CHEVALIER PROPERTY MANAGEMENT LTD v. YU CHAU YEUNG

[English Translation - 英譯本]
CACV 259/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 259 OF 2006

(ON APPEAL FROM DCMP1943 OF 2005)

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J U D G M E N T

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Hon Cheung JA (giving the judgment of the Court):

The Facts

1.  The Plaintiff was the management company of Success Industrial Building at 17 Sheung Hei Street, San Po Kong, Kowloon (“the Building”), and the Defendant was the owner of Flat E, 4/F of the Building (“the Unit”).  The Defendant had defaulted on the payment of management fees in respect of the Unit since January 1992.

2. As at 24 November 1992, the amount of management fees payment on which the Defendant had defaulted was $6,971.10 with interest.  On 24 November 1992, the Plaintiff, pursuant to the terms of the Deed of Mutual Covenant of the Building (“the DMC”), registered a memorandum of charge in the Land Registry for the arrears of management fees (“the First Memorandum”).

3. As the Defendant continued to default on the payment of management fees, the Plaintiff registered another memorandum of charge (“the Second Memorandum”) in the Land Registry on 20 April 2005, according to which the total amount of management fees and other expenses on which the Defendant defaulted from January 1992 to April 2005 was $308,337.27.

Application by Originating Summons

4. On 30 June 2005, the Plaintiff by originating summons (“the Summons”) applied for the following relief:

(1)      The Defendant was to deliver up vacant possession of the Unit;

(2)      The Defendant was to pay the arrears charged as set out in the Summons; and

(3)      The Plaintiff was entitled to sell the Unit for the purpose of having the arrears paid.

Order of Deputy Judge Chan

5. Deputy District Judge Samuel Chan allowed the application and made an order on 27 February 2006 which included the following:

Unless the Defendant, within 28 days of the service of this Order on him, pay the Plaintiff $341,153.88 with interest at judgment rate (calculated from 28 February 2006 to the date of payment), he shall deliver up vacant possession of the Unit to the Plaintiff, who may sell the Unit in accordance with the terms set out below.

6. Deputy Judge Chan ordered that the Unit was to be sold with a reserve price fixed at $970,000.

Legal Issues on the Limitation Period of Appeal

7. The Defendant has been granted leave by the Court of Appeal to appeal against the order of Deputy Judge Chan, with the ground of appeal confined to “the legal issues on the limitation period”.

The DMC

8. Clause 4 of Paragraph D of Part V of the DMC provides that the owner of each unit of the Building shall pay management fees.  Furthermore, Paragraph E provides as follows:

2.         If any Owner shall fail to pay any amount payable hereunder within 30 days of the date on which the demand is made as aforesaid, he shall further pay to the Manager :-

(1)    Interest calculated at the rate of $1.50 for each $100 or part thereof remaining unpaid for each period of 30 days or part thereto for which it remains unpaid.

(2)    A collection charge of $500.00 (such sum to increase by 10% on a compound basis on each anniversary of the date of this Deed) or such lesser sum as the Manager may agree to cover the cost (other than legal costs of proceedings as hereinafter mentioned) of the extra work occasioned by the default.

3.         All amounts which become payable by any Owner in accordance with the provisions of this Deed together with interest thereon as aforesaid and the said collection charge and all damages claimed for breach of any of the provisions of this Deed and all other expenses incurred in or in connection with recovering or attempting to recover the same shall be recoverable by civil action and shall be a charge upon the Share or Shares of the defaulting party and his Unit or Units at the suit of the Manager (and the claim in any such action may include a claim for the solicitor and own client costs of the Manager in such action and the defaulting Owner shall in addition to the amount claimed in such action be liable for such costs).  In any such action the Manager shall conclusively be deemed to be acting as the agent or agents for and on behalf of the Owners as a whole and no Owner sued under the provisions of this Deed shall raise or be entitled to raise any defence of want of authority or take objection to the right of the Manager as plaintiff to sue or to recover such amounts as may be found to be due.

4.         In the event of any Owner failing to pay any sum due and payable by him in accordance with the provisions of this Deed or failing to pay any damages awarded by any court for breach of any of the terms or conditions of this Deed within 30 days of the date on which the same become payable, the amount thereof together with interest as aforesaid and the said collection charge and all costs and expenses which may be incurred in recovering or attempting to recover the same including the legal expenses referred to in Clause 3 of this Sub-Section and in registering the charge hereinafter referred to, shall stand charged on the Share or Shares of the defaulting Owner and his Unit or Units and the Manager shall be entitled without prejudice to any other remedy hereunder to register a Memorial of such charge in the Land Office against the Share or Shares of the defaulting Owner and his Unit or Units.  Such charge shall remain valid and enforceable as hereinafter mentioned notwithstanding that judgment has been obtained for the amount thereof unless and until such judgment has been satisfied.

