The Incorporated Owners of Man Ying Building v. Lai Ming Fung

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Building Management Application No. LDBM 342 of 1999

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J U D G M E N T

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Background:

1. The Applicant is at all material time the Incorporated Owners of Man Ying Building (the Building) situated at No. 9-16, Man Ying Street, Ferry Point, Kowloon. The Respondent is the registered owner of Alcove Shop at Ground Floor of the Building. It is common ground between the parties that upon receipt of two Building Orders from the Building Authority, the Applicant had respectively on 17th January, 1997 and 15th April 1998, passed several resolutions in the owners' meeting. Pursuant to those resolutions, the Applicant had engaged a contractor to effect renovation works to be carried out on the Building. The renovation works include, inter alia, the repair works on the outer wall, the canopy, other common parts of the said Building, refurbishment of the entrance hall and the replacement of pipes. By a resolution passed in the second mentioned owners' meeting above, the Applicant sought to split the renovation cost of HK$20,700,000 by the then existing number of units of the Building (i.e. 445 units) in equal shares and to collect contributions from owners of those units. The Applicant relies on Clause 4 and the Third Schedule of the Deed of Mutual Covenants (DMC) for its authority.

2. The Respondent protest and put forward two alternative arguments. The Respondent first argues that paragraph (s) of the Third Schedule of the DMC exempts him from making any contributions to the maintenance. Alternatively, the Respondent contends that the renovation cost should be shared by the owners of the Building according to the formula provided in s.22(2) of the Building Management Ordinance; i.e. in proportion to the number of shares held by that owner. In the Respondent's case, he holds only 1/10 of a share out of a total of 435 undivided shares for the Building. Hence, if the Respondent is upheld on his alternative argument, he should only be liable to pay HK$4,758.60 (HK$20,700,000 /435 shares x 1/10).

Construction of the Deed of Mutual Covenants:

3. In the main body of the DMC, only two clauses deal with the contribution of funds. They are Clause 4 and Clause 5.

4. Clause 5 provides for "The Crown Rent in respect of the said premises shall be borne and paid by the owners in proportion to the respective shares in the said premises for the time being vested in them." Clearly, this provision has nothing to do with the apportionment of renovation clause.

5. On the other hand, Clause 4 imposes on each owner a cluster of liabilities all of which are spelt out in the Third Schedule. This schedule contains 19 paragraphs i.e. paragraphs (a) to (s). Paragraphs (b), (c) and (d) set out how the individual amounts should be shared by the owners while paragraph (h) provides for the method of further fund raising when the funds collected under paragraphs (b), (c) and (d) become insufficient to cover the designated purposes. As the nature of the funds collected under those paragraphs is crucial in determining whether those provisions are also applicable to the collection of the renovation fund in the case before this Tribunal, I have reproduced those paragraphs hereunder for further analysis:

"(b) Each of the owners of flats and shops in the said Building shall in respect of each flat or shop owned by him pay a sum of $15.50 per calendar month payable monthly in advance to the Manager as contribution towards the costs of the following:-

(i) Maintaining an office and employing adequate staff for the management of the said Building.

(ii) Maintaining the wells, water tanks and electric pumps and electricity charges for operating such pumps.

(iii) Cleaning the parts of the building in common use.

(iv) Disposing of garbage.

(c) Each of the owners of flats on the second and upper floors of the said building shall in respect of each such flat owned by him pay a sum of $12.00 per calendar month payable monthly in advance to the Manager as contribution towards the costs of operating maintaining and repairing the lifts and the charges for electricity used for operating the said lifts and for lighting the corridors lifts lobbies staircases and parts of the Building in common use.

(d) If any one flat or shop in the said building shall have its own separate Government water meter then the water charges for the supply of water to such flat or shop shall be paid by the owner thereof but if two or more flats or shops in the said building share the same Government water meter then the water charges for the supply of water to such group of flats or shops shall be shared and paid by the owners thereof according to the separate private water meter of each flat or shop if such have been installed but if no separate private water meters have been installed then such water charges shall be borne and paid by such owners in proportion to the number of the said group of flats or shops for the time being owned by such owners

(e) .............

(f) .............

(g) ..............

(h) If the total contributions towards any of the expenses aforesaid shall be insufficient to cover the same than those owners liable to contribute towards such expenses as aforesaid shall make further contributions towards such expenses in proportion to the number of flats or shops owned by him which are liable to contribution but provided that the expenses in respect of any lift shall be paid by the owners of those flats on the second and upper floors served by such lift and not by the other owners Provided Further that the expenses of repairing the water tanks and electric pumps and the electricity charges for operating such pumps shall be paid by the owners of those flats on the upper floors whose water supply requires the use of such pumps and water tanks and not by the owners of those flats on the lower floors whose water supply does not require the use thereof." (underlines added)

6. From the wordings used in the above quoted paragraphs, one can make these observations. Firstly, paragraph (b) and (c) both deal with monthly contributions as opposed to irregular or contingent payments to be effected by the owners. Secondly, The uses of these contributions are restricted for designated purposes only, i.e.:

(i) maintaining the office for the management staff,

(ii) maintaining the installations and equipment of the building,

(iii) cleaning of the building,

(iv) disposing of garbage and

(v) maintaining the lifts service for the building.

