LONG SOURCE INDUSTRIAL LTD v. GUARDIAN PROPERTY MANAGEMENT LTD

LDBM 63/2013

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT APPLICATION NO. 63 OF 2013

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J U D G M E N T

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1. The disputes in the present application arose from common parts being converted for private use and common facilities being altered within the development of Savanna Garden in Tai Po Kau, New Territories (“the Development”). The Applicant is an owner of a car park in the Development. It is noteworthy that as at date of hearing there is no owners’ incorporation formed. The Respondent was since October 2011 and still is the manager under a deed of mutual covenant executed on 18 October 1988 (“the DMC”). Its rights and obligations are set out in the DMC and a management agreement which took effect on 1 October 2011 (“the Management Agreement”).

2. The Applicant complained that the Respondent had failed to perform its duty as manager to enforce the DMC in particular taking no legal actions to correct breaches committed by owners.  Relying on Clauses B(1), (j), (l), (v), (y) & (cc) of Section VI of DMC, and Clauses 5.1 & 8.1 of Management Agreement,it asks for an order for the Respondent to be compelled to take enforcement action including legal proceedings against owners of House Nos. 1-19 (“the Defaulting Owners).

3. The Respondent by its counterclaim asks for a declaration that the Respondent is entitled to use the management fund of the Development to pay the costs for running its defence and counterclaim in these proceedings (“the Funding Decision”).

The Application

4. It is undisputed fact that the Defaulting Owners were in breach of the DMC resulting in building orders being issued against the Defaulting Owners in 2008 (“the Building Orders”).  At the trial, the Applicant accepted that owner of House No. 8 had since January 2011 carried out rectification works and could therefore be taken as an exception.  The breaches as stated in the Building Orders include:-

(a)	extension of the rear garden which abuts a slope, and
(b)	alteration of a surface channel (“the Breaches”).

5. There is no dispute that the surface channel is a common facility under the DMC and unauthorized alteration of the same is in breach of Clauses 14 and 22 of Section V of the DMC.  There is also no dispute that the garden extension of Houses 8 to 19 amounted to trespass to the common areas in breach of Clause 12 of Section V of the DMC and s.34I of the Buildings Management Ordinance, Cap. 344.  It is also not disputed that as at the time the Respondent became manager, no rectification works were effectuated as a consequence of the Building Orders.

6. The Agreed issues regarding the Application and the Counterclaim are as follows:-

(1)	Whether acting reasonably by the Respondent is sufficient and good enough for discharging the Respondent’s duties imposed on the Respondent by the DMC;
(2)	Whether the Respondent has acted reasonably in the circumstances in light of the admitted facts regarding its performance of its duties imposed by the DMC in taking enforcement action against the Defaulting Owners;
(3)	Whether the Funding Decision is valid, lawful and proper; and
(4)	Whether the Respondent was entitled to rely on Section VI Part (B) Clause 4 of the DMC.

The Respondent’s case

7. The Respondent’s case is mainly that it had already taken reasonable steps in the circumstances to enforce the Breaches and it was therefore not in breach of its duties and obligations under the DMC.  The Respondent became Manager of the Development on 1 October 2011.  At the time, the Development had (since September 2007) been running at a deficit, and the first task of the Respondent was to turn that around.  In addition to the above, the Development had many other long standing problems pending resolutions and there were divided views on various issues among owners in the Development.  In any event it is of the view that taking out private civil litigation against the Defaulting Owner was not the only way to rectify the Breaches.

8. The Applicant wrote to the Respondent for the first time on 4 October 2011 informing it of the Breaches when it was just the 4^th day of its becoming Manager of the Development.  The Respondent made a reply on 18 October 2011.  Within a month of that letter in reply, the matter was brought to the Owners’ Committee meeting held on 10 November 2011 for discussion.  Suggestions were made that the Respondent should carry out overall assessment on unauthorized building works in the whole of the Development.

