THE INCORPORATED OWNERS OF SAN PO KONG MANSION v. ISLAND MANAGEMENT SERVICES LTD.

HCMP 1744/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1744 OF 2004

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R U L I N G

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1.  This is the plaintiff’s application:

(1) That the following question of law may be determined, namely whether the plaintiff can recover all outstanding management charges and/or contributions owed by the Rainbow Arcade from the defendant, a tenant in common of the Rainbow Arcade:

(2)  If the plaintiff is entitled to recover the full amount of the outstanding management charges from the defendant, then a hearing dealing with the issue of quantum be ordered.

2.  The plaintiff is the owners’ incorporation of the San Po Kong Mansion.  The building is divided into 800 equal undivided shares.  The owners are subject to the provisions of a Deed of Mutual Covenant (“the DMC”) dated 15 May 1968.  Originally there was a restaurant comprising a shop entrance on the ground floor, and restaurant portions of the 1^st, 2^nd, 3^rd and 4^th floors, and this restaurant was allocated 43 of the 800 equal undivided shares. 

3.  The restaurant was later converted into a shopping arcade named the Rainbow Arcade.  By a Deed Poll dated 12 November 1992, the then owner of the restaurant, Kwok Heung Tea House and Restaurant Ltd., renamed the restaurant as the “Rainbow Arcade”, and subdivided the 43 equal undivided shares into 301 equal undivided shares.  On 21September 1993, a Sub-Deed of Mutual Covenant and Management Agreement (“the Sub-DMC”) was executed between Kwok Heung Tea House and Restaurant Ltd as first owner, Kong Fu Li as second owner and Grand View Property Management Ltd as manager, in respect of the Rainbow Arcade.

4.  The 301 equal undivided shares of the Rainbow Arcade were allocated to 162 individual shops and reserved common areas spread over the five floors of the Arcade.  The defendant has since 1995 been the owner of 17 of those 301 equal undivided shares. 

5.  The plaintiff now claims against the defendant for outstanding management fees for the period from December 1996 to 31 October 2005, administrative fees and outstanding contributions amounting to $2,063,520.00.  In the alternative, it claims vacant possession of the defendant’s premises. 

6.  These sums, however, do not relate simply to the defendant’s premises, but to the whole of the Rainbow Arcade and the 43/800 equal undivided shares in the building allocated to it.  The plaintiff registered the two Memoranda of Charge referred to in the Originating Summons against the defendant as a co-owner of Rainbow Arcade.

7.  The defendant denies liability for the outstanding or any management fees, administrative fees and contributions.  There is no admission even of liability in respect of the defendant’s own premises.  It pleads that the DMC was varied by the Deed Poll and the Sub-DMC, or by significant changes in the circumstances and/or the neighbourhood, or by mutual consent or acquiescence. 

8.  In addition, the defendant counterclaims for damages on the grounds of libel, malicious falsehood, breach of the varied DMC or alternatively breach of the DMC, breach of statutory duty under the Building Management Ordinance and negligence. 

9.  The pleadings in the counterclaim are lengthy and repetitive.  In effect, the defendant’s case is that the two Memoranda of Charge which the plaintiff published in the Land Registry were defamatory of the defendant.  By reason of these publications, the defendant has suffered loss and damage to its commercial or business reputation and its goodwill.  As a result, the defendant has been rendered incapable of selling its own premises at a profit, or renting them out at a reasonable rent. 

10.  The defendant further claims that the plaintiff published the Memoranda maliciously, knowing that they were untrue, or being reckless as to their truth or falsity.  It relies on certain representations made in the minutes of the meetings of the plaintiff’s management committee that the plaintiff’s accounts were in “a chaotic mess”, that it had not audited all its accounts, and that it did not know how many bank accounts it had or what had been paid to it by the other owners within the Rainbow Arcade.

11.  The defendant also relies on the above averments in support of its claims that the plaintiff was in breach of its duties as a building manager under the Ordinance and negligent in its discharge of those duties. 

