THE INCORPORATED OWNERS OF HIP WO HOUSE v. DAILY TREND LTD AND OTHERS

cacv 113/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 113 of 2004

(on appeal from LDBM NO. 95 of 2003)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from a judgment of HH Judge Yung dated 27 March 2004.  The respondents other than the 12^th respondent were ordered to pay to the applicant the amounts claimed as contributions under the deed of mutual covenant and all the respondents were ordered to pay interest on the sums and at the rates and for the periods specified.  At the conclusion of the hearing, the appeal was dismissed for reasons to be handed down which we now do.

Background

3.  The applicant is the Incorporated Owners of Hip Wo House (“the building”) which consists of 24 shops on the ground floor with 20 residential floors of 15 units each above.  The respondents are the owners of the shop units.  Extensive repair and renovation works were carried out in 2003, in part to comply with building orders issued by the Building Authority concerning the common drains and exterior of the building.  The dispute between the parties related to the method of calculating the contributions in respect of the cost of those works totalling $5.98 million.

The deed of mutual covenant (“the DMC”)

4.  The DMC dated 1 February 1967 provides for two different methods of calculating contributions depending on the expense in question.  Expenses that fall within clause 10 are borne by the owners in proportion to the number of undivided shares in the building for the time being vested in them (“the undivided shares method”).  Clause 10 reads:

“10.      The following expenses namely (a) the Crown Rent in respect of the said premises and (b) The cost of keeping in good and tenantable repair and condition the foundation, the side walks, main walls, supports, beams, gutters, fences, drains, well, water tanks, electric pumps, pipes, conduits and all plumbing fire fighting and other apparatus (if any) intended for the general service of the said Building (except as regards damage caused by or resulting from any act or default or negligence of any of the owners for the time being of the said premises and the said building their respective servants or agents or tenants or licensees for which damage that one of the owners shall be solely responsible and so that each of the owners shall be responsible for the acts and defaults of their servants agents tenants and licensees) 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.”

5.  Clause 9 provides for costs and expenses that fall within clause 8 to be borne by the owners in accordance with the ‘service fee table’ attached to the DMC (“the service fee method”) subject to certain provisos.  Such costs and expenses are identified in clause 8 as:

“… costs and expenses for or in connection with the maintenance, operation, cleaning, repairing, services and apparatus of and other charges and expenses payable for or in connection with the said Building.  Such expenses shall include but not be limited to:-

  (a)    Rates for water consumed on the said Building, charges for electricity used in connection with the common pumps and the lighting for lifts corridors passages staircases, landings, and all other common areas of the said Building and the cost of keeping in good and tenantable repair and condition the common entrance-hall, staircases, landings passages and the lifts and the convenience thereof.

  (b)    Management fees.

  (c)    Remuneration for watchmen, cleaners, attendants and the like.

  (d)    The cost of garbage disposal.”

It is relevant to note that under one of the provisos owners of the shops are not required to pay or contribute to “any electricity or other charges for the lifts”.

6.  Under the DMC, 2309 out of 8824 (approximately 26%) of the equal undivided shares are attributable to the 24 shops on the ground floor and 6515 (approximately 74%) to the 300 flats.  In other words, the 24 shop owners bear 26% of costs incurred under clause 10.  Under the service fee method, the fee payable by the owner of a shop unit is 10/6848: the owner of a residential unit (depending on the size of the unit) therefore pays a service fee that is either 2 or 2.4 times that of the owner of a shop unit.  In money terms, the service fee method for calculating contributions is far more advantageous to the owner of a shop unit.

