CHAMPION RAY LTD AND ANOTHER v. THE INCORPORATED OWNERS OF WORKINGBERG COMMERCIAL BUILDING

HCA2926/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2926 OF 2004

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J U D G M E N T

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1. The defendant is the Incorporated Owners of the building (“the Incorporated Owners”) known as Workingberg Commercial Building (“the Building”), Nos.41-47 Marble Road, North Point, Hong Kong.  The defendant was incorporated in September 1997.  

2. Since November 1998, the 1^st plaintiff has been and still is the registered owner of the shop premises at the ground floor of the Building, namely, Shop Nos.1-3.  The 1^st plaintiff operates a Chinese style café at those premises.  The 2^nd plaintiff was another owner of the ground floor shop premises known as Shop Nos.4-5.  The 2^nd plaintiff discontinued its claim in August 2005 and has ceased to be a party since.

3. As in a lot of other multi-storey buildings, the rights and obligations of the co-owners in the Building are governed by a deed of mutual covenant (“the DMC”).  Clause 10(e) of the DMC provided that each owner would have to pay for a proportion of the total sum budgeted to cover the management expenses.  The sum payable by each owner was to be calculated by reference to the Management Shares allocated to the Unit as prescribed in the 5^th Schedule of the DMC.

4. For a long time in the past, management fees were calculated and charged in proportions other than those provided for in the 5^th Schedule of the DMC.  There seems to have been a practice going back as long ago as late 1991 of apportioning management expenses by reference to the gross floor area of the respective units of the Building.

5. In 2003, the Incorporated Owners commenced legal proceedings against three of the owners (LDBM Nos.341, 342 and 343 of 2003), claiming arrears of management fees according to the long-standing basis of apportionment.  On 16 April 2004, the Lands Tribunal ruled against the Incorporated Owners, holding that the proportion of management fees must be calculated in accordance with the DMC. 

6. Consequent upon the Lands Tribunal decision, the Management Committee held a meeting on 22 April 2004.  Upon legal advice, the Management Committee resolved that with effect from 1 June 2004, management fees would be charged according to the proportion of Management Shares prescribed in the DMC.  It was further resolved that the Incorporated Owners should not seek recovery of the deficiencies from the owners who had hitherto underpaid, nor make refund to those who had previously overpaid.  It was further decided that endorsement be sought from the owners’ general meeting as to their decision to waive recovery of shortfall or refund overpayment.

7. Notices were distributed for the forthcoming extraordinary general meeting (“Notice of the EGM”) to be held on 18 May 2004 (“the EGM”).  One of the items on the agenda was :

“To vote for the proposal of the OI’s management fee issue – a/ not to chase back the less-paid management fee; b/ not to return the over-paid management fee”

8. At the same time, a separate notice dated 30 April 2004 (“the Notice of Management Fees”) was given by the Manager as to the Management Committee’s decision to alter the proportion for sharing management expenses.  Notification was given in the same notice that the new management fees would take effect from 1 June 2004 and that on the basis of the new apportionment, the unit rate of each share of the management expenses would be reduced from $5.14 to $4.50.  The notice also informed owners that a copy of the draft budget had been posted on the notice board at the main entrance of the Building.

9. The EGM was held on 18 May 2004.  The meeting resolved, among other things, to endorse the decision of the Management Committee not to seek recovery of past shortfall or make refund of overpayment.  It is to be noted that one Mr Lau Yeung Kam attended the EGM as representative of the 1^st plaintiff’s unit.

10. Despite the reduction in unit rate, the adoption of the new apportionment had resulted in an increase of the 1^st plaintiff’s liability for management fees.  In actual terms, as from 1 June 2004, the 1^st plaintiff’s monthly contribution increased from $3,477 to $6,930, a rise of 99.3%.

11. Feeling aggrieved, the 1^st plaintiff commenced the present Action.

Formulation of the 1^st plaintiff’s case

12. At the commencement of the trial, the 1^st plaintiff sought to challenge the new apportionment by inviting the Court to declare that the EGM was invalidly convened and hence the resolutions passed thereat ineffective.  The main argument was that the Notice for the EGM had not been served in compliance with the Third Schedule of the Building Management Ordinance.  Both parties had adduced oral evidence on the question of service of the notice. 

