THE INCORPORATED OWNERS OF TSUI CHUK GARDEN v. EDENTOWN LTD

LDBM 303 OF 2004

 IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT Application No. 303 of 2004

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J U D G M E N T

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Background

1. The Applicant is the owners incorporation of a housing estate.  The main buildings in the estate are 14 residential blocks, a commercial block, and a kindergarten block.  The management committee prepared and approved a budge for the year 2004.  The respondent challenges the propriety of part of the budget.  For this reason the Respondent refuses to pay contributions to that disputed part of the budget.

Apportionment of Expenses in the Budget

2. The Applicant relies on Clause 14(e) in its preparation of the budget in question. This clause in effect requires the budget expenses to be divided into four parts, each of the first three parts containing expenses attributable solely to or solely for the following types of premises:

               (1)the Residential blocks;

               (2)the Commercial Development;

               (3) the Cark Parks;

and the fourth part containing expenses not so attributable to the first three types of premises.    An owner of a unit in each of the three types of premises is to contribute to the corresponding part of the budget according to the number of shares allotted to the unit.  The Respondent being the owner of all the shares allotted to the units in the Commercial Development shall contribute to the whole of the second part of the budget.   

Three Challenges to Expenses Apportioned to the Commercial Development

3. In dispute are six items of expenses and one item of income in the second part of the budget. The primary contention of the Respondent is that it owns the entire Commercial Development and its own property requires no management services of the Applicant and there is nothing for the Applicant to manage for the Commercial Development. Furthermore the Applicant has no authority to manage the property of the Respondent.  Further and alternatively, the Respondent contends that none of the items of expenses in the second part of the budget is attributable solely to or solely for the benefit of the Commercial Development (whether or not the Respondent owns its entirety).  Apart from these contentions Mr. Lam, raises a short and fundamental point. He argues that the Applicant is not entitled to apportion costs or expenses.   

The Fundamental Point---No Apportionment Allowed

4. It is convenient to deal with the fundamental point first. Each of the six items in the second part of budget represents the apportionment of total costs in obtaining services of its kind from service providers serving not only the Commercial Development but other premises as well.  The relevant contracts or contracts to be are lump sum contracts. These contracts do not provide a breakdown corresponding to the apportionments made by the Applicant.  They are only apportionments worked out by the building manager and approved by the management committee. 

5. Mr. Lam argues that Clause 14 does not allow the manager to apportion such costs so as to attribute the resulting apportionments to the Commercial Development. He submitted that as the balance of those bills`      are attributed to premises other than Commercial Development it must follow that the expenses for those services as represented by the total amount of the bills are not solely to or solely for the benefit of the Commercial Development.  Put in simple and other words, the argument runs like this.  If the whole of the bill of the service provider is not attributable solely to or solely for the benefit of the Commercial Development (whatever premises included), no part thereof, however small and however arrived at, can be said to be attributable solely to or for the benefit of the Commercial Development.  Furthermore the Applicant has no right to apportion the bill not even with the assistance of the service providers concerned.

6. The theme of this argument is the basis of cross-examination by Mr. Lam of the witness for the Application. Thus, Mr. Lam argues, if a cleaner is employed to clean the Commercial Development and other premises, he or she does not perform a service attributable solely to or solely for the benefit of the Commercial Development, and therefore the expenses for his or her service is not so attributable.  Similarly, in the case of the contract for maintenance service for the two lifts, and the lump sum contract with the security company, neither of the two contracts specifies the costs or expenses attributable solely to or for the benefit of the Commercial Development.  Mr. Lam argues that if the whole bill is not for the benefit of the commercial development, no part of it can be attributed as solely to or for its benefit.

7. This interpretation of Clause 14 as contended by the Respondent is pedanticand ignores the reality and the nature of the DMC.  In interpreting clause 14 one should bear in mind the view of the contracting parties and the purpose the DMC is intended to achieve.  The owners and manager must have interpreted clause 14 to mean that building management expenses should be apportioned among different categories of owners with reference to the benefits conferred by the expenses on each category.  After all, this appears to be a fair and reasonable way of sharing management expenses.  This is also the intent of the DMC. Further, the manager, and in the instant case the Applicant, has a positive duty to do its utmost to do the apportionment.  The Applicant should not be deterred and definitely is not prohibited to do the exercise of apportionment. The narrow interpretation contended by the Respondent would lead to absurd results.  The argument applies to all of the first three categories.  Therefore if for the same type of service the Applicant is to enter into three separate contracts, each one for each category, there will be no need for apportionment and as a result the budget cannot be faulted on the ground of apportionment. On the other hand if the Applicant is to enter into one lump sum contract for the same type of services for the three categories, the budget will be faulted.  This cannot be right. It is not the intent of the DMC to require owners to contribute to management expenses according to manner of entering into contract with service providers and not according to actual benefits conferred on the owners’ property. I do not find any merit in this fundamental point raised by the Respondent.

