THE INCORPORATED OWNERS OF MORLITE BUILDING v. ASIA CENTURY LTD AND OTHERS

CACV 231/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 231 of 2015

(ON APPEAL FROM HCMP 1801 OF 2014)

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J U D G M E N T

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Hon Yuen JA:

1.1. This is an appeal by the 1^st to 3^rd defendants (“the appellants”) from a Judgment of Recorder Pow SC given on 9 September 2015 (“the Judgment”) after the hearing of an Originating Summons in HCMP1801/2014 (“the OS”) issued by the plaintiff, the Incorporated Owners of Morlite Building (“the IO”), against the owners of four units therein, for an order that their units be sold unless they paid contributions demanded pursuant to a resolution passed on 21 February 2013. The 4^th defendant to the OS was Wealth Treasure Corp Ltd (“WT”).

1.2.  In his Judgment, the learned Recorder ordered that the appellants be given 14 days from the date of the Judgment to pay the IO the sum of $100,000 each, plus interest at 1% a month from 21 February 2013 to the date of payment, failing which the IO would be at liberty to enter judgment under the OS, as amended and adjusted to reflect the exclusion of WT against whom no order was made.

1.3.  The Recorder also ordered the appellants to pay the IO’s costs of the proceedings and ordered the IO to pay WT’s costs (even though the four defendants are related, being corporate vehicles held by the same investor, and were represented by the same team of lawyers).

2. Within the 14-day period stipulated in the order, the appellants paid the IO a total sum of $393,200 (being the sum of $100,000 each, plus interest at the stated rate from 21 February 2013). 

3. On 7 October 2015, the appellants lodged a Notice of Appeal against the Judgment. Although the IO filed a Respondent’s Notice, this was to affirm the Judgment and did not challenge the dismissal of the OS against WT which was on the ground that it was exempt from payment of management fees under the DMC (see para. 18 of the Judgment).  WT is therefore not a party to the appeal.  The consequence of its absence from this appeal will be discussed below.

Background

4. The factual and procedural background of this appeal is quite complicated.  I will first set out the relevant facts so far as they have been disclosed in the materials before this court.

5. Morlite Building (“the Building”) is a 9-storey factory building which was constructed on Kwun Tong Inland Lot No.272 in the early 1970’s.  The front of the Building faced Hung To Road.  There are buildings abutting it on both sides.  At the back of the Building is a scavenging lane with a loading area. 

The Approved Ground Floor plan

6. The Ground Floor Plan approved by the Building Authority on 6 July 1970 (“the Approved Ground Floor plan”), which was provided to the court during the hearing, indicated the following layout of the ground floor:

(1)   as one faces the front of the Building,

(a)   there is an entrance (which has been called for convenience “the Front Entrance”) which leads to a passenger lift;

(b)   there is an “Additional Door” to the left of the Front Entrance. The location of this additional door was near the mid-point of the stretch of wall between the Front Entrance and the left corner of the Building;

(2)   at the back of the Building is an entrance from the scavenging lane, which entrance leads to a goods lift;

(3)   near the back entrance, there are some lavatories and staircases;

(4)   there are 2 spaces designated “Work Space”, the smaller one to the right being separated from the other larger “Work Space” by a “new 9" brick partition”.

7. The Occupation Permit was issued also on 6 July 1970.  It referred to “2 workshops” on the Ground Floor. 

Alterations?

8. The materials before us do not show whether there were alterations (authorised or otherwise) to the layout during the period when the developer Morlite Steel Windows Ltd was the sole owner of the Building (between 1970 and 1977).  As will be seen below, evidence on what occurred on the ground during this period would be significant.

The DMC

9.1.   On 31 December 1977, a Deed of Mutual Covenant was executed between the developer as the “first owner” and Hong Kong and Shanghai Bank, Hong Kong (Trustee) Ltd as the “second owner”.  The lot was divided into 90 equal undivided parts or shares. 

9.2. The DMC recited that the Building comprised, among other things, “2 Workshops (being Workshops A and B) on the Ground Floor”, and that 3 shares were allocated to Workshop A and 8 shares to Workshop B.  No plans were attached to the DMC showing the boundaries or areas of Workshops A and B. 

9.3.   In the DMC, 1 share was allocated to “first-aid room on the 1^st Floor, Caretaker’s room on the 8^th Floor, store room on the main roofs, the Flat Roof on the 8^th Floor level, the main roofs, the Top Roofs, all the stair-case heads, all the external walls and all other areas that are not intended for common use [of] the said building (hereinafter called ‘the developer’s share’)”.