13. Questions were raised as to the relevance of the 1^st plaintiff’s challenge to the validity of the EGM.  Mr Lam for the Incorporated Owners indicated categorically that it was not part of his client’s case to rely on any of the resolutions passed at the EGM.  In light of that, Miss So for the 1^st plaintiff had obvious difficulty to maintain the challenge.  Somewhat surprisingly, however, Miss So responded by seeking to substitute the challenge to the EGM with a new challenge to the validity of the resolutions passed by the Owners’ Committee at their meeting on 22 April 2004.  The case, at that point, was adjourned part-heard.

14. Before resumption of the hearing, a draft of the Re-Amended Statement of Claim was submitted.  The challenge to the EGM was reinstated.  The draft contained a new ground to challenge the Management Committee’s power to alter the proportion of sharing management expenses. 

15. At the resumed hearing, Mr Cheung was brought in as leading counsel for the 1^st plaintiff.  Eventually, the challenge to the validity of the EGM was abandoned and Mr Cheung indicated, in my view rightly, that the question over service of the Notice of the EGM would no longer be in issue.  A large part of the oral evidence on that point has consequently become irrelevant.

16. In the end, the only issue before the Court is whether the Incorporated Owners were entitled to alter the apportionment of the management expenses.  Mr Cheung relied on two substantive grounds.  First, he contended that the Management Committee lacked the power to alter the previous apportionment because to do so without the sanction of the general meeting would infringe section 21(1A) of the Building Management Ordinance.  Second, due to the long-standing practice of charging management fees on the basis of gross floor area, the Incorporated Owners were precluded from adopting the proportions set out in the DMC by reason of waiver, acquiescence and estoppel. 

17. I should also mention here that, in addition to the substantive grounds, the 1^st plaintiff’s pleading contained an allegation that, procedurally, the draft annual budget for the year 2004/05 had not been served in accordance with the Seventh Schedule of the Ordinance.  However, no relief in the Re-Amended Statement of Claim was sought in respect of the alleged procedural defect and Mr Cheung confirmed that the allegation was not a live issue in this case. 

Section 21(1A) of the BMO

18. Section 21 of the Ordinance provides :

“(1)       Subject to subsection (4), a management committee shall determine the amount to be contributed by the owners to the funds established and maintained under section 20 during such period –

       (a)    in the case of the first such period after the date of registration of the corporation, not exceeding 15 months; and

       (b)    in any other case, not exceeding 12 months,

as the management committee may determine.

(1A)       Subject to subsection (3), any amount (‘subsequent amount’) determined by a management committee under subsection (1) after the first such amount (so determined under that subsection) shall not exceed a sum equivalent to 150% of the preceding amount (so determined under that subsection) unless that subsequent amount is approved by the corporation by a resolution passed at a general meeting.”

19. Mr Cheung argued that by reason of section 21(1A) the Management Committee had no power to increase the 1^st plaintiff’s monthly contribution by 99% unless the owners’ sanction was obtained by way of a resolution at a general meeting.  The reference to the “amount” in section 21(1A), argued Mr Cheung, was a reference to the amount to be contributed by an individual owner.

20. I disagree with the interpretation contended for by Mr. Cheung.  The meaning of the word “amount” in section 21(1A) becomes clear when one considers the next section, section 22, which provides:

“(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)    payable at such times and in such manner as the management committee may determine.”

In section 22, a distinction is drawn between “the amount to be contributed by an owner” and “the amount determined under section 21”.  In light of the distinction, “the amount determined under section 21” could not mean contribution by an individual owner.  It must be a reference to the aggregate amount of contributions of all the owners.  Therefore, I would accept Mr Lam’s argument that the requirement of a sanction under section 21(1A) applies only in respect of an increase of more than 150% of the total contributions of all the owners and not of the contribution by any individual owner.  I also note that this interpretation sits well with the other references to “the amount” in the several subsections of section 21, and in particular, the reference to the 5^th Schedule in section 21(4).

21. As is apparent from the draft budget for the year 2004/05, the proposed total contribution was in fact a reduction when compared with that for the year 2003/04.  Section 21(1A) is therefore not engaged.

