14 December 2020
Malaysia

Gated and guarded communities are highly sought after in Malaysia. The concept of the gated residence with security guards provides comfort and assurance in terms of safety and security. In general, a gated and guarded community or gated community housing scheme refers to a cluster of houses or buildings where its facilities and services including the infrastructure (roads, drains, etc.) within the premises are privately managed and owned. Usually, the premises are bordered by walls or fences on a perimeter, the entrances are controlled by security guards, boom gates or barriers, and other security restrictions may include guard patrols, central monitoring systems and closed-circuit television (CCTV).

This article provides an overview of the types of gated and guarded communities in Malaysia, as well as legal implications vis-à-vis the collection of maintenance charges and Deeds of Mutual Covenants.

Gated communities under the Strata Titles Act 1985

In Malaysia, a gated community may be established under the Strata Titles Act 1985 (“STA”)[1]This refers to residential communities with a strata title, and includes high-rise property such as apartments, condominiums and townhouses, or landed property such as bungalows, terrace or detached houses. The law on strata titles prescribes that the owner of a stratified property is not only the owner of the said property, but also the joint owner of all the common facilities provided in the development. Anything within the development is essentially private property and may be managed by the management committee of the Joint Management Body (“JMB”) or Management Corporation (“MC”) as established under the law.  Developers may set up a gated community upon approval of the relevant authorities.

Guarded neighbourhood schemes not falling under the STA

Residential properties held under individual land titles do not fall within the ambit of the STA. As such, they are not empowered by the law to create gated and guarded communities. Despite this, a similar scheme can be seen in the form of a guarded neighbourhood. Guarded neighbourhood schemes generally refer to a neighbourhood with security services. It cannot have physical barriers on public streets and may not enforce any entry and exit restrictions to the residents and the public. This is as section 46(1)(a) and (b) of the Street, Drainage, and Building Act 1974, provides that:

“(1) Any person who—

(a) builds, erects, sets up or maintains or permits to be built, erected or set up or maintained any wall, fence, rail, post or any accumulation of any substance, or other obstruction, in any public place;

(b) without the prior written permission of the local authority covers over or obstructs any open drain* or aqueduct along the side of any street…”

Without any specific law allowing for a gated residential area, neighbourhoods consisting of properties with individual titles are not free to control the entry of any persons into the said neighbourhood as compared to a gated community consisting of stratified property.

Conversion of guarded neighbourhood to gated community with barriers to entry

A guarded neighbourhood can be converted into a gated community with barriers to entry. This is allowed by the Ministry of Urban Wellbeing, Housing, and Local Government through the Federal Department of Town and Country Planning pursuant to the 2010 Guideline for the Gated Community and Guarded Neighbourhood.

The application for conversion can be made to the local government, and will be approved once the guidelines prescribed are fulfilled. The general pre-requisites can be summarised as follows:

  1. the application can be made through the residents’ association registered with the Registrar of Societies;
  2. all the premises which are to be included in the guarded neighbourhood must have received the Certificate of Fitness for Occupation (CFO) or the Certificate of Completion and Compliance (CCC); and
  3. the application must be made with the consensus of the majority of the residents (head of family), subject to no coercion or pressure from residents in disagreement.

Deed of Mutual Covenants

For properties under strata title, the Strata Management Act 2013 (“SMA”) expressly allows the collection of maintenance payment through the developer (under section 9 for the recovery of maintenance fees and sinking fund), JMB (section 21 empowers JMB to collect maintenance payment for common properties), and subsequently the MC (section 59). The SMA expressly empowers the relevant strata management entity to take legal action against defaulting homeowners.

However, federal law does not expressly provide for such collections in relation to developers’ properties held under individual titles.  Sale and purchase contracts for such properties are prescribed by statute and are not variable.  It is therefore common practice for developers and purchasers to enter into a Deed of Mutual Covenants (“DMC”) to create additional obligations, such as terms relating to the formation of a housing or residents’ association, maintenance of common property, security services which entails the creation of a guardhouse and boom gate, and the employment of security guards. A DMC confers contractual rights and obligations, instead of statutory power and responsibilities as per stratified properties.