9. According to Mr Chu, manager of the Respondent, follow-up actions had been carried out in regard of the Breaches throughout 2012 and 2013 by the Respondent.  Such actions included making enquiries with the Defaulting Owners on progress of rectification works and they all expressed their willingness to rectify the problems with their own efforts.  On the other hand it had also written to the Buildings Department on 18 January 2013 to enquire about enforcement action to be taken by the authority if the Breaches continued.  On 24 January 2013, the Buildings Department informed the Respondent that it was handling the matter. On 20 February 2013, the Buildings Department wrote to the Respondent again and said it would continue to follow up on the Building Orders in question and would consider criminal prosecution if necessary.  Finally the matter of how to tackle unauthorized building works was discussed at the annual owners’ meeting held on 24 February 2013.

10. Less than 2 weeks later on the 8^th and 11^th of March 2013, the Respondent received written confirmations from Defaulting Owners’ solicitors that rectification works would be carried out by professionals (for Houses 2, 5, 7, 10, 11, 15, 17 & 19) in stages commencing on 11 March 2013.  For purpose of carrying out such works, there were applications for temporary work permits made on various dates between March and July 2013.  These applications concerned 16 houses, namely  Nos. 1, 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 15, 16, 17, 18, and 19. 

11. There was an Owners’ Committee meeting held on 13 March 2013 (the evening of the day these proceedings were taken out) in which the Applicant’s complaints had been reported and the Owners Committee was informed that the matter was now being handled by the Buildings Department and that some rectification works had already commenced on 11 March 2013.  It was recorded that the Respondent had advised the Owners’ Committee that the cheapest means to enforce the Breaches was to let the Buildings Department to handle.  According to the record of meeting, upon hearing the report, the Chairperson and the Treasurer reminded the Respondent that it was the duty of the Respondent to enforce the Breaches and as far as the Owners Committee was concerned, they would receive report from the Respondent but the Respondent need not consult their view on such matter. In fact, Mr Chu concededthat it was for the Respondent to decide whether to take legal action against an owner. It might have to report to the Owners’ Committee but the Respondent would not be bound by the decision thereof. 

12. It was submitted for the Respondent that in the circumstances that (i) Building Order had been issued and the Breaches were being monitored by the Buildings Department, (ii) the Defaulting Owners had clearly indicated or started to take action to rectify the Breaches and owner of House No. 19 had produced a report saying that the Breaches would not cause danger to the slope; and (iii) that there was no evidence to show that the slope was under immediate danger, the Respondent saw no need in taking immediate legal action.  It was further said by Mr Chu that it was literally impossible for the Respondent to resolve all problems of the Development (which had been accumulated for about 10 years) within a period of 2 years.  Moreover, it was considered by the Respondent at that time that “proper management” included (i) proper management of the funds available; (ii) avoiding unnecessary litigations; and (iii) avoiding wrongful litigations.

Discussion

Issue 1: Whether Acting Reasonably by the Respondent is Sufficient for Discharging the Respondent’s Duties

13. Mr Chain, counsel for the Applicant, highlighted the difference in the responsibilities of a DMC Manager and a management company under the employment of the “DMC manager” which quite often is the incorporated owners nowadays.  He submitted that in the event that there is no owners’ incorporation the owners committee has no authority to represent all owners and it has very limited power over the Respondent.

14. Mr Chain had referred the Tribunal to Clause j (iv) of Section VII of the DMC where it providesthat any resolution purporting to take away or abrogate or prevent the exercise of any of the powers of the Manager unless such resolution is passed by the owners of not less than 75% of the total number of undivided shares in the Land and the Development.

15. Mr Chain said that the Respondent’s duty is essentially contractual.  The nature of such contractual duty is a question of law, whether it was performed is a question of mixed fact and law, but generally performance has nothing to do with reasonableness, and performance does not mean taking reasonable steps to perform.

16. Mr Chain said that the Lo Yuk Chu’s line of authorities are not applicable in the present case.  Those cases did not decide that a manager’s duty is in all cases limited to taking reasonable steps.  Those cases were decisions on the facts and if any principle of law is established, it is only that a manager cannot be and is not the insurer of the common parts.  It is suggested that PC Fortune Co. Ltd v Incorporated Owners of Kwong Fu Building [2009] 2 HKLRD 787 at p.794 paragraph 29 is relevant.