7. All these purposes relate to the day to day maintenance of the building and operation of services rendered to the residents of the same. Needless to say that the water charges under paragraph (d) also relates to an expense of a recurrent nature. Hence, whenever the Third Schedule referrers to contribution of costs and expenses, it is these regular and recurrent expenses that the schedule is providing for. It is also these expenses that paragraphs (g) and (h) are dealing with when the contributions made by the owners in the aforesaid paragraphs respectively yield a surplus or fall into deficit. Counsel for the Applicant relied on paragraph (h) to say that the renovation cost in question should be split by the number of the existing units in the building and then shared by their owners. In my judgment, this contention of the Applicant can hardly be sustainable. Although paragraph (h) says "If the total contributions towards any of the expenses aforesaid (meaning those aforesaid day to day and recurrent expenses) shall be insufficient to cover the same than those owners liable to contribute towards such expenses as aforesaid shall make further contributions towards such expenses in proportion to the number of flats or shops owned by him...", paragraph (h) does go on further to say "...which are liable to contribution....." If the Applicant is relying on paragraph (h) to call for contribution of the renovation fund, the Applicant must prove that the renovation fund was levied for the purposes specified in paragraphs (b), (c) or (d) AND that the Respondent's alcove shop is a shop "which are liable to contribution" in the first place. Clearly, the Applicant fails in both limbs in this test. Renovation costs were not expenses of a recurrent nature and paragraph (s) has unambiguously exempted the alcove shops owners from making any contribution under paragraphs (b), (c) and (d). As a result of my analysis, I find that the DMC has been silent on how funds should be shared by owners of the building if large scale renovation works are to be carried out for the same. Paragraph (h) of Third Schedule only, for reasons given above, deals with contribution for expenses of a regular nature and has no application to renovation works involving a very substantial amount of money to be contributed by the owners of the building.

Construction of the Ordinance:

8. In the Building Management Ordinance, Cap.344, section 20 deals with the establishment of management funds. On the other hand, sections 21 and 22 prescribe how the amount of contribution to those funds is to be determined and collected by the management committee. I first turn to section 20(1) and (2). These two subsections provide for two kinds of fund to be established:

"20 Establishment of funds

(1) A corporation shall establish and maintain a general fund-

(a) to defray the cost of the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) and this Ordinance;

and

(b) to pay Government rent, premiums, taxes or other outgoings (including any outgoings in relation to any maintenance or repair work) which are payable in respect of the building as a whole.

(2) A corporation may establish and maintain a contingency fund---

(a) to provide for any expenditure of an unexpected or urgent nature; and

(b) to meet any payments of the kind specified in subsection (1) if the fund established thereby is insufficient to meet them." (underline supplied)

9. In my view, two observations can be made readily by contrasting the wordings of the two subsections. Firstly, the fund established under subsection (1) clearly gears up for expenses incurred by the corporation on a day-to-day basis. The primary responsibility of the corporation under the DMC as well as the Ordinance is of course either by itself or through its agent, very often a management company, to manage the common parts of the building as well as to make routine repairs to and maintenance of the public facilities. On the other hand, a contingency fund established under subsection (2) obviously caters for "expenditure of an unexpected or urgent nature" AND in the event that the fund establish under subsection (1) become insufficient to meet its purposes. The Applicant might argued that paragraph (b) of subsection (2) represented the same mechanism as designed in paragraph (h) of the Third Schedule in the DMC. My reply to this argument, however, is that the contribution called for under paragraph (h) goes into the management fund while the fund under subsection (2) of s.20 is meant to be a separate fund altogether from the time of its inception.

10. The second observation I can make of the two subsections is that for subsection (1), the mandatory "shall" is used to qualify the corporation's duty in establishing the general fund. At the same time, the discretionary "may" is used to vest a power in the corporation to establish the contingency fund under subsection (2). The legislature clearly had in mind that a general fund for the operation of the day-to-day business of the corporation was a necessity and thus imposed on the corporation a duty to establish such fund. On the other hand, as the contingency fund was for meeting contingency only, it was not a must for the corporation to maintain such a fund all the time. The corporation may, if it so choose, establish such fund whenever such need arises. My view on the nature of the two different funds under the two subsections is reinforced by s.21(1), s.21(4) reading together with the Fifth Schedule of the same Ordinance. S.21(1) also used a mandatory "shall" to impose a duty on the management committee to "determine the amount to be contributed by the owners to the funds established and maintained under section 20" within the time limit prescribed under paragraph (a) and (b). Prima Facie, the duty of the management committee seems to apply to both the general fund and the contingency fund. Yet, if one looks at paragraph 2 of the Fifth Schedule of the Ordinance which is incorporated into s.21 by virtue of subsection (4) and to which subsection (1) is subject, one would know that the management committee is required to determine on the amount of contribution for the contingency fund if and only if such fund is established. So the paragraph goes:

