PROMISING REALTY LTD. v. LAM WAI SHAN

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J U D G M E N T

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Clough, J.A.:

1. The two defendants in four consolidated action appeal from the order of His Honour Judge Roy made the 1st June 1988 in the District Court whereby they were ordered to pay the plaintiff company the amounts claimed by it as arrears of management fees interest, collection fees and costs payable to the plaintiff as the manager of the Walton Estate in Chai Wan under a Deed of Mutual Covenant dated the 24th December 1982 ("the Deed").

2. The defendants are the owners of four leasehold shops, namely Nos. 29, 30, 31 and 32, on the ground floor of Block 'A' of the Walton Estate. Three of the shops. namely Nos. 29, 30 and 32 are owned by the same defendnat, Mr. Lam Wai Shan. The fourth shops, No. 31, is owned by the other defendant, Mr. Yau Kwan Ying. Shops Nos. 29, 30 and 31 each comprise a gross area of 169 square feet. Shop No. 32 comprises a gross area of 175 square feet.

3. The estate comprises our blocks of residential Flats standing over two linked podia Under the podia there are parking spaces and on two storeys there are commercial premises. The defendants shops are part of the 50 commercial units of varying size situated on the ground floor of Block A. On the mezzanine floor of the same block there is a restaurant. On the ground floor of Block 3 there are 90 commercial units and on the first floor of that block them are 127 commercial units.

4. It is common ground that no issue arises regarding the enforceability of the Deed as between the parties or regarding the powers of the plaintiff to enforce the due performance of the owners obligation under the Deed to make their proper contribution towards the management out goings. The relevant provisions regarding the management of the estate are contained in Part VI of the Deed which is subdivided into Parts A to F. Parts D, E and F contain provisions which are material to these proceedings. The provisions in Part D deal with the assessment of the management and other expenses relating to the estate. Under clause 1 of Part D the plaintiff:

"shall prepare an annual budget showing the estimated expenditure for the ensuing year for the purpose of determining the contributions payable by the Owners."

5. Under clause 2 of Part D the year follows the calendar year for the purposes of the annual budget. Clause 3 provides that the budget shall be the plaintiff's estimate of the sum necessary to meet all the costs of managing maintaining and repairing the estate Clause 5 requires the plaintiff to make the annual budget available for inspection in its offices am the estate and entitles s any owner or his representative to a copy thereof on payment of a reasonable copying fee.

6. Under clause 6 of Part D each annual budget is required to be divided into four parts containing estimated management expenses which are attributable (a) "solely to all the Owners of the Estate and shall be apportioned to the Owners of the Estate proportionally, according to the number of their undivided shares in the land (b) "solely to or solely for the benefit of the Owners of the Commercial Development and shall be apportioned to the owners of the Commercial Shares proportionally according to the gross floor area" of the unity held by them; (c) "solely to or solely for the benefit of the Owners of the Pesidential Development" and apportioned as therein Provided; and (d) "solely to or solely for the benefit of the Owners of the Car Port" and apportioned as therein provided.

7. Clause 6(e) gives the absolute discretion to attribute management expenses to any of the categories mentioned in clause 6(a), (b), (c) and (d). Under clause 6(f) the Plaintiff is empowered to require an owner to may additional charges with regard to special use of his premises. The effect of clauses 6(g) and 7 is to empower the plaintiff to make up a deficiency by producing a revised budget and adding to the amount of the owners contributions.

8. The provisions in Part E of Part VI are concerned with the recovery of management expenses. Clause 1 provides as follows:

"1.    Unless the Manager shall decide otherwise, each Owner shall on the first day of each and every calendar month pay to the Manager a sum representing one twelfth Of such Owner's liability estimated to be payable in Clause 1 of Part D of Part VI for, the purpose of making contribution to the budget for that year."

