The DMC Share Regime

Discovery Bay Main Road

Anyone who follows Government land sales knows that Government leases always contain strict limits on total allowable gross floor area (GFA) and site use. Always … except for Discovery Bay.

In DB, there are no limits on development contained in the lease. Land use and the development parameters of each phase are controlled through the Master Plan. The developer may at any time apply to the Government to modify the Master Plan and the development on the Lot. The developer may go back again, and again and again — without limit.

This flexible arrangement requires an equally flexible Deed of Mutual Covenant (DMC). And, indeed, the Discovery Bay DMC provides great flexibility to the developer when planning the development on the Lot.

But, at the same time, the DMC places a strict cap on development, thus providing protection to the assigns of the developer — the 8,300 plus owners of residential properties. This cap is set by the share allocation and sub-allocation regime.

It is thus essential to understand the share regime under the DMC, and to ensure that it is implemented faithfully.

How the share regime works

Upon the execution of the DMC in 1982, the Lot was “notionally divided” into 250,000 undivided shares. At this time, these undivided shares were allocated to various uses (see table at page 7 of the DMC). As the Lot is developed, shares are sub-allocated from this defined usage pool according to the regime described at Section III, Undivided Shares (pages 15-17 of the DMC).

No undivided shares were sub-allocated or assigned in the DMC, other than the shares to the First Purchaser. Rather, the DMC established a framework within which future development (and share sub-allocation) could take place.

The key concept that must be understood is that, as the Lot is developed, the undivided shares that were allocated to the various uses upon the execution of the DMC may only be sub-allocated in line with these same uses. The sub-allocation regime described at Section III specifically forbids the transfer of shares from one use to another (except that any unneeded shares within a given use may always be deemed to be Common Area/Facilities shares).

This regime provides the flexibility necessary to accommodate the unique arrangement stipulated in the lease. At the same time, this regime limits the extent and type of development on the Lot, as described below.

Number of shares available for Residential Development

The undivided shares available for sub-allocation to any given use are limited. For example, only 56,500 of the total of 250,000 undivided shares were allocated to Residential Development use when the DMC was executed. Once these shares were fully sub-allocated and assigned to owners of residential properties – and they were fully so used with the development of Neo Horizon in 2000 – further residential development may only take place through the sub-allocation of so-called Reserve Undivided Shares.

Once all of the Reserve Undivided Shares are fully utilised, no further residential development may take place on the Lot. No other undivided shares (Hotel, Commercial, Retained Area, etc.) associated with the Lot may be sub-allocated for Residential Development use.

Beach Village

It is also important to note that Reserve Undivided Shares are not exclusively for sub-allocation to Residential Development use. Under the regime described at Section III, Reserve Undivided Shares may be sub-allocated to any use. They specifically must be sub-allocated to the “Service Area and Other Units”.

Given that future residential development is limited by the number of Reserve Undivided Shares remaining to be sub-allocated to Residential Development use, it is essential to maintain an accurate record of the sub-allocation of all Reserve Undivided Shares to all parts of the development.

Ideally, this record should be maintained in the Land Registry.

Unfortunately, no such record exists.

To make matters worse, it appears that until recently no one in Lands Department understood the share regime in Discovery Bay. There have been no proper controls in the past, and shares have been mis-allocated throughout the history of Discovery Bay.

Unless we return to the regime described in the DMC, it will be very easy for HKR to over-allocate undivided shares to the Residential Development on the Lot. That would in effect dilute the value of the shares of all the residential property owners in Discovery Bay, by enabling more development on the Lot than is allowed under the DMC.

Life’s Great Coincidences

Siena 1 & Siena 2B, DB North

Prior to development of Discovery Bay North (Siena, Chianti, Amalfi, etc) Hong Kong Resort Company Limited (HKR) was required to conduct a detailed Environmental Impact Assessment (EIA) of the proposed development area. The following extracts are taken from the chapter on Ecology from the final EIA report:

7.3.1 The initial studies were conducted in autumn 1994 to identify the key ecological issues. Field surveys were performed on the proposed Discovery Bay North development site on 17 and 23 November, 1994. The rocky shore of Yi Pak Wan and Yi Pak Hill were surveyed non-systematically. Major habitats of terrestrial vegetation were noted and dominant flora were recorded. The objective was to establish the conservation significance of the study area, and particularly to determine whether species of plants which are protected by local regulations or international convention occur in the study area. Plants were identified to species level where possible.

