THE INCORPORATED OWNERS OF MANDARIN COURT ARBUTHNOT ROAD v. GOLDBEACH INDUSTRIAL LTD

LDBM 110/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT APPLICATION NO. 110 OF 2014

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J U D G M E N T

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1. The applicant is the owners’ incorporation (“IO”) of a building assigned street no. 16 Arbuthnot Road and the respondent an owner of the only 2 shops of that building. By the present application, the applicant claims against the respondent for balance of:

i) outstanding management fee in the sum of $57,000 (“1^st Claim”); and

ii) outstanding contribution towards a “Contingency Fund” in the sum of $9,228 (“2^nd Claim”).

2. On the second day of trial, the IO applied for discontinuance of the 1^st Claims with costs to the respondent. Accordingly an order to that effect was made. For taxation purpose, this tribunal directs half of the respondent’s costs incurred up to the making of the discontinuance order be appropriated to the 1^st Claim, and be assessed summarily on a date to be fixed if the parties cannot agree on the amount payable.

3. The only outstanding issue for the trial is the applicant’s 2^nd Claim. The dispute basically turns on the construction of certain terms of a Deed of Mutual covenant dated 26 October 1987 (Memorial no. UB3546855) in respect of the said building (“the said DMC”). Most of the relevant facts are basically not in dispute.

Brief background and the Contingency Fund

  Brief Background

4. The applicant was incorporated on 11 July 1990 under the Building Management Ordinance, Cap 344 (“BMO”). The respondent has become the registered owners of the whole of the ground floor (“G/F”) the lower ground floor (“LG/F”) as from August 1999. The building in question is a small single-block tower erected on a narrow strip of land lying on a sloping street. It comprises the LG/, G/F both for shop purposes and 10 floors above each with 2 domestic units. According to the said DMC[1], the allocation of undivided shares are as follows:

		Total
i)	Each units from 1st  to 10th floor (1 share x 20):	20
ii)	G/F shop (3 shares):	3
iii)	LG/F shop (3 shares):	3
iv)	Common area and common facilities (1 share):	1
	Total:	27

5. The undivided shares ratio between a shop and domestic unit is 3:1 (“undivided share ratio”).

6. Clause 5 of the said DMC and Part I of its Third Schedule stipulate:

“5. Subject to Clause 6, each and every owner of the Land and the Building shall at all times hereafter pay the monthly amount set out in Part I of the THIRD SCHEDULE in respect of his own premises against the Management Expenses set out in Part II of the THIRD SCHEDULE to well and sufficiently manage repair and maintain the Land and the Building and shall at all times hereafter be bound by and observe and perform the covenants provisions and restrictions set out in Part III of the THIRD SCHEDULE.

…

THE THIRD SCHEDULE

PART I

PREMISES	MONTHLY AMOUNT PAYABLE
Lower Ground Floor	HK$720.00
Ground Floor	HK$720.00
Each Domestic Unit	HK$360.00
(1st – 10th Floors)

PROVIDED THAT  if the total contribution receivables as aforesaid by the Manager shall be insufficient to meet the Management Expenses then each and every owner will make good a due proportion of the deficiency by making a further contribution to the Manager such further contribution being in the same proportion to the total deficiency as the contribution of the owners to the overall costs calculated as aforesaid bears to the total of the Management Expenses Provided Further that the said monthly amount shall be revised and adjusted from time to time by the Manager in the like proportion herein specified and the monthly Management Expenses shall be payable in advance on the first day of each calendar month.”[2]

7. Apparently, the contribution ratio of management fee by a shop and a domestic unit is 2:1 (“management share ratio”) according to the said DMC.

8. The present dispute lies in which sharing ratio should be adopted in arriving at the respondent’s contribution towards the contingency fund set up by the IO.

  The Contingency Fund

9. Although it was pleaded in the Application that the Management Committee (“MC”) of the IO resolved to establish a “Sinking Fund” on 11 December 2012[3], the said pleaded case appears not entirely correct and is inconsistent with contemporaneous documents comprising the IO’s meeting minutes which are basically not in dispute.

10. After reading the IO’s meeting minutes, it is the finding of this tribunal that at the IO’s annual general meeting (“AGM”) held on 7 June 2012, it was resolved that a sinking fund was to be established in order to cope with:

“…the expenses of fire-services repair as well as those expected maintenance like regular wax polishing of the floor of newly renovated lobby and unexpected repair of common facilities in future …”[4]

11. It was further discussed and resolved in a MC meeting on 11 December 2012 that the aforesaid sinking fund is for:

“…the general maintenance and contingency of the building excluding the lift. …

…, then each share (referred to the relevant schedule of the Deed of Mutual Covenant) should contribute HK$6,000 to the new established sinking fund account before the end of February 2013. Contribution notice will be posted up in G/F lobby of the building and with copy to the owners through email.”[5]

12. By a notice dated 31 January 2013 issued by Alico Management Ltd (“Alico”), the IO’s property manager and agent, the respondent, being owner of G/F and LG/F, should pay $12,000 for each of its 2 shops while each domestic unit owner pay $6,000 per unit. It is therefore apparent that the applicant apportioned the contribution to the sinking fund according to the management share ratio.