9. The remaining provisions of Part E are concerned with the Imposition of a liability on any owner to pay interest and a collection charge to the plaintiff if he fails pay any amount payable by him under the Deed within 7 days of the amount falling due, and with the entitlement of the plaintiff to sue for and enforce the payment of such amount together with solicitor and own client costs.

10. Clause 1 of Part F requires the plaintiff to keep proper accounts of all money collected by it under the Deed and of all expenditure thereunder on a monthly and annual basis. These accounts are required to be audited and posted on the public notice board of the estate.

11. By its particulars of claim in each of the actions the plaintiff claimed that in breach of his obligations under the Deed each of the defendants has failed to pay his monthly contributions.

12. The pleadings in each action are in the same form mutatis mutandis. The plaintiff's claim relates to the same two periods for each shop. The first period is from the 1st October 1983 (when the defendants' liability first arose) to the 31st January 1987. The second period is from the 1st February to the 31st August 1987. The rite of charge is slightly higher for all the shops during the second period. The total sum claimed by the plaintiff against the respective owners of Nos. 29, 30 and 31 in respect of each of their shops is $23,247.16 with interest and costs. In the case of No. 32 the total sum of $24,260.24 with interest and costs is claimed. The higher claim in the latter case is due to the larger area comprised in No. 32.

13. The writs and particulars of claim were served by post, the date of posting being the 27th October 1987. The defences, which were in common form mutstis mutandis, were filed on the 13th November 1987 before discovery had been made by the plaintiff. All the defences were signed by the individual defendants and had not been professionally drawn. There was no denial of non-payment by the defendants who disputed the plaintiff' claims on three grounds which can be summarised as follows:

14. The plaintiff had failed "to show and prove to the satisfaction of the defendant":

(1)     That any budget or expenditure in respect of the management of the estate had been properly made in accordance with the provisions of the Deed.

(2)     That the management fee claimed had been properly rated and fixed in proportion to the shares of the estate or the "volume of area" of the estate.

(3)     That the management fees shared by all the owners were rated to be shared at the same rate "with no difference between unit owners."

15. Each defence included a counterclaim for an unquantified loss of "Money Gaining Time" in handling the action which was pleaded to have been wrongfully begin on the footing that "before the Management Fee is proved to be properly and lawfully rated and demanded the Plaintiff should have no right to recover anything through Legal Proceeding."

16. On the 30th December 1987 the four actions were consolidated. On the 16th March 1988 the defendants sent a registered letter to the plaintiff's board of directors reminding them of the Plaintiff's obligation under the Deed to produce an annual budget and accounts relating to the management and other expenses. In that letter the defendants alleged that the ground for the refusal by the defendants to meet the plaintiff's claims was that:

"you, as the party to demand and as the Manager of the Estate fail to prove to our satisfaction that the Management Fee so demanded were property made in accordance with the provisions of the Deed of Mutual Covenants especially on the rate and share of the Management Expenses."

17. There followed a demand in the letter for copies of specified documents to be produced at the defendants cost. The defendants wanted copies of all the relevant budgets and annual amounts. They also demanded the plaintiff's records showing how the plaintiff had "properly" informed the defendants of their liabilities under the Deed. This information was said in the letter to he sought for the consideration of the defendants in order to settle the pending actions which were due to be heard in May 1988.

18. Omitting the penultimate paragraph which is not material, the letter concluded as follows:

"Since we do strongly believing (sic) that we are not properly informed on the details of subject as claimed in the above actions it can he firmly said that Cause of the Actions are on your part.

Upon knowing that the amount so claimed were properly rated, we will pay with no necessity to go through Court Proceeding.

Subject to your discontinuation on the above Actions, we will waive our Counter-claim against you.

This notice will be submitted to the Court as Evidence in the above Actions. Early settlement will be benefit to both parties.

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Looking forward to a fruitful settlement as soon as possible."

