FANINGTON CO LTD AND OTHERS v. UNITE PATRON LTD AND OTHERS

LDMP 2/2010

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Miscellaneous Proceedings Application No. 2of 2010

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BETWEEN

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DECISION

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Background

1.  This is the Applicants’ application by way of Originating Summons dated 4 June 2010 for leave to issue execution against the Respondents to enforce two Final Allocaturs dated 11 November 2009 and 26 June 2009 respectively (“the 1^st and 2^nd Allocaturs”) granted in High Court Action No. 561 of 2006 (“the High Court Action”).

2.  By virtue of section 17(1)(b) of the Building Management Ordinance, Cap. 344 (“the BMO”), the Lands Tribunal is empowered to grant leave to a party to issue execution against any owner of a building so as to enforce a judgment or an order made against the owners’ corporation of the building. Section 17(1)(b) reads as follows:-

“(1) If a judgment is given or an order is granted against a corporation, execution to enforce the judgment or order may issue-

…

(b) with leave of the tribunal, against any owner.”

3.  The High Court Action was commenced by the Incorporated Owners (“the IO”) of Vincent Commercial Centre situate at No. 21 Hillwood Road, Tsimshatsui, Kowloon, Hong Kong (“the Building”), which is a 15-storey office building completed in 1987, for contribution to its building management expenses for the use of its common areas and facilities by the adjacent owners of No. 23 Hillwood Road and other injunctive and declarative relief. The Applicants were the defendants in the High Court Action.

4.  No. 23 Hillwood Road is a 24-storey office building completed in 1997 adjoining the Building. It was developed as an extension of the Building and merged with the Building to form one integral building. As an integral building, No. 23 Hillwood Road uses some of the common areas and facilities of the Building and vice versa.

5.  The 1^st Applicant was the developer of No. 23 Hillwood Road and the registered owner thereof prior to October 2005. The 4^th Applicant became the registered owner of No. 23 Hillwood Road in October 2005. The 2^nd Applicant is the registered owner of the Staircase Spaces adjoining No. 23 Hillwood Road from the Ground Floor to the 5^th Floor (both inclusive) with 10/921 undivided shares in the Building. The 3^rd Applicant was the registered owner of the Ground Floor, the 1^st Floor and the 3^rd Floor of the Building prior to October 2005, but the 4^th Applicant became the registered owner of these floors in October 2005 with a total of 245/921 undivided shares in the Building.

6.  Full trial of the High Court Action took place in May and June 2008. By a judgment of Deputy High Court Judge To (as he then was) dated 22 September 2008 (“the Judgment”), it was adjudged that all the IO’s claims be dismissed with costs. Although the IO was granted leave to appeal against the Judgment, the IO eventually did not pursue the appeal. Thus, the IO remains liable to pay costs to the Applicants.

7.  The 1^st and 2^nd Allocaturs were granted pursuant to the Judgment, and the costs allowed were in the sums of $1,954,149.33 and $30,888.67 respectively, giving a total sum of $1,985,038.00. There was, however, an agreement between the IO and the Applicants that the Applicants would waive 10% of the costs, so that the IO would only be liable to pay 90% of the costs, i.e. $1,786,534.20, plus interest thereon. The IO failed to pay this sum to the Applicants and hence the Applicants commenced the present proceedings on 4 June 2010 to recover the sum from the Respondents who are co-owners of the Building. The Respondents together with the 2^nd and 4^th Applicants are all the co-owners of the Building.

8.  The Applicants have recently applied for a garnishee order against the IO’s banker, Hang Seng Bank Limited, in the High Court Action. A garnishee order nisi was granted on 7 June 2010, which was made absolute on 21 July 2010. On 2 August 2010, Hang Seng Bank Limited gave a cashier order of $1,330,459.72 to the Applicants’ solicitors pursuant to the garnishee order absolute. As at 2 August 2010, the interest accrued on the principal sum of $1,786,534.20 was $268,035.20. The sum received from Hang Seng Bank Limited was used to set off the interest of $268,035.20 and part of the principal sum, leaving a balance of $724,109.68 still outstanding. Further interest on this balance sum is payable at judgment rate from 3 August 2010 until satisfaction.

9.  The Applicants’ application is to seek for leave to recover the whole of the balance sum of $724,109.68 together with interest thereon from the Respondents, each limited to the extent of the proportion of the number of management shares assigned to a particular Respondent’s property to the total number of management shares assigned to all the Respondents’ properties under the Deed of Mutual Covenant of the Building (“the DMC”). Alternatively, the Applicants seek to recover 24,050/28,270 (being the proportion of the management shares assigned to the Respondents) of the balance sum of $724,109.68 together with interest thereon, each limited to the extent of the proportion of the number of management shares assigned to a particular Respondent’s property to the total number of management shares of the Building.