Order 14A

12.  Order 14A Rule 1 provides:

(1)  The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that:

(a)  such question is suitable for determination without a full trial of the action; and

(b)  such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein.

13.  This Order was considered by the Court of Final Appeal in Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co. Ltd & anor [2003] 3 HKLRD 62.  The following principles are set out in the judgment of Chan PJ at paragraphs 19-25 on pp 68-69:

(1)   The procedure can be invoked for the purpose of finally determining not only the entire cause or matter but also “any claim or issue” in the cause or matter.  However, it is not contemplated that the parties would submit a trivial matter for determination under O.14A.  This should be refused in the proper application of the judge’s discretion. 

(2)   It is inappropriate to use this procedure if the issues of fact are interwoven with the legal issues to be determined. 

(3)   Even if the conditions are satisfied, the court still has a discretion under r.1 to decide whether to entertain an application under the Order.

14.  What the plaintiff is seeking is essentially a determination that, whatever the amount of the outstanding management charges and contributions which may be owed by all the owners of properties within the Rainbow Arcade together, the plaintiff can recover them from the defendant, who is a tenant in common with them.  This appears to be a crisp legal point, which can be decided by reference to the DMC and the Sub-DMC.

15.  The defendant’s position is, however, primarily that a determination under Order 14A is not appropriate at this stage.  It is therefore necessary to consider first the question of appropriateness.

Appropriateness

16.  Mr Chong, counsel for the defendant, argues that in the first place, the issue is fact-sensitive.  In the second place, he says that there must still be a full trial on liability in any event.  Therefore, an order 14A determination would not save time or costs.  He also argues that there must be a full trial of the counterclaim.

17.  Mr Chong also notes that the plaintiff previously attempted to obtain summary judgment against the defendant under Order 88 of the Rules of the High Court.  The learned Master refused the application and ordered that the proceedings should continue as if commenced by writ.  At that stage, no application was made for determination under Order 14A, although similar arguments on law were put forward on behalf of the plaintiff as have been put forward before me.

18.  I do not think that the issue is fact-sensitive.  As it is framed, the question of law requires neither proof that the outstanding management charges and contributions are owed, or proof of the amount that is owed in each case.  The question goes to whether, if the plaintiff can prove that it is owed these charges and contributions under the DMC and Sub-DMC, it can recover all of them from the defendant and leave the defendant to pursue the other owners for recovery of their shares.

19.  The real difficulty is that, whatever the determination, there must still be a trial of the plaintiff’s claim.  The defendant denies any liability whatsoever. 

20.  If the court now determines that the defendant can recover all the outstanding management charges and contributions owed by all the owners of property within the Rainbow Arcade, the plaintiff will have to prove that all the owners, including the defendant, owed those management charges and contributions and have not paid them.  I do not see that the plaintiff will have any difficulty in proving that the individual owners are liable for management charges and contributions under the DMC and Sub-DMC.  However, there must inevitably be a trial on quantum, in which the plaintiff must prove what, if anything, has been paid and what has not been paid by all the individual owners.

21.  If the court now determines that the plaintiff cannot recover all the management charges and contributions owed by all the owners in the Rainbow Arcade, the plaintiff must still prove the management charges and contributions owed but not paid by the defendant in respect of its own units.  Again, I do not see that the plaintiff will have any difficulty in proving liability, but proof of quantum will be less onerous.

22.  Either way, there is an outstanding counterclaim.  The existence of the counterclaim would not, of itself, lead the court to decline to make the determination sought.  The counterclaim will still require to be tried, whether the determination the plaintiff seeks is made or not; and it should be tried along with the plaintiff’s claim.  The averments relating to the plaintiff’s minutes and the state of its accounts will be relevant to the quantum of the plaintiff’s claim whether that claim is for all the management charges and contributions owed by all the owners, or only those owed by the defendant in respect of its own units.

23.  I accept that the question of law could be determined without a full trial of the action, and that its determination would establish whether the plaintiff has to prove all its claims in respect of all the owners, or only those in respect of the defendant itself.  I do not see that the fact of a previous unsuccessful attempt to obtain summary judgment should lead me to decline to make the determination.