13. At the AGM held on 24 August 2013, it was resolved that the IO should run a “General Reserve” instead of a “Sinking Fund”, and the contribution already paid by owners towards the Sinking Fund be transferred to the “General Reserve”. It is also resolved that the present firm of solicitors acting for the applicant in the present proceedings should be retained to deal with litigation then instituted by the respondent (not the present application)[6].

14. At a MC meeting on 9 October 2013, it appears that there has been further discussion on the fund so established. It was resolved:

“Resolution 3:

It was resolved that the General Reserve Fund discussed and resolved in the Committee Meeting on 11^th December 2012, being in law a Contingency Fund under Section 20 of the Building Management Ordinance and in the sum of $144,000, be hereby confirmed and ratified, and if necessary be established. It was further resolved that the apportionment of the General Reserve Fund shall be revised and payable by the owners by undivided shares according to Section 22 of the Ordinance. The revised contribution shall be payable upon demand by the Manager. It was further resolved that for those owners who have already paid the contribution of General Reserve Fund, they will be refunded of the difference after the above re-apportionment.”[7]

15. By the resolution set out in the preceding paragraph, the apportionment based on management share ratio was abandoned. Instead, contribution based on the undivided share ratio is adopted. No doubts it leads to more contribution to be paid by the respondent.

16. It is the evidence of Mr. Ng, the IO’s chairman, that the use of a different contribution ratio is upon advice of applicant’s present firm of lawyers. It is also Mr. Ng’s evidence, which this tribunal accepts, that the fund, now renamed as Contingency Fund upon legal advice, was set up to cater for urgent and unforeseen matters that may pop up in connection with the building’s management such as urgent repairs because the monthly management fees do not provide any surplus to cater for such contingency. He said when they discussed the setting up of the fund, he had in mind the sorts of incidents such as breakdown of the building’s pump which had in fact occurred twice before. The IO wants to have a large enough fund to be constituted immediately by asking for contributions in one go instead of having to accumulate through monthly management fee surplus, even after an increase. 

17. By 2 demand notes each for $16,614 issued by Alico, an aggregate of $33,228 was demanded from the respondent in satisfaction of its contribution. The apportionment is based on the undivided share ratio[8].

18. It is the evidence of Miss Chin, a director and representative of the respondent that the respondent accepts the setting up of the present fund to cater for contingencies and cover general management expenses shortfall, if any, which ought to have been covered by their monthly management fees. She does not challenge the purpose for which the fund is formed. She, however, disputes the way of apportionment.

19. It is not in dispute that the respondent settled a sum of $24,000 on 6 January 2014, leaving a balance of $9,228 unpaid. According to the respondent, $24,000[9] is the exact amount it is required to pay if the contribution is based on the management share ratio, and the other domestic unit owners are required to pay $6,000 per each unit.

20. It is submitted by Mr. Peter Chan on the applicant’s behalf that there is no provision in the said DMC providing for how the said Contingency Fund under s.20(2) of the BMO is to be contributed. Accordingly, by virtue of s.22(2) of BMO, the contribution should be fixed by the MC in accordance with the undivided shares of the owners.

21. The respondent disagrees.  Its contention, in a nutshell, is this. The fund is basically applied to cover management expenses in relation to the building, whether or not they are regular, contingent or urgent. The nature of these expenses is no different from management expenses defined in the said DMC the contribution of which is based on management share ratio. The same ratio should therefore be applied. There is no reason for the contribution to be fixed by a different formula.

Discussion

22. The respondent has no objection to the setting up of the fund to cater for contingencies and to cover shortfall of general management expenses established under s.20(2) of the BMO, despite the various names given it after its birth. The question is whether or not the said DMC has provided for fixing of its contribution from owners.

23. The Contingency Fund is set up to cover 2 broad areas of expenses:

i)   Urgent and unforeseen expenses, such as urgent repair expenses, in connection with the exercise of powers of the IO under the said DMC and BMO; and

ii)  Shortfall in the daily management expenses of the building.  

24. Clause 5[10] of the said DMC provides that each owner should pay the management fee in accordance with the management share ratio against the “Management Expenses” set out in Part II of the Third Schedule. Each owner also covenanted with each other to be bound by and observe and perform Part III of the Third Schedule. Management Expenses is defined in the said DMC and particularly in the aforesaid Part II. This Part, together with the relevant part of Part III of the Third Schedule, is set out as follows:

“[11]‘Management Expenses’ shall mean the costs charges and expenses for the management and maintenance of the building as provided in this Deed but excluding the Manager’s Remuneration.