5.        Any charge registered in accordance with the last preceding paragraph shall be enforceable as an equitable charge by action at the suit of the Manager for an order for sale of the Share or Shares of the defaulting Owner together with the right to the exclusive use, occupation and enjoyment of the Unit or Units held therewith and the provisions of Clause 3 of this Sub-Section shall apply equally to any such action.

Charge arising from Default on Payment of Management Fees

9. In Beacon Heights (Management) Limited v. Leung Ping Hung Antonio and others [1995] 1 HKLR 181, Godfrey JA dealt with an issue concerning the construction of a deed of mutual covenant.  The provisions in paragraph 27 of the deed of mutual covenant in that case were similar to those in paragraph 4 of the DMC in the present case.

10. Godfrey JA construed Clause 27 as imposing the following obligation on the first owner who signed the deed of mutual covenant: if he defaulted on the payment of management fees, he must, upon demand by the building manager, give a charge in respect of his unit to secure payment of the arrears, and all successors in his title of that unit would be subject to the charge.  However, as the deed of mutual covenant provided that the owner’s property would stand charged as a result of the owner’s default, and equity would treat something which ought to be done as done, it was therefore unnecessary for the manager to require the defaulting owner to sign an instrument of charge.  

11. The charge arising from a deed of mutual covenant is an equitable charge: see Halsbury’s Laws of Hong Kong, Volume 19(2), paragraph 280.152.

Issues on the Limitation Period

12. Pursuant to section 19(1) of the Limitation Ordinance, Cap. 347 of the Laws of Hong Kong:

No action shall be brought to recover any principal sum of money secured by a mortgage or other charge on property, or to recover proceeds of the sale of land, after the expiration of 12 years from the date when the right to receive the money accrued.

13. According to this Ordinance, an action to recover money in arrears must be brought within 12 years “from the date when the right to receive the money accrued”.  In Hornsey Local Board v. Monarch Investment Building Society [1889] 24 QBD 1, the English Court of Appeal dealt with a statutory provision which was equivalent to section 19(1) in Hong Kong.  Lord Lindley said that the limitation period began to run from the moment when the charge was created.  This construction has been adopted by the English courts in subsequent cases: see, for example, Gotham v. Doodes [2006] 1 WLR 729 (Lindsay J) and [2007] 1 All ER 527 (the English Court of Appeal).  We agree with the construction made in Hornsey on the relevant provision. 

14. The first argument put forward by Ms Yang, Counsel for the Plaintiff, is that the Plaintiff’s application for sale of the Unit was made on the basis of the Second Memorandum dated 20 April 2005.  As the Plaintiff’s Summons was taken out on 30 June 2005, and the present application made merely two months after the Second Memorandum become effective, it had complied with the Limitation Ordinance, meaning that the Plaintiff is entitled to recover the management fees which the Defendant has failed to pay since January 1992 as stated in the Second Memorandum.

15. With respect, we do not agree with this argument.  Pursuant to Clause 3 of Paragraph E of the DMC, if the owner of a unit has defaulted on the payment of management fees, the building manager may by civil action recover the arrears which shall be a charge upon the unit. (“All amounts which become payable by any Owner … shall be recoverable by civil action and shall be a charge upon the share or shares of the defaulting party and his unit or units at the suit of the Manager.”)

16. Under Clause 4 of Paragraph E, when an owner has failed to pay the relevant fees within 30 days, his property shall stand charged to secure payment of the arrears (“In the event of any owner failing to pay any sum due … the amount thereof … shall stand charged on the share or shares of the defaulting owner and his unit or units.”), and the building manager shall register the charge in the Land Registry without prejudice to any other remedy.

17. Clause 5 of Paragraph E of the DMC provides that the registered charge shall be enforceable as an equitable charge by the building manager, and that the provisions of Clause 3 of the same paragraph shall apply equally to the relevant action for enforcement.

18. On the aforesaid provisions of the DMC, we take the view that a charge was created upon the owner’s failure to pay the amount payable within 30 days and it was unnecessary for the Plaintiff to register a memorandum before a charge could be created.  Support for this construction can be found in Clause 4 of Paragraph E of the DMC: “the Manager shall be entitled … to register a Memorial of such charge …”, which shows that the charge has been created and in existence prior to the registration of the memorandum.  Although Clause 3 itself does not mention the 30-day period, this in our view is not at variance with Clause 4.  Clause 3 only states that the arrears shall be a charge upon the unit, and the date of creation of the charge is 30 days after the date on which the owner is required to make payment.

19. In Guardian Property Management Limited v. Golden Cheer (HK) Company Limited (DCMP 1572/2003) (date of judgment: 4 December 2003), which concerned a deed of mutual covenant in terms similar to those of the DMC in the present case, District Judge Barbara Chan construed the deed in the same way as that in the present case.