24.  In my view it is appropriate to make the determination at this stage so that the plaintiff knows beforehand what it must prove, and the defendant knows what it must defend.  This will also allow the defendant to decide what action to take, if any, against its co-owners.  

The determination

25.  As I have indicated, the defendant’s main defence is that the DMC has been varied or superseded by the Sub-DMC. 

26.  As set out above, the Rainbow Arcade is allocated 43 of the 800 equal undivided shares in the San Po Kong Mansions where originally allocated to the restaurant.  The defendant is allocated 17 of the 301 equal undivided shares in those 43 equal undivided shares. 

27.  Clauses 9, 10, 11, 13, 17 and 18 of the DMC oblige the owners to pay their due proportion of various expenses.  The Third Schedule of the DMC sets out the rates of contribution which the various owners including the “Owners of the Restaurant of the Building” must pay. 

28.  It is argued that when the DMC was drafted in 1968, it was not within the contemplation of the parties that the restaurant would later be subdivided into 301 equal undivided shares.  Since that subdivision, the wording of the Third Schedule has therefore become ambiguous.  It must be construed contra proferentem and it is for the plaintiff to prove that the Third Schedule created a liability which is not just joint, but joint and several.  I take this to mean joint and several as between the “Owners of the Restaurant” referred to.

29.  I do not think that there is any mileage to be obtained from the fact that the Third Schedule refers to “Owners” in the plural.  The DMC contains the usual clause to the effect that words importing the singular number only shall include the plural number and vice versa.  One would normally expect a restaurant on five floors to be owned by a partnership, an unincorporated association or a limited company.  One could properly refer to any of those collective organisations as “owner” or “owners”.  The DMC treats those “owners” as a single entity owning 43 of the 800 equal undivided shares.

30.  Section D of the Preamble to the Sub-DMC states that the Sub-DMC is supplemental to the DMC.  Section E thereof states that the parties have agreed to enter into the Sub-DMC for the purposes of regulating and defining the rights, interest and obligations of themselves and all subsequent owners in respect of the “said premises and any part thereof”.  The “said premises” is defined in the First Schedule of the Sub-DMC; it is the 43 equal undivided parts or shares, etc.  There is no mention that the Sub-DMC is to be binding on any other owners in the building apart from those in the Rainbow Arcade. 

31.  Clause 5 of Section II of the Sub-DMC gives the individual owners the usual right to sell, assign or otherwise dispose of or deal with his share or interest in the said premises, but this is stated to be expressly subject to and with the benefit of the DMC.

32.  In Incorporated Owners of Po Lok Mansion v Richards Company Ltd, CACV 282 of 2004 at paragraph 6, Yam J, giving the judgment of the Court of Appeal, noted:

“It is trite law to say that whilst the DMC binds all the owners, the Sub-DMC only binds the parties to the Sub-DMC, i.e.  all units of the commercial centre except the one who did not enter into this Sub-DMC.”

33.  I cannot therefore see how the DMC could be said to have been varied or superseded by the Sub-DMC.  The Sub-DMC is a contract between the owners of the equal undivided shares in the Rainbow Arcade premises.  Those shares themselves consist of the 43 equal undivided shares in the Building.  The owners, in a question with the other owners of the 800 equal undivided shares in the San Po Kong Mansions, stand in the shoes of the original owners of the restaurant. 

34.  As to the liability of those owners to the owners of the other 800 shares in the San Po Kong Mansions, and hence to the plaintiff, Mr Leo, for the plaintiff, relies on the principle that an assignment of premises to co-owners renders each co-owner liable for the entire rent and covenants of the lease.  See United Dairies Ltd v Public Trustee [1923] 1 KB 469. 

35.  Mr Chong says that this authority is not binding in Hong Kong, and should not be followed; and the trial judge should be left free to decide whether or not to follow it, after hearing evidence relating to the physical separation of the units in the Rainbow Estate.  Reference is made in particular to the following passage in the judgment of Greer J in United Dairies Ltd at pages 472-473:

“Where the leased property has been physically divided amongst two or more assignees it is clear that the obligations of the lease, so far as they affect the assignees, become separate, and each of the assignees is liable, while he is assignee to perform the covenants so far as they affect his divided part of the leased property.”