…

Part II

1. The Management Expenses includes but are not limited to the followings:-

(a) The costs charges expenses to well and sufficiently manage repair uphold support maintain pave purge scour cleanse empty amend and keep all building and structures erected or to be erected on the Land and all wells banks cuttings hedges ditches rails lights pavements privies sinks drains channels watercourse pumps tanks roads paths the facilities thereto belonging and which shall in anywise belonging or appertaining to the Land as well as the common Area in by and with all and all manner of needful and necessary reparations cleansings and amendments whatsoever;

(b) Electricity water caretakers’ telephone and other similar charges;

(c) Remuneration for caretakers watchmen cleaners attendants and the like;

(d) Insurance premia;

(e) All other charges which the Manager considers necessary or requisite for the proper management operation and maintenance of the Building and for the improvement or maintenance of the Building and for the improvement or maintenance of the services amenities or facilities thereon; and

(f) Management accountancy legal advisory and consultation fees and all other expenses properly incurred by the Manager in carrying out its duties and obligations.

Part III

…

2. Every such owner HEREBY COVENANTS with each of the others that he will:-

(a) Deposit with the Manager a sum equivalent of 3 times the monthly management fee referred to in Part I of the THIRD SCHEDULE above partly as security against the Owner’s liabilities under these presents and partly to meet any exceptional costs, charges and expenses of initial establishments and major repairs or in respect of such contingencies as the Manager shall deem fit;

…

3. Provided That the owners for the time being of the shops shall not be responsible to contribute the costs charges and expenses for the operation maintenance repair and replacement of the lifts in the Building.” (Emphasis added)

25. According to Part II, management fee which is apportioned according to the management share ratio is payable for managing, repairing, maintaining or even improving the building. Now, any shortfall arising out of the daily management of the building normally covered by the management fee is proposed to be paid off using the Contingency Fund.

26. On the other hand, the applicant[12] does keep another fund constituted by 3 months’ management fees contributed by each owner according to Part III, Third Schedule of the said DMC. This is usually referred to as management fee deposit and payable when anyone becomes an owner of the building. According to paragraph 2(a) of Part III, this fund is for meeting, inter alia, major repairs and such contingencies as the IO thinks fit. This deposit or fund is contributed by each owner paying 3 months management fee. The management share ratio is adopted.

27. It is noted that one of the stated objectives of this 3-month fund is to cater for contingencies as the IO deems fit. In the tribunal’s judgment, it is exactly the same as one of the Contingency Fund objectives. This tribunal accepts Mr. Ng’s evidence that the Contingency Fund is to cater for unforeseen and urgent repair expenses, such as when water pumps have broken down and other unforeseen circumstances arising from management of the building, excluding the lift. The Contingency Fund is therefore set up to cover a scope which has been contemplated by the 3-month deposit/fund raised by reference to the management share ratio.

28. Since the Contingency Fund is raised to cover 2 major areas both of which, according to the said DMC, are raised by reference to the management share ratio, it will offend common sense to adopt different ratio simply because the fund’s name is not used or not mentioned in the said DMC. The fact that the label “Contingency Fund” not being used or mentioned in the said DMC does not mean the contribution to it is not provided for. In the tribunal’s judgment, one has to examine whether the nature of use that the fund is put to is the same or similar to those funds or payment provided for in the said DMC, though with different or even no label at all. The court looks at the substance and not label of the fund. In the tribunal’s view, the said DMC has sufficiently provided for the contribution ratio to the Contingency Fund now set up by the IO.   

29. Mr. Chan for the applicant submitted that Part III of the Third Schedule is only restricted to the management fees deposit. It has no application to any newly established fund pursuant to the BMO. This tribunal cannot accept his submission. If his submission were to be accepted, unless a DMC has expressly referred to a particular BMO fund and set out its contribution ratio, all BMO funds would have to be contributed by undivided share ratio. It is too restrictive a construction. In addition, it does not appear that the BMO is drafted in such manners as to reflect this. In the tribunal’s judgment, as discussed above, one has to approach the matter by considering whether the DMC has made provisions for matters of similar nature.Only when none can be found that the default position of undivided share ratio as set out in s.22(2) of the BMO is to be adopted.

Conclusion and Orders

30. By reasons of the above, it is this tribunal’s conclusion that the Contingency Fund established by the applicant is to be contributed by owners according to the management share ratio instead of the undivided share ratio. This 2^nd Claim of the applicant is therefore dismissed.

31. Following the usual principle of costs are to follow the event, this tribunal now make a costs order nisi that the applicant is to pay the respondent’s costs of defending the 2^nd Claims, such costs to be assessed summarily on a date to be fixed if the parties fail to agree on the same, such costs order be made absolute if no application is made to the tribunal to have it varied within 14 days from today.