Carisfield Estate Pty Ltd v Douglas No. Scgrg-97-1623 Judgment No. S7003

CARISFIELD ESTATE PTY LTD v DOUGLAS
[1998] SASC S7003

Full Court: Prior, Lander and Wicks JJ

PRIOR J. The appellant company administers a retirement village at Frederick Road, Seaton, The respondent has been a resident of that village since 9 October 1990. A dispute arose as to the true interpretation of certain of the provisions of two agreements to which the parties to this appeal were bound. The respondent applied to the Residential Tenancies Tribunal for resolution of the matters in dispute.
The Tribunal ruled that expenditure from a Sinking Fund, referred to in the Licence Agreement, was limited to items for the upkeep of the grounds and buildings whereas capital expenditure, whether relating to individual units or community facilities, should be charged to the Capital Replacement Fund, separately identified in the other agreement, the Loan Agreement.
The findings of the Tribunal were the subject of an appeal to the District Court. The Chief Judge held that the Capital Replacement Fund should be used for specified purposes in preference to the Sinking Fund. At the end of his reasons the Chief Judge said he would vary the Tribunal’s order. His order was:-
“(a).. The Sinking Fund may be applied towards defraying operating costs of the estate (either in respect of individual units or the common areas) in the nature of repairs, renovations, replacements and maintenance which are of an infrequent and irregular nature and not of a structural nature.
(b)The Capital Replacement Fund may be applied, and should be applied in preference to any other source of funds, in defraying the costs of the estate (either in respect of individual units or the common areas) in making total replacements or repairs of such a substantial nature as to make a thing as good as new in respect of the improvements, plant, fixtures and fittings of the estate.
(c).... For the purpose of clause (b) all moneys in the Capital Replacement Fund shall be deemed to be available unless:-
(i) they have been appropriated in a statement of estimates of income and expenditure to a specific project;
(ii) the project is one in which moneys in the Capital Replacement Fund may properly be applied in terms of clause (b); and
(iii) the statement of estimates of income and expenditure has been placed before the residents in the manner required by section 10 of the Act.”
In the original application to the Tribunal the respondent sought an order directing the appellant to charge all capital expenditures to the Capital Replacement Fund. The undisputed facts were that the respondent objected to the appellant paying expenses in respect of the replacement of major items and carpets from the Sinking Fund maintaining that those expenses should be met from the Capital Replacement Fund. The appellant had resolved to use the Sinking Fund to meet the cost of replacement of air conditioners, hot water services, ovens and carpets within individual units in the Estate. That was the background to the Tribunal posing as a proper question for it the division of expenditure between the two funds. At the time the matter was before the Tribunal the appellant maintained that the Capital Replacement Fund was not to be used for capital expenditure associated with individual units but applied for the upkeep of grounds and buildings. This serves to explain the ruling given by the Tribunal as well as the variation made in the District Court.
Proceedings before the Tribunal are confined to the resolution of particular disputes. It has no jurisdiction to make declaratory judgments. If it finds a party to the dispute in breach of its obligations under a residence or service contract it may restrain any proven breach of the contract or require action in performance of the contract.[1] There was no argument before this court as to the absence of a dispute. However, it must be noticed that there is a specific provision in s14 of the Retirement Villages Act 1987 empowering the Tribunal to decline to entertain an application if the Tribunal considered it would be more appropriate for proceedings to be taken in a court or in another Tribunal constituted by law.[2] Plainly, if nothing beyond mere declaratory relief were sought an order in accordance with that power would have to be made. There is a further power not relied upon in this appeal that could be relevant to this case. That is the power to require the administrating authority to vary or reverse a decision or the effect of an act of the administering authority if the Tribunal finds the authority to have acted in a harsh or unconscionable manner.[3] That power is enforced, “by such order as (the Tribunal) considers appropriate in the circumstances.” For the purpose of this appeal a dispute was assumed to have arisen from the disclosed attitude of the appellant that denied the appropriateness of using the Capital Replacement Fund for any replacement of items within individual units. That attitude has not been maintained on the appeal. The appellant now seeks to argue that it has an unfettered discretion with respect to which of the two funds it might use in a particular case.