36.  Later in the same judgment, at page 476, after expressing the view that it has never been conclusively established that an assignee holding with other tenants under the terms of the original lease is not liable jointly with those other tenants for the whole rent, Greer J goes on to deal with the covenant to repair, in these terms:

“However this may be, even if tenants in common are only liable for the duly apportioned part of the rent, it by no means follows that they are only liable for an apportioned part of the damages for breach of covenant to repair.  It seems clear that before breach the obligation of each of them is of necessity an obligation to repair the whole estate.  This in itself is not divisible and, if one of the tenants in common expended in repairs one half the sum necessary to repair other all property, he would not thereby be in a position to say that he had fulfilled his obligations as assignee of an undivided share over the whole of the leased land, inasmuch as there is only one indivisible obligation extending over the whole of the land.”

37.  I do not think that the concept of severalty of possession is important here for two reasons.  In the first place, it does not affect the covenant to repair and here we are dealing not with rent but with management charges and repair contributions.  In the second place, in Hong Kong the tenure of property in multi-storey buildings depends on tenancy in undivided shares.  This is explained in detail by Kent, Merry and Walters in Building Management in Hong Kong at pp 15-16, and in particular at page 16:

“The term ‘undivided’ refers to the fact that the property in which the shares subsist, that is, the whole of the land and buildings erected on the land, has not been physically divided up and distributed amongst the co-owners.  This reflects the essential characteristic of the tenancy in common, the ‘unity of possession’.  Unity of possession means that each co-owner has the right to possession of the land and buildings erected on the land in common with all other owners.  There is no separate ownership of the land, building or units.  Each co-owner is entitled to possess the whole of the property comprised in the development.  No single co-owner has the right to point to a part of the land and say to the other co-owners, ‘This is mine, you have no right to enjoy it.’”

38.  In fact the Sub-DMC recognises the fact that responsibility for the actions or non-actions of any co-owner within the Rainbow Arcade may be fixed on the other co-owners.  Section V sets out the covenants, provisions and restrictions to be observed and performed by the owners.  By clause 2 thereof each owner is required to pay and discharge all existing and future taxes, rates, assessments and outgoings of every kind and description for the time being assessed all payable in respect of that part of the said premises owned by him and to indemnify the other owners against all liabilities therefor.

39.  Clause 5(a) of Section V reads:

“Each Owner shall observe and perform all the covenants agreements and conditions contained in the Crown Lease and the Principal Deed of Mutual Covenant and on the part of the Owner to be observed and performed so far as the same relates to the Undivided Shares of the said premises and also will from time to time and at all times from the date of this Deed hold harmless, indemnify and keep the other Owners indemnified from and against all proceedings, costs, claims and expenses on account of any failure to perform and observe any of the said covenants agreements and conditions so far as they relate as aforesaid.”

40.  This appears to me to provide explicit recognition by the parties to the Sub-DMC of their joint and several liability to perform the covenants, agreements and conditions contained in the DMC, with a corresponding right of indemnity as between them.  Further the right of indemnity would be otiose if one co-owner could not be found liable for the debts of another. 

41.  This is obviously capable of putting an individual owner of a unit in the Rainbow Arcade in an awkward position in that it makes him liable for the default of his co-owners and leaves it up to him to obtain contribution from them.  However, it seems to me that that is the inescapable effect of the DMC and the sub-DMC.

Conclusion

42.  I conclude, therefore that the plaintiff can recover all outstanding management charges and/or contributions owed by the Rainbow Arcade from the defendant, a tenant in common of the Rainbow Arcade.

43.  It is, however, not appropriate to order a separate hearing on quantum; as I have indicated this will require to be dealt with at a full trial of the claim and counterclaim. 

44.  The plaintiff will have the costs (nisi) of this application in any event.