Deed of Mutual Covenant: approach to construction of charging clause

In Thorogood Estates Ltd v Robinson Heights (IO) ([2013] HKEC 55, CA) the Court of Appeal had to interpret the provisions of a Deed of Mutual Covenant allocating among the owners the liability to contribute to management expenses.

T owned the garage on the upper and lower ground floors of the development. The Incorporated Owners had carried out major works of repair and renovation works for the whole development. The question was whether all owners, including T, were liable to contribute in proportion to their shares in the development without any need to consider which parts of the development had benefited from the works. The Court of Appeal applied the well-known approach to contractual interpretation explained, for example, by Lord Hoffmann in Jumbo King.

The DMC divided the development into three (the Garage, the Tower and the Building). T argued that it was only liable to works relating to the Garage and the Building. The incorporated owners argued that T had to contribute to all works in proportion to the shares in the development that it owned.

One provision (D5) provided for the relevant budget to be split into two parts, one relating to the Garage and the other relating to Units (any flat, roof or car parking space in respect of which an exclusive right of occupation had been granted). Another provision (E2) provided that liability to pay was to be apportioned among the owners by reference to the number of shares they owned. The incorporated owners relied on this provision but failed in the Court of Appeal.

The Court of Appeal argued that an exclusive focus on E2 did not have sufficient regard to the terms of the DMC as a whole, the purpose which it sought to achieve and (in this light) to properly discern the parties’ objective intention as it would be understood in the light of the relevant background knowledge.

In terms of purpose, the purpose of the DMC was to provide for a due propertion of the management expenses to be borne by the owners ([10]). An exclusive focus on E2 would not give due weight to the split budget arrangement in D5. A reading of the rest of section D of the DMC made it clear that the reason for splitting the budget into two parts was to ensure that where expenditure was incurred solely for the benefit of a unit then the owner of that unit would bear that cost ([32]). D5 sought to create a significant division between expenditure for the benefit of the Garage and that incurred for the benefit of the Towers ([34] – [35]).

As part of the relevant background, the court took into account the fact that:

‘It is not uncommon for provisions to be made in a DMC to differentiate between the contribution to be made by owners to management expenses in respect of different types of common areas and facilities, to cater for different requirements for maintenance owing to the different usage of common areas and facilities and to achieve a degree of fairness among the owners.’ ([33])

Kwan JA concluded:

‘Thus, viewing the DMC as a whole, and the practical object which it was intended to achieve, in my judgment a reasonable person having all the background knowledge would have understood clauses D5(a) and (b) to provide for a mutually exclusive apportionment of the estimated Management Expenses. The practical effect of clauses D5(a), 5(b) and 6 is that flat Owners who do not benefit from the use and enjoyment of the Garage would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the Garage including the Garage Common Areas, and the Garage Owner who does not benefit from the use and enjoyment of the flats in the Towers would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the flats in the Towers including the Towers’ Common Areas and Facilities.’ ([38])

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