17. There is no dispute that according to the DMC, the Respondent has the power to enforce the DMC including taking legal action.  Pursuant to Clause B(1) of Section VI of the DMC, the Manager shall be responsible for and shall have full and unrestricted authority to do all such acts and things as may be necessary or requisite for the proper management of the Development, and in particular the following which are relevant to the present case:-

(i)	Paragraph (1)
To keep all common facilities in good condition and working order
(ii)	Paragraph (cc)
To commence legal proceedings relating to the Development and to enforce the due observance and performance by the owners or any person occupying any part of the Development through under or with the consent of any such owner of the terms and conditions of the DMC.

18. As to whether taking reasonable step was sufficient in the context of satisfying a contractual duty, I have read the authorities referred to by the parties.  The Respondent relied on Lo Yuk Chu v. Hang Yick Property Management CACV 169/1996.  The Applicant relied on PC Fortune Company Limited v.  The Incorporated Owners of Kwong Fu Building.

19. The relevant passages in the DMC in Lo Yuk Chu, are in fact similar to those in the present case as could be seen in Section V Part B:-

“1. During the said term ... the Manager will manage the Building and the Land in a proper manner and in accordance with the provisions of this Deed and the Manager shall be responsible for and shall have full and unrestricted authority to do all such acts and things as may be necessary or requisite for the proper management of the Building and the Land.  Without in any way limiting the generality of the foregoing the Manager shall perform the following duties:-
...
(10)	To keep all the common sewers, drains, watercourses and pipes free and clear from obstructions.
...
(12)	To keep all Common Facilities in good condition and working order.”

20. When handing down judgment of  Lo Yuk Chu Power, Atg CJ as he then was has in paragraph 11 stated:-

“The overall duty imposed on the respondent by the Deed of Mutual Covenant is one of “proper” management.  Such management entails doing all that is reasonably required of a manager in the circumstances.  Things like keeping drains clear are specific aspects of a building manager’s overall duty.  But the mere fact that such a thing is listed without being qualified by expressions such as “take reasonable steps to” does not turn a manager into an insurer against the consequences of a drain becoming obstructed through no failure on its part to act reasonably as a manager should.” (Emphasis added)

21. In fact HHJ Leung has stated in PC Fortune that he saw no dispute as to the principles (see paragraph 29).  It was his view that the issue was whether the IO had failed such duty in that case.  Applying the test of reasonableness on those facts found by him, he set out his conclusion in paragraph 39:-

“In view of the history of the matter, I find the expediency in which the IO had acted upon awareness of the problematic condition of the roof fell short of what the Tribunal accepted in the factual circumstances of the李明月case cited by Mr Poon above.  I find what the IO had done or omitted to do was not reasonable in the circumstances.  Breach on the part of the IO is established.” (Emphasis added)

22. Applying the above principles, in my judgment, the duty of the Respondent under the DMC is not absolute.  This is the situation even though “reasonableness” was not added to Clause B(1) of Section VI of the DMC, it does not mean the Respondent could not decide, among options available to it, what action was to be taken in light of those circumstances faced by it.  In my judgment, acting reasonably by the Respondent is sufficient and good enough for discharging the Respondent’s duties.

Issue 2 : Whether the Respondent has Acted Reasonably

23. To be put in a nutshell, as appeared in the Notice of Opposition and evidence filed at a later stage, steps taken by the Respondent included the following:-

(i)	Made enquiries with the Defaulting Owners as to the steps being taken by such owners to ensure the compliance with the DMC and the Building Orders;
(ii)	Made enquiries with the Buildings Department as to the progress of the rectification works done by the Defaulting Owners;
(iii)	Reported to the owners the progress of the rectification works at meetings of the Owners’ Committee and at general meetings of all owners;
(iv)	Informed the Applicant of the progress of Rectification Works upon enquiries; and
(v)	Continued to follow-up the Defaulting Owners on the rectification works should be carried out with due dispatch.

24. It was submitted by Mr Chain that none of the above so-called “reasonable steps” except item (v) was related to enforcement of the DMC, rather all of the so called reasonable steps are excuses for not enforcing the DMC.  Upon a closer look at the evidence of Mr Chu it showed that they were no more than writing letters to the Defaulting Owners to enquire about the latest situation of the Breaches, they were not even warning letters. 