19. There being no response to the defendants' letter dated the 16th March 1988, they repeated the contents of it in a subsequent letter dated the 11th April 1988 to the plaintiff .  By their reply dated the 20th April 1988 the plaintiff's solicitors pointed out that this was the defendants' first request for the annual budgets and accounts which were available at all times for inspection in the plaintiff's solicitors' office, that the plaintiff was always prepared to provide copies upon payment of charges pursuant to the Deed and that the budgets and other documents had been posted in the estate.

20. The letter concluded with an indication that the plaintiff's solicitors would be serving the plaintiff's list of documents and that thereafter the defendants would have rights of inspection. On the 19th April 1988 the plaintiff's solicitors had issued a summons applying for leave to file their list of documents out of time. This application was granted on the 3rd May 1988 when the plaintiff was given 7 days to file its list of documents. The list was filed on the 5th May 1988. It included copies of the relevant annual budgets and accounts, a floor plan of the estate's shopping arcade and a list showing gross areas of individual units which was confined to the 50 units on the ground floor of Bock A and the restaurant on the mezzanine floor of that Block. On the 14th May 1988 Messrs. B.C. Chow & Co. filed their notice to act for the defendants and filed the defendants' list of three documents.

21. When the trial began two days later on the 16th May 1988 the defendants were represented by counsel, Mr. Alexander Wong. On his unopposed application the defendants were given leave to amend the defences by deleting the counterclaim and by changing the wording of the second ground for disputing the plaintiff's claims so as to plead in each action that the plaintiff had failed "to show and prove to the satisfaction of the Defendant" that the management fee claimed was:

"properly rated and fixed in proportionate (sic) to the shares of the Estate and/or gross floor area of the estate and/or unit in question in accordance with Part VI, Part D clause 6(a) & (b) of the Deed of Mutual Covenant."

The words which I have underlined were substituted for the vague words "or the volume of area of the Estate in question "which had appeared in the original pleading.

22. The plaintiff produced a budle of documents at the trial which must have been prepared from its list of documents for discovery. It included all the relevant budgets and audited accounts and the letters, floor plan and limited list of unit gross areas already referred to above. When at the beginning of the trial the judge granted the defendants' unopposed application to amend the defences be almost certainly must have been unaware of the significance of the fact that the discovery made by the plaintiff on the basis of the general allegations in the original defences did not include any data regarding the gross floor areas of 217 commercial units in Block B of the estate. In the absence of such data it was not possible, if the court concluded by reference to the limited gross floor areas disclosed that the plaintiff had not fully complied with clause 6(b) of Part D, to calculate what the correct assessment of the defendants' shops should be. The plaintiff's counsel clearly missed the point when he raised no objection to the amendment of the defences and failed to apply for an adjournment and for leave to make further discovery.

23. The plaintiff called one witness, Mr. Wan Yui-ming, the manager of the plaintiff's management office who had prepared the relevant annual budgets. For the purposes of this case they were the budgets which had been prepared towards the end of the years 1982 to 1986 inclusive, each budget being intended to be a projection of the following year's management expenses for the estate.

24. It emerged from Mr. Wan's evidence that in each of those years he had produced a separate budget referable to the commercial units in the estate pursuant to clause 6(b) of Part D of Part VI of the Deed. The budget was identical for each year. It listed all the relevant items and amounts of expenditure and projected a total of S131,200 in respect of a total floor area 56,303 square feet for the commercial units. This amounts to $2.33 per square foot. Mr. Wan's evidence was that the budget had not been posted on the board outside the management office but had been available for inspection by the owners under the need. He referred to the audited annual account's contained, in the plaintiff's bundle which indicated the build up of a deficit over the years but that for all purposes material to this case the auditors' had certified that the accounts complied with the of Deed.

