XCHRX LEUNG KWOK FU and Others v. KONG MEAU CO. LTD.

1997, Nos. A4427 & A6172

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background

1. This litigation concerns a block of flats called Golden Gay Mansion (the block). There are 27 flats in the block. The plaintiffs own 8 of these. The defendant owns 16 of the other 19.

2. There is a deed of covenant (the deed) governing the parties rights in the land and the block and by which the defendant is the agent of the owners to manage and provide services in respect of the block.

The deed provides for "a meeting of the owners to discuss and decide matters concerning" the block. Each of the owners, or joint owners, has one vote. A resolution of the majority present is binding on all the owners.

3. There has been a long-running dispute between the plaintiffs and the defendant concerning the defendant's management of the block. This culminated in the plaintiffs issuing a writ on 29 April 1997.

4. In its statement of claim, the plaintiffs cite express provisions of the deed and other provisions incorporated by the Building Management Ordinance (Cap. 344) (the Ordinance). The plaintiffs allege that "for many years past and up to the present" the defendant has breached these provisions, and gives details of the breaches alleged. In particular, the plaintiffs say that the defendant has created 4 car parking spaces on the common parts (the spaces). The plaintiffs claim specific performance, and injunction and other relief.

5. In its defence, the defendant admits the provisions of the deed cited but denies any breaches.

6. In a counterclaim, the defendant claims that the plaintiffs have failed to pay management, maintenance and repair fees. The management fees are claimed at the rate of $1000 per month to the end of January 1996, $1200 per month until the end of March 1997 and $1600 per month from the beginning of April 1997.

7. In its defence to the counterclaim, the plaintiffs admit liability for management fees, without saying for what amount, but say that the defendant failed to follow the required procedure for determining the amount of expenses.

8. On 1 September 1997, the plaintiffs issued a summons under Order 14 claiming specific performance of the clauses of the deed, an injunction restraining the defendant from continuing to let the spaces and an order for their removal.

9. After this, the defendant issued a summons also under Order 14 claiming the management, maintenance and repair fees.

10. These are the summonses before me.

The Form of the Plaintiffs' Application

11. Mr Maurice Chan makes the point that the plaintiffs' Order 14 summons, in part, claims simply specific performance of the clauses in the deed, without asking for any specific order. I agree that the Order 14 summons might have been better drafted, but the nature of the plaintiffs' complaint and the relief it seeks is clear from the papers. The defendant has suffered no prejudice.

The Keeping of Accounts

12. The deed requires that the defendant keep "accounts (vouchers and receipts) in respect of all expenditure incurred and of all payments made to the Agent by the owners . . . and each owner . . . shall at any time during office hours have the right to inspect such accounts and to make extracts therefrom.".

13. Paragraph 2 of the Seventh Schedule of the Ordinance requires the defendant to "maintain proper books or records of account and other financial records and shall keep all bills, invoices, vouchers, receipts and other documents referred to in those books and records for at least 6 years."

14. Although the plaintiffs' evidence speaks of a breach in respect of the right to inspect, the statement of claim identifies the breach as only "that [the defendant] has never kept proper accounts". I must concern myself only with this alleged breach.

15. The defendant's response to this, through an affirmation made by Mr Chen Chiu Ming, the manager of the defendant, is not entirely clear. It seems to be that the defendant has kept proper accounts relating to the block but these records are intermingled with accounts of the defendant's other business activities, and, therefore, it did not want to show the accounts to the plaintiffs. Mr Chen says that he now recognises that it would have been prudent for the defendant to have kept the block's accounts separate "so that copies of the documents could be released to the Plaintiff in their entirety." In that he is quite right. In my view, the obligations of the defendant are to keep accounts in such a way that, by perusing them, one could ascertain a fair picture of the income and expenditure relating to the block. It should not be necessary to plough through accounts that deal with the entire business of the manager.

16. It does not seem to me that, even now, the defendant understands its obligations under the deed and the Ordinance. For that reason, an order for specific performance is justified.

Failure to Hold Meetings

17. The plaintiffs next complaint is that the defendant failed to hold meetings of the owners.

18. I cannot find any obligation on the defendant to convene such meetings. Under the deed, the plaintiffs are entitled to convene a meeting of owners. They have not done so. There is no legitimate ground of complaint here.

Failure to Prepare Budget

19. The defendant has an obligation to prepare a draft budget setting out the proposed expenditure during the financial year and then handle the process of preparing a budget as laid down.