10.  The Respondents have no dispute that the Applicants are entitled to seek leave to enforce the 1^st and 2^nd Allocaturs against them under section 17(1)(b) of the BMO, but raise the following issues for the Tribunal to determine:-

(a)  Whether the contributions from the Respondents should be based on the management shares allocated to all the units in the Building or on the undivided shares allocated to all of the units in the Building under the DMC (“Issue 1”);

(b)  Whether the 2^nd and 4^th Applicants which own units in the Building and are allocated management shares and undivided shares in respect thereof should be exonerated from making contributions (“Issue 2”); and

(c)  Whether leave to issue execution to enforce payment should still be granted against those Respondents who had made contributions towards the recovered sum of $1,330,459.72 (“Issue 3”).

11.  I shall deal with these issues in turn below.

Issue 1

12.  On issue 1, the Respondents contend that their contributions should be based on the undivided shares allocated to all of the units in the DMC. Part 4 of the DMC stipulates that the management shares are allocated to the units in the Building to determine the due proportions that the owner of each unit shall pay to the Manager of the costs and expenses incurred in connection with the management of the Building, its equipment apparatus and services and shall include the Manager’s remuneration. The outstanding sum under the 1^st and 2^nd Allocaturs is not management expenses but rather the liability of the IO. Section 34 of the BMO provides that in the winding up of an owners’ corporation, the owners shall be liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities. Section 2 of the BMO defines “share” as the share of an owner in a building determined in accordance with section 39 of the BMO, which provides that an owner’s share shall be determined in the manner provided in the deed of mutual covenant or if there is no deed of mutual covenant, in the proportion that his undivided share in the building bears to the total number of shares into which the building is divided. Thus, the Respondents are of the view that the sum due under the 1^st and 2^nd Allocaturs should be contributed by all the owners of the Building in proportion to their respective undivided shares and not to the management share.

13.  I, however, agree with the Applicants that it is too simplistic for the Respondents to say that taxed costs are liability and not management expenses. One must look at the DMC to see if there is a charging provision that can cover the legal costs in question, the determination of which is a matter of construction of the DMC (see Sam Woo Marine Works Ltd v. Incorporated Owners of Po Hang Building [2010] 1 HKLRD 92). A purposive construction and common sense application of the relevant provisions of the DMC and the BMO should be adopted (see Grande Properties Management Ltd v. Sun Wah Ornament Manufactory Ltd (2006) 9 HKCFAR 462). The mere fact that the legal costs in question are not recurring in nature cannot be a ground to say that they are not management expenses (see The Incorporated Owners of Yee On Court v. Li Zee Zing Hai, CACV 181/2000).

14.  The relevant provisions can be found in Part 3 and Part 4 of the DMC. Part 3 concerns the management powers of the Managers (which include the IO). In particular, paragraphs 1(k), (m), (o), (q) and (u) of the Part 3 stipulate that the Managers shall have the powers to “prevent obstruction of any of the common parts of the said Building”, to “remove any structure or installation … in or on the said Building which is illegal or which contravenes the terms herein contained and to demand and recover … the costs and expenses of such removal”, to “prevent any person from unlawfully occupying or using any of the common parts or areas of the said Building”, to “prevent any person detrimentally altering or injuring any part or parts of the said Building” and to “enforce the due observance and performance by the owners of the terms and conditions of this Deed and to take action in respect of any breach thereof including the commencement, conduct and defence of legal proceedings” respectively.

15.  Paragraphs 1(t), 2(e) and 2(g) of Part 3 also stipulate that the Managers shall have powers to “engage … solicitors to commence, conduct carry on and defend legal and other proceedings touching or concerning the Property and the said Building or the management thereof”, to “recover … the legal and other expenses” in the event of any owner failing to pay any sum due, and to “commence proceedings for the purpose of enforcing the observance and performance by any owner … for the breach non-observance or non-performance thereof” respectively.

16.  Part 4 of the DMC concerns the management expenses. Paragraph 1 is on the apportionment of the management expenses in accordance with the management shares as allocated. There is a proviso to paragraph 1 stipulating that there can be further contribution according to the same ratio of the management shares if the total contributions are insufficient. Paragraph 2 is on the items to be included as part of the management expenses to be covered by the annual budget, and paragraph 2(a)(9) specifically includes “Legal or other fees and expenses which may be incurred by the Managers in the performance of any of their duties or in the exercise of any of their powers contained in the deed”.

17.  From these provisions in the DMC, it is clear to me that legal costs incurred by the Managers in carrying out their duties should be part of management expenses. The only thing that may not have been clearly spelt out is whether the legal costs payable to another party in the proceedings (as opposed to the legal costs payable by the Managers to their own lawyers) can be regarded as management expenses. However, I agree with the Applicant that, as a matter of purposive construction, legal costs payable to another party must be treated in the same way as legal costs payable to the Managers’ own lawyers. This must be part and partial of the costs or expenses incurred as a result of bringing the legal proceedings by the Managers. There is no reason to treat it as a separate debt or liability not related to the exercise of the management powers. Section 34 of the BMO, relied by the Respondent, only concerns with the liability of owners in the winding up of a corporation. I see no relevancy of this section at all, as we are not dealing with a winding up situation.

