THE INCORPORATED OWNERS OF FOUR WINDS APARTMENT v. KOA HSUNG LAND INVESTMENT CO LTD

LDBM 218 OF 2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT Application No. 218 of 2005

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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 building. In 2002 a Building Order was issued requiring the Applicant to undertake certain slope stabilization work. In 2003 the Government advised the Applicant to look into the safety of electrical installation at the common areas of the building.  About the same time, it was discovered that the waterproofing work was required on the roof of the building. Obviously it is incumbent on the Applicant to carry out these necessary items of repair and the Applicant has just done that.  There is no dispute about all these.  The present dispute concerns only the procedure adopted to raise the necessary funds for these projects. 

2.  Two methods were adopted by the Applicant to raise the funds for the project. Firstly, for the roof repairs, the costs were met by raising the monthly management fees from $1,100 to $1,300, effective from 1^st October 2003. Secondly, a special fund was raised so that owners were required to contribute $10,000 for each flat. The Respondents owning a number of flats had not at the time of filing of this Application paid all the amounts of the newly increased management fees and contributions demanded of them.

3.   The Respondents have now paid their outstanding contributions and management fees but only after the case was set down for trial. The remaining issue are interests and costs of these proceedings.

4.  Despite that they have paid the contributions claimed by the Applicant, the Respondents do not concede that they have been liable at any time to pay the contributions and the new management fees.

5.  Respondents raise three main defences. Firstly, the management committee has not passed the necessary resolutions.  Secondly, there was no budget for the management committee to base its decision on. Thirdly, the budget, if there was one, was not and that in any event and failed to comply with the provisions of the Building Management Ordinance (“the BMO”) relating to the budget . On that basis they dispute the liability to pay interest and costs.  Further and alternatively, Respondents contend that they are reasonable in challenging the claims and therefore should not penalised with costs and interest.

Conduct of business of the management committee and its meetings

6.  The management committee in question (“the Management Committee”) has conducted its business in no way different from its predecessors.  I believe that the building has been managed quite efficiently all these years, especially when no profession building management firm has been employed. The low level of monthly management fees speaks for itself. All members of the Management Committee acted bon fide. Indeed the Respondents have not made any allegations, insinuations of impropriety of the Management Committee. In many similar cases, a chairman of the former management committee was much more generous with his imputations of impropriety of all kinds, often groundless, to the chairman succeeding him or his committee.

7.  The Respondents complain that the management committee failed to comply with the provisions of the BMO.  These challenges are purely technical in the particular sense that I do not see how the Respondents would be prejudiced if they paid the outstanding amounts before the Applicant filed this claim.  After all, they were the last persons to pay.  For this reason, I invited counsels, after their closing submissions, to assist me if these non-compliances, would be fatal to the Applicant’s claim. I should be grateful to counsels for their effort to assist me, filing written submissions in response to my invitation.

Power to increase in monthly management fees

8.  Section 20 envisages two types of fund, the general fund, and the contingency funds. The Applicant did not at any stage clearly announce the establishment of general fund or the maintenance of such fund. This practice is not unusual. An owners incorporation would just carry on collecting monthly managements fees after incorporation and should expenditure become insufficient to meet the day-to-day management expenses they would consider increasing the monthly management fees.  When repair work becomes necessary, it may defray the cost from the accumulated surpluses, or if the project is substantial, it may raise a fund specially for the purpose. Very often when the repair project has been completed and its payment settled, the fund specially raised simply ceased to exist or to be kept. Surpluses would be used in day-to-day management expenses. When next occasion arises for substantial repairs, the exercise to raise funds specially for the work would then be repeated.

