WONG PUN MAN v. THE INCORPORATED OWNERS OF TUNG FAT BUILDING

Building management - after expiration of original management contract Incorporated Owners took over the direct management of the building - DMC provided for management expenses to be paid in the proportion of $60 for flats and $25 for shops - shop owners for several years paid management expenses increased by resolutions of the Corporation in general meeting but in adverse proportions and contrary to the DMC - relationship between DMC and statutory provisions - whether past and future more beneficial DMC proportions waived by shop owners or similarly varied by acquiescence - Held:

1. Although generally BMO statutory provisions prevail over DMC - e.g. Section 21(5) - where contractually so provided the amount of contributions from owners are to be fixed in compliance with the DMC otherwise in accordance with the owners respective shares - Section 22;

2. The Applicant shop owners by paying without objection past contributions previously fixed by owners general meeting resolutions had waived their right to pay the proportionately lower DMC permitted increases for the period down to 31.3.95;

3. The shop owners conduct was not sufficently notorious or avowed as to duration or otherwise to extinguish their DMC right to pay lesser proportionate increases in the future for the period commencing 1.4.95;

4. Alternatively if acquiescence established it was merely suspensive and not extinctive and was terminated by the shop owners objection to pay non-DMC proportioned increases from 1.4.95.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application No.BM113 of 1995

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J U D G M E N T

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1. The Tribunal on 16th February 1996, delivered an interim judgment in these proceedings, which were brought pursuant to Paragraph 4(a),(b)and (c) of the Tenth Schedule to the Building Management Ordinance, Cap.344 ("BMO"). The Applicant had sought declarations relating to management expenses, other fees and costs.

2. The principal dispute arose from the fact that the Respondent in general meeting, had determined management expenses for shops and flats, within their Tung Fat Building, other than in the proportions specified in the Deed of Mutual Covenant("DMC"). The DMC was in elementary form and had been executed in 1977. The Tribunal has already held that for the relevant years expiring on 31st March 1995, the Applicants were liable to pay the amounts determined, in terms of the resolutions passed, at the Respondent's appropriate prior annual general meetings.

3. The Tribunal reached this holding on the ground that payment by the owners over several years of the varied proportionate expenses, approved by the resolutions, had established waiver or acquiescence. As a result the Applicants were for those earlier years, now estopped from enforcing the more favourable proportions provided for in the DMC.

4. The dispute over subsequent expenses from 1st April 1995 was complicated by the fact that these were the first amounts sought to be recovered, after the new provisions of the BMO came into effect. Counsel for the Applicant had also submitted that the increased 1995 amounts were invalid, because they had not been passed in accordance with the provisions of the Seventh Schedule.

5. The Applicants related submission was that not only was the increase statutorily invalid but the amounts claimed required to be decreased. It was submitted that any prior acquiescence was only suspensive and ceased upon objection being made to the non-DMV varied proportions. The Respondent's Counsel, at the earlier hearing, conceded that Paragraph 1(3)(a) of the Seventh Schedule, invalidated the 1995 increase in fees.

6. After consideration, the Tribunal held that both parties had erroneously proceeded on the basis that the Seventh Schedule applied. This was because the Schedule only imposes its mandatory restrictive requirements where a manager, appointed by the owners, seeks to increase fees. In this case the original manager's employment ceased several years ago. The Respondent instead of appointing a new manager, elected itself to manage the Building. Accordingly, the Schedule was inapplicable.

7. The Tribunal in its interim judgment, for this reason, adjourned the issue of management expenses for the period commencing 1st April 1995, for further submissions. The Tribunal has now had the benefit of those submissions. Both Counsel now accept that, in the absence of a manager, the Seventh Schedule does not apply. Counsel for the Respondent also resiled from his previous concession.

8. Counsel for the Applicant accepted that a contractual right might be extinguished by conduct. However, he submitted, it was important to distinguish acquiescence from a mere waiver of past breaches - Banning v. Wright [1972] 1 WLR 972,989. It was submitted that the present facts failed to establish the necessary notorious or avowed acquiescence - Fairfax v. Attorney General [1995] 2 HKC 617,621. Further, the Applicants conduct did not make it dishonest or unconscionable, for them to exercise their original DMC contractual rights - Shaw v. Applegate [1977] 1 WLR 970.

