KWOK MO KAI DORIS v. THE INCORPORATED OWNERS OF KARIN COURT

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I have had the advantage of reading the judgment of Le Pichon JA in draft.  I agree with it.  I would only like to add a few observations of my own.

2.  I consider that the argument on construction on behalf of the Incorporated Owners would, if taken to its logical conclusion, enable those co-owners who were for the time being in control of the Incorporated Owners to vary the incidence of charges for costs for the maintenance of the building to their advantage.  Mr Shieh’s response to that point was that the court could control any unfairness.  In my view that answer alone demonstrates that any rational construction of the DMC must entail the preservation of the proportions of the contributions unless the contrary was clearly the case.  In my view the matter is abundantly clear that the Incorporated Owners’ argument was flawed from the start.

3.  In respect of the waiver and estoppel argument, I am unable to see how any such waiver or estoppel can operate for any future decision of the Manager.

Hon Le Pichon JA:

4.  This was an appeal by the Incorporated Owners of Karin Court (“the Incorporated Owners”) from the judgment dated 19 July 2005 of HH Judge Yung sitting as the Presiding Officer of the Lands Tribunal.  At the conclusion of the appeal hearing, the appeal was dismissed with costs.  Written reasons were to be handed down later which we now do.

5.  The issues before the judge were (1) whether clause 8 (b) of the Deed of Mutual Covenant dated 30 September 1975 (“the DMC”) gave the Incorporated Owners, as Manager under the DMC, power to vary the apportionment of management expenses amongst the co-owners of Karin Court (“the building”) laid down in clause 3 and the third schedule of the DMC, and if so, (2) whether by reason of waiver, acquiescence and/or estoppel the applicant must continue to pay more than she would otherwise have been required to under the DMC.  The judge ruled that management expenses had to be apportioned in accordance with clause 3 and the third schedule to the DMC .  As to the second question, as the applicant had abandoned her claim to reopen the account prior to her challenge to the management fees sought which the judge, on a broad brush basis, took to be January 2004, the issue whether she was entitled to a refund for the period before January 2004 did not need to be decided.  As to future payments as from January 2004, it was implicit from the judgment that the judge considered that the applicant was not obliged to pay more than the amount payable calculated, where appropriate, in accordance with the ratios of the figures set out in paragraph 1 (b) of the third schedule under the DMC.

Background

6.  The building is a 12-storey residential building comprising 24 flats.  There are two flats on each floor, Flat A and Flat B, having any area of 1000 sq. ft and 700 sq. ft respectively.  There are altogether 24 car parks situated on the ground and first floors.  Under the DMC, only residents of the building are entitled to use the car parks.

7.  The applicant became one of the registered joint owners of Flat 12B, portion B of the roof and one of the car parks in 1992.  In March 2004 the applicant made an application to the Lands Tribunal leading to the judgment which is the subject of the present appeal.  Since its incorporation in February 1977, the Incorporated Owners has acted at all material times as the Manager under the DMC and, for convenience, in this judgment the terms “Incorporated Owners” and “the Manager” are used interchangeably.

8.  Clause 3 (a) of the DMC dealt with the incidence of management expenses as follows:

“All costs charges and expenses relating to the said Premises and the said Building as a whole including but not limited to Crown Rent, the maintenance repair and cleaning of the lifts, entrance halls, staircases, landings, corridors, passages, open spaces, the provision of caretakers, watchmen and similar staff, the repair and the maintenance of the main sewage and drainage pipes and conduits and other main services and garbage disposal shall be paid by the owners for the time being of all the undivided shares in the said Premises and the said Building in the proportions or shares of such costs and charges and expenses as are set out in the Third Schedule hereto.”

The third schedule was in the following terms:

“1. (a) The cost and expenses for replacing the Lifts in the said Building shall be borne by all the co-owners of the flats of and in the said Building (EXCEPT those who own any portion of the Car Parking Spaces on the Ground Floor and the First Floor) in proportion to their respective such shares and interests of and in the said Building.

(b) The cost and expenses for operating servicing maintaining and repairing the said Lifts shall be paid by all the co-owners of the said Building (EXCEPT those who own any portion of the Car Parking Spaces on the Ground Floor and the First Floor) and the cost and expenses for operating, servicing, maintaining and repairing the water pumps, walls, water tanks, drainage, pipes, conduits and all apparatuses intended for the general service of the said Building and the lighting of the entrance, staircases, landings and passages in common use and garbage disposal and cleaning of all parts of the said Building in common use and reasonable remuneration for any clerical help employed by the Manager or by any authority which may be set up by the co-owners of the said Building as well as the wages of all watchman, caretakers and janitors shall be paid by the co-owners of the said Building in accordance with the following Table:

	Amount payable monthly in
	respect of each Flat or
Description of Premises	Car Parking Spaces
Flat A from 1st to 12th floors (inclusive) each at	$220.00
Flat B from 1st to 12th floors (inclusive) each at	$140.00
Car Parking Spaces Nos.1 to 24 (inclusive) each at	$  5.00
Each of Portions A and B on the Roof	$  5.00

(c) If the cost and expenses aforesaid exceed the total amount payable by the co-owners of the said Building in accordance with the Table set out above, then such excess shall be shared by the co-owners in proportion to the amount payable by each of them as aforesaid as it bears to the total amount payable by all the co-owners.

