HUGE DRAGON CORPORATION LTD v. THE INCORPORATED OWNERS OF LUNG MUN OASIS

CACV 6/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 6 OF 2013

(ON APPEAL FROM HCA NO 524 OF 2010)

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REASONS FOR JUDGMENT

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Hon Stock VP :

1.  I agree with the reasons provided by Poon J.

Hon Lunn JA :

2.  I also agree.

Hon Poon J :

INTRODUCTION

3.  The plaintiff is the owner of 16 units in the Wet Market of Lung Mun Oasis in Tuen Mun, New Territories (“the Estate”).  The defendant is the incorporated owners of the Estate.

4.  The plaintiff claimed against the defendant for, among other things, a declaration, in substance, that the defendant had wrongly determined the management expenses payable by the owners of the units in the Wet Market (“the Owners”) since 1998.  On 11 September 2012, the master refused the plaintiff’s application for summary judgment and gave the defendant unconditional leave to defend.  On 17 December 2012, Deputy High Court Judge Mayo allowed the plaintiff’s appeal and entered judgment against the defendant on the declaration sought.  The defendant appealed to this Court.  On 25 September 2013, after hearing counsel, we dismissed the appeal with costs.  These are the reasons of our decision.

DETERMINING THE MANAGEMENT EXPENSES

5.  The only issue in this appeal concerns how the defendant should determine the contributions towards the management expenses to be made by the Owners under the relevant provisions of the principal deed of mutual covenants in respect of the entire Estate, the sub-deed of mutual covenants in respect of the Non-Residential Development of the Estate and the sub-sub-deed of mutual covenants in respect of the Wet Market, all dated 8 August 1998 (“the Principal Deed”, the Sub-Deed” and “the Sub‑Sub‑Deed” respectively).

6.  Clause 1 of Sub-section D of Section VI of the Principal Deed requires the defendant to prepare the Management Budget annually for the ensuing accounting year for the purpose of proper and efficient management of the Estate and of determining the contributions payable by the owners of the Estate.  The Management Budget shall include, under sub-clause (c), the Commercial Management Budget which shall show the estimated expenditure of the management and maintenance of the Commercial Development (including the Wet Market), after excluding certain items of expenses.

7.  Clause 7(1)(c) of Sub-section D of Section VI of the Principal Deed then requires the owners of the Commercial Units to contribute:

“towards the Commercial Management Expenses (where applicable) in accordance with the Commercial Management Budget pro rata according to the number of Management Shares allocated to the Commercial Units owned by them respectively.”

8.  Pursuant to the Third Schedule of the Sub-Deed, the numbers of management shares allocated to the Wet Market and the Commercial Development are 1,001 and 4,219 respectively.  So the ratio for the purpose of Clause 7(1)(c) is 1001/4219 (“the Ratio”).

9.  The obligation of the Owners to pay the management expenses in accordance with Clause 7(1)(c) of Sub-section D of Section IV of the Principal Deed is repeated in Clause 4(b) of the Sub-Sub-Deed.

10.  In my view, the effect of the above provisions is, upon a proper construction, beyond doubt.  In short, the defendant should first prepare the Commercial Management Budget and then apply the Ratio to determine the Owners’ contributions towards the management expenses.

OVERCHARGING

11.  Since the Commercial Management Budget varies from year to year, the Owners’ contributions towards the management expenses must likewise vary too.  However, the manager of the Estate, the defendant’s predecessor for the purpose of the DMCs, had since 1998 applied a fixed sum of HK$23.82 per Management Share for the monthly contribution towards the management expenses paid by the Owners.  After its incorporation in March 2001, the defendant has applied the same fixed rate up to date.  Based on the available evidence, between 2005 and 2011, the management expenses determined by the defendant by applying the fixed rate and paid by the Owners totaled HK$1,716,696.00; whereas had the defendant applied the Ratio, the contributions towards the management expenses to be made by the Owners would have varied from year to year and amounted to HK$1,552,269.85 in total.  In other words, the defendant had overcharged the Owners HK$164,426.15 between 2005 and 2011.

FIXED RATE NOT JUSTIFIED

12.  In the courts below and before us, the defendant advanced a number of reasons to justify its application of the fixed rate in determining the contributions towards the management expenses to be made by the Owners.  Those reasons may be conveniently reduced to three but none of them is arguable.

13.  The first and foremost reason relied on by the defendant is that it is entitled to keep a healthy annual budget, which might be a deficit or surplus budget, depending on the year in question.  However, even assuming that it is so entitled, what the defendant has failed to explain is why it is necessary to apply the fixed rate for each of years between 1998 and 2011.  More importantly, keeping a healthy annual budget does not allow the defendant to disregard the clear provisions of the DMCs and the Ratio in determining the Owners’ contributions towards management expenses.

14.  Mr Chan, for the defendant, conceded that if we rejected this reason, which we did, the appeal must fail.  In light of his concession, I would only deal with the other two reasons briefly.

15.  Mr Chan relied on Clause 10 of Sub-Section D of Section VI of the Principal Deed, which provides :

“The Manager shall have power to increase or reduce the amount to be contributed monthly by any [owner] at such sum as shall be determined as aforesaid and from time to time to meet revised estimated expenditure in the accounting year to the intent that any such amount shall form part of the monthly contribution of such [owner] to the Management Expenses and be recoverable accordingly.”

16.  On a proper reading, the defendant’s power to increase or reduce the contributions under Clause 10 is engaged only when (i) such contributions have already been determined in accordance with Clause 7(1) in the first place and (ii) there is a need to meet any revised estimated expenditure.  It does not entitle the defendant to disregard Clause 7(1)(c) and apply the fixed rate in determining the Owners’ contributions towards management expenses.

17.  Finally, Mr Chan referred to Clauses 1(a) and 9 of Sub‑Section B of Section VI of the Principal Deed and Clauses 1 and 2 of Section VII of the Sub-Deed and argued that the defendant has a general discretion to determine the Owners’ contributions towards the management expenses.  It is not necessary to recite those provisions here.  Properly read, those provisions, which deal with some other matters, simply do not support Mr Chan’s argument at all.

CONCLUSION

18.  Plainly, the defendant has no defence to the declaration sought.  The defendant’s appeal was unmeritorious.  It was therefore dismissed with costs.