7.  The amount the applicant sought from each of the respondents was calculated in accordance with the following methodology.  The renovation/repair costs related to 11 items of work itemised in the tender document.  The applicant considered that by reason of the nature of the individual items of work and according to the DMC,

“   (a)    the price of following items should be contributed to by the owners in accordance with the undivided shares as provided in Clause 10 of the DMC:-

Items (brief description)	Amount (HK$)
2 (portion concerning external wall)	$1,190,000.00
3 (70% concerning external wall)	$280,070.00
5.1 and 5.2 (painting external wall)	$2,107,600.00
9 (drains)	$540,800.00
10 (water pipes)	$521,500.00
11 (common flush water pipes)	$88,000.00
12.1-12.5 (miscellaneous, relating to external wall, flush water tank, fences)	$463,000.00
Total:-	$5,190,970.00	(“Amount A”)

    (b)    the price of following items should be contributed to by the owners in accordance with the Service Fee Share as provided in Clause 8 of the DMC:-

Items (brief description)	Amount (HK$)
2 (portion concerning interior wall)	$13,800.00
3 (30% concerning interior wall)	$120,030.00
6 (interior walls and floors)	$317,700.00
7 (windows at staircases and corridors)	$9,500.00
8 (smoke doors)	$125,000.00
Total:-	$586,030.00	(“Amount B”)

”

The applicant considered the remaining items totalling $203,000 (Amount C) as “inextricably mixed” and since the ratio of Amount A to Amount B was 90% to 10%, Amount C was similarly apportioned and added to Amounts A and B respectively.  The net result was that approximately 90% of the expense fell to be calculated by the undivided share method.

This appeal

8.  In very broad terms, the primary issue is whether, on the true construction of the DMC, the whole of the renovation and repair costs fell to be apportioned by reference to the service fee method, and no part fell to be apportioned by reference to the undivided share method on the basis that clause 10(b) ought to be struck out for repugnancy.

9.  Clause 5 of the DMC required the owner or owners for the time being of each undivided share in the building to “observe and perform the covenants provisions and restrictions set out in the Third Schedule” to the DMC.  After cross-referring to clause 5, the third schedule proceeded to list out the particular covenants in paragraphs (1) to (11).  For present purposes, it would suffice to set out paragraphs (1) to (3):

“(1)      To pay a due proportion as provided in Clause 9 of this Deed of all costs, fee and expenses which may be or become payable for or in connection with the management, maintenance, cleaning, repair and servicing of the said premises and the said Building in accordance with the provisions of this Deed.

(2)        To pay a due proportion as provided in Clause 10 of this Deed of the Crown rent of the said premises.

(3)        To pay and discharge all existing and future taxes, rates, assessment and outgoings of every kind and description for the time being assessed or payable in respect of each shop or flat of which he is the owner and to indemnify the other owners from and against all liability therefor.”

10.  The thrust of Mr Leung’s submission was that paragraphs (1) to (3) of the third schedule covered all the expenses for which an owner was to be responsible and the omission of any specific reference to clause 10(b) was therefore deliberate or intentional such that it was not a covenant that fell within clause 5.

11.  Clause 5 containing mutual covenants by the owners is a conventional provision to be found in every DMC.  Clause 10 set out specific items of expenses to be borne by the undivided shares method.  Clause 10(b) constituted one such item of expense and the payment obligation was plainly intended to be enforceable and binding on all the owners.  The omission of any specific reference to clause 10(b) is not necessarily fatal to its enforceability: any inadvertent or accidental omission would have been saved by the concluding ‘wrap-up’ provision of the third schedule which reads:

“(12)    To observe and perform all the covenants conditions and provisions of this Deed.”

In my view, there is no question but that clause 10(b) would fall within paragraph (12).

12.  It was further submitted that clause 10(b) should be struck out as being inconsistent with paragraph (1) of the third schedule and because of the ambiguity an interpretation should be adopted that would not generate an unreasonable result.

13.  One of the cardinal principles of construction is that the document must be read as a whole in order to collect the intention of the parties and effect should be given to every part of it if at all possible.  No part should be treated as surplusage unless no sensible meaning could be attributed to it or if effect were to be given to it, it would clearly defeat the real intention of the parties.