The first assignments of Workshops A and B

10.1.   The first assignments of Workshops A and B were executed 10 years after the DMC, in 1987 and 1988 respectively.  These assignments (and more importantly the plans attached thereto showing their boundaries) were not included in the materials before us. 

10.2.  However it was alleged by the IO in the Statement of Claim in HCA1574/2014 (“the 2014 Action”),to which reference will be made below, that the plan attached to that pleading was identical to the plans attached to the first assignments of Workshops A and B.  I will refer to it as “the presumed first assignment plan”.

The Corridor

11. In the presumed first assignment plan, Workshops A and B were not the same as the “Work Spaces” identified in the Approved Ground Floor plan.  Workshop A on the left is separated from Workshop B on the right by a corridor (“the Corridor”) which runs through the Building from the front (Hung To Road) to the back (the loading area and scavenging lane).

The Disputed Entrance

12.1. At the front of the Building, the Corridor ends at an opening which for convenience has been referred to as “the Disputed Entrance”. 

12.2.  The Disputed Entrance is to the left of the Front Entrance as one looks at the Building but from its location, it does not appear to be the “additional door” referred to in the Approved Ground Floor plan (see para 6(1)(b) above). 

12.3.  Accordingly if the Building had been constructed according to the Approved Ground Floor plan, then it must follow that at some stage, part of the external wall must have been demolished to form the Disputed Entrance. 

13. On the basis of the presumed first assignment plan, it is the IO’s case that by 1987/1988 (and even possibly 10 years before, as the DMC already referred to “Workshop A” and “Workshop B”), the Disputed Entrance and the Corridor had become common parts.

Incidents at the Disputed Entrance

14. In early February 2012, WT acquired the developer’s share. 

15.1.  In July 2012, WT bricked up the Disputed Entrance.  A day later, someone knocked down the bricks and reinstated the Disputed Entrance. 

15.2.  The Fire Services Department issued a fire hazard abatement notice.  Although it is not clear from the exhibit before us what was the area “designed as a means of escape” referred to in the notice, it was pleaded in the 2014 Action that the Corridor and the Disputed Entrance formed the “main fire escape route and exit for the Building in the event of fire or other emergencies” (para. 11 of the Statement of Claim). 

HCA1658/2012 (the 2012 Action)

16. Coming back to 2012, in September 2012, there was another dispute over WT’s intention to brick up the Disputed Entrance.  WT also asserted that use of the Corridor constituted trespass over its property (although it later asserted that it has exclusive possession of only part of the Corridor).

17. WT issued injunction proceedings in HCA1658/2012 (“the 2012 proceedings”). The IO of the Building was not a party.  There were 8 named defendants, the 9^th defendant being “persons entering or remaining at the plaintiff’s property without the consent of the plaintiff and other persons trespassing on the said property and preventing the plaintiff from reinstating the external wall”. 

IO meeting 21/2/2013

18.1.  At a meeting of the IO on 21 February 2013, various resolutions were passed. There would appear to be no record of the meeting in any form other than the minutes (written in Chinese) which are rather brief. 

18.2.  The material minutes (translated into English) are as follows:

“6. To resolve, by voting, whether the Incorporated Owners should join into the present injunction [action] against the external walls’ owner as a third party.

After discussion, voting by show of hands was made to authorize Incorporated Owners in the capacity of owners to join into the present injunction [action] against the external walls’ owner as a third party. ...

[Table showing votes]

This agenda item was passed”.

“7. To resolve, by voting, whether the Incorporated Owners should by way of adverse possession of the external walls, and join into the litigation of resumption of escape route and/or common area.

After discussion, voting by show of hands was made for the Incorporated Owners would by way of adverse possession of the external walls, and join into the litigation of resumption of escape route and/or common area. ...

[Table showing votes]

This agenda item was passed”.

“9. To resolve, by voting, whether the Incorporated Owners should by reason of the aforesaid items 2 to 8 demand for contribution. If contribution is agreed, the contribution amount, payment method and deadline, and to authorize MC to follow up [with] lawyers the litigation problem and all litigation costs and expenses.

Owners’ representative of 5/F [the 3^rd defendant in this appeal] said that contribution should not be made in the name of the Incorporated Owners. The agenda did not list out the contribution amount and any such resolution would not be recognized. Owner’s representatives of 1/F [the 1^st defendant in this appeal] and external walls [WT] concurred with owner of 5/F.