22. Alternatively, Mr Cheung argued that the draft budget for the year 2004/05 failed to make provision for some items of expenditure, for example, for maintenance of the outer wall, replacement of sewage drains, and maintenance or replacement of fire-fighting installations.  It was pointed out that these items, which were not insubstantial in amount, were discussed by the Management Committee at about the time the draft budget was published.  These items, argued Mr Cheung, ought to have been included in the draft budget for 2004/05; and had they been so included, the total contributions from the owners would have been increased beyond the projections set out in the draft.  Section 21(1A) would then have been engaged. 

23. I do not accept this argument.  First, the reference in section 21(1A) to “the amount” is a reference to the amount actually determined by the management committee, not an amount which might be or ought to have been determined.  Secondly and in any event, only preliminary proposals were discussed at the meetings.  It would appear that no decision had been made at the time the draft budget was prepared, or even sometime thereafter, on the questions whether the works should be carried out, the scope of the works, or the expenditure to be incurred.  In my view it would not be necessary at that stage to require provisions to be made for such expenses in the preparation of the budget.  Thirdly, the questions regarding the discussion of these proposals and the alleged omission of such items in the draft budget were not matters canvassed in witness statements or oral evidence at the trial.  I have no hesitation to reject Mr Cheung’s argument on the point.

24. Accordingly, the 1^st plaintiff’s first ground of challenge fails.

Waiver/acquiescence/estoppel

25. In this Action, the 1^st plaintiff seeks a declaration that management fees should be calculated by reference to the gross floor area of the respective units in the Building and not the proportions set out in the DMC.  The 1^st plaintiff relies on principles of waiver, acquiescence and estoppel as the basis of its claim.

26. The 1^st plaintiff relies on the following matters:  There has been a long-standing practice beginning with the predecessors of the current manager, possibly from about 1991, to calculate and charge management fees on a basis other than as provided for in the DMC.  In 2003 when the present manager took over management of the Building, they had raised the question of non-compliance with the Incorporated Owners who simply instructed them to follow the previous practice.  Accordingly, management fees continued to be calculated on the basis of gross floor area despite the Incorporated Owners’ knowledge that the basis of apportionment was inconsistent with the DMC.  Ever since becoming an owner, the 1^st plaintiff continued to pay management fees as demanded.

27. These circumstances, argued Mr Cheung, created “an expectation to the 1^st Plaintiff that the old method would be used continuously” : submissions of the 1^st plaintiff.  As a matter of law, Mr Cheung contended that such expectation was sufficient to found an action based on estoppel.  He argued that reliance on the part of the representee or a change of the representee’s position is not a necessary requirement for the application of the doctrine. 

28. It would be appreciated that the Incorporated Owners here are seeking only to recover the due proportion of management fees payable by the 1^st plaintiff from June 2004.  The Incorporated Owners are not seeking recovery of the shortfall prior to that date.

29. As to the 1^st plaintiff’s alleged expectation, I am prepared to assume in the 1^st plaintiff’s favour (although there is no direct evidence to that effect) that because of the past practice, the 1^st plaintiff believed that management fees would continue to be charged on the basis of gross floor area.  I am also prepared to assume that the 1^st plaintiff’s belief had strengthened as time passed when the same demand was made every month prior to June 2004.  But, in my view, that is not the material question.  The important question is : Whether the past practice adopted by the Incorporated Owners amounted to a representation, or whether the practice could be regarded as having created a reasonable belief or expectation, that the Incorporated Owners had relinquished its right to enforce the provisions in the DMC to charge management fees according to the proportions therein stipulated.

30. To answer the question, one should have regard to the statutory duties of the Incorporated Owners to enforce obligations contained in the DMC : section 18(1)(c) of the Ordinance.  Such duties were not discharged if management expenses were apportioned and charged in a manner inconsistent with the proportions set out in the DMC.

31. The fact that for a number of years there had been a departure from the provisions of the DMC might well have encouraged a belief that the same practice would likely to continue.  However, in light of the statutory duty placed upon the Incorporated Owners to enforce the provisions of the DMC, the past practice, long-standing though it was, could not reasonably have created an expectation on the part of the co-owners that the Incorporated Owners should continue to ignore its duties, or relinquish its right ever in future to revert to the apportionment of management expenses specified in the DMC.