2. The Crown Rent and the insurance premium payable on the policy (if any) for insuring the said Building against loss or damage by fire shall be paid by the co-owners of the Building in proportion to their respective shares and interest of and in the said Building.”

It will be seen that contributions for Flat A/Flat B/roof portion/car park set out in the table in paragraph 1 (b) of the third schedule are in the ratio 44/28/1/1 (“the specified ratio”).  That governed recurrent management expenses other than Crown Rent and insurance which, under paragraph 2 of the third schedule are apportioned by reference to the number of undivided shares held for Flat A/Flat B/roof portion/car park in the ratio 10/7/1/1 (“the undivided shares ratio”).  There is also a separate provision relating to capital and recurrent expenditure concerning the lift, being a variation of the undivided shares ratio in as much as the shares attributable to car parks are excluded.

9.  Historically, well before the applicant became one of the owners of the building, management expenses had been levied on the co-owners on a basis otherwise than as provided for by clause 3 of the DMC and the third schedule.  Such minutes of the Incorporated Owners as have been exhibited show that that had been the case from an date unknown save that it was prior to 3 February 1980.  From the time the applicant became one of the owners until her application in March 2004, she had not objected to the amount of management fees levied on the premises owned by her.

The construction point

10.  Put shortly, the Incorporated Owners rely on clause 8 (b) as conferring the requisite power on them as the Manager to apportion management expenses among the co-owners in a manner different from that stipulated by clause 3 and the third schedule.  Clause 8, in pertinent part, reads as follows:

“(b) Each of the owners of the flats and the car parking spaces in the said Building shall in respect of each flat and each car parking space owned by him pay a reasonable sum each calendar month in advanceon or before the 1^st day of each month to the Manager as contribution towards his share of costs for the maintenance and management of the said Building.  The amount to be paid in advance each month shall be decided upon by the Manager and shall, until and unless otherwise decided upon by the Manager, be in accordance with the provisions set out in the Third Schedule.

(c) …

(d) If the contributions towards any of the expenses aforesaid shall be more than sufficient to cover the same and there shall be a surplus then such surplus shall be held by the Manager in trust for the owners contributing the same in proportion to the amount of their respective contributions and shall be retained by the Manager in payment of such expenses.”

11.  It is the applicant’s case that clause 3 (a) “entrenches” the ratio for apportioning management fees.  For the Incorporated Owners, on the other hand, it was contended that the words “until and unless otherwise decided by the Manager” entitled the Incorporated Owners as ‘Manager’ not only to revise the monthly management fees by increasing or decreasing the amounts set out in the table to the third schedule by the same multiple or percentage, but also “to vary that ratio itself”.  The written submissions of the Incorporated Owners appear to have been premised on there being only one ratio for apportionment i.e. that to be derived from the table in paragraph 1 (b) of the third schedule but whilst the rate of contribution was set by reference to the that ratio which applied to the bulk of recurrent management expenses, the third schedule contained no less than 3 different ratios for apportionment depending on the expenditure in question.

12.  Clause 3 (a) provides for the incidence of recurrent management expenses, stipulating that those are to be borne by the co-owners inter se in the proportions or shares set out in the third schedule.  As noted above, under the third schedule, except for expenses that relate to the repair and maintenance of the lift, Crown Rent and the insurance premium all of which fall to be apportioned differently, all other recurrent management expenses were to be apportioned in accordance with the specified ratio.  In the event of there being any shortfall, that shortfall was also to be defrayed by the co-owners in the same way.  See paragraph 1 (c) of the third schedule.

13.  By way of contrast, clause 8 (b) addresses the practical matter of putting the Manager in funds by providing for the payment of management expenses by the owners on a monthly basis in advance.  The focus is thus on the amount to be paid by each co-owner by way of monthly contribution.  Although expressed to be decided upon by the Manager, clause 8 (b) went on to provide that, unless and until otherwise decided by the “Manager”, it should be in accordance with the provisions set out in the third schedule.  As noted above, despite the 3 different apportionment ratios for different categories of expenses, there was only one rate of contribution specified.  The words “until and unless otherwise decided upon by the Manager” in my view do no more than empower the Manager to revise the amount of contributions set out in the table in paragraph 1 (b) of the third schedule upwards or downwards but in the same ratio as between Flat A/Flat B/car park/roof portion.  There is nothing in that clause that authorises the Manager to alter or vary the incidence of liability as between the co-owners inter se in respect of each of the 3 apportionment ratios.