Power of Residents’ Association under Deed of Mutual Covenants

The execution of the DMC binds both the developer and purchaser, and creates obligations for both parties to fulfil the terms of the deed, which includes making payment for maintenance fees for security services. The DMC commonly includes a clause which prescribes the formation of a residents’ association for the purpose of managing the neighbourhood. It must be noted that when there exists both a Sales and Purchase Agreement (“SPA”) as well as a DMC, these agreements form part of one transaction and ought to be read together as if they were one.[2]

The courts have also given effect to the terms in the DMC and held that the validly executed DMC perfectly binds the parties as how a valid agreement would operate. Therefore, when a DMC is executed and there exists a clause dictating the handing over of power of the developer to the residents’ association, the clause will then take effect and the residents’ association would be empowered to carry out acts agreed to in the DMC.[3]

Additionally, where the terms of the DMC state that the management of such  a community is to be managed by a third party which is not the developer, such terms would then empower the third party to manage the community and among others, to collect maintenance charges as prescribed by the DMC. This can be seen in the case of Property Skyline Sdn Bhd v Tan Moy Hong,[4] where the Court of Appeal held that a DMC prescribing payment to the management company is effective as against the purchaser, so long as the DMC was entered into willingly by the purchaser.

Obligations of Subsequent Owners under the DMC

A DMC executed by the purchaser and developer would be binding on the signatory parties. However, when the property is subsequently transferred to another party, would the new owner now be bound by the same DMC, even if they refuse to execute the said DMC?

Based on the principle of privity of contract, an agreement, prima facie, does not bind a non-signatory. Following this, new house owners would not be bound by the terms in the DMC as these persons are not privy to the DMC. Nevertheless, when it involves gated and guarded communities, the courts have indicated otherwise and held that a DMC would still bind the sub-owner of a property, regardless if a DMC was executed by the subsequent purchaser.

In Dr Christian Jurgen Kaul & Anor v Meru Valley Resort Bhd,[5] the plaintiffs, as the new purchaser of the land in a gated and guarded community, refused to execute the DMC. The High Court held that by buying into the concept of resort living, it was implied that the plaintiffs would have agreed to abide by what is already in place with respect to the contractual obligations of the previous owner. The court was of the view that subsequent owners to a gated and guarded neighbourhood would have impliedly agreed to sign a DMC to govern the use, maintenance and payments for common areas and common facilities. It is not for the new owners to pick and choose the types of service and terms that they will enjoy, but at the same time refuse to make payment in enjoying the facilities. The court reminded that as the property is not one which falls under the provision of the STA, the principles of contract law will apply:

“[67] Perhaps on hindsight it would have been better for the law to have caught up with development. We are told that there is now such a thing as a horizontal strata title and perhaps that would have solved a problem like this. Absent that this problem is essentially a problem in contract.”

Interestingly, the court held that there cannot be an argument of ignorance with regard to the DMC. During the preparations of the SPA between the original owner (as the vendor) and the new purchasers, the new purchasers’ solicitors would have asked for a copy of the agreements signed between the developer and the original owner. As such, they should have been alerted to the fact that there are binding covenants between the developer and the original owner that are binding on the subsequent purchasers. It is for the solicitors to further enquire with the original owner or the developer when advising their clients on the covenants that would be binding on them. The court appears to have placed important responsibility on the solicitors acting on behalf of the new purchasers to ascertain all obligations which may arise out of the transaction. Failure to do so may expose the solicitors to the tort of professional negligence.

