THE INCORPORATED OWNERS OF YEE ON COURT v. LI ZEE ZING HAI

CACV 181/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 181 OF 2000

(ON APPEAL FROM LDBM NO. 33/1999)

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal from a decision of Deputy Judge Lee in the Lands Tribunal.

2. In her judgment she has set in some detail all the agreed facts and the conclusion she reached on those facts. In this appeal it is sufficient to refer to the main outstanding issue between the parties. For the avoidance of confusion reference will be made to "the Incorporated Owners" who are the respondent in the appeal and "Madam Li" who is the owner of Shop 7 on the ground floor of the building in question. She is the appellant but was the respondent in the proceedings below.

3. The building Yee On Court is a mixed commercial and residential development fronting Argyle Street and Waterloo Road in Kowloon. It was developed in 1976 and is subject to a Deed of Mutual Covenant ("DMC"). Madam Li's shop was allocated 19 undivided shares of the 4,152 equal undivided parts of the building.

4. In 1988 various renovation and repair work was undertaken. This included "repairing the external walls and other structural parts; repairing sanitary pipes and fresh water pipes; and repainting [the] common area of the Building". In 1994 it was agreed that further renovation and repair work needed to be undertaken. This included:

"(a) renovation to arcade, entrance lobby, lift lobby, common toilet and carpark;

(b) electrical works; and

(c) air-conditioning works.

All these works were of a non-recurrent nature."

5. Also in the agreed facts, it was accepted that further work in 1997 included:

"(a) electricity installation works; and

(b) fire fighting equipment."

6. The problem which had to be considered by the Deputy Judge was how the cost of all this work should be divided amongst the various owners.

7. The problem which arises is whether the work comes within the scope of clause 4 of the DMC.

8. The clause runs to 12 pages in the DMC. The following clauses are of relevance to this appeal:

"4. Each owner shall be bound by and shall observe and perform the following covenants provisions and restrictions:-

(a) Each owner shall enter into or be bound by a Management Agreement whereby the said International Property Management Limited shall be appointed as the Manager for all the owners to manage and provide services in respect of the whole of the said building and shall continue so to act for the term of ten years from the date hereof and thereafter until it resigns from such appointment by six months notice in writing to the owners of the said premises and building or if removed by a meeting of owners under clause 8 and the expression 'the Manager' used in this deed shall mean the said International Property Management Limited or the Manager for the time being for the owners of the building appointed as hereinafter provided.

...

(d) The following costs charges and expenses shall be borne and paid by the owners of the said building in proportion to the number of unit or units in the said premises for the time being owned by them, namely:-

...

(iv) The cost of repairing, renewing, maintaining cleansing, painting, or decorating the building or any part or parts thereof and all water pumps, tanks, pipes, sewers, drains, watercourses, cable, wires or services therein and all the apparatus equipment and conveniences thereof.

...

(vi) The cost of operating maintaining repairing servicing replacing and renewing all the lifts in the building save and except that no contribution shall be payable by those parties whose shops or spaces are not served by the lifts.

...

(e) For the purpose of financing the Management each owner shall on becoming Owner contribute in respect of each individual unit owned the sum of $400.00 for each Shop and each domestic flat of the said building towards a maintenance fund which shall be utilised solely and exclusively for the management and maintenance of the said Building.

(f) Each owner shall pay to the Manager on account of his share of the said costs charges and expenses per Calendar month for each such shop, flat and car parking space payable monthly in advance the following sums:-

...

	Amount
(8) Shop No. 7 on the Ground floor otherwise known as No. 124M Argyle street Ground floor;	$40.00

...

(g) If the total contributions payable to the Manager by the owners of the said building as aforesaid shall be insufficient to cover all or any of the said costs charges and expenses then such owners shall make further contributions towards such expenses in the shares as above provided.

(h) If there should be any surplus after payment of all the costs charges and expenses then the surplus shall be held by the Manager in a bank account and shall only be applied by him in or towards payment of such costs charges and expenses thereafter to become due.

(i) The Manager shall have power and authority to do all or any of the following acts and things namely:-

(i) To demand and receive from each owner the contributions payable by each owner as hereinbefore specified and all such contributions shall without prejudice to any other remedy exercisable hereunder be recoverable by the Manager by civil action and the defaulting owner shall not be entitled to dispute the right of the Manager aforesaid to sue and recover the unpaid contributions.

(ii) If any of the owners shall fail to make any such contribution or further contribution as above provided within seven days after written notification from the Manager calling upon him so to do the Manager shall be at liberty to disconnect all water supply to the defaulting owner's premises and to stop the use of the lifts by the defaulting owner until such contribution or further contribution shall have been paid by such defaulting owner.