[1] s14(1), (2)(a)(i)
[2] s14(6)
[3] s14(1)(c)
By cl4 of the Licence Agreement the company undertook and agreed with the respondent as licensee that it would pay and discharge “the total operating costs of and in relation to the village”. In the Licence Agreement the village was referred to as “the Estate”. The Estate was defined to mean “the land with all buildings and improvements situated on the land and laid out as a residential village including all home units and other accommodation, walkways, driveways, gardens, reserves and other areas whether common or private”.
By cl10, the respondent as a licensee paid a fortnightly service fee and undertook to keep the unit he occupied in the same state of repair and condition as at the date of the Licence Agreement, fair wear and tear and damage by fire, storm and tempest excepted. The respondent also undertook to give up possession at the termination of the licence with all fixtures, fittings and other things such as windows, doors and locks unbroken and in good order and complete repair.
In the Schedule to the Licence Agreement, the total operating costs which the company, by cl4 of the Agreement, undertook to pay was defined to mean and include all outgoings payable in relation to the land, any improvements and all “costs, charges, expenses, fees and other outgoings paid or payable by or on behalf of the (appellant) in managing, supervising, operating, cleaning, painting, maintaining and keeping secure the Estate”. There were further provisions with respect to the definition of total operating costs which said that that expression included costs for or in connection with the maintenance, operation, renovation and upkeep of the Estate (excluding the costs of any structural work) repairs, maintenance, renovation and replacements, painting and other surface treatments, depreciation of plant and equipment, fittings and furnishings of the Estate and provision for contingencies in replacements. (See (d), (f), (g) and (h) of Item 5 of the Schedule.)
A further provision with respect to total operating costs was the source of a fund which has become known as the Sinking Fund. By par(q) of Item 5 in the Schedule to the Licence Agreement, total operating costs included:
“(q).. at the election of the company an amount (not exceeding in any year five per centum (5%) of Total Operating Costs, other than this Operating Cost, of the Estate in that year) which in the reasonable opinion of the Company should be set aside for or paid into a fund established to cover infrequent and irregular repairs, renovations, replacements and maintenance of the Estate.”
The appellant has elected, in each year, to require that an amount equal to 5 per cent of the total operating costs should be deposited in the Sinking Fund.
By the Loan Agreement, the respondent made a loan to the appellant of $98,000 interest free. By cl4.4 of that Agreement, a fund was established, known as the Capital Replacement Fund. The effect of that provision was that the company deducted an amount equal to 1 per cent of the loan for each completed year that the respondent was in occupation of a unit at the village, that money being set aside “for the purpose of replacing or renewing any improvements, plant, fixtures or fittings of the Estate”. A subsequent agreement signed in February 1996 limits the deduction to no more than 10% of the loan.
After analysing particular terms of the two agreements and accepting the view that the two agreements must be read together, the Chief Judge pointed out that the Capital Replacement Fund was created in a way quite different to the way in which the Sinking Fund was established. In the case of the Capital Replacement Fund, there is no discretion as to whether or not contributions are to be made to the Fund. This Fund only receives a contribution at the time when a licensee is repaid the amount of his or her loan. The purpose for which the Fund was created was for “replacing or renewing any improvements, plant, fixtures or fittings of the Estate”. The Chief Judge pointed out that the Capital Replacement Fund cannot be used for any other purpose, such as the day to day running expenses or for expenses such as insurance premiums, rates and taxes, painting or garden maintenance. His Honour said that the Capital Replacement Fund can only be used for total replacements or for repairs of such a substantial nature as to make something as good as new. He said it could only be used for replacement or renewal of a very limited class of things, namely improvements, plant, fixtures and fittings of the Estate. Unlike the Sinking Fund, it could be used for structural replacements or renewals. The Chief Judge said:
“In many cases, major repairs or replacements can only be met out of one of the funds. For example, the re-painting of a unit or of any common property of the Estate may only be paid as a general running expense or out of the Sinking Fund. On the other hand, the replacement of a building structure would be chargeable only against the Capital Replacement Fund. On the other hand, there are certain expenses which could properly be charged against either fund. A simple replacement of an item of plant or equipment could be regarded as an ordinary operating cost of an infrequent and irregular nature and so be properly payable out of the Sinking Fund. On the other hand, it could clearly be paid from the Capital Replacement Fund.”