After discussion, voting by show of hands was made for the Incorporated Owners to demand for contribution by reason of the aforesaid items 2 to 8. ...

[Table showing votes]

Other owners present proposed 3 contribution amounts. The amount for each undivided share would be (a) $10,000 (b) $15,000 or ( c) $20,000. ...

[Table showing votes]

This agenda item was passed, and it was resolved each undivided share to contribute for $10,000 for payment of the Incorporated Owners’ operating costs”.

18.3.  It should be noted that although the English translation of the minutes refers to “external walls” in the plural, in the original Chinese, “外牆” may refer to either singular or plural. I will come back to this later in this Judgment.

IO meeting 5/4/2013

19.1.  On 5 April 2013, another meeting of the IO was held.  There were 11 items on the agenda, but for present purposes it is sufficient to record that when the representative of the 3^rd defendant queried whether at the February meeting, “before casting votes, the chairman ... needed to explain and describe the agenda”, the majority resolved (in Resolution 2) that there was no such need. 

19.2.  It was resolved -

(in Resolution 4) to recognize the resolutions passed at the February meeting, and specifically

(in Resolution 9) not to revoke items 6 and 7, and

(In Resolution 10) not to revoke item 9 (among others).

Appellants’ refusal to pay contributions

20. When the IO demanded contributions, the Appellants and WT refused to pay.  This led to the IO registering a charge on their units. 

HCMP1801/2014 (the OS)

21.1.  In July 2013, the IO issued the OS against the appellants (and WT as the 4^th defendant) for an order that their units be sold pursuant to the charges.

21.2.  On 1 September 2015, the matter was heard by Recorder Pow who gave judgment on 9 September 2015 from which this is the appeal.

Discontinuance of the 2012 Action

22. In the meantime however, in November 2013 WT discontinued the 2012 Action.

HCA1574/2014 (the 2014 Action)

23. Subsequently the IO commenced the 2014 Action.  WT is the only defendant.  For the most part, the issues were similar to those in the 2012 Action discontinued by WT. 

24. The statement of claim was divided into three sections. 

25.1.  The first section concerned the Corridor and the Disputed Entrance (called “Goods Entrance” in the pleading).

25.2.   The IO pleaded that they had been in existence since at least the date of the DMC (in 1977) or the date of the 1^st assignment of Workshop A (in 1987).  It pleaded that WT “or its predecessors-in-title have never had exclusive use of [the Disputed Entrance] or the ... Corridor”.  The IO claimed a declaration that the Corridor and the Disputed Entrance constituted common parts of the Building. 

26.1.  The second section concerned the 2012 Action.  The IO pleaded in para. 19 why the title to the Corridor and the Disputed Entrance had never been passed to WT or its predecessors-in-title, and in any event those areas were intended for the common use of the Building and were common areas.

26.2.  In para. 20, the IO pleaded in the alternative that even if WT did acquire title to the  Corridor and the Disputed Entrance, the IO had dispossessed it and its predecessors-in-title, and consequently its title had been extinguished by operation of adverse possession and/or under the Limitation Ordinance. There is also a pleading in para. 21 of easement and/or lost modern grant.

27.1.  The third section concerned “External Walls” (emphasis added).  The claims pleaded in this section have been emphasized by counsel for the appellants. 

27.2.  In para. 22, the IO pleaded that “the owners of the units/Workshops on all floors of the Building and their predecessors-in-title have affixed objects to the external walls of the Building particularly the front facade wall facing Hung To Road ...” (emphasis added), those objects including air-conditioning units, signboards, racks and brackets and electricity piping for the a/c units and signboards, and wire security fences. 

27.3.  I pause here to note:

(a)   that the term “external walls” was not restricted to the facade facing Hung To Road, and

(b)   it is not alleged that the affixing of these objects were done for or on behalf of the IO.

27.4.  In para. 23, the IO pleaded that “by reason of the foregoing matters”, even if WT were entitled to exclusive possession of the “External Wall”, the IO “(as well as other owners of units in the Building) have acquired an easement over the same” under lost modern grant/prescription/s.16 Conveyancing and Property Ordinance Cap.219. 

27.5.  It is notable that the term used was “External Wall”, which was

(a)   in the singular form, and

(b)   not defined in the pleading.