...

(v) To replace repair renew maintain service clean and paint the said building or any of the common areas and common facilities thereof and for such purpose to engage and to enter into contracts with any person firm or corporation.

...

(viii) To paint or whitewash or treat with cement wash or other material or appropriate such of the exterior and common parts of the said building as should be painted, white washed or so treated at such intervals as the same may reasonably be required to be done and if so required by any Government Department.

...

(x) To keep in good repair and condition all water pumps, tanks, pipes, sewers, drains, watercourses, cables and wiring in the said building which are for the common use of the occupants of the said building.

(xi) To keep the lifts in the said building in good repair and condition and to replace any parts that may require replacement.

...

(xix) To enter into contracts and to engage, employ, remunerate and dismiss solicitors, architects and other professional advisers and consultants, contractors, workmen, servants, agents, watchmen, caretakers and other building staff and attendants and to commence, conduct carry on and defend legal and other proceedings touching or concerning the said premises and building or the management therof on behlaf of all the owners for the time being.

...

(l) The owner of the shops in the lower basement, upper basement and the ground floor shall not in respect thereof be liable to contribute towards the maintenance and unkeep of the lifts.

...

(p) Before the owner of any unit in the said building is given possession of his unit he shall (I) deposit with the Manager a sum of $400.00 as a standing deposit partly by way of contribution to the utility deposits for the common services of the said building and partly by way of security for the due payment of the monthly management expenses payable in accordance with the terms and conditions of this Deed and such sum shall not be used to set off against contributions to be made, and (II) pay the Manager a sum equivalent to one month's contributions by him under this clause as payment in advance of the first month's contribution.

...

(w) The Crown Rent in respect of the said premises shall be borne and paid by the owners in proportion to the respective shares in the said premises for the time being vested in them.

..."

9. The main point to note is that if the work which has been undertaken comes within clause 4 each unit owner only pays one share according to clause 4(f).

10. Another point to be noted is that as Shop 7 is on the ground floor Madam Li does not have to contribute towards the expenses for any lift.

11. It is Madam Li's contention that even though the work earlier referred to may not have been of a recurring nature nonetheless it fell within the scope of clause 4.

12. The alternative contention which appears to have been accepted by the Deputy Judge is that the work was for "specific and ascertained purposes" which fall outside the scope of DMC. She said at p. 89 of bundle A which was before us:

"The 1st and 2nd Projects are both one of a kind, for specific and ascertained purposes. They are not of a recurring nature. The contributions towards these projects are for the same specific nature. The expenditures are of a kind not expected to be incurred annually. There is no provision in the DMC for such expenses. They come within the meaning of 'special fund' under clause 4 of the Seventh Schedule to the Building Management Ordinance, Cap.344. By virtue of Section 34E of Building Management Ordinance the provisions of the Seventh Schedule to the Ordinance is impliedly incorporated into the building's DMC, and binds the owners and the management committee.

Clause 4(2) of the Seventh Schedule provides that, where there is a corporation, the corporation shall determine, by a resolution of the owners, the amount to be contributed to the special fund by the owners, and the time when those contributions shall be payable.

This special fund is within the ambit of the contingency fund under Section 20(2) of the Building Management Ordinance, the recovery of which is governed by Section 22 of the same Ordinance. This DMC does not provide for the fixing of the contributions. In the circumstances, the amount 'shall be fixed by the management committee in accordance with the respective shares of the owners.' [Section 22(2) BMO]."

13. It makes a significant difference to Madam Li whether the cost of the work in question comes within the scope of the DMC. If it does not the amount payable by Madam Li is approximately four times as much.

14. This is on account of the fact that if the expenses are met by virtue of the provisions contained in the Building Management Ordinance, Cap. 344 the expenses would be shared on the basis of the notional division of the building into the undivided shares earlier referred to which is provided for in clause 3 of the recitals to the DMC. That is that Madam Li would have to pay 19/4152 of the costs.

15. From reading the judgment as a whole it would appear that the main rationale for the Deputy Judge coming to the conclusion that the work in question did not come within the ambit of clause 4 is that the fund was intended "for general day to day expenses".

16. With the greatest respect to the Judge I do not consider that there is any warrant for this conclusion.

17. If one takes as an example an expense such as painting the external parts it is obvious that you do not just do a small amount of painting every month. What you do is to provide for a sinking fund to meet expenditure as and when it arises. There is sufficient power vested in the manager to do just that.

18. What is clear is that managing a building requires anticipating future expenditure and the way this is done is to provide for a sinking fund. Any other approach would be a prescription for chaos.

