Goldenshine Dyeing Factory Ltd. v. Retail Warehouses Ltd. and Another

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Building Management Application No. BM 93 of 1996

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J U D G M E N T

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1. The Applicant is, and since 10th May 1985, has been the owner of the Ground floor and Third floor of the Watson Building (the Building), at 204 - 210 Texaco Road, Tsuen Wan.

2. The first Respondent (R1) was the registered owner of the whole of the Building until 17th March 1982, when it assigned the 13th floor of the Building to a second owner. A Deed of Mutual Covenant was executed and registered in the Tsuen Wan New Territories Land Registry under Memorial Number 248727 and later re-registered under Memorial Number 267737 (the DMC).

3. Under the DMC, R1 was appointed to be the first manager of the Building for a term of seven years from 17th March 1982, and thereafter until the termination of the appointment.

4. There are a total of 402,475 undivided shares in the building. The Ground floor was allotted 75,000 shares, and the Third floor 30,631 shares.

5. There is no incorporation of owners, nor is there an owners' committee.

6. The second Respondent (R2) later took over the management of the Building, although there was no formal documentary evidence to that effect. The Applicant accepts that R2 is the de facto manager. R1 and R2 have common directors and shareholders. On 27th March 1997, R1 sold off all its remaining interest in the Building to Grace Magic Limited. This company is also related to R1 in its shareholding.

7. Various increases in the management fees had been levied, and were not queried by the Applicant. The Applicant was under the impression that previous increases were on account of inflation. On 1st October 1994, the monthly management fees for the Ground floor was increased to $6,000 from $4,922.28, and that for the Third floor was increased to $11,400 from $9,424.88 (the 1994 increase). On 1st December 1995, the management fees for the Ground floor was increased to $37,500 per month, and that for the Third floor was increased to $15,315.50 (the 1995 increase).

8. The Applicant protested against the 1995 increase by a letter dated 18th December 1995 addressed to R2. The Applicant demanded to see the accounts relating to the Building's expenses, and statements of income and expenditure, under Section V Section H of the DMC. None was forthcoming. The Applicant disagreed with the increase and continued to pay management fees under the old rate.

9. The Applicant brought the present Application. Under the orders of the Lands Tribunal, R2 produced certain accounts. These were the "Audited Financial Statements, The Building Management of the Watson Building, Years ended 30 June 1988 to 30 June 1996". The auditor was Messrs. Ernst and Young, Certified Public Accountants. Their auditors' report was dated 30th September 1997 (the auditors' report). The second document was the "Watson Building - Management fee received from January to December 1955 (both inclusive)" with bank statements of a current account no. 636-1110519-01 in R2's name, held at the Bank of America, from 3rd January 1995 to 30th April 1996 (the bank account). The third document was " Watson Building - Management fee received from January 1996 to June 1998 (both inclusive)" with bank statements of the bank account from January 1996 to January 1998.

10. The auditors' report stated expressly that a proper system of internal accounting control had not been in place for the periods in question. The auditors could not determine if the management fees income was correctly stated, as there was insufficient evidence to do so. They could not determine the management fees collectable, and because of that, could not ascertain the manager's remuneration. The manager's remuneration was 10% of the management charges. The auditors had not been provided with sufficient documents to support expenditure on fire repair fees of $204,000 and insurance expenses of $200,000. The Tribunal was informed that there was another case pending on the sharing of repair costs after a fire.

11. Until the audited report and management accounts were supplied, under the Tribunal's orders, the Applicant was not aware of how the management funds had been dealt with, nor was it aware of the Respondents' breaches. The Applicant then amended its Application to include the objection to the 1994 increase.

12. In 1996, the Applicant asked R1 to deal with R2, as R2's appointment as the manager had not been formalized. R1 took no action. R1 was therefore joined as a respondent in the present Application.

13. The Applicant sought a declaratory order that the 1994 increase and/or the 1995 increase were void ab initio and of no effect. They were in breach of the mandatory provisions implied into the DMC by Section 34E of the Building Management Ordinance, Cap.344 (BMO), and Paragraph 1 of the Seventh Schedule of the same Ordinance. They were also inconsistent with the provisions of Clause D3 of Section V of the DMC.

14. The Applicant also asked for a declaratory order for the proper calculation, apportionment and determination of the monthly management fees payable by the Applicant for the Ground floor and Third floor.

15. The Respondents raised no substantial defence, and only claimed there was acquiescence or waiver on the Applicant's part. The Respondents had failed to prove that there had been either acquiescence or waiver.