25. As regards the apportionment among the commercial units of the projected expenditure for the relevant years, Mr. Wan referred in chief to the list of gross floor areas of individual commercial units on the ground and mezzanine floors of Block A of the estate (which comprise only 24,850 or the total floor area of 56,303 square feet of commercial units) and acknowledged that three of the units, on the ground floor, namely Nos. 1, 49 and 50 which were larger units than the others, had not been charged at $2.33 but about $1.80 per square foot on the instructions of the developer. He said "These 3 units were particularly large and they instructed us to charge them less. If subdivided the public areas would be larger." Under cross-examination Mr. Wan also acknowledged that the restaurant on the mezzanine floor of Block A, which comprised a gross area of 10,983 square feet, had been charged $6,370.00 which is a rate of only 57.9 cents. All this data was apparent from the list of gross floor areas in the plaintiff's bundle.

26. Under re-examination Mr. Wan explained that restaurant and the other three larger units which had been more lightly charged used independent air-conditioning and so were not charged "for that".

27. In his submissions counsel for the plaintiff acknowledged that Mr. Wan's budgets may not always have been accurate but he said that he had explained them and done his best and if there had been a surplus it would have been of the benefit of the owners. He contended that the rates were reasonable and it was premises like a restaurant and supermarket which had been charged less. He also stressed that the defendant had never intended to pay their charges and had only asked to see the budget a month before the trial. He asked rhetorically what rate should be charted if the rates of the charges actually levied were wrong, bearing in mind that other owners had Paid.

28. For the defendants Mr. Wong relied on the terms of the Deed. He took no point on clause 6(a) of Part D of Part VI Which had been relied on in the amended defences. He took two points under clause 6(b), which he contended required the plaintiff to apportion the relevant expenses proportionally according to the gross floor area of the commercial units and conferred no discretion upon the plaintiff to charge some owners of such units less than others. The apportionments being "in a mess" the defendants must, Mr. Wong contended be able to "reap the benefit of poor management unti1 a realistic apportionment is received". The case for the defendants was thus put on the footing that not only were the charges claimed wrong apportioned but the defendants (although they had indicated their willingness to pay the proper charges) were not obliged to pay anything until proper apportionment as made.

29. The Judge, not surprisingly, reserved judgment. Treating the first ground of defence as a general allegation he rejected it on the basis that whilst there were deficiencies in the preparation of the annual budgets he did not think it could he said that they were not properly properly in good faith in accordance with the Deed.

30. Taking the second and third grounds of defence together as challenging the rates of changes levied on the commercial units in the estate, the judge concluded that the rates had been reasonable and that they had been fixed in good faith. However he was clearly troubled by the fact that whilst he could see the reasonableness of the reduced rates levied on the larger units he could find no provision in the Deed which authorised the plaintiff to apportion the charges finder clause 6(b) of Part D of Part VI in respect of those units on a different basis from the other units.

31. The judge went on to say:

"Is that fact sufficient for the unit-owners assessed at the higher rate to escape liability for their own payments? I think not. To put it in the language of the law even if there has been a breach of the contract comprised in the Deed of Mutual Covenant that breach is not a fundamental one such as would in law discharge the defendants from the liability to pay the charges which is created by the Deed."

32. The judge then repeated his view that the changes made on the defendants appeared to be "properly based" and made two points which he considered to be relevant. The first point was that the defendants had never paid the management charges levied on them or attempted to negotiate their amount, nor had they demanded copies of the annual budgets until a month before the trial. The second point related to the amount properly due from the defendants to the plaintiff. He observed:

"Secondly, (and I do not suggest there is any onus on defendants to prove this) it has not been shown on a balance of probabilities that even if the owners of the 3 larger units were assessed and actually paid fees at the higher rate at which the other owners paid, that the deficits would then have been wiped out. Even if those three owners had paid at the higher rate the charges levied against the defendants more likely than not would still have been the same. On a balance of probabilities they would certainly not have been any less."

33. The judge concluded by saying he thought the management would be well advised to (1) up-date their budget every year by reference to their latest available accounts slowing actual expenditure and (2) "ensure that all commercial unit-owners are assessed at the same uniform rate 16 accordance with the provisions of the Deed of Mutual Covenant."