32. Mr Cheung’s argument based on estoppel fell at the first hurdle.  However, I would like to add a comment on Mr Cheung’s argument, which struck me as somewhat startling, that reliance or change of one’s position is not a necessary requirement for the application of the principle.  Mr Cheung referred to the judgment of Clarke J in The “Stolt Loyalty” [1993] 2 Lloyd’s Rep.281, in which the learned judge at p.290 adopted the following passage of Kerr LJ in The August Leonhardt [1985] 1 Lloyd’s Rep.28 at p.35 :

“The applicability of the doctrine of estoppel in any given case can also be tested in another way.  There cannot be any estoppel unless the alleged representor has said or done something, or failed to do something, with the result that – across the line between the parties – his action or inaction has produced some belief or expectation in the mind of the alleged representee, so that, depending on the circumstances, it would thereafter no longer be right to allow the alleged representor to resile by challenging the belief or expectation which he has engendered. ….”

33. Plainly, the above passage does not support the proposition advanced by Mr Cheung.  There the learned judge was clearly setting out what would be a necessary element for the application of the doctrine.  The presence of a necessary element is not, without more, sufficient for the application of the principle.

34. Contrary to Mr Cheung’s submissions, Lord Templeman delivering the opinion of the Privy Council in Attorney General v. Humphreys Estate (Queen’s Gardens) Ltd [1986] HKC 592, said at p.598 :

“Their Lordships accept that the government [the party setting up the estoppel] acted to their detriment and to the knowledge of HKL [the party arguing against the estoppel] would not withdraw from the agreement in principle.  But in order to found an estoppel the government must go further.  First, the government must show that HKL created or encouraged a belief or expectation on the part of the government that HKL would not withdraw from the agreement in principle.  Secondly the government must show that the government relied on that belief or expectation. ….”

35. None of the other authorities to which Mr Cheung referred support his contention in law. 

36. Mr Cheung argued as a fallback position, if I were to hold against him on the law, that the fact that the 1^st plaintiff continued to pay management fees throughout the years since its becoming an owner is evidence of reliance on his client’s part.  However, no evidence has been adduced to establish any causal connection between the previous mode of charging management fees and the 1^st plaintiff’s acquisition or continued ownership of the shop premises.  Without that causal connection, I do not see how the mere payment of management fees could amount to an act of reliance on the part of the 1^st plaintiff or any change of its position for the purpose of the doctrine.  I therefore find against the 1^st plaintiff also on this ground.

37. Furthermore, it is clear that the effect of the estoppel, even if established, is merely “suspensory” and does not permanently extinguish the right of the Incorporation Owners to revert to proportions set out in the DMC.  The notice given to the owners for the application of the new apportionment as from June 2004 was clearly adequate for the purpose.

38. Mr Cheung also sought to characterize the estoppel as proprietary estoppel which, he said, justified its being deployed as a cause of action.  He referred me to a number of authorities on the subject.  However, the present issue is not one that concerns title in land or interests in property.  I do not consider proprietary estoppel has any application in the present case. 

39. Mr Cheung further invoked the principle of waiver.  He relied on the observations of Lord Denning MR in W.J. Alan & Co. Ltd v. El Nasr Export and Import Co. [1972] 2 QB 189 at p.213.  I do not think those observations help to advance the 1^st plaintiff’s case.

40. In the course of argument, reference was made to the case of Cheung Yuet v. The Incorporated Owners of Oriental Gardens [1979] HKLR 536.  That case concerned owners who had undertaken extensions to their properties in breach of the deed of mutual covenant.  The Court of Appeal, discharging the injunction that compelled the appellants to demolish the extension, held that the breaches of covenant by the other owners in the building could reasonably have been considered as a representation that the addition of a room of equivalent size would be tolerated by the incorporated owners.  Consequently, the incorporated owners were held to have acquiesced in the particular kinds of breach in question.  It would be inequitable to compel the appellants to remove their extension.

41. In respect of the decision in the Oriental Gardens’ case, Deputy Judge Jerome Chan (as the late J. Chan J then was) observed in Incorporated Owners of Chungking Mansions v. Shamdasani [1991] 2 HKC 342 at p.359G that :

“…. it was an important consideration in that case that the building was literally littered with numerous similar unauthorized extensions;”

and later at p.360E that :

“The equity is that the appellants should not be singled out for enforcement of a covenant which had been flagrantly breached by many others without any complaint by the respondent.”