… and,  a few pages later, the Consultant wrote:

7.4.2 In general, the site is a frequently disturbed area. Much of the vegetation in the area has been subject to surface disturbance by construction or fire in recent years. The most recent fire occurred between November 14 to 16, 1994. This fire extensively burned the study area including Tai Che Tung, Yi Pak Au and down to Lau Fa Tung. Only the relatively mesic habitats such as the backshore, ravine, riparian and foothill regions survived the fire. The plant species recorded during the 1994 and 1995 surveys are listed in Table 7.1.

The EIA report was prepared by AXIS Environmental Consultants Limited and published in February 1996. Click to download the full chapter on Ecology.

Open Letter on LPG Supply

La Serene, La Vista Village, Discovery Bay
La Serene, La Vista Village

San Hing (LPG) Co Ltd has supplied LPG to Discovery Bay through a dedicated, reticulated supply network since 1983. Efforts over the years to find out why San Hing has a monopoly, and the terms under which it supplies LPG to DB, have met a brick wall — until now.

With the enactment of the Residential Properties (First-hand Sales) Ordinance in 2013, the developer, Hong Kong Resort Company Limited (HKR), came under a statutory obligation to provide details of such supply contracts in the sales brochure for new residential developments. The Amalfi development, re-launched in December 2013, was the first phase in DB to fall under the Ordinance, and its sales brochure provided a very interesting revelation.

Even though the terms of the Deed of Mutual Covenant (DMC) require that the DB management company, Discovery Bay Services Management Ltd (DBSML), represent the DB owners in all contracts with suppliers, supply of LPG is governed by a contract with HKR.

Full details are provided in the Open Letter to Mr. Vincent Chua, Director of DBSML, below.

Mr. Chua replied to the above letter, making reference to the provisions in the DMC regarding supply of electricity by CLP Power. Mr. Chua advised that the arrangements for San Hing followed those for CLP Power.

This is blatantly false, as explained in the following Open Letter.

No reply has been received to this second Open Letter, and the very worrying issues raised about the security of LPG supply to DB remain unresolved.

The supply agreement between HKR and San Hing expires on 31 May, 2020, and there is no guarantee that it will be renewed. San Hing has all along enjoyed the profits of supplying LPG while the system was new and maintenance requirements were minimal. As the network reaches the end of its service life and maintenance requirements start to rise, what is to prevent San Hing from concluding that the maintenance cost is too great to bear? San Hing has no obligation to renew the contract in 2020 on the same terms as at present. What then?

Twilight Court, Peninsula Village, Discovery BAy
Twilight Court, Peninsula Village

Thus, the owners of residential properties in DB face a huge potential liability for the maintenance of the LPG reticulation network in future. The fact that Mr. Chua has not responded to deny these concerns, or to provide a road map beyond 2020, speaks volumes in itself.

Land Grant, Master Plan and Control of Development

I have mentioned several times that Discovery Bay is unique in Hong Kong, in that the development on the Lot is not limited under the lease. Instead, development is controlled through two documents, the Master Plan and the DMC. The Master Plan controls the what and where. The DMC controls how much, through the share regime under the DMC.

In respect of the Master Plan, Lands Department exercises control over development through Special Condition 6(b) of the Land Grant, which states: “…no alterations whatsoever shall be made by the Grantee to the Master Layout Plan or to the development or any redevelopment without the prior consent in writing of the Secretary…”

Celestial and Graceful Mansions, Siena Two B Village, Discovery Bay
Celestial and Graceful Mansions, Siena Two B Village

In addition, the Master Plan controls use through Special Condition No. 7, which states “…the lot or any part thereof or any building or buildings erected or to be erected thereon shall not be used and the Grantee shall not permit or suffer the use thereof for any purpose other than for the purposes … indicated on the Master Layout Plan.”

Thus, the Master Plan is the key to understanding and controlling the development on the Lot.

However, a review of the “6” series master plans posted at the sidebar makes it clear that Lands Department has allowed considerable development to take place without requiring the developer to obtain prior approval through the Master Plan.

To take one obvious example, Central Park is not a permitted use of land at N1 under MP 6.0E1, as there was no provision for “Public Recreation” within N1 under the Plan. Only in recent years are the draft master plans catching up to the actual development on the Lot.

Even under draft MP 6.0E7g, Central Park is improperly shown as Open Space/Public Recreation and coloured light green. Only on the most recent drafts is Central Park (N7) properly shown as Public Recreation and coloured dark green. The colours represent  the uses shown on the Legend on the right of the Plan.