Primary Contention---Right to Manage the Commercial Development---a Red Herring

8. That the Applicant has no right or requires the Respondent’s authority to manage the Commercial Development, the Respondent’s property is another pedantic argument of Mr. Lam.   The second part of the budget contains expenses spent on common areas and common facilities. The Applicant has not only the right but the duty to manage these common areas and common facilities. The relevant issue is whether the expenses are attributable solely to or for the benefit of the Commercial Development.  In this respect if the common areas in fact form part of the Commercial Development as alleged by the Applicant, the Applicant’s case would be stronger than if they do not. The primary contention of the Respondent is therefore a red herring, to say the very least.

The Extent of the Commercial Development

9. The definition of Commercial Development is given by clause 1(a):
    “ (Commercial Development) shall mean those parts of the estate intended for commercial use and situated on level 3, 4 and 5 of the Commercial complex and shall include the Kindergarten---”

10. The Respondent owns all the commercial units and the kindergarten block including the roof. These three types premises were the only premises allotted shares under the heading of Commercial Development in the first schedule to the DMC. Mr. Lam argues that one need not look at its definition in clause 1(a) as schedule one gives a clear and conclusive definition. 

11. This is the main reason for the Respondent’s contention that these units form the entirety of the Commercial Development within the meaning of the deed of mutual covenant (“the DMC”).   On the contrary the Applicant contends that theses units do not form the entire Commercial Development as there are               some premises within the category of Commercial Common Areas forming part of the Commercial Development relying on the definition in clause 1 of the DMC. Mr. Kwan, counsel for the Applicant, submits that the categories of premises specified in the definition clause are not necessarily mutually exclusive.

12. The purpose of the first schedule is to set out the allotment of shares to various premises in the estate. It is not intended to define what or what is not to be included in the Commercial Development. The extent of the Commercial Development must be ascertained in the context of the DMC.  Looking the appearances of the term “Commercial Development” in various provisions of the DMC, one can see this term serves two useful purposes. One is for allotment of shares to various premises. Schedule one serves this purpose.  The other is for determining the shares of management expenses in the manner provided in Clause 14. These two purposes are also inter-related.   The amount of contribution each owner has to make depends on two factors, firstly which category his units fall into, and the number of shares allotted to his units.  The spirit of clause 14 is to apportion management expenses according to the benefit accorded to the units of the owner. The services as represented by these expenses need not be done physically and actually on the owner’s property before he is liable to contribute to it.  For instance, looking at requirement of the first part of the budget, the Residential Owner of a single unit in a Residential Block has to contribute to the management expenses relating to the common area and facilities within the block. The sentence structure of the requirement of the second part of the budget requirement in Clause 14(e) is similar. Therefore it suggests or at least permits an interpretation that Commercial Development does not comprise only of Commercial Units as contended by the Respondent. It is necessary to look at, as contended by Mr. Kwan, the definition clause.

13. Firstly it should be noted that in Clause 1 the word  “parts” and not “units” is used. The meaning of the term “unit” is given in another part of the Clause 1. It means among other things premises with shares allotted to them. Therefore definition of Commercial Development in clause 1 does not rule out the inclusion of premises which have not been allotted any shares. 

14. Whether the definition in clause 1 intends to include such parts other than the Commercial units, depends obviously whether there are in fact such part intended for commercial use.

15. Those parts of estate which should be included as Commercial Development as contended by Mr. Kwan fall into other categories as well. I accept his submission that the categories of premises need not be mutually exclusive.  Mr. Lam disputed strongly that these part are intended for commercial use.  His argument seems to be that they are not actually put in commercial use.

16. Examples of these parts are stairs, lifts, the plaza (which was the open space between the commercial complex and the kindergarten) etc. No doubt the residents of the estate has access to these parts.  For instance residents may use the stairs to short-cut the way home or to gain access to the roof or to the management office.  From time to time residents in fact with the permission of the Applicant hold various activities in the plaza. The term commercial use must be given its ordinary meaning and in the context of the DMC and the management of a composite estate like the one in the instant case. Furthermore Mr. Kwan is right in pointing out that the intended use of the premises and not the actual use should be considered.  Looking at the lay-out of the estate and the design of the commercial block and its design for pedestrian circulation both within and through it, I draw the conclusion that these parts are intended for commercial use.

17. Bearing all the above factors in mind I come to the view that the true meaning of the term Commercial Development in Clause 14(2)is given by Clause 1 and its extent covers those parts as contended by the Applicant.