9.  The Respondents argues, though not strongly, that the Applicant cannot rely on Sections 20, 21 of the Ordinance to raise any funds, or to determine the contributions to these funds since none is established or maintained. I find this argument has no merit. Sections 20 provides that:

(1)	A corporation shall establish and maintain a general fund -
	(a)	to defray the cost of the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) and this Ordinance; and
	(b)	to pay Government rent, premiums, taxes or other outgoings (including any outgoings in relation to any maintenance or repair work) which are payable in respect of the building as a whole.
(2)	A corporation may establish and maintain a contingency fund -
	(a)	to provide for any expenditure of an unexpected or urgent nature; and
	(b)	to meet any payments of the kind specified in sub-section (1) if the fund established thereby is insufficient to meet them.
(3)	A corporation shall maintain an interest-bearing account and shall use that account exclusively in respect of the management of the building.   (4) Subject to subsections (5) and (6), a corporation shall without delay pay all money received by the corporation in respect of the management of the building into the account maintained under subsection

It should be noted general fund does mean general. It covers every types of expenditure of building management which an owners incorporation has to meet.  Contingency fund is established to provide for the expenditures of the same nature as those covered by the general fund. Its purpose is to set aside an reasonable amount of money for contingency purpose or to supplement the general fund. An owners incorporation may or may not establish a contingency fund. The word “may” is used in subsection (2) as opposed to “shall” in subsection (1). Further there is no requirement for the funds to be kept in separate bank accounts as long as the funds should be put in an interest bearing bank account. The right to establish two funds has the practical effect of entitling owners incorporations to maintain or to accumulate the surpluses from collection of monthly management fees as contingency fund, and, to raise fund to eliminate deficits without raising the monthly management fees. Very often owners would challenge the need to raise the fund for repair or renovation work when there is surplus to defray the costs. Some owners, like the present Respondents, may query the need to increase management fees when there is a surplus.

10.  When owners incorporations want to raise fund for the management of the building be way of increase in monthly management fees, or by calling for lump sum contributions, they simply explain the need for such exercise. Very often they would not clearly set out which provisions in the Ordinance they rely on. The fact they have failed to mention names of the funds is not fatal. It is not even necessary. It is the procedure and the reasons behind for raising the management fees or funds that should be looked at.

11.  In the instant case, a general fund must have been established although no one can point to any document referring to the date of establishment. Monthly management fees have been collected for a long time. Income and expenditures accounts were complied and audited year and after year. This practice clearly point to the inescapable conclusion that the Applicant has maintained a general fund.

12.  I accept that the deficit situation has not improved and the Applicant is entitled to raise contributions to the general fund, i.e. the monthly management fees.

Determination by the Management Committee

13.  The Applicant contends that the Management Committee decided to increase management fees at the meeting on 20 August 2003. The minutes do not record expressly a resolution to that effect. The Chairman and the Treasurer present at the meeting gave evidence that the committee did resolve to increase the monthly management fees at that meeting.

14.  The Respondents have not called any evidence. Through their counsel the case doubt on the veracity of the witnesses for the Applicant. I accept the evidence of the witnesses. It is unfortunate that no formal record of the resolution was recorded in the minutes. It is trite law that minutes are not conclusive of matters transacted. Looking at content of the matters recorded in the minutes, the question of raising management fees is discussed. More importantly, it is clearly recorded that “---with effect from 1^st October 2003, monthly management fees is set at $ 1,300 per month. At this rate we may be able to balance the budget---” These words expresses a definite decision by the committee and support the evidence of the witnesses that there was a resolution of the committee to raise the monthly management fees.

Budget for the increase of management fees

15.  The Treasurer gave evidence of tabling a draft budget at the meeting. In the minutes, discussion about the financial position of the Applicant took place, ad the estimate of the deficit was mentioned. I accept the evidence of the witnesses. There was tabled before the committee at the meeting a budget on which the Management Committee based its determination to increase the monthly management fees.