9. Counsel for the Respondent submitted that Sections 20 and 21 and the Fifth and Sixth Schedules applied, where the owners did not appoint a manager. Section 21(5) provided that in the event of any inconsistency between the statutory provisions and a DMC, the former prevailed. On this basis it was submitted, that a resolution of owners, prevailed over any contrary DMC apportionment. On the acquiescence issue, it was submitted that it would now be unconscionable for the Applicants to enforce the DMC apportionment. Alternatively, the Applicants had long abandoned any legal right to enforce Clause 3(f)

10. I will deal first with the Respondent's statutory submissions. It is true that the major 1993 amendments generally reversed the former contractual supremacy of a DMC. Under the original Ordinance, I held in Pearl Island Hotel Ltd v. Li Ka-yu [1988] 2 HKLR 87, that subject to any express statutory exceptions, the provisions of a DMC prevailed over any conflicting statutory provisions of the Ordinance.

11. In accordance with the general scheme of the amendments, the new Section 21(5) expressly provides:

"(5) In the event of any inconsistency between this section (which shall be construed to include the Fifth Schedule) and the terms of a deed of mutual covenant or any other agreement, this section shall prevail."

12. Section 21 is primarily concerned with contributions by owners to a corporation's funds. Management committees, unless they secure approval of owners at a general meeting, may not increase contributions by more than 150% of the preceding contribution. Although Section 21 is concerned, in some detail, with the machinery for increasing owners contributions, both its provisions and the Fifth Schedule are silent on apportionment.

13. The amount to be contributed by an owner, towards the total sum determined under Section 21, is set out in Section 22. Section 22(1)(a) provides that those amounts shall be fixed by the management committee in accordance with the DMC. If there is no DMC provision, the amounts shall be fixed "in accordance with the respective shares of the owners" - Section 22(2).

14. So even where there is no DMC, or a DMC exists but does not provide for fixing contributions, they may not be determined by the management committee or even by the corporation in general meeting. In either of the latter events, they may not be fixed by resolution but are determined according to the respective share of the owner, as a tenant in common of an undivided share of the Building, under the Crown lease or other grant.

15. On the basis of these statutory provisions, I reject the Respondent's submission, that by resolution in general meeting, it could vary the proportions contained in Clause 3(f) of the DMC. I hold that in terms of Section 21, the Respondent's management committee or where necessary the Corporation in general meeting, may determine the total quantum of contributions. However, I further hold that the actual amount to be contributed by each owner, then has to be separately fixed in accordance with the DMC.

16. In the present case, the DMC contractually expressly provides in Clause 3(f), for the proportions in which those contributions are to be paid. Accordingly, this is not a case where recourse has to be made to Section 22(2) to fix the individual contributions, in accordance with the respective shares of the owners in the Building. I therefore hold that the contributions of the individual owners, have to be fixed in accordance with the contractual position created by the DMC.

17. I confirm that Clause 3(f) provided for original fees of $25 for shops and $60 for flats and for subsequent increases to be in the "like proportion." It is common ground that subsequent increases have not been in the like proportion. To the contrary, the fees for shops have been increased in a greater proportion to flats, while a new category of "small shops" has more recently been created.

18. Whether since 1st April 1995, these differently apportioned fees are legally payable, therefore falls to

be determined as a matter of contractual and not statutory law. This makes it necessary to return to the crucial issue, whether the DMC contractual proportions have been varied by acquiescence.

19. On this issue the law is tolerably clear and has recently been considered by the Court of Appeal in Fairfax Ltd v. Attorney General (supra). The Court of Appeal held, on the ground of acquiescence, that the Crown could no longer enforce the restrictive building covenant contained in a Crown lease granted on 16th June 1862, for a term of 999 years commencing on 7th January, 1862.

20. Godfrey JA., at page 621, after considering English authorities on acquiescence, summarised the legal requirements in these terms:

"These cases establish that, in the words of Pollock CB,...`notorious and avowed acquiescence' in a breach of covenant is sufficent evidence from which it may be presumed that the otherwise unlawful act has grown into a right, so that an abandonment of the covenant is to be presumed; thus, if you find a long course of useage which is wholly inconsistent with the continuance of the covenant relied upon, the court infers, some legal proceeding which has put an end to that covenant, in order to show that the useage has been and is now lawful, and not wrongful."

21. As the 20th Century draws to a close the same result as a matter of law may, with respect, equally be reached without having to invoke the 19th Century legal fiction of intervening legal proceedings. The user covenant before the Court of Appeal restricted buildings to one or more villa houses. Later a number of terrrace houses were built but by 1958, these were demolished when a six-storey building of 12 residential multi-owned units was erected.

22. In 1993 the Appellant wished to redevelope the property and erect a new larger multi-storey residential building. The Court of Appeal held that the 1958 multi-storey building did not satisfy the user covenant. However, the lengthy period of Crown acquiesence in non-compliance, showed it had abandoned any interest in the covenant, which was therefore no longer enforceable.

23. The issue in the present case, is whether there has been a sufficently long period of acquiescence by the Applicants to the Respondent determining and recovering contributions, towards the management of the Building, other than in the proportions agreed to in the DMC. I hold that the burden of establishing acquiescence is on the Respondent. This at once places the Respondent at a disadvantage, because of incomplete records and uncertain recollections of when contributions were first determined other than in the DMC proportions.