19. In my view this appeal should be allowed and the case should be referred back to the Lands Tribunal.

20. There will be a number of matters to attend to such as for example the fact that the basis for sharing the costs of the work done under the first project was reversed and the fact that a fresh account will need to be prepared so as to exclude from the costs which will have to be borne by the owners of the ground floor shops the expenses relating to the lifts. What is clear however is that the expenses do come within the ambit of clause 4 of the DMC and that they will have to be apportioned amongst the owners in the manner contemplated by the clause.

Hon Keith JA:

21. I agree that this appeal should be allowed, but I add a few words of my own in deference to the Lands Tribunal from whom I take a different view of the case.

22. The proportion of Madam Li's contribution. The principal issue which the cases raises relates to the contribution which Li Zee Zing Hai, who owns a unit in a mixed commercial and residential building, must make towards the cost of two sets of works of a non-recurring nature. The incorporated owners of the building, who are also the managers of the building, contend that the contributions of each of the owners of the units in the building to the cost of the works should be calculated by reference to the proportion which the undivided shares allocated to each of the units bear to the number of shares in the building as a whole. By that calculation, Madam Li must pay 19/4,152, i.e. 0.4576%, of the cost of the works. Madam Li contends that the contributions of each of the owners of the units in the building to the cost of the works should be calculated by reference to the proportion of the monthly management charges which each of the owners have to pay. By that calculation, Madam Li would only have to pay 40/39,100, i.e. 0.1023%, of the cost of the works. The Lands Tribunal found in favour of the incorporated owners, and it is from that finding that Madam Li appeals.

23. The answer to the problem lies, in my opinion, in clause 4 of the Deed of Mutual Covenant for the building:

(i) Clause 4(d) lists the "costs, charges and expenses" which are to "be borne and paid by the owners" of each of the units in the building. Those costs are to be shared "in proportion to the number of units .... for the time being owned by them". That means, for example, that someone who owns two flats in the building has to pay twice as much as someone who owns only one flat in the building.

(ii) Clause 4(e) requires the owners of each of the units in the building, on becoming an owner, to pay $400.00 "towards a maintenance fund".

(iii) Clause 4(f) identifies the contributions towards the "costs, charges and expenses" which the owners of each of the units in the building must pay each month to the manager of the building. Madam Li's monthly contribution is $40.00 out of a total of $39,100.00.

(iv) Clause 4(g) provides for what is to happen if the total contributions payable by the owners of the units in the building are insufficient to cover the "costs, charges and expenses". In that event, the owners have to make further contributions towards such expenses "in the shares as above provided".

24. In my judgment, the words "in the shares as above provided" in clause 4(g) can only be a reference to the breakdown of shares in clause 4(f). That is because the breakdown of shares in clause 4(f) was specifically for the purpose of identifying the contributions to be made (albeit on account and on a monthly basis) in respect of the "costs, charges and expenses" referred to in clause 4(d). The words "in the shares as above provided" in clause 4(g) could not have related to the amount payable under clause 4(e) because the difference between the amount in any maintenance fund and the cost of the works may be greater than the $400.00 payable by each owner of a unit in the building under clause 4(e). Nor could the words "in the shares as above provided" in clause 4(g) have related to the number of undivided shares in the building attributable to each unit, because that breakdown (which appears in para. 3 of the Recitals and which is described as "notional") is a breakdown only "[f]or the purpose of sale of units in the .... building". Moreover, when the Deed of Mutual Covenant wished to provide for contributions to be paid by reference to the number of undivided shares in the building attributable to each unit, it provides for that in express terms: see clause 4(w).

25. Thus, the only remaining question is whether the cost of the particular works to which the owners of each of the units in the building were required to contribute was included in the costs included in the "costs, charges and expenses" listed in clause 4(d). The Lands Tribunal held that it was not included, and that the apportionment fell to be determined in accordance with the provisions of the Building Management Ordinance (Cap. 344) ("the Ordinance"). Its reasoning was that the "costs, charges and expenses" listed in clause 4(d) relates to costs, charges and expenses of the kind which could reasonably be expected to be covered by the owners' monthly contributions. The "costs, charges and expenses" listed in clause 4(d) does not, so the Lands Tribunal thought, relate to costs, charges and expenses of an extraordinary or non-recurring nature.