Even in instances where the first purchaser did not execute the DMC, the courts have still found that subsequent purchasers would be bound by the terms in the DMC. In Leisure Farm Corporation Sdn Bhd v Loh Yuen Seng & Ors and another suit,[6] the subsequent purchasers refused to sign the Master Deed and DMC, which was essential for the continued development of Leisure Farm Resort. The developers claimed that they should have done so as they had bought into the concept of resort living. They developer claimed against the purchasers for unpaid maintenance charges and the failure to maintain the lawn, resulting in demands being issued and the action herein being commenced. During the trial, the original purchaser contended that he had never been asked to execute the Master Deed and DMC, which had thus been waived and was unenforceable on him. The subsequent purchasers then contended that there was no contract with the developer and nothing was said in the sub-sale to execute the Master Deed and DMC, therefore there is no obligation placed upon them to do so.

While the claim against the original purchaser was dismissed due to limitation, the court found that the terms and conditions in the original SPA between the developer and the original purchaser remained binding on the subsequent purchasers, who knew or are deemed to have known of such terms and conditions. The High Court was of the opinion that having bought into Leisure Farm, the purchasers would surely be interested to know what they were committing themselves to, and this includes the maintenance and other hidden charges. By all reckoning, their conduct would also bind 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 court further held that there had not been any oppressiveness in the operation of the Master Deed and the DMC, as it was for the overall benefit and interests of all the owners and residents of Leisure Farm, including the subsequent purchasers. They would also rely on the developers to provide services and regulate the conduct of other residents in Leisure Farm. It would be inequitable for them to be selective based on their needs alone. 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.

While not invoked in cases involving succession of a DMC, it appears that by the judgment of the courts, the principle of caveat emptor may be applicable in these circumstances. The principle of caveat emptor is defined by Halsbury’s Laws of England[7] as follows:

“The rule is caveat emptor; a purchaser should make inspection and inquiry as to what he is proposing to buy. If he omits to ascertain whether the land is such as he desires to acquire, he cannot complain afterwards on discovering defects of which he would have been aware if he had taken ordinary steps to ascertain its physical condition: and although as a general rule a vendor must deliver property corresponding to the description contained in the contract, yet an error in the particulars or description of the property in the contract is not a ground of objection if it is readily corrected on inspection.”

While it is the obligation of the seller to disclose material information of the property to the buyer, such obligation does not go beyond information that is not readily available. Where such information is readily available, the court’s stand has been consistent – a buyer should exercise due diligence to verify such information. The applicability of this legal principle largely depends on the facts of the case, but as a rule of thumb, it is always advisable to properly verify and review the sale and purchase documents carefully before committing to the deal. If a DMC is to be executed with the SPA, it is the responsibility of the purchaser’s solicitor to ensure that the purchaser knows of its existence and understands it. Where the property is in a gated and guarded neighbourhood or involves common facilities, the purchaser must make proper enquiries if there is a DMC.

Conclusion

While the courts have allowed developers and residents’ associations to collect and recover maintenance charges in a gated and guarded neighbourhood under individual land title, it remains an area that is largely unregulated. The guidelines provided by the Ministry of Urban Wellbeing, Housing, and Local Government do not carry legal effect and as such, has resulted in a myriad of confusion in relation to the laws surrounding non-stratified gated and guarded communities.

A specific legislation or regulation addressing this issue must be created, recognising once and for all, the legality of gated and guarded communities consisting of properties held under individual land titles. It should also contain the power of the residents’ association in managing common facilities which includes recovering sums owed by homeowners.

In countries practising the same land law system as Malaysia, such as Singapore and Australia,[8] the legislation and regulation similarly do not provide for gated and guarded communities under individual land title (in Australia, this is known as the Torrens title). Gated and guarded communities in these countries fall within the ambit of strata regulations. The distinction between such countries and Malaysia lies in the fact that the status of gated and guarded communities has been long acknowledged and addressed by these countries, while the prescription of law towards gated and guarded communities in Malaysia is fairly recent.