20. On the said construction of the relevant clauses of the DMC, a charge was created 30 days after the Defendant defaulted on the payment of management fees.  In our judgment, the memorandum was only a record of the charge but not an instrument of the charge itself.  Therefore, the limitation period in respect of the charge arising from the default is 12 years prior to 30 June 2005.  In other words, the Defendant is only liable for the management fees, collection charges and other expenses relating to the claim which have been in arrears since 1 July 1993 and not since November 1992.  Ms Yang has also conceded that, should her first argument be rejected, the amount of the arrears which the Plaintiff is entitled to recover is to be calculated as from 1 July 1993.

Interest

21. Furthermore, section 19(5) of the Limitation Ordinance provides that:

No action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of land, or to recover damages in respect of such arrears, shall be brought after the expiration of 6 years from the date on which the interest became due: …

(The Proviso is not applicable to the present case.)

22. According to the materials submitted by Counsel for the Plaintiff at the hearing of this appeal, the amount of outstanding management fees payable by the Defendant from July 1993 to February 2006 was $138,696 and the interest thereon was $153,064.08, totalling $291,760.08.  Furthermore, the Defendant was required to pay collection charges of $500.00, memorandum registration fee of $2,920.00 and memorandum withdrawal fee of $2,310.00.  The grand total payable was therefore $297,490.08.

23. First of all, we do not think that the interest on which the Defendant has defaulted is subject to section 19(5) of the Limitation Ordinance because it is not “interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of land”.

24. Under Clause 2(1) of Paragraph E of the DMC, if an owner fails to pay the relevant fees within 30 days of the date on which a demand for payment is made by the management officer, the owner shall pay interest at the rate of 1.5% per month (18% per annum) on the outstanding amount.  Clause 3 of the same paragraph of the DMC provides that the arrears and interest shall be a charge.  In other words, the Plaintiff may charge the Defendant’s property as security not only for the Defendant’s payment of management fees but also for the payment of interest.  Therefore, the Plaintiff is protected by the security when he recovers the interest on the arrears.  Pursuant to the principle in Ezekiel v. Orakpo [1997] 1 WLR 340, the Plaintiff is not only a “judgment creditor” but also a “secured creditor”.  He is seeking recovery of the interest on the basis of the security (i.e. the charge) but not by way of civil action.  The Plaintiff of course has to apply to the court for an order for vacant possession and sale of the unit, but this does not mean that he needs to recover the arrears by civil action.  Therefore, regarding the Plaintiff’s claim for interest, section 19(5) of the Limitation Ordinance does not apply.

The Arrears from April 2005 to February 2006

25. The Second Memorandum dated 20 April 2005 shows that the arrears were calculated only up to the date on which the document was registered, i.e. 20 April 2005.  However, Deputy Judge Chan ordered the Defendant to pay the arrears up to February 2006 (i.e. the date of judgment).  The only basis upon which the Plaintiff may recover the arrears from May 2005 to February 2006 is that, after April 2005, a new charge would, pursuant to the DMC, be created 30 days after the Defendant defaulted on the payment of management fees on each occasion as the security for payment.

26. Although the Plaintiff did not clearly state in the Summons or affirmations that it relied on the charge arising from the Defendant’s default on the payment of management fees every month after April 2005 as the cause of its claim for the arrears, we are of the view that the Plaintiff may on the present appeal raise this as a ground for buttressing the judgment of Deputy Judge Chan.  The issue is purely one of law which does not involve factual evidence.  The Defendant has also admitted that he has defaulted on such payment.  Had this issue been raised before Deputy Judge Chan, he would have had the power to allow amendment of Summons and dealt with the claim at the same time, because Order 20 Rule 5(5) of the Rules of the District Court empowers the court to allow a plaintiff to add a cause of action which arises after the summons has been taken out:

(5) An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.

27. The facts relating to the newly created charge in the present case are the same as those relating the charge in the original action.

Conclusion

28. On the materials submitted by the Plaintiff, it may only recover from the Defendant the sum of $297,490.08 for the period between July 1993 and February 2006.  Therefore, we allow the appeal and vary the figure in the first order of Deputy Judge Chan from $341,153.88 to $297,490.08.  We also extend the time limit for the Defendant to pay the sum to the Plaintiff to 28 days after he receives this judgment.

29. As this appeal does not involve the issues of whether the Plaintiff was entitled to take vacant possession of and sell the Unit, we uphold the orders of Deputy Judge Chan on those two issues. 

30. The other order which we need to vary is item 5(ii) which states that the total amount of costs and expenses incurred by the sale of the Unit shall not exceed $23,000.00.  We vary this order so that the total amount shall not exceed the following:

(1)     $3,000 for the auctioneer’s handling fees;

(2)     $10,000 for the Plaintiff’s legal expenses; and

(3)      1% of the sale price of the Unit as the auctioneer’s commission, with a minimum commission of $10,000.

31. As the Plaintiff’s appeal is only allowed in part, we order that each party is to bear its own costs of this appeal.  The costs order of Deputy Judge Chan shall remain unchanged.