27.6.  In para. 24, the IO pleaded that further or alternatively, “by reason of the owners of the units/Workshops in the Building having been in exclusive ... possession and control over the external walls of the Building and having the requisite intention of taking over exclusive possession and control over the external wall”, the developer and/or the first purchaser of the developer’s share and [WT] have been “dispossessed and/or ousted of their rights over external wall” by virtue of adverse possession and/or under the Limitation Ordinance Cap.347. 

27.7.  I have emphasized in italics the apparently inconsistent references to one or more external wall(s). 

28. The relief claimed include:

“A. A Declaration that [the Disputed Entrance] and the ... Corridor constitute common parts of Morlite Building, and that [WT] is not entitled to exclusive possession and/or ownership over the same;

B. A Declaration that [WT’s] right to exclusive possession over the external walls of Morlite Building have been extinguished and/or is subject to an easement acquired by the [IO]” (emphasis added).

The Recorder’s judgment

29. Before the Recorder, there were 3 broad issues.

(1)   First, the appellants argued (among other things) that on the true construction of clauses 7 and 14 of the DMC, they have no obligation to pay contributions towards legal proceedings instituted by the IO to claim adverse possession over private property (which the appellants allege include all the external walls, including the Disputed Entrance, as well as the Corridor); accordingly, the IO was not entitled to register charges over their units or to apply for an order for sale.

(2)   The IO argued that even if the appellants’ construction of the DMC was correct (which it disputed), the contributions were payable towards a “special fund” within the meaning of para. 4 of Schedule 7 of the Building Management Ordinance Cap.344 (“BMO”) which was impliedly incorporated into every DMC by s.34E(1) of that Ordinance.

(3)   Separately, the appellants argued that, in any event, it was oppressive to make an order for sale when the contributions demanded were only in the total sum of $300,000 plus interest and the units were worth millions. 

30. In respect of issue (1), the Recorder found that the contributions demanded were covered by clause 7 of the DMC.  He referred to Recital (5) of the DMC which provided that the purpose of the DMC was “for the management operation servicing ... of the said land and building ...”.  He held that “in resolving to participate in [the 2012 Action], the principal objective of the IO was to regain control and management of what the IO considered as common parts of the Building”.  He held that that was clear from the framing of Resolution (7) at the February meeting.  The argument based on adverse possession was simply a “means” of achieving the recovery of areas which the IO considered as common parts (see para. 8 of the Judgment).

31. Having found for the IO on issue (1), the Recorder did not need to decide issue (2) but he touched on it in deference to counsel’s submissions.  He took the view that a litigation fund relating to expenditure in the management of the building could be the subject of a “special fund” within the meaning of para. 4 of Schedule 7 of the BMO (see para. 16 of the Judgment).

32. As for issue (3), the Recorder dealt with this in a pragmatic way by offering the appellants 14 days to make payment.  As mentioned earlier in this Judgment, the sums have been paid.

Appeal

33. The appellants appealed.  On 1 March 2016, they filed a summons for leave to further amend the Notice of Appeal but nothing turns on it. 

Discussion

34. Put in a nutshell, the appellants’ arguments are that WT’s “developer’s share” entitled it (WT) to exclusive possession of the “external walls”, including the Disputed Entrance, and the Corridor, and further (assuming that to be the case) the IO’s claim to a possessory title of the external walls on the basis of adverse possession is beyond the IO’s powers.  Consequently the contributions demanded by the IO for the litigation were not covered by clause 7 of the DMC. 

35. In my view, it is not appropriate for this court to determine these issues on this appeal.  First, although on the face of it, the appellants’ argument is that the IO should not be entitled to demand contributions from them to sue WT, in substance the appellants are arguing WT’s case vicariously and rehearsing the case for their related company WT, when WT is not before the court and would not be bound by the judgment one way or the other.

36. Put another way, in advancing the arguments above, the appellants are employing satellite litigation to determine an issue that is fairly and squarely the subject matter of other proceedings between parties with direct interests in the result.

37.1.  This is particularly inappropriate when all the relevant materials are not before the court.  First, there are no contemporaneous documents or witness statements relating to the developer’s intentions and actions regarding the Building in the period between 1970 (when the Building was constructed) and 1977 (when the DMC was made) and 1987/1988 (when the first assignments of Workshops A and B were made).  Documents and/or witness statements from the developer and/or occupants at the time would be relevant to whether, and if so, when (1) it had knocked down part of the external wall at the front of the Building to form the Disputed Entrance and (2) it had set aside space for the Corridor to create a thoroughfare within the Building running from the front entrance to the back entrance.  Such evidence would be relevant to a determination of the answer to the following questions (among others):

(a)   when the DMC referred to “all the external walls and all other areas that are not intended for common use [of] the said building” in the developer’s share, was the opening formed by the Disputed Entrance included in “the external walls” or not, and was the Corridor an area that was intended for common use of the Building or not? 