16.  This draft budget was titled for the year ending 30 September 2003. The Respondents therefore argue that this is not the annual budget required by the Fifth Schedule of the Ordinance. What the Management Committee tried to do was to forecast the expenditures for the next year. They are not fortune-tellers, it is only reasonable for them to make the forecast by looking at the figures projected for current year and in the past years. The budget so complied though termed as budget for the year ending 30 September 2003, it also lists out side by side corresponding items in audited accounts for 2001 and 2002. Looking at the content of it, I accept this document was used by the Management Committee to forecast expenditures for the year as from 1 October 2003. This budget gave all the information reasonably necessary for the Management Committee to determine the increase in management fees and for the owner to comment or to challenge the increase on its merit.

Liability to pay the increase in management fees

17.  For the reasons given above, I find the Respondents liable to pay the new management fees.  

Contribution to the contingency fund

18.  The Management Committee did not arrive at its decision in one single or formal meeting.  Discussions were held between members through telephone and E-mails. I have no doubt that the Chairman was co-ordinating all these. Eventually the Management Committee determined that the contributions should be $10,000 per flat. Contribution notice was sent to each flat owner and posted up in the notice board.

19.   The Respondents argue that there was no resolution at a meeting. In response to the Respondents’ worry, the Management Committee has complied a confirmatory memorandum. The Respondents do not accept the content of the memorandum and allege that there has been no determination or decision to raise fund. They called no evidence to support that. They simply rely on lack of documentary evidence on the part of the Applicant.

20.  The sole question is whether a management committee can make decision without having a formal meeting. Paragraph 9 (b) provides that all matters etc. authorised or required to be done by the management committee may be decided by a resolution passed by the majority. It does not require that it must be done by a resolution at a meeting. For example for simple matter, like certification of outstanding management fee, or effecting urgent and minor repairs, it would be too onerous for the members to attend formal meeting.

21.  In the particular circumstances of this case, the matters of repair work have been raised and explained at a general meeting of owners, the Management Committee members are entitled to make their decision in the informal way. It would be superfluous to hold a meeting to formally pass the resolution on a issue already agreed. It would be a different matter if some members had different views.  When all members are of one mind, it would simply be a waste of their time to attend a formal meeting. Although a paper resolution would be much better. However a confirmatory memorandum in this case can certainly rectify the defects in the procedure. I do not think it reasonable for Respondent to insist on challenging the fact that there had been a decision by the Management Committee after the issuance of the confirmatory memorandum.

22.  The other complaint is again about the budget required. There is no individual document called budget. I accept the submission by Mr. Poon that there is no formal requirement.  The purpose of the budget is to inform the owners of the proposed expenditure, its size and purpose, and, the reasons for raising the fund.

23.  In this particular case, the nature of expenditure was simple. It was given in the notice of meeting of owners together with the estimates. Every owner should be left in no doubt that the Management Committee was to determine contribution to the fund based on the estimates and information contained in the notice of meeting. The notice of meeting in question can serve the purpose of budget. Even if it cannot, the non-compliance is not fatal. Take a simple example of the case when an owners incorporation is due to pay a heavy fine, say, $300,000 and to the knowledge of owners there is no money in the bank account. The management committee can simply proceed to make the determination of contribution. In the notice of meeting of management committee or owners meeting, all need to be specified is the lack of funds and the amount of fine due. There is no need to prepare a separate document named as budget.

24.  In the instant case, the Respondent had all the information he required to challenge the decision to raise funds. There is no non-compliance with the BMO. Even if there is, the non-compliance does not excuse the Respondents’ refusal to pay.

Interest and costs

25.  The Respondents rightly contend that the Management Committee is not entitled to charge interest on overdue payments. On the other hand that Applicant would have been entitled to recover interests once it filed its claim in this Tribunal. This case is unusual. The Respondents at some stage had reasons to doubt their liability. However, as I have said, it is unreasonable for the Respondent not to pay before the case was set down for trial. It is proper for me to order him to pay interest at judgement rate form the time the case was set down for trial and I so order. There be order nisi for costs from the date of setting down for trial on High Court Scale to be taxed if not agreed. The order nisi be made absolute in 6 weeks.