18.  Moreover, section 39 of the BMO stipulates that an owner’s share shall be determined in the manner provided in the DMC, and only when no such manner is provided, undivided shares come into pictures. The only reference to undivided shares in the DMC is in Recital c) which is just for the purpose of sales. It cannot be regarded as a charging provision. As aforesaid, the charging provisions can be found in the aforesaid provisions in Part 3 and Part 4 of the DMC. When there is such a manner for apportionment provided in the DMC, there is no need to resort to undivided shares by virtue of section 39 of the BMO.

19.  At one stage, the parties seemed to be arguing on the apportionment mentioned in the correspondence between the parties, but they agree at the hearing that it is a matter of law for this Tribunal to determine. Thus, I do not need to consider the correspondence relied on by the parties any more.

20.  In sum, I am of the view that as a matter of proper construction of the DMC, the legal costs payable to the Applicants under the 1^st and 2^nd Allocaturs by the IO are part and partial of the management expenses, which are to be shared by the owners of the Building in accordance with their respective management shares under the DMC.

Issue 2

21.  On issue 2, the Respondents submit that in granting leave to enforce the judgment against the IO against any owner in exoneration of the other owners, the Tribunal should have regard to whether that owner’s act has resulted in the judgment against the IO. If that owner has exclusive use of the common part of a building and it is the failure to maintain that common part that causes injury to third party resulting in judgment against the IO, leave to enforce the judgment against the IO against that owner could be granted in exoneration of the other owners because that owner has breached his statutory duty to maintain the common part which he has exclusive use under section 34H of the BMO. (see Part IV 20.5 sub-paragraph (f) of the Hong Kong Conveyancing Law & Practice Volumn 1). In the present case, the owners resolved in a properly convened meeting that the High Court Action be instituted against the Applicants. It is true that the 2^nd and 4^th Applicants opposed the passing of the resolution but the resolution is still valid and binding on all the owners of the Building including the 2^nd and 4^th Applicants (see paragraph 3(j) of Part 5 of the DMC). The Respondents therefore submit that it is wrong for the 2^nd and 4^th Applicants to say that they should not be bound by the resolution and should not be required to make the contribution because the DMC states very clearly that they are bound. To hold otherwise would result in extreme chaos because the dissenting owners can then say that they are not bound by any resolution of the owners in respect of which they object and they are not required to make any contributions that the resolution entails.

22.  Section 17(b) of the BMO gives a wide discretion to the Tribunal to give leave to issue execution against any owner. Strictly speaking, any owner can be liable for the whole sum due under the judgment in question, as any owner is liable jointly and severally with the other owners under the judgment against the IO. In the premises, it is just a matter of proper exercising of the discretion of this Tribunal. It is true that liability to contribute to legal costs is “an internal matter affecting those who constitute the Owners whose duties and obligations inter se arise under and are governed by the deed of mutual covenant” (per Le Pichon JA in Aberdeen Winner Investment Co Ltd v. Incorporated Owners of Albert House [2004] 3 HKLRD 910, see also The Incorporated Owners of Tsui Chuk Garden v. Edentown Ltd, CACV No. 18 of 2005). However, the present proceedings are not proceedings against the IO but against the Respondents who are responsible for issuing the High Court Action against the Applicants. In the exercise of the Tribunal’s discretion, I am of the view that it would be unfair for the 2^nd and 4^th Applicants as successful parties in the High Court Action to bear part of the costs themselves. I will therefore allow the 2^nd and 4^th Applicants not to be included in the apportionment for paying the outstanding sum.

Issue 3

23.  On issue 3, the Respondents submit that some of the Respondents had made contributions towards the sum recovered by the Applicants, and it would be grossly unjust to ask those Respondents to pay again, as it would mean that they have to pay twice.

24.  I do not agree with the Respondents’ submission in this regard. As aforesaid, each owner has in fact the duty to pay the full amount alone, as the liability is joint and several. There is also no reason to suggest that the Applicants should only recover from those who have not paid before, as it would mean that the Applicants might not be able to recover the balance sum at all, when the remaining owners are unable to pay. I therefore accept the Applicants’ argument that they are entitled to claim further contributions from even those who had paid before. If any Respondent who has paid in excess of his share, he can seek contribution from the defaulting owners as a matter of internal matter among themselves.

Conclusion

25.  In view of my decisions above, I find that the Applicants are entitled to have leave to issue execution against all the Respondents to recover the whole of the balance sum of $724,109.68 together with interest thereon at judgment rate from 3 August 2010 until satisfaction. I therefore order in terms of the first option of reliefs sought by the Applicants.

26.  As to the costs of the originating summons herein, I grant an order nisi for the Respondents to pay the Applicants’ costs including certificate for counsel to be taxed on High Court Scale if not agreed. The costs order nisi shall become absolute if there is no further application for costs within 14 days from the date of this order.