16. From the facts, which were not in dispute, it is clear that the Applicant had never been making an informed decision to accept the increase, at least from the year 1994. Until the Applicant was aware of the breach, it could not be in a position to raise any protest. There had never been any proper accounting, nor was there any proper budget prepared. The other owners were given no chance to view the budget or to comment on it. There was neither Incorporated Owners nor any Owners' committee to oversee the manager. None of the procedures required under the BMO for increase of management fees had been followed. There can be no acquiescence or waiver on the Applicant's part, as from 1994.

17. The Respondents raised various matters, which are not relevant to the present Application. It was also alleged that the Applicant had underpaid for past years. There is no counterclaim for such underpayment. There is, in fact, no counterclaim at all. The Respondents asked the Tribunal to decide on certain matters, which the Tribunal is not seised of. The Tribunal cannot deal with them.

18. The Respondents produced certain copied documents, which had not been verified; to say that there was actually documentary support for the items queried by their auditors. They had been misplaced and there was insufficient time to find and produce them to their auditors. The factual situation was, in May 1997, the Respondents were given four months to produce audited building management accounts from 1988 to 1996. On their request, they were allowed another additional month to comply with the order. The draft audited financial statement, pending the endorsement of the Respondents' directors, was sent to the Applicant at the end of October 1997. On 5th November 1997 the audited financial statement with the directors' endorsement was given to the Applicant. If the Respondents considered it necessary, they could have asked for further extension of time to complete their search for documents. Alternatively, they could have presented the documents to their auditors to be verified, as the basis for a supplementary report. The Respondents had taken none of these steps. The Tribunal can only rely on the Respondents' auditors' report, and the comments by the Applicant's auditors. The auditors found that they were unable to form an opinion as to whether the financial statements gave a true and fair view.

19. If the Respondents were now in possession of the documentary evidence required by their auditors, proper accounts for the previous years should be prepared for auditing. This had not been done.

20. The Building is being managed, in fact, by R2. R1 should have been the manager until an effective termination of R1's appointment, and an effective appointment of R2 was in place. However, the Applicant is not seeking an order as to the capacity of the Respondents. The Applicant accepted that R2 is the de facto manager. R2 is a "manager" within the definition in Section 34D of the BMO.

21. The Seventh Schedule to the BMO, which became mandatory terms in the DMC by virtue of Section 34E, provided for the determination of the total amount of management expenses payable by owners.

22. There is no management committee in this Building. The Seventh Schedule of the BMO required that the manager to prepare a draft budget setting out the proposed expenditure during the financial year. The manager must display a copy of the draft budget in a prominent place in the building, and a notice inviting each owner to send his comments on the draft budget to the manager, within 14 days from the date the budget was displayed. At the end of that 14 days, the manager should prepare the budget specifying the total proposed expenditure during the financial year, and to display a copy of the budget in a prominent place in the building. (Paragraph 1 (2) Seventh Schedule BMO)

23. Where, in respect of a financial year, the manager had not complied with the foregoing requirements, the total amount of the management expenses for that year shall, until the requirements has been complied with, deemed to be the same as the total amount of management expenses for the previous financial year. (Paragraph 1 (3)(a) Seventh Schedule BMO)

24. When the manager had complied with the requirements, the total amount of the management expenses for that year shall be the total expenditure as specified in the budget. The owners' contribution towards the management expenses would then be calculated and adjusted according to the budget. (Paragraph 1 (3)(b) Seventh Schedule BMO) Any revision to the budget would require the same procedure, under Paragraph 1 (2) of the Seventh Schedule, to be taken.

25. The manager must supply a copy of the draft budget, budget or revised budget on the written application of an owner, on the payment of a reasonable copying charge. (Paragraph 1 (7) Seventh Schedule BMO)

26. The manager is under a duty to keep proper books or records of account and other financial records, with all bills, invoices, vouches, receipts and other documents referred to in those books and records for at least 6 years. (Paragraph 2 (1) Seventh Schedule BMO)

27. The manager should also display a copy of the summary of income and expenditure for a period of 3 months or less, within a month of the period, in a prominent place in the building. (Paragraph 2 (2) Seventh Schedule BMO)

28. Within 2 months of the end of a financial year, the manager shall prepare an income and expenditure account and balance sheet for that year. (Paragraph 2 (3) Seventh Schedule BMO)

29. On the facts and evidence, neither the BMO nor the DMC had been complied with. There was a total disregard for procedures under the BMO.

30. The Applicant is entitled to the declaration and relief sought under its application.

31. Both the 1994 and 1995 increases were void ab initio and of no effect.

32. The Applicant is to pay management fees for the ground floor and third floor of the Building at the 1993 rate, until such time that the second Respondent should provide for the proper determination of the management fees under the provisions of the Seventh Schedule of the Building Management Ordinance.

33. Costs to the Applicant against the second Respondent, to be taxed if not agreed.

34. The application against R1 is dismissed.