26. I cannot agree. I see no warrant for drawing the distinction which the Lands Tribunal drew. There are a number of non-recurring costs, charges and expenses listed in clause 4(d) which could well be substantial, and could easily exhaust the funds collected from the owners by the monthly contributions payable under clause 4(f). Indeed, the particular non-recurring works to which this appeal relates all come within the costs, charges and expenses listed in clause 4(d). Those works consisted of renovations to the arcade, entrance lobby, lift lobby, common toilet and car-park, electrical works, air-conditioning works, electricity installation works and fire-fighting equipment. All those works come within clause 4(d)(iv) which includes among "the costs, charges and expenses"

"[t]he cost of repairing, renewing, maintaining cleansing, painting, or decorating the building or any part or parts thereof and all water pumps, tanks, pipes, sewers, drains, watercourses, cable, wires or services therein and all the apparatus equipment and conveniences thereof."

Many of those costs, charges and expenses are plainly non-recurring.

27. In my view, therefore, the cost of the particular works to which this appeal relates were costs included in clause 4(d)(iv) of the Deed of Mutual Covenant, and having regard to my construction of the words "in the shares as above provided" in clause 4(g), the contribution which Madam Li had to make to the incorporated owners as the managers of the building was to be based on the breakdown of shares in clause 4(f).

28. That approach is not inconsistent with the provisions of the Ordinance. Section 20(1) of the Ordinance required the incorporated owners to maintain a general fund to defray the cost of works. Moreover, section 34E(1) of, and para. 4(1) of the 7th Schedule to, the Ordinance in effect required them to maintain a special fund to provide for expenditure of a non-recurring kind, even though section 20(2) of the Ordinance merely empowered rather than required them to maintain a contingency fund to provide for any expenditure of "an unexpected or urgent nature". However, the incorporated owners did not assert that two separate funds were maintained, and the fund represented by the contributions to which clauses 4(e) and 4(f) relate consisted of both the general fund required by section 20(1) and the special fund required by para. 4(1) of the 7th Schedule.

29. The lifts. The other issue in the case relates to the extent to which Madam Li had to contribute towards the cost of all the works, or only towards the cost of those works which did not involve the renewal, maintenance or upkeep of the lifts. Madam Li's unit was a shop on the ground floor, and therefore not served by the lifts. In my view, Madam Li only had to contribute to the cost of works which did not involve the renewal, maintenance or upkeep of the lifts. Two provisions in the Deed of Mutual Covenant bear that out. First, the list of costs, charges and expenses in clause 4(d) included 4(d)(vi) which reads:

"The cost of operating maintaining repairing servicing replacing and renewing all the lifts in the building save and except that no contribution shall be payable by those parties whose shops or spaces are not served by the lifts." (Emphasis supplied)

Secondly, clause 4(l) provides:

"The owner of the shops in the lower basement, upper basement and the ground floor shall not in respect thereof be liable to contribute towards the maintenance and upkeep of the lifts."

30. The Lands Tribunal held that clause 4(f) would make no sense if effect was given to that argument. I have not understood why the Lands Tribunal reached that view. If the Lands Tribunal was saying that practical effect could not be given to that argument, I disagree. No problem arises even in connection with the apportionment of the costs attributable to the lift. That was pointed out by Mayo V-P in the course of argument. From the list of persons set out in clause 4(f), remove the persons not served by the lifts. Then add up the monthly contributions of the units which are left. The contribution to the costs attributable to the lifts will be the proportion which each of the remaining owners' shares bear to the remaining total.

31. Conclusion. I therefore agree that the appeal should be allowed. I would set aside the orders of the Lands Tribunal, and I would remit the case back to the Lands Tribunal for the Lands Tribunal to decide what sums are owed by which party to the other in the light of the court's judgments.

32. I wish to make one final comment. A transcript was obtained, at not inconsiderable expense, I assume, of the hearing before the Lands Tribunal. No reference was made to the transcript either in the skeleton arguments or in the oral submissions before us. That is not surprising since no evidence was called before the Lands Tribunal. The issue between the parties was decided on the basis of agreed facts. Those agreed facts had been set out in a document placed before the Lands Tribunal, and there could have been no disagreement on any appeal as to what the agreed facts had been. In those circumstances, I ask rhetorically: why was a transcript obtained? If there is a practice to obtain a transcript of a hearing in the lower court whenever an appeal is lodged, I venture to suggest that that practice should be discontinued. The time and expense of obtaining a transcript would only be justified if the transcript really is necessary for the disposal of the appeal.

Hon. Stock J:

33. I agree with both judgments and have nothing to add. I too would allow the appeal.

Hon Mayo VP:

34. The appeal is accordingly allowed and the case is remitted back to the Lands Tribunal for the purposes above indicated. Costs of appeal to Madam Li and costs of the hearing below also to her and costs of the action are reserved to the Lands Tribunal.