Against the decision of the Tribunal and submissions of counsel, the Chief Judge concluded that a proper interpretation of the two agreements was to identify the Sinking Fund as concerned with operational costs of an infrequent and irregular nature whether with respect to individual units or the common areas in the village. As for the Capital Replacement Fund, the Chief Judge was of the opinion that that was to be used for “replacing or renewing any improvements, plant, fixtures or fittings either in the residential units or in the communal areas”. His Honour agreed with the submissions for the respondent that the Capital Replacement Fund “should be used for expenses falling within its ambit of operation when funds are available and irrespective of whether or not it would be lawful for the expense to be met out of the Sinking Fund”.

In the appeal it is said that the Chief Judge erred. The submission was that there was nothing in the agreements requiring one fund be used before another or in preference to another. As a matter of construction, it was not open to construe the agreements in this way. The proper construction of the agreements gave rise to a discretion in the administrating authority to determine how it would use the funds in the case of an overlap between them, subject to an obligation upon the appellant as the administering authority not to act capriciously and to have due regard to the interest of the Estate. There was no dispute that the appellant would also have to comply with its statutory obligations in terms of presenting relevant information to the residents.
The submission was that the order made by the Chief Judge deprives the administering authority of the flexibility it needs to properly administer funds. As an example, if residents stay at the Estate longer there will almost certainly be less funds in the Capital Replacement Fund. It was complained that the effect of the Chief Judge’s orders is that repairs infrequent and irregular would be paid out of the Sinking Fund whereas replacement of things not repaired would have to be paid out of the Capital Replacement Fund unless conditions in par(c) of the Chief Judge’s order were made out. The submission was that there was nothing in the agreements which supported the drawing of such a distinction.
The appellant asserted that the Chief Judge’s approach placed insufficient weight on the fact that in the case of structural repairs only the Capital Replacement Fund may be used. The submission was that although those repairs are likely to be a long term expense, they are also likely to be a significant expense. The restriction upon which fund may be used in the case of structural repairs suggested that there should be maximum flexibility in terms of the discretion in those cases of overlap between the funds.
The respondent’s submission was that the decision of the Chief Judge should be affirmed. It was put that the appellant has a duty to use the monies in the Capital Replacement Fund for replacing or renewing improvements, plant, fixtures or fittings of the Estate. There was no discretion. That fund was the “natural, first port of call, for such expenses.” However it was also put that recourse could be had “to the natural operational or maintenance fund, the Sinking Fund” should there be a lack of monies in the Replacement Fund. The appellant should not be allowed to let the Replacement Fund grow, unaccounted for against some unnamed potential expenditure while charging the respondent and other residents for replacements or renewals of plant fixtures and fittings of the Estate whether by way of the Sinking Fund contribution or otherwise.
In my view a proper construction of the agreements identifies the Sinking Fund as the appropriate fund to attend to total operation costs other than the cost of any structural work and the Capital Replacement Fund a separate fund “for the purpose of replacing or renewing any improvements, plant, fixtures or fittings of the Estate”. The particular intent discernible from the Loan Agreement is that capital expenditure should be charged to the replacement fund. Capital expenditure plainly includes structural work and the replacement of major items within individual units, given that these are expenses of a capital nature. The Sinking Fund has as its principal function the provision of funds to deal with the usual ongoing expenses involved in the management of the Estate. Nevertheless, the language used throughout Item 5 of the Schedule to the Licence Agreement makes plain that the Sinking Fund can be used not just for maintenance and repairs but for renovation and replacements as distinct from structural work. Thus, the two funds are not separate and distinct though one is a more general fund that the other.