The fact that development of Central Park was allowed to proceed without proper control under the Master Plan had significant financial implications for the small owners and residents of Discovery Bay. Between 2002 and 2012, owners and residents were charged for the upkeep of Central Park, as it was not officially recognised as “Public Recreation”. Only when Lands Department required HKR to sign the Undertaking was this burden removed.

The total cost to the small owners and residents during that 10-year period was well over $15 million.

Supplementary Master Plans

Seabee Lane, Headland Village, Discovery BAy
Seabee Lane, Headland Village

I have now added a number of Supplementary Master Plans (SMPs) to the menu at the left, directly under the Master Plans.

As described in the Director of Audit Report, these show the detail of the development on the Lot. But they do much more. Together with the Master Plans, they control the development on the Lot. DB is the only development in Hong Kong where there is no limit or control on development in the lease.

The Audit Report highlights that the cable car system that was supposed to have been installed in DB was removed in one of the early SMPs, thus removing the obligation to provide the cable car under the lease. (This happened after the first owners had moved in to DB, and surely must be one of the very few times that the Government has permitted a change to the lease conditions after a DMC had been executed.)

Of the SMPs included here, the most interesting is the one for DB Plaza (Area 9a). This is the only official documentation that I know of that shows the location of the Public Recreational Facilities in Area 9a, including the Recreation Deck, the North Promenade, the Seafront Plaza and the South Promenade.

As you will note, the PRF are detailed very clearly. The tables on the SMP even record how the PRF were re-allocated over time. Given this level of detail, I find it quite surprising that the Director of Audit would state in his report that: “As the Lands D had no record of the specific replacement public  recreational facilities provided by Developer A, it asked Developer A to provide details of the facilities” (emphasis added).

Discovery College, from Central Park, Discovery Bay
Discovery College, from Central Park, one of the public recreational facilities in DB

The SMP is dated 24 April, 1997, while the Director of Audit asked Lands Department for confirmation of the PRF in June 2002. Was there no one left in Lands Department who knew about the SMP for Area 9a and the important role that it played?

Certainly, the SMP has never been updated since 1997, in contrast to the careful record of changes maintained throughout the 1990s.

Siena 1 SMP is also interesting as it shows the development concept for DB before the Disneyland project was given the go-ahead. With Disneyland, a restrictive covenant was imposed on DB limiting building heights over much of the Lot and also limiting development in the upland areas. As a result, the next phases of development will all take place at DB North near the tunnel, as detailed in MP 7.0E.

6.0E1 Approval Letter

Peninsula Garden, Peninsula Village, Discovery Bay
Peninsula Garden, Peninsula Village

The Approval Letter for the development under Master Plan 6.0E1, which was approved on 28 February, 2000,  is now posted in the sidebar at the left. In the Approval Letter, the Government imposed a new definition for the term Gross Building Area (GBA), with severe adverse consequences for the owners of properties in DB.

COC Minutes and Audited Accounts

Neo Horizon Village, Discovery Bay
Neo Horizon Village

I will slowly put up the entire set of minutes of the City Owners’ Committee and Audited Accounts of the Owners’ Funds for Discovery Bay. I am starting in opposite directions, with the COC minutes beginning from the earliest meetings in 1983 and 1984, but the accounts from the most recent. Everyone is probably interested to know the beginnings of DB, but, as far as money is concerned, the latest information is the most relevant.

Discovery Bay: The Ultimate Data Resource

Hillgrove Village, Discovery Bay
Hillgrove Village

Discovery Bay is a unique resort-style residential development on the north-east coast of Lantau Island, Hong Kong. It is the brainchild of Hong Kong Resort Company Limited (HKR) and its legendary founder, Cha Chi Ming (1914-2007).

That is both the beauty and the downfall of Discovery Bay. With a single developer, a unique vision could be implemented. With a single developer, one vision and one way prevails.

Unfortunately, the foundations of Discovery Bay have been forgotten over time, providing HKR an opportunity to re-write history and change the course of development. The aim of this website is to dig out the forgotten documents and explore their meaning, for all who may be interested.

To begin, I have uploaded all the master plans from 5.0 through to the latest draft, 7.0E. The current master plan is 6.0E1, dated 28 February, 2000. All subsequent plans are drafts.

The master plans have a unique role in the development of DB. Under the land grant, there is no limit to development on the Lot. Development is controlled through the master plan; development is limited through the share regime described in the Discovery Bay Deed of Mutual Covenant.

Over time, I will upload more documents and more commentary. Hopefully, it will all start to make sense — eventually