25. Mr Chain submitted that it is clear the Respondent had done nothing notwithstanding a letter from theChairlady dated 29 January 2013 urging it to take enforcement action. Mr Chain said that the Respondent’s attitude was that it would just leave the matter to the Buildings Department to enforce the Building Orders.  He saidthat this cannot be sufficient reasonable steps even if the Tribunal accepted that reasonable steps would be good enough.

26. Mr Chain said that events showed that leaving it to the Buildings Department was clearly insufficient.  As could be seen, up to the day of trial rectification works had not yet been fully done after a lapse of more than 2 years since these proceedings, and over 7 years since the Building Orders were issued.  He said that this was unacceptable when the Breaches involved were not just unauthorized building works they in fact amounted to trespass into the Common Areas and alteration of a Common Facility.  He said that injunctive relief is necessary in the circumstances.

27. To determine this issue, the whole of the circumstances must be considered.  The power and duties of the Respondent as the DMC Manager is governed by the DMC and the Management Agreement in the present case.  Pursuant to Clause A(3) of Section VI of the DMC the Manager shall be bound by and shall observe and perform all of the conditions, duties and obligations provided in the DMC.  Further pursuant to Clause A(2) of Section VI of the DMC, each owner covenants not to enforce the terms of DMC otherwise than through the Manager unless the Manager shall be in breach of the provisions of the DMC.

28. At the trial, the Applicant focused its complaint on the Respondent’s failure to take legal action 18 months after it had been notified of the Breaches.

29. Among other incidents the Applicant relied on a letter from the Applicant itself and another from the Chairperson of Owners’ Committee urging the Respondent to take stringent enforcement action including legal action.  The Chairperson of the Owners’ Committee had also stated the reason why she had to ask the Respondent to commence legal action as it was the duty of the Respondent to do so under the DMC.  These exchanges took place in January 2013.  On the face of it, nothing effective happened in 2012 except for follow-up works.  It seemed to be for this reason that the Applicant had to write to the Respondent and also to the Chairperson in January 2013.  However such follow-up works bore fruit by early 2013.  There were letters from legal representatives of some of the Defaulting Owners.  At about the same time there was correspondence from the Buildings Department by which the Respondent was given to know that prosecution would be considered if necessary.  The Respondent reported this at an Owners Committee meeting.  I am of the view that the Breaches had been taken seriously by the Respondent and not just being left unattended.

30. This Tribunal heard evidence from two officers of the Buildings Department subpoenaed by the Applicant.  Their evidence was not challenged by either party.  In gist, this Tribunal was given to know that all except two (House Nos. 2 and 8) of the Defaulting House Owners had been prosecuted.  As a result of subsequent site inspections carried out in 2014, the Buildings Department confirmed that owners of Houses 2, 3, 4, 5, 6, 7, 9, 10, 15, 16, 17, 18 and 19 (13 houses) were certified to have complied with the Building Orders issued in 2008.  Three houses were found to have rectified the Breaches leaving some unrelated minor breaches to be tidied up (House Nos. 1, 8 and 11).  There are however 3 houses which the Buildings Department found to have ignored the Building Orders and as far as they knew no rectification works had ever been started until trial day (House Nos. 12, 12A and 14).

31. I am of the view that as at the time of March 2013, what the Respondent had in hand were (i) letters from the Defaulting Owners to the Buildings Department saying that they were commencing rectification works; (ii) applications to the Respondent for permits to commence such rectification work and (iii) replies from the Buildings Department saying that they would consider taking out prosecution as and when necessary (in fact prosecution work had commenced since 2012).  In the circumstances, I do not accept the complaint that the Respondent had failed its duty because no legal action had been taken is substantiated.