34. On appeal Mr. Wong rightly disowned any reliance on fundamental breach (which had originally been included as an alternative argument in his skeleton argument) which, with respect to the judge, appears to have no place in a situation where it is sought to enforce a deed of mutual covenant against owners of undivided shares in land who are not contending that they are discharged from liability for payment of management charges but that their liability has not yet arisen because it only arises when the amount of the chares has been correctly assessed by the management.

35. The main thrust of Mr. Wong's argument on appeal, as below, was that the defendant's liability could not arise until their contributions to the management expenses had been duly assessed in accordance with clause 6(b) Part D of Part VI of the Deed. That provision had not, he contended, been complied with because the plaintiff had assessed the three larger commercial units on the ground floor of block A and the restaurant on the mezzanine floor of that block at a lower rate per squire foot than the defendants' units and, as the judge had acknowledged, this was not in accordance with clause 6(b) which required the apportionment to be made proportionally according to the gross floor area of the commercial units. It followed, Mr. Wong contended, that the liability of the defendants to pay their contributions had not yet crystallised.

36. Mr. Wong accepted that something must be due from the defendants to the plaintiff when the proper calculations had been made but he countered the suggestion that the defendants had failed to pay anything into court by pointing out that the plaintiff's claim had been for specified sums with no alternative claim for a lesser sum. The judge had been wrong, Mr. Wong contended, in holding it against the defendnats that they had paid nothing before the trial and had only called for the relevant budgets and accounts shortly before the trial. Mr. Wong pointed to the letters from the defendants before the trial which had made it clear that the defendnats were prepared to discharge their liability for contributions if calculated on a proper footing under the Deed.

37. Although the matter was not raised in the defendants' grounds of appeal Mr. Wong responded to the suggestion from this court that something must be due from the defendants to the plaintiff by saying, in effect, that his fall back argument was that in that case the appeal should at least be allowed in part. He pressed to have the judge's order set aside with judgment for the defendants or an order for a re-trial.

38. For the plaintiff Mr. Louis Chan (who did not appear below) stressed that the defendants had made no attempt at any stage to indicate what figure they claimed to be the correct amount of contributions payable by them under the Deed and by their grounds of appeal they were seeking to have the whole of the judgment sums set aside. They had made no payment into court as an indication of the "reasonable" sum payable by them and had not raised the specific "error of calculation" point until the trial.

39. Mr. Chan contended that even if the three larger commercial units and the restaurant had been undercharged there had been no evidence that the charges for the defendants' units were incorrect and excessive. It was up to the defendants, he contended, to demonstrate that they had been wrongly assessed and to pay the correct amount. He went on to say that on the evidence before the court it was not possible to calculate the correct figure because the data regarding the Block B commercial units was not before the court.

40. On this aspect of the case he relied on the history of the claim which went back to the 1st October 1983. He pointed out that there had been no actual complaint from the defendants until after the action had begun. The plaintiff had, he said, acted in good faith and its assessment of the defendants' contribution should prevail until shown to be wrong.

41. When asked by the court on what basis the plaintiff was entitled to the full amounts claimed against the defendants Mr. Chan relied on the second concluding double point made by the judge (which had not been challenged in the defendants' grounds of appeal) to the effect that (a) it had not been shown on a balance of probabilities that even if the larger units had been assessed at a higher rate the deficits would have been wiped out and (b) even if those units had been so assessed it was more likely than not that the charges levied on the defendants would still have been the same and on a balance of probabilities would certainly not have been any less. In this connection Mr. Chan referred to the expression "gross floor area" in clause 6(b) of Part D and said that the larger commercial units had a higher "net area" than "gross area" in contrast to the smaller units.