20. The defendant admits that it did not perform its obligations in this respect. Its attitude seems to be that, because the defendant was the majority owner, it did not need to do so. The defendant says that, just before the plaintiffs' action was commenced, it did take some steps towards fulfilling its obligations, but it does not pretend that it has done what was required of it.

21. Again, the defendant does not seem to understand its obligations and an order is required to ensure that it complies.

Failure to Maintain a Bank Account

22. The plaintiffs complain that the defendant has not, as it is obliged to do, maintained an interest-bearing account and used it exclusively in respect of the management of the block.

23. The defendant admits this, but says that it has done so since January 1997. It produces bank statements that show that the account was opened only on 14 April 1997; again just before the plaintiffs commenced action. There is no evidence that the defendant told the plaintiffs it had done this until after the action commenced.

24. The defendant says that this account is a current account, and the bank documents confirm this. There is no evidence that it is an interest-bearing account.

25. Again, I am not satisfied that the defendant understands its obligations in this respect. An order is necessary to ensure that the defendant performs its obligations.

The Car Parking Spaces

26. Here the plaintiffs complain that the defendant has created 4 car parking spaces from common ground.

27. There is no doubt that the defendant has done this. The defendant admits that this was done and that the spaces were let to the defendant, which then sublet them. The defendant cannot maintain that, before 17 January 1998, there was an legal basis on which it was entitled to take away some of the common area. There are provisions, both in the deed and the Ordinance about the use of the common parts, but it is not necessary to refer to them. It is quite clear that no owner, even a majority owner, is entitled to take over the exclusive use of any of the common parts.

28. On 17 January 1998, at the instance of the defendant, a resolution was passed by the owners that the spaces concerned "be the legal car parking spaces of this building (with 17 votes in favour and 10 owners absent)".

29. Mr Thomas Chan says that this resolution is in contravention of section 34I of the Ordinance that says that no person may "convert any part of the common parts of a building to his own use unless such conversion is approved by a resolution of the owner's committee (if any)". There is no owner's committee, but neither is there any conversion to anyone's use. The resolution creates new parking spaces for the block.

30. The real question is whether or not such a resolution such as this one may amend the terms of the covenant between the parties. Clearly, it cannot. The covenant that created the common parts of the block is binding on the plaintiffs and the defendant, and the other owners. No one owner, or group of owners, no matter how powerful in terms of votes in an owners' meeting, has the power to alter the covenant. A covenant is a covenant, and is binding on all the owners equally. It is not a matter concerning the management of the building that can be made binding on dissident owners by a majority vote.

31. Accordingly, the plaintiffs are entitled to an injunction requiring the defendant to restore the new spaces to the common parts.

Clean Hands

32. Mr Maurice Chan argues that the plaintiffs are not entitled to the relief claimed because they have failed to pay the claims mentioned in the counterclaim. I am not in the slightest surprised that the plaintiffs have not paid these claims. At least until recently, the defendant seems to have regarded the block as its private fiefdom in which it was entitled to do much as it liked because it was the majority owner. The defendant has not given a proper accounting of what it has done with the plaintiffs' contributions, and gave no sign that it would perform its obligations to give such accounting in respect of further contributions that the plaintiffs might make. In these circumstances, I believe the plaintiffs were entitled to withhold contributions until they had full assurance that their money would be properly handled.

The Counterclaim

33. Mr Maurice Chan accepts that there is no evidence of the defendant's counterclaim in respect of maintenance and repair fees. He urges, however, that the defendant has established the claim in respect of the management fees.

34. Mr Thomas Chan says that the defendant has not established that it has gone through the proper budgetary procedures to justify the increases of the fees beyond $1000 per month. I agree with that. The plaintiffs says that it has always been willing to pay the fee of $1000 per month but the defendant has refused to accept this. This was said in the plaintiffs' evidence and is repeated in a letter by the plaintiffs' solicitor dated 4 March 1998. The defendant does not specifically deny these allegations.

35. Beyond this amount, the plaintiffs have advanced a case that is fit for trial. The plaintiffs are entitled to unconditional leave to defend the counterclaim on the claims for management fees beyond $1000 per month, and the claims for maintenance and repair fees, and I so order.

36. The defendant is entitled to judgment in respect of the management fees at the rate of $1000 per months, and I so order.

JK FINDLAY

Judge of the High Court
Court of First Instance