14.  The “costs, fee and expenses” in paragraph (1) of the third schedule are referable to those specified in clause 8 of the DMC.  Although both provisions dealt with the cost of “repair” and “maintenance”, itis relevant to note that the “expenses” that form the subject matter of clause 10(b) could be described as those of a capital nature pertaining to the “structure” or “fabric” of the building.  By way of contrast, the “costs” that form the subject matter of clause 8 are, by and large, those of a recurrent nature, being day-to-day expenses.  As regards “the cost of keeping in good and tenantable repair and condition the common entrance hall, staircases, the landings, passages and the lifts and the convenience thereof” in clause 8 which could be said to be capital in nature, given the parts of the building to which that cost relates, being common parts of the building that are used by, and are largely for the convenience of, the flat owners rather than the owners of the shop units who occupy the ground floor only, it is wholly unexceptionable that the DMC should provide for that cost to be borne by the service fee method.  In my view, it cannot be said to be either unfair or unreasonable.

15.  In short, I do not consider that there is any inconsistency between clause 10(b) and paragraph (1) of the third schedule.  In my view, there is no reason not to give effect to the clear terms of clause 10(b) and the respondents’ challenge to that part of the allocation of renovation costs made by reference to the undivided share method must fail.

16.  Mr Leung’s fallback position was that the damage done to the external wall by the individual owners caused the building orders to be issued, and that 90% of the repairs to the external wall of the building was in respect of defects attributable to damage caused by the individual owners.  He submitted that the judge erred in not giving effect to the proviso in clause 10 of the DMC which required such costs to be borne by those owners.  What was being suggested was that 90% of item 2 of the tender document should be borne by the individual owners exclusively.

17.  Two building orders were issued on 19 December 2001.  The works ordered were:

“For common drains only

 Repair or renew the defective rainwater, waste, soil and vent pipe.”

“For exterior of the building

 (Including the canopies at 1/F and the underside of balconies at 1/F)

(a)        Remove loose cracked and otherwise defective concrete from the reinforced concrete structure of the building, clean existing exposed steel bars of loose rust and foreign matter, provide and securely fix in place additional steel bars as necessary and reinstate.  New concrete is not to be placed prior to inspection by the Building Authority.

(b)        Remove all loose and defective external rendering and internal plastering.”

It is to be observed that work on the drains could hardly have been caused by damage done by the individual owners.  As to work to the external wall, the description of the work does not shed any light on the question of how the defects arose.

18.  The court was shown photographs of some of the defects.  Mr Leung submitted that they were due to illegal structures having once been affixed to the external wall and, after their removal, no proper reinstatement work had been carried out, causing the concrete to loosen up.  Reference was made to various passages in the transcript as to that but those passages also dealt with damage caused to the exterior of the building in relation to lintels above the windows of the flats and damage such as rust caused by leakage from water pipes.  In my view, the individual owners could not have been responsible for defects relating to the lintels since these were part of the fabric of the building installed when the building was refurbished in 1994.

19.  The real difficulty in Mr Leung’s way is § 12 of the judgment:

“12.      … the Respondents failed to quantify the defects or the cost for their rectification.  The defects were trivial as compared to the scale of the renovation project and can be conveniently rectified by the contractor.  It has not been shown that these defects would inflate the overall cost of renovation.  I accept the evidence of the witnesses that the contract with the contractor was a lump sum contract and that the existence of these defects on the walls did not make any difference on the price.”

20.  Those are findings of fact.  Since this is an appeal from the Lands Tribunal, the appeal has to be on a question of law.  For the respondents to succeed, it must be shown that there was no evidence below to support the judge’s findings.  That Mr Leung was unable to do, quite apart from that fact that it was never put to the applicant’s witness that it was damage done to the external wall by the individual owners that caused the building order relating to the external wall to be issued and there was no evidence that 90% of the repair work required was attributable to damage caused by the individual owners.  There is no substance in Mr Leung’s fallback position which accordingly falls to be rejected.

Hon Stone J:

21.  I agree with the reasons for judgment of Le Pichon JA.