I am not persuaded that the approach taken by the Chief Judge is incorrect. He said that the Capital Replacement Fund should be used for particular purposes, not that it must. There is an overlap in the purposes for which the funds can be used. The point finally relied upon by the appellant in the appeal has to be acknowledged in the sense that the agreements empower the use of either fund in some situations. However, I am not persuaded that there is an absolute or unfettered discretion in the appellant. Rather, I think it depends upon such facts as maybe established in any particular case. This is where this court and the District Court are at a disadvantage. It seems to me that the general principles argued before the Tribunal and the District Court have now to be considered in the light of particular facts and circumstances if a true resolution of particular matters in dispute is to occur. Whether this can be achieved within arbitration or before the Tribunal armed with the powers vested in it by s14 of the Act is not easy to say. It may be that the respondent would wish to assert that the administering authority has acted in a harsh or unconscionable manner in a particular situation. If that be so, the Tribunal’s order granting the parties liberty to apply should be taken up and the matter pursued further in the Tribunal.
It is unfortunate that the dispute as originally brought before the Tribunal attracted such a broad argument. A proper order on that application could have been to direct the respondent to apply monies from the Capital Replacement Fund towards the cost of replacing or renewing major items such as air conditioners, hot water services, ovens and carpets in the respondent’s unit without resort to the use of funds from the Sinking Fund for those purposes unless financial circumstances so required it.
I would set aside the orders made by the Chief Judge and substitute an order of the kind outlined. The order originally sought by the respondent was an order requiring the appellant to charge all capital expenditure to the Capital Replacement Fund. That was not and is not an appropriate order. Any order of the Tribunal should be confined to particular matters identified in the dispute before it. Against what we have been informed about that, I would direct that the cost of replacing any air conditioner, hot water service, oven and carpet in the respondent’s unit should be met from the Capital Replacement Fund. Replacement costs for these items can be met from the Sinking Fund but only if the funds available from the other fund do not permit it when replacement is required.
The appeal is allowed solely for the purpose of substituting the order proposed in lieu of the order in par(3) of the orders made in the District Court.

LANDER J. I have had the advantage of reading, in draft, the reasons of Prior J.
The relationship between the appellant and the respondent and other residents of the appellant’s Estate is governed by two documents; namely the Loan agreement and Licence Agreement.
The two agreements must be read together because they form a scheme whereby the company provides housing in the form of self contained independent living units one of which the respondent occupies.
Logically one starts with the Loan Agreement because it is the Loan Agreement which provides for the right of a person to occupy a unit on the Estate.
The respondent agreed to lend the appellant the sum of $98000 in two instalments, the first of $800, payable on signing the Loan Agreement and the second of $97200, payable on the date upon which the trustee handed to the respondent a form set out in item 6 of the Loan Agreement, which was to the effect that the respondent was entirely satisfied with the unit which had been assigned to him.
The loan made by the respondent is interest free and is repayable in accordance with the provisions of cl4 of the loan agreement.
Clause 4.4 of the Loan Agreement provides for the regular deduction by the appellant from the loan made by the respondent of a sum equal to 1 per cent per annum of the amount of the loan. Clause 4.4 provides:
“Notwithstanding anything elsewhere herein contained, there shall be deducted by the Company from any amount payable by the Company calculated pursuant to sub-clause 4.3 an amount equal to one per centum (1%) per annum of the Loan for each completed year during which the Lender shall have been in occupation of the Unit pursuant to any licence granted to the Lender by the Company. The Company shall set aside all such amounts received under this sub-clause for the purpose of replacing or renewing any improvements plant fixtures or fittings of the Estate.”

The general intent of cl4 and of the Loan Agreement is that the resident provides a sum of money, which can be used by the company for the purpose of generating income. The income so produced by the use of the respondent’s money is for the benefit of the appellant.
Clause 4.4, however, provides for a further sum, amounting to 1 per cent of the loan, to be payable to the respondent each year. An amendment to the Loan Agreement has put a ceiling on the total amount payable at 10 per cent. The sum which is deducted each year can only be used for the purpose provided for in cl4.4 and that is for the purpose of replacing or renewing any improvements, plant, fixtures or fittings of the Estate. The fund so established has been described by the parties as the ‘Capital Replacement Fund’.
It seems to me that the intent of the clause is quite clear. The sum which is deducted from the resident’s loan is to be made available for the replacement or renewing of any improvements, plant, fixtures or fittings of the Estate. The sum so provided is not used only for the purpose of replacing or renewing particular improvements or only for improvements to the units themselves. The sum, which is to be deducted, is to be used for the purpose of replacing or renewing all improvements, plant, fixtures or fittings of the Estate whether part of the units or otherwise.