24. The original manager's contract was not renewed when it expired in 1982 since when the Corporation has been fully responsible for managing the Building. Although it appears that contributions for a number of years may have been determined in non-DMC proportions, it was not unti1 1993 that shops were charged with amounts, larger in cash terms, than flats. Further, it was not until 1994 that a new non-DMC category of small shops was created.

25. Mr. Wong Pun-man, who purchased Shop A in 1984, gave more detailed evidence than the other Applicants. Until 1986 his tenant paid the management expenses. During the period 1986 to 1994, Mr Wong paid direct to the Respondent, in each of those years, monthly amounts of $100, $100, $100, $100, $120, $150, $200, $300 and $360 respectively. Unfortunately, there was not adduced in evidence the contributions recovered from flat owners during all of those years. However, from 1992 to 1994 the sums of $230, $280 and $320 were charged to flat owners, which represented much lesser proportions, than provided for in the DMC.

26. The Respondent's present Chairperson, Madam Wong Fei-fung and its Treasurer Mr. Lee Yiu-ching both gave evidence. I record that they impressed the Tribunal as being honest voluntary officers, doing their best to administer the Building, amidst increasing unfortunate conflict and friction. Madam Wong had attended every annual meeting of the Respondent since 1988, as had Mr. Lee, who has held office as Treasurer since 1988. The Applicants generally did not attended annual meetings.

27. Madam Wong stated that annual contributions had been passed unanimously at each annual meeting she had attended since 1988. Until the present proceedings she personally had been unaware of the different DMC stipulated proportions. She considered the basis of the annually resolved contributions to be fair and reasonable. The necessity to create a small shop category arose when some existing shops were partitioned into smaller areas.

28. The factual position is that the Respondent has for many years determined owners contributions without regard or perhaps even actual knowledge of the DMC proportions. The resolved proportions may well have been reasonable. Indeed, that possibility is open to reinforcement from that fact that it is only since 1993, that Mr. Wong became concerned at these proportions and encouraged other shop owners to object.

29. I find that owner contributions have been determined since at least 1991, for the then forthcoming 1992 financial year, in proportions other than provided for in the DMC. I suspect that contributions on a non-DMC basis may have been recovered for a rather longer period. However, the evidence does not enable the Tribunal to make such a finding prior to 1991.

30. I accept that the length of any period of non-enforcement, necessary to be sufficently notorious and avowed to constitute acquiescence, will necessarily depend on the particular facts of each case. However, obviously a period of 4 years, which may be found from the facts of this case, is very much less than the 35 years which had passed in Fairfax Ltd v. Attorney General(supra).

31. The present period of 4 years cannot properly be considered without some qualification. Although the contributions are fixed annually they are payable monthly. The Applicants conduct may therefore properly be approached on the basis, that without objection, they made payment to the Respondent on 48 consecutive occasions. On the other hand, the 4 years period also has to be considered, in the light of the actual proportions annually determined during that time.

32. In each of those 4 years, the Respondent annually determined contributions, on a different proportionate basis to the preceding year. So this was not a case where the original DMC proportion was changed to a new proportion, thereafter strictly adhered to by the Respondent and annually paid by the Applicants, without any further variation. The several annual further proportionate variations are not necessarily fatal to acquiescence being established. However, they remain relevant factors when analysing the parties overall conduct and considering all the other circumstances.

33. After applying the well settled law to the facts, the Tribunal has arrived at these several conclusions. First, I record that the Tribunal has already held in its prior judgment of 16th February 1996, that the Applicants conduct amounted to a waiver of their right to pay the lesser DMC proportioned amounts, for the period expiring on 31st March 1995. Accordingly, for that earlier period, they were legally liable to pay the larger amounts fixed in general meeting.

34. Secondly, I hold that for the period commencing 1st April 1996, that the Applicants conduct as to duration and otherwise, was not sufficently notorious or avowed, to establish acquiescence. I also record that it has not been established that the Applicants reliance on the DMC is either dishonest or unconscionable. Thirdly, I hold that even if acquiescence and not merely waiver was established prior to 1st April 1995, it was only suspensive and not extinctive. On this alternative basis, it was susceptible of being terminated and would have been so terminated, by the Applicants objection to the amounts determined for the period commencing 1st April 1995.

35. There will therefore be declarations in terms of this judgment in favour of the Respondent for the period expiring on 31st March 1995 and conversely for the Applicant for the period commencing on 1st April 1995. I will hear the parties further, if necessary, on the form of those declarations. Liberty to apply for costs and any other incidental matters is also reserved.