14.  I would add that it would be surprising if provisions as fundamental as the incidence of liability for management expenses among the co-owners inter se could be altered at the discretion of the Manager of the building, albeit subject to the reasonability requirement.  I say this because when one considers the provisions relating to the “Manager” in the DMC, it was envisaged that he would be an employee whose remuneration is capped at $460 per month. (See clause 14)  The notion that a person employed in that capacity should be given an unfettered discretion (subject only to the reasonability requirement), to alter the apportionment ratio so carefully spelt out in clause 3 and the third schedule in respect of the different categories of expenses is not only out of place, it is also contrary to common sense.  The fact that the Manager now happens to be the Incorporated Owners cannot affect the true construction of the DMC or make the argument any more respectable when the quorum for a meeting of the Incorporated Owners is but 10% of the owners.  For my part, a construction of the DMC that has that effect is one that should not be adopted if an alternative construction that would not lead to such an absurd result were available.

15.  For these reasons, I have no hesitation in coming to the conclusion that the Incorporated Owners as the Manager had no power to alter the apportionment of management expenses among the co-owners of the building.

Acquiescence

16.  Mr Shieh SC who appeared for the Incorporated Owners submitted that the fact that the applicant had made no objection to the management fees charged during the 12 years after becoming an owner was sufficient to entitle the court to infer abandonment.  It was said that the period was long enough to bar the recovery of land and amounted to “notorious and avowed acquiescence” in the breach of covenant, citing Fairfax v Attorney General [1995] 2 HKC 617.  In that case, the plaintiff sought a declaration that the covenant under a Crown lease restricting development of land to the erection of one or more villa residences could not be enforced against it.  A six-storey building that had been erected on the site not far short of 40 years previously manifestly did not comply with the building covenant.  On those facts, the court concluded that the Crown as landlord had long since abandoned any legitimate interest in the enforcement of that covenant.  But the Fairfax principle is simply not applicable to the present case.  The length of time concerned aside, in the present case, the covenant in issue is contained in a deed of mutual covenant affecting all the co-owners of the building.  It is the statutory duty of the Incorporated Owners as Manager under section 18 (1) (c) of the Buildings Management Ordinance to enforce the obligations contained in the DMC.  In my view, the Incorporated Owners may not assert a right that negates or is at variance with that statutory duty particularly when it involves only one of many co-owners: for it would strike at the concept of mutuality which underpins the DMC.  Whether that assertion is framed as an application of the Fairfax principle or, in the alternative, as waiver, estoppel and/or acquiescence on the part of the co-owner, the effect of which is to extinguish the co-owner’s rights under the DMC, matters not.  The court should not entertain, much less allow, such a claim.

17.  As part of the waiver, estoppel and/or acquiescence argument, it was urged upon this court that there is detriment to the Incorporated Owners in that certain decisions had been taken based on the then unchallenged re-apportioned management fees.  To illustrate this detriment, Mr Shieh referred to the installation of a gate to the car park which carried with it significant initial as well as maintenance costs.  It was said that this was done for the benefit of the car park owners and that therefore it was only fair that their contribution should be sufficient to defray those additional costs.  I do not agree.  Quite apart from the fact that only residents of the building are entitled to use the car parks under the DMC, the gate provides security to the co-owners to ensure that unauthorised persons do not gain access via the car parks to the building itself and is thus beneficial to all co-owners.

18.  For all these reasons, I would reject the submission based on acquiescence, waiver and/or estoppel.

Hon Stone J:

19.  I agree with the judgment of Le Pichon JA.

20.  Initially I had been attracted to the argument advanced by Mr Shieh SC that as a matter of construction clause 8(b) of the Deed of Mutual Covenant in effect ‘trumps’ the provisions of Clause 3(a).

21.  On reflection, however, and notwithstanding the persuasiveness of his argument, I do not think that this should be regarded as being the case.

22.  It seems to me that if and in so far as something as significant as the contribution ratio ‘entrenched’ in Clause 3(a) – which refers back to the proportions as set out in Third Schedule – is to be varied, then clearer words are required so as to achieve this purpose than is the case with the wording of clause 8(b), which, as Le Pichon JA points out, in itself addresses placing the Management in funds for the payment of management expenses on a monthly basis in advance.

23.  Accordingly I do not consider that clause 8(b) in fact achieves, by a side-wind, that which the Incorporated Owners now have urged upon the court.

24.  As to the ‘acquiescence’ point, for my part I also would decline to infer from the circumstances the abandonment which Mr Shieh concedes is necessary to get home on this issue; the highest that this reasonably can be put, in my view, is that the period of acquiescence is ‘suspensory’ only, and does not serve to extinguish a co-owner’s rights under the DMC.