32. The Applicant’s case was that the Respondent should have taken legal action against those Defaulting Owners before March 2013 as it was said that the Buildings Department had failed to do their job in taking enforcement action.  The Applicant was of the view that prosecution undertaken by the Buildings Department had been proven, through passage of time, to be ineffective as until day of trial there were still Defaulting Owners not doing anything at all.  I could not agree.  Although owners of 3 houses had ignored the Building Order, I am of the view that the Buildings Department had accomplished satisfactory results as far as the Breaches were concerned from 13 houses as rectification works were certified to have been completed since August 2014 with 3 still had minor breaches not concerning the Breaches.  I am of the view that throughout 2012 and in particular early 2013, the Defaulting Owners appeared to be co-operative.  I also noticed a few letters issued on divers dates in September, October and November of 2013 by which the contractors representing their respective clients, a total of 16 Defaulting Owners, reported to Buildings Department on the progress of works with estimated date of completion of works.  Such correspondence showed that most of the rectification works had commenced with some completed in 2013 and they were eventually certified by the Buildings Department in 2014.

33. I am of the view that to decide whether the Respondent had failed its duty the circumstances in March 2013 are to be considered and not events which happened afterwards.  The result of the enforcement action taken by the Buildings Department was set out above in answer to the Applicant’s assertion that such action was not effective.

34. At this juncture it would be helpful to read the Building Ordinance to see the consequence of a conviction for non-compliance with a building order.  Mr Lam representing the Respondent has referred me to section 24(3) and (4) of Building Ordinance (Cap 123) where the provisions provide that if a building order is not complied with, the Buildings Department is empowered to demolish those offending structure and recover costs from respective owners.  Further section 40 (1BA) of Cap 123 provides for penalty for not complying with an order issued under section 24(1):-

“40 (1BA) Any person who, without reasonable excuse, fails to comply with an order served on him under section 24(1) shall be guilty of an offence and shall be liable on conviction—
(a)	to a fine of $200,000 and to imprisonment for 1 year; and
(b)	to a fine of $20,000 for each day during which it is proved to the satisfaction of the court that the offence has continued. ”

35. Under the provisions set out in the above, the Director of Building is empowered to take effective legal actions.  I do not agree that the consequence and effect is inferior to that of private civil proceedings including contempt proceedings. I could not agree with Mr Chain’s saying that a person convicted of contempt by a civil court would be released from custody only when the contempt is purged.  It would depend on circumstances.

36. Having considered the whole of the circumstances in the present case, I accept that the Respondent had already taken reasonable steps and in fact I find that it had done what was reasonably necessary at the time these proceedings were taken out.  I do not agree that as at the time of March 2013, the Respondent had failed its duty to take enforcement action in particular for failing to take out legal proceedings against all Defaulting Owners.  In my view, it would only be unreasonable if upon receiving letters from professional representatives of the Defaulting Owners in early 2013 that they would commence rectification works and then the Respondent turned around and took legal proceedings against them without giving them time to carry out the rectification works as planned. I do not accept the submission of Mr Chain that the Respondent was only leaving the matter to the Buildings Department.  One must not ignore the fact that there were such correspondences from the Defaulting Owners in early 2013.  I accept the submission on behalf of the Respondent that it also owes a fiduciary duty to the owners to manage funds of the Development properly.  I am of the view that it had undertaken what was reasonably necessary to do in enforcing the Breaches by approaching the Buildings Department in the light of plans on rectification works submitted by the Defaulting Owners as at March 2013.

37. As mentioned above, although the Applicant sought a relief to order the Respondent “to take such actions including legal action against the Defaulting Owners” in its Notice of Application, it turned out that what the Applicant aimed at was legal action only.  In the light of my findings, and having considered the whole of the circumstances, I do not think an injunctive order is warranted.  As to the Defaulting Owners of Houses No 12, 12A and 14, the Respondent shall decide what action is most effective in the circumstances as at present.  A close monitor on the action of the Buildings Department would be helpful in deciding when and whether private legal action is necessary.

Counterclaim

38. As mentioned, the Respondent by its counterclaim asks for a declaration that the Funding Decision is lawful i.e. that the Respondent is entitled to use the management fund of the Development to pay the costs for running its defence and counterclaim in these proceedings.

39. Mr Chain said that the Counterclaim must fail because the Respondent is asking for a declaration by which interest of all owners in the Development would be affected but no other owners had been joined in these proceedings nor did the Respondent issue the Counterclaim by representative action.