Expenses Attributable Solely to or for the Benefit

18. The Respondent contests strongly the reasons given in arriving at the result of the apportionment exercise. Mr. Lam submits that these apportionments are arbitrarily made. I do not agree with Mr. Kwan that it is merely a budget and if anything is wrong it can be put right when the final accounts are to be made up. Generally it is true that a budget is only a forecast of expenditures to be incurred. This is an estimate of quantum and the Respondent have to prove that it is plainly wrong. However in the instant case the Respondent is contesting not only the quantum but also the liability to pay according to the apportionment formulas. There is nothing to indicate that future adjustments to these formulas would be made when the final accounts are made up. To date the Applicant still maintains the formulas are correct.  Under these circumstances the Respondent has every right to challenge the validity of the budget on the ground that these formulas are contrary to the provisions of the DMC. The fact that if the contention of the Respondent is upheld other owners may complain in a similar way is quite beside the point. Equally the Applicant cannot say that if the budget is adjusted the Respondent may end up paying more. Be that as it may, there is no evidence to that effect. The burden of proof is on the Applicant. The Respondent need not prove that. The Respondent has a legitimate interest in having a budget prepared according to the provisions of the DMC.  This interest does not depend on the prejudice to its actual and immediate pecuniary interest.   Applicant has to get the formula right at the time of the budget taking into account all known circumstances and seeking professional help if appropriate.    If the formulas so arrived at is reasonable, the budget cannot be faulted.  This general principle should be applied in assessing the correctness of the formulas adopted to work out the apportionments resulting in the six disputed items.

19. Item 1-security services: This represents the costs of two shifts of security guards posted near the loading and unloading bay. The Applicant attempts to justify this on the ground they are there to oversee the operation of the loading and unloading area. I have no doubt about that this is one of their duties. Mr. Lam makes several points of attack on the formula. Without disrespect to him, I do not find any merit in any but one of them. He manages to establish that these two guards are performing duties other than for the benefit of the Commercial Development.   From the evidence of the Applicant’s witness, and looking at the location of their guard post which is at the vehicular entrance of the estate, I have come to conclusion that a substantial part of their service is for other parts of the estate. The imputed costs for having post these two guards comes nowhere near the amount which can be said to be attributable solely to or for the benefit of the Commercial Development. The formula adopted in arriving at this item is plainly wrong and not supported by evidence. I cannot see what other amount should be apportioned to be included in this part of the budget or what the correct formula should be.  None has been suggested by counsels.  The Applicant should have considered engaging professionals in working out the correct formula if the management company is not up to the job but intends to make the apportionments. This it has done.  That being the case this item should not be so included in the second part of the budget.

20. Item 2-cleaning:  This item represents the imputed costs of a cleaning service provided to the part of the Commercial Development not owned by the Respondent and the loading and unloading area. Mr. Lam insists on arguing that the services are not for the benefit of the Commercial Development because the residents are among those who littered the areas. Who littered the place is irrelevant. It is the duty of the Applicant to clean up that part of the Commercial Development. Cleaning up that part of the Commercial Development is for the benefit of it not for the benefit of the persons who littered the place.  If you invite guests to your house and they made a mess of it, you would clean it up and it can be rightly said it is for your own benefit and not for the benefit of your guests. I find no merit in this argument. It is reasonable for the Applicant not to take into account who actually littered the place.  As to loading and unloading area, it is intended for the use of commercial units. Cleanliness is solely to and for the benefit of the Commercial Development. The fact that other visitors, including residents of the estate, may use the loading and unloading area is not relevant. Even if it is relevant, the Applicant is reasonable in not taking it into account because the adjustment, if any, would be minimal if any.

21. Item 3-contractor maintenance: This represents 4/5 of the maintenance costs of the two lifts in the commercial complex. Clearly owners of other categories  use them by virtue of their right as owners. The residents use the lifts to go to the tennis court. The car park owners use these lifts to get out and into the car park. The apportionment is clearly an arbitrary one. I cannot see what other apportionment is appropriate and none has been suggested to me. This item should not have been included in the second part of the budget.

22. Item4-repairs: This represents an estimate of the repair costs for the part of common areas which I find to be part of the Commercial Development.  This is an off hand estimate of the Applicant and no details are provided. However this is only an estimate of quantum which the Applicant is entitled to make. In case of an over-estimate, the surplus will be put in reserve fund. This is only a small amount and judging from the size of the area involved, the age of the building, this sum is not plainly excessive. It is reasonable for the Applicant to make a budget of that sum as a matter of common sense. This item is properly provided for in the second part of the budget.

23. Item 5-sundry expenses : The Respondent has consistently enquired into the nature of this item. No explanation has been given and not even at the trial. I cannot see any justification of the provision of this item in the budget despite the small size of it.

24. Item 6-remuneration to the Manager:- No formula or explanation for the apportionment is offered. However the Applicant has taken into two main factors into account. Firstly the two security guards above –mentioned are solely for the benefit of the Commercial Development. Secondly that the letting out of motor-cycle spaces are solely for the benefit of the Commercial Development. The Respondent contends that the rental income form motor-cycle owners should not be credited to it.  The rental income so credited far exceeds this items of manager’s remuneration. In view of this and in view of my finding in relation to the security guards, this item should not be in the budget. In any event the question has become academic.

Orders

25. The budget is fundamentally wrong particularly it second part, as far as the Respondent is concerned the budget cannot be used as a basis for claiming the contributions in question.  The claim by the Applicant is dismissed with costs to the Respondent on High Court Scale with certificate for counsel. The  costs order nisi be made absolute in 6 weeks.

The Applicant: represented by Mr. Thomas Kwan instructed by M/S Herbert Tsoi & Partners

The Respondent: represented by Mr. Allen Lam instructed by M/S Ng, Lai & Chan