The Oriental Gardens’ case was clearly decided on its own particular set of facts.  The pervasive nature of similar breaches committed by the other owners that the incorporated owners had all along tolerated was undoubtedly the reason which led the Court to refuse to allow the appellants to be singled out for enforcement.  While the principle in the Oriental Gardens’ decision cannot be in doubt, the facts of that case are very different from those presented in the present case.  In the present case, I have already explained why in my view no form of estoppel has been established against the Incorporated Owners.  There is also no question of any victimization of the 1^st plaintiff.  To the contrary, the revised proportion of sharing management expenses under the DMC was applied to all the co-owners.  There was evidence to show that the 1^st plaintiff was in fact the only owner who had refused to accept the revised apportionment.  The Oriental Gardens’ case is of little assistance to the 1^st plaintiff.

42. In the course of his argument, Mr Cheung further submitted that the Incorporated Owners had abandoned its right to revert to the apportionment provided for in the DMC.  The leading authority on abandonment, Fairfax Ltd v. Attorney General [1997] 1 HKC 17 (PC); [1995] 2 HKC 401 (CA), was considered recently by the Court of Appeal in Kwok Mo Kai Doris v. The Incorporated Owners of Karin Court, CACV No.267 of 2005.  In the case of Kwok Mo Kai Doris, management expenses had been levied on the co-owners on a basis otherwise than as provided for in the DMC, apparently since a time prior to 1980.  The applicant became owner of one of the units in 1992 but did not object to the amount of management fees levied on her premises.  The incorporated owners argued that the applicant’s failure to raise objection amounted to “notorious and avowed acquiescence” in the breach of covenant and entitled the court to infer abandonment.  Rejecting that argument, Le Pichon JA said, at paragraph 16 :

“But the Fairfax principle is simply not applicable to the present case.  The length of time concerned aside, in the present case, the covenant in issue is contained in a deed of mutual covenant affecting all the co-owners of the building.  It is the statutory duty of the Incorporated Owners as Manager under section 18(1)(c) of the Buildings Management Ordinance to enforce the obligations contained in the DMC.  In my view, the Incorporated Owners may not assert a right that negates or is at variance with that statutory duty particularly when it involves only one of many co-owners: for it would strike at the concept of mutuality which underpins the DMC.”

43. In the Fairfax’s case, on the basis of “notorious and avowed acquiescence” by the government as landlord, the court drew the inference that “the landlord had long since abandoned any legitimate interest in the enforcement” of the relevant covenant under the Crown lease : judgment of Godfrey JA in the Court of Appeal at p.622F.  In the present case, obviously the Incorporated Owners cannot escape criticism for allowing the erroneous practice to be followed for a considerable period of time.  However, given the statutory duty of the Incorporated Owners (as emphasized by Le Pichon JA in the passage above-quoted), I think the court should be slow to draw any inference that the Incorporated Owners had abandoned their legitimate interest, or more accurately their duties, in the enforcement of the provisions in the DMC.  I will not do so in the circumstances of the present case.

44. I would reject Mr Cheung’s submissions based on waiver, acquiescence and/or estoppel.

Variation of the DMC

45. Although there was an allegation in the 1^st plaintiff’s pleading that the past practice regarding charging of management fees amounted to a variation of the DMC among co-owners, the Incorporated Owners and the manager, this argument was not developed in the final submission.  I think this argument is fraught with difficulties and I propose to deal with it briefly.

46. First, there is simply no evidence of any agreement among those parties to vary the DMC.

47. Secondly, to effect a variation of the DMC, consent of all the co-owners is necessary.  Assuming it was argued that the alleged agreement to vary the DMC was constituted when all the co-owners made payment of management fees based on the erroneous basis of apportionment, evidentially there is still nothing to show that all the co-owners had actually fully discharged their payment obligations to support the alleged agreement amongst all of them. 

48. Thirdly, I am unable to accept that by merely discharging one’s payment obligation in response to a demand from time to time could be regarded as subscribing to an agreement having the effect of varying the proportions prescribed in the DMC for sharing management expenses.

49. Fourthly, there is no evidence that the co-owners’ actions at any given point of time were intended to bind their successors in title.

50. I do not, therefore, accept that there has been a variation of the DMC.

Conclusion

51. For all the reasons above, I would dismiss the 1^st plaintiff’s claim.  I would also make an order nisi that the defendant should have the costs of the Action.