40. I agree with Mr Chain on this point.  No owners other than the Applicant had a chance to be heard on a declaratory order which would be binding on them if granted.  The Applicant when “challenging” the Funding Decision was only speaking on his own behalf and nobody else.  Asking for a declaratory relief affecting interest of all owners in the Development is inappropriate.

41. I also doubt if the declaration would serve any useful purpose.

42. HHJ Lam, as he then was, has said in 曾婉玲對兆隆苑業主立案法團LDBM 199/2001 that declaratory relief would be granted if it served a useful purpose:-

“A well established reason for a court to refuse to grant declaratory relief is a situation where the exercise does not serve any useful purpose. The principle is summarized in Zamir & Woolf, The Declaratory Judgment, 2nd Edn., at Para.4.087, ‘If it can be shown that a declaration would not serve any practical purpose, this will weigh heavily in the scales against the grant of declaratory relief. If, on the other hand the grant of declaratory relief will be likely to achieve a useful objective, the court will be favourably disposed to granting relief. The question of whether or not any useful purpose would be served by granting declaratory relief is therefore of prime importance in determining how discretion should be exercised.’”

43. As at this stage there was no action taken by the Applicant causing or threatening to cause any loss or damage to the Respondent or other owners subsequent to the Funding Decision.  As could be seen from the evidence there was no indication from the Applicant that he was to resort to legal action to resolve their differences.  In fact what the Applicant had said in the emails was to ask the Respondent and the Chairman of the Owners’ Committee to let all owners know about its reply to the emails, if any.  This cannot be said to be unreasonable since the Funding Decision was circulated to all owners by way of an open letter.  The wordings in the three emails addressed to the Chairperson of the Owners’ Committee and the Respondent are as follows:-

(i)	email dated 29 March 2013
	“…..因此（佳定文件SG/L/019/13 日期：22/3/2013）實與BOM/34L法例可能有不符！SG/L/019/13文書、是否真實？若是真實、請派發｢該文書｣各業戶，因涉及各業戶的財政支出。 如有錯或失實，等候葉偉樑主席公開回覆賜教。 本人並不是「法律界人仕或工作者」，只是以「一般法律常識人仕」、作交流與分享。”
(ii)	email dated 1 April 2013
	“請葉主席僅慎署理「佳定物業管理有限公司函件SG/L/019/13」要求的事項，請公開回覆眾業主關注此事。”
(iii)	email dated 2 April 2013
	“Mr Jerry Yip 先生（未參與委員會工作）2010年閣下曾發出三封函件有關LDBM 120/2010訴訟事宜，內容非常詳盡。「勇氣」與「公義」並重，直得眾業主敬重的律師。 至今LDBM  63/2013 「佳定」與「鎮隆」的訴訟事宜，祈望閣下（21屆業主委員會主席）對各業戶作出公平、公正、公開、的處理SG/L/019/13「佳定」的訴求。”

44. According to the Respondent, the reason for taking out the Counterclaim is that if the issue is determined, the Respondent would “be able to focus on the day-to-day management of the Development”.  In my view it is not a “useful purpose” contemplated.  I agree that having to be engaged with a person who does not agree with the course of action taken by the management is energy-straining, time-consuming and costly.  It is however part of the management duty.  It is my judgment that there is not a good cause for the Respondent to issue the Counterclaim with a view to stopping the Applicant from further challenging it especially when the order sought would affect the interest of other owners who are no party to these proceedings.  The Counterclaim is therefore dismissed.

Conclusion

45. For reasons I have set out in the above, I find that the Respondent had done what was reasonably necessary to enforce the Breaches.  I do not think an injunctive order is warranted.  The Application is dismissed.  For reasons set out in the above, I am not satisfied that a declaration on the validity of the Funding Decision should be made at this stage, the Counterclaim is dismissed.

46. Costs normally follow the event.  I order that the Applicant do pay those costs of the Respondent in respect of the Application with certificate for counsel.  Costs of the Counterclaim be borne by the Respondent with certificate for counsel. Such costs are to be taxed at District Court Scale if not agreed.  This is an order nisi to become absolute if no application is taken out to vary the same within 14 days.