(b)   in the first assignments of Workshops A and B, what was the developer’s intention in setting out their boundaries on either side of the Corridor?  Did that show that the Corridor was intended for common use? Or did that show that the Corridor was intended to remain in the developer’s exclusive possession and included in the developer’s share?

37.2.  Further, there are also no contemporaneous documents or witness statements from the IO (which was incorporated in 1988) regarding its intentions and actions in relation to the externals walls, including the Disputed Entrance, and the Corridor, eg the use of the Corridor as the main fire escape route and exit for the Building in the event of fire or other emergencies. 

38. When such evidence is not before the court, it is impossible for the court to determine the arguments advanced by the appellants in a vacuum.  It is at least arguable that the Disputed Entrance and Corridor are common parts.  As the IO has a duty to preserve common parts, it must be entitled to contributions required for litigation to assert its rights over them.  The issues argued by the appellants should be determined in the litigation between the IO and WT which claims title to them, not as part of an argument that the IO should not receive any funds for the litigation.

39. That is not to say that an individual owner can never come to court to dispute an IO’s demand for contributions for the purpose of litigation if he thinks it is acting outside its powers.  But it would only be in plain cases that the court would decide, in litigation between an IO and an owner, the merits of a case between the IO and a third party, and in light of the matters discussed above, this is certainly not a clear cut case.

40. Counsel for the appellants sought to argue that as a matter of law an IO has no capacity to claim adverse possession against an individual owner.  However, as noted above, that is only the IO’s alternative position in the 2014 Action against WT.  The issue should be decided in that action, not put as a theoretical question in these proceedings in which, as noted above, WT is not a party. 

41.1.  Further, counsel for the appellants argued that in any event, the IO’s claim to adverse possession of “the external walls”, not confined to the Disputed Entrance, had not been authorised by the owners at the February meeting.

41.2.  As noted above (para. 18.1), there would appear to be no record of the meeting in any form other than the minutes (written in Chinese) which are rather brief, and it is not clear from the original Chinese “外牆” whether it is singular (meaning only the wall in which the Disputed Entrance has been formed) or plural (including other parts of the external walls).  Obviously the IO’s lawyers have read it in the plural form.  It is the duty of the IO’s legal advisers to consider the merits of pursuing an alternative case based on adverse possession, and if so, to decide on the proper ambit of that case, ie whether it should cover external walls other than the front wall with the Disputed Entrance. 

41.3.  However I have to say, with respect to the pleader of the Statement of Claim in the 2014 Action, that that part of the pleading is not clear at all (see para. 27 above).  There is no definition of “external wall” or “external walls” (which is important considering the Disputed Entrance was formed from one external wall only), sometimes the singular form is used and sometimes the plural, and there are inconsistencies within the same sentence (para. 24 of the Statement of Claim).  I think there is something in the criticisms of the IO’s case expressed by counsel for the appellants. 

42. At the end of the day however, the appellants’ defence to the OS relates only to whether the IO was entitled to demand contributions from them for the litigation against WT.  The fact that part of the IO’s pleadings would benefit from review and amendment cannot exempt the appellants from making those contributions.  Whatever the merits or otherwise of the appellants’ argument concerning an IO’s capacity to claim adverse possession of property originally belonging to an individual owner, there can be no doubt that the IO was entitled on the facts of this case to mount an arguable case that at least the Disputed Entrance and the Corridor were common parts, and to demand contributions for the litigation. 

43. I would therefore agree with the Recorder on issue (1).  Accordingly issue (2) falls by the wayside and it is not necessary for this court to express any views on it.  As for issue (3), even if the market value of the units were substantially greater than the contributions demanded, I do not think it was oppressive to apply for an order for sale.  First, as the units had been mortgaged, there was no evidence as to how much net equity the appellants had in the units.  In any event, it was up to the IO to decide how to obtain liquid funds for the litigation.  

Order

44. I would therefore dismiss the appeal with costs to be paid by the appellants to the IO. 

Hon Kwan JA:

45.   I agree with the judgment of Yuen JA.

Hon McWalters JA:

46. I agree with the judgment of Yuen JA.