In Thailand, the notion of collective tenure and incorporated organisational arrangements govern the gated communities. Internal governing bodies variously known as “Ni-Ti-Book-Kon” and “Gam-Ma-Garn-Moo-Barn” govern the residents living in such area, and the homeowners are tied by legal agreements to a common code of conduct and collective responsibility towards the management.[9] In Indonesia, similar structure can be found, where there are conditions and restrictions imposed on residents and owners of properties in a gated and guarded community by way of legal agreements with the developers, instead of legislation by the lawmakers.[10]

Similarly, in the United States from where the system seen in Asia is adopted, gated communities, as they are known, are a part of a “Master Planned Community” created by developers with a great deal of capital. A large piece of land would be privatised and developed, and subsequently sold to wealthy purchasers. Covenants are set up and these stipulate in detail how the property is to be maintained, and are binding on all persons living in the vicinity.[11]

The framework of the Malaysian gated and guarded communities under individual title can be said to be the most similar to those in the United States. Reliance on the principles of contract law has created many legal issues and confusion regarding non-stratified gated and guarded communities in Malaysia, especially since a standardised law for this type of neighbourhood exists under strata title, but not for those under individual title. Thus, the Malaysian parliament must hasten to bring about this long overdue legislation.

As we await a specific Act or regulation to govern such gated and guarded communities, developers and residents’ associations, are reminded to take the necessary steps in ensuring that the DMC is executed and well-understood by the purchasers and sub-purchasers. Even professional personnel involved in the transaction, such as the developer’s agents and conveyancing solicitors, should always be reminded to advise on the requirement to execute a DMC along with the SPA. The failure to do so may result in civil action for misrepresentation or professional negligence. [12] It is further advisable for developers and residents’ associations to check with the local authorities and procure the necessary permission before setting up gated and guarded neighbourhoods in order to avoid future legal complications. Purchasers must also continue to be alert and exercise due diligence in purchasing properties in gated or guarded neighbourhoods.

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the Zaid Ibrahim & Co partner you usually deal with. This article was prepared with the assistance of Audrey Lim Shu Ting of Zaid Ibrahim & Co.


This alert is for general information only and is not a substitute for legal advice.

[1] See section 6(1A).

[2] Prestaharta Sdn Bhd v Ahmad Kamal bin Md Alif & Ors [2016] 4 MLJ 39.

[3] See Bandar Eco-Setia Sdn Bhd v Angelane Eng [2016] 1 MLJ 764 and Faridah binti Abdullah (menyaman bagi pihak dirinya dan bagi pihak pembeli-pembeli dan pemilik-pemilik lain hartanah di Taman Paya Rumput Perdana Fasa 2) v Gjh Avenue Sdn Bhd & Anor [2018] MLJU 508.

[4] [2012] MLJU 920.

[5] [2014] 9 MLJ 539.

[6] [2019] MLJU 1993.

[7] Halsbury’s Laws (4th edn, 2006) Vol 42 at p 47, as cited in Aim Edition Sdn Bhd v Ambank (M) Berhad [2020] MLJU 82.

[8] Tay Eng Siang, Kuek Chee Ying, Jason Kung Que Seng, ‘Gated Community – Modern Lifestyle in Urban Area: Issues and Challenges on Legal Development in Peninsular Malaysia’ [2015] 1 MLJ lxxiii-xcvi.

[9] Veeramon Suwannasang, ‘Urban Gating in Thailand: The New Debates’ in Samer Bagaeen, Ola Uduku (eds), Beyond Gated Communities (1st edn, Routledge 2015).

[10] Harald Leisch, ‘Gated communities in Indonesia’ (2002) 19(5) Cities 341–350.

[11] Klaus Frantz, ‘Gated Communities in the USA – A New Trend in Urban Development’ (2000) Espace Populations Sociétés 101.

[12] Loh Bee Tuan v Shing Yin Construction (Kota Kinabalu) Sdn Bhd & Ors [2002] 2 MLJ 532.