owners are entitled to fair, transparent and lawful treatment. This encourages trust and accountability in strata governance.
References:
1. Can a Residential Scheme with High Rise and Villas apply different rates of charges? – BurgieLaw
2.MC Cannot Impose Different Rates of Maintenance Charges for Residential Development – HHQ