"2. The budget referred to in paragraph 1 shall set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in section 20(1) and shall, if a contingency fund is established under section 20(2), set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in that subsection." (underline added)

11. As for s.22, it provides, inter alia, how the management committee should discharge its duty under s.21 in working out the amount for the funds established under s.20. The relevant subsections is reproduced below for analysis:

"22. Recovery of contributions from owners

(1) The amount to be contributed by an owner towards the amount determined under section 21 shall be-

(a) fixed by the management committee in accordance with the deed of mutual covenant (if any);

(b) ............

(2) If there is no deed of mutual covenant, or if the deed of mutual covenant does not provide for the fixing of contributions, the amount to be contributed by an owner towards the amount determined under section 21 shall be fixed by the management committee in accordance with the respective shares of the owners."

12. The formula under the section is clear. Whenever the building has a DMC, the management committee should follow the provisions in the DMC in working out the amount or amounts of contribution to the two funds established under s.20(1) and (2). When the building has no DMC or if there is a DMC but the DMC makes has no provision governing how contributions to those funds is to be made, then the management committee should follow s.22(2) and levy contributions in proportion to the number of undivided shares in respect of a unit owned by the owner at the time.

The combined effect of the DMC and the Ordinance in the present case:

13. In my judgment, the starting point for this analysis is that s.20(1) and (2) provide for the establishment of 2 different funds-one general fund and one contingency fund. The corporation MUST create the general fund under s.20(1) and its management committee MUST determine on the amounts of contribution within the statutory periods specified in s.21(1)(a) and (b). On the other hand, the corporation MAY create the contingency fund under s.20(2) when need arises. Yet, whenever the corporation chooses to establish a contingency fund, its committee shall determine the amount of contribution. The formulas for levying contributions to both funds is spelt out respectively in s.22(1)(a) and (2). In order to determine which formula applies, the management committee should first look at the DMC to see if there is any provision which governs how contribution to a particular fund is to be made. If the DMC is silent on the point, the management committee should adopt the formula provided in s.22(2) to determine the amount of contribution. The same exercise is to be carried out by the management committee when it comes to determine how contributions are to be made to each of the two funds. It is because some DMC, as the one before me, may have provided for contribution to the s.20(1) fund (i.e. the general fund) but is silent on the establishment of and contribution to a s.20(2) fund (i.e. the contingency fund). In such cases, the management committee would have to calculate the amount of contribution to the first mentioned fund by making reference to the DMC and determine the contribution amount to the second mentioned fund by relying on the s.22(2) formula. Hence, in my judgment, the management committee of the Building in this case has correctly calculated the amount to be contributed to the general fund on a monthly basis according to the paragraphs (b),(c) and (d) and as subject to paragraphs (e),(f) and (s) of the Third Schedule. However, the extra ordinary general meeting of owners had wrongfully passed a resolution on 15th April, 1998 authorizing the levying of contribution amounts arrived at by the formula provided in paragraph (h) in the Third Schedule. That formula in paragraph (h) is only applicable to calling contribution to and the maintenance of the general fund. Considering the nature of the renovation work and the amount involved, what the Applicant had done was in fact establishing a s.20(2) fund to meet with the contingency created by the two Building Orders from the Building Authority. As the DMC does not provide for the establishment or the maintenance of such fund, the management committee should have determined the amount of contribution to the same by applying the formula in s.22(2). Should the Applicant have done so, it would arrive at the correct amount of contribution to be borne by the Respondent as being HK$ 4,758.60.

Conclusion:

14. The Applicant is seeking a declaration by way of its present application contained in a Form 22 in this case. However, the Applicant has not spelt out the terms of the declaration it is seeking. On the other hand, I believe I have already resolved the legal issues before me in this judgment with sufficient clarity. I do not think I could take the matter any further by working out my own declaration. For this reason, I dismiss the Application made by the Applicant. It has come to my attention that the Respondent had, as early as 31st March, 2000, made payment into court in the amount of HK$4,758.60-the amount which I have adjudged to be payable by him. The Applicant still proceeded with its application after that date. I can see no reason why the Respondent should not have his cost in the circumstances. Therefore, I grant an order nisi that the Applicant shall pay the Respondent's costs on the High Court party to party scale to be taxed if not agreed. Such order to become absolute unless, within 14 days, application is made to the contrary.