42. For my part I have no hesitation in rejecting, as the judge did, the defendants' contention that they can be under no liability to pay contributions to the plaintiff until the amount of the contributions has been correctly assessed. It seems to me that once the plaintiff has complied (as it did in this case) with clause 6 of Part D by making the basic division of the annual budget into four parts so as to identify the estimated management expenses attributable to categories (a) (all owners) (b) (commercial owners) (c) (residential owners) and (d) (car port owners), the apportionment thereafter required is a matter of arithmetical calculation. In the case of the commercial units the calculation is to be based on gross floor area of the units and the rate is to be the same per square foot of gross floor area of each unit.

43. If therefore the plaintiff has erroneously charged any owner more thant he proper amount (as the defendnats contend) it does not mean that that owner is not obliged under clause 1 of Part E to pay the correct amount on the first day of each calendar month. Each owner is entitled under clause 5 of Part D to inspect the budget and to require the plaintiff to comply with its obligation under clause 1 of Part F to post the annual set of certified accounts on the public notice board for the owner's inspection. Each owner is therefore in a position to determine whether the contribution levied on him is correctly assessed and, if not, to make the correct assessment and pay the correct sum due.

44. It follows that if and when the plaintiff, having divided its budget in accordance with clause 6 of Part D, should levy an erroneous and excessive contribution charge on an owner, the plaintiff must be entitled in subsequent proceedings to recover the lesser correct amount notwithstanding its excessive claim. The position is no different from any other where a creditor over claims for a debt whcih is subsequently proved to be established for a lesser amount.

45. In the present case the plaintiff has clearly established that something is payable to it by the defendants. The problem remains regarding the quantification of the actual amount payable. There was no evidence before the judge to provide the basis for the determination of that amount. Mr. Chan for the plaintiff made that very point on the appeal. The judge clearly appreciated the difficulty and sought to get round it by saying that on the balance of probabilities the result would have been the same even if the larger commercial units had not been undercharged. However, with respect to the judge, there seems to have been no evidential basis for that conclusion once he accepted that the larger units had been undercharged.

46. If that conclusion cannot be sustained, for want of evidence, I would not nevertheless uphold it solely on adversarial forensic principle on the footing that the conclusion was not challenged in the defendants' grounds of appeal. It seems to me that the powers conferred by Order 59 rule 10(4) should be exercised in the present situation in order to do justice between the parties in relation to a trial which was doomed to be abortive from the moment the defendants made their unopposed amendment to the defences in order to make a specific attack on the plaintiff's assessment of their contributions. If the amendment had not been made the very general and vague laymen's defences would probably have failed. On the other hand if the plaintiff had applied for an adjournment to make further discovery and consider its position the judge would have had before him all the material he needed to determine the issues between the parties.

47. In my judgment both sides have in their own way and to their own extent contributed to the causes of these abortive proceedings and both should be so held responsible. I add that in forming this view I have not thought it right to penalise the defendants for the regrettable failure of their solicitors to include the relevant parts of the plaintiff's bundle in the appeal bundle. In all the circumstances I would allow the appeal and order a re-trial before another judge ont he basis that all issues are open, including the question whether the lower rates charged on the larger units and the restaurant were (by reason of net floor area differences or otherwise) permissible under clause 6(b) of Part D. It may be that the parties can come to terms. It may also be that the plaintiff will be advised to add alterpative defendants or to discontinue these proceedings and bring proceedings by originating summons in the High Court, joining all affected parties on a representative basis. That is a matter for the parties or the plaintiff as the case may be.

48. In all the circumstances I would make an order nisi under Order 42 rule 5B(6) that the costs of the appeal, in which the defendants' main contention has been decisively rejected, be to the plaintiff and that there be no order for costs below. I express my sympathy for the trial judge who was denied the necessary material upon which to reach a complete conclusion on this matter.

Cons, V.-P.:

49. I agree with my Lord and the orders that he proposes. I would only add that now the differences have been put in their proper perspective, it is to be hoped that, at least for the sake of all the other owners in the complex, they can be satisfactorily settled without further recourse to the courts.

Hunter, J.A.:

50. I agree.

Cons, V.-P.:

51. There will therefore be an order as proposed.