In that way the residents provide the capital for the ongoing requirements of the Estate.
The Licence Agreement provides for a different purpose. The Licence Agreement regulates the day to day occupancy, by the residents, of their unit.
The Licence Agreement recites that the Licensee, in this case the respondent, has advanced moneys by way of loan to or to the credit of the company and subject to the terms and conditions contained in the Loan Agreement. The recitals include:
“E.... The licensee is desirous of entering into occupation of one of the aforementioned units and for the purpose thereof the parties hereto have entered into this Licence Agreement.”
I think the recitals make it clear that the Licence Agreement is directed to the day to day occupancy of the units and, as I have already observed, the Loan Agreement is directed to the capital outlay required for the purpose of obtaining occupancy.
That the two agreements must be read together is made entirely clear in the Licence Agreement. Clause two provides:
“2..... The parties hereby mutually covenant and agree each with the others to be bound by the provisions of the Deed and the Loan Agreement as if the same were fully set forth herein and the parties do hereby acknowledge the accuracy of the contents of the recitals which are hereinbefore set out, and the same shall, to the extent to which they may be operative, be read with and form part of this Agreement.”
The deed referred to in Clause 2 is a deed between the appellant and Elders Trustee and Executor Company Ltd as trustee in relation to the issue of licences to occupy units on the Estate. It is not important for the purpose of a consideration of these matters.
Clause 3 of the Licence Agreement provides:
“3..... In consideration of the advance made by Licensee to the Company pursuant to the terms of the Loan Agreement, the Company and the Trustee grants to the Licensee:-
(a)the right to use, occupy and reside in the unit referred to in ITEM 2 of the Schedule hereto (such unit being part of the Estate and being herein called “the unit”) for a period of one week commencing as and from the date specified in ITEM 3 of the Schedule hereto and thereafter from week to week until determined as hereinafter provided;
(b)The right to use the fixtures, fittings, furniture, appliances and other articles presently affixed to or situated in the unit and described in ITEM 2 of the Schedule hereto; and
(c)The right during the period of this Licence to use in common with the Company its servants, agents and invitees and with the other Licensees of portions of the Estate and their respective servants, agents and invitees and the common entrances, stairways, passageways, roadways, footpaths, car parks and the other communal services of the Estate but upon and subject to such terms and conditions as may from time to time be prescribed by the Rules.”
Clause 3 makes it clear enough that the right to occupancy is dependant upon the licensee having made the advance in the Loan Agreement. The right to occupancy is only from week to week. The right to occupancy includes the right to use all of the fixtures, fittings, furniture and appliances situated in the unit and the right also to use all the common services of the Estate.
Clause 4 provides:
“4..... The Company undertakes and agrees with the Licensee that the Company will at all times and from time to time pay and discharge the total operating costs of and in relation to the Estate. “The total operating costs” means the outgoing costs and expenses set forth in ITEM 5 of the Schedule hereto.”
The operating costs are therefore the responsibility of the Company and those operating costs are defined in Item 5 in the Schedule. I will return to Item 5.
Clause 8 provides:
“8(1)... The Licensee shall in respect of each year or part of a year expiring on 30 June during which the Licensee occupies the unit pursuant to this Licence reimburse and pay to the Company the Licensee’s proportion of the total operating costs relevant to such year or part thereof. The Licensee’s proportion shall be that proportion which is calculated in accordance with ITEM 6 of the Schedule hereto. The Licensee shall pay on account of the Licensee’s contribution to the total operating costs hereunder fortnightly in advance the amount (hereinafter called “the service fee”) set out in ITEM 4 of the Schedule hereto or such other amount as is reasonably determined from time to time by the Company and is approved from time to time by the Trustee. No increase in the service fee shall occur prior to the expiration of thirty (30) days from the service of written notice of such increase by the Company upon the Licensee and provided that no such increase shall occur prior to the expiration of six (6) months from the date of the last such increase.
(2)Not later than 31 October in any year, the Company shall furnish to the Licensee a statement setting forth the actual amount of each of the operating costs paid, incurred or provided in respect of the period of twelve (12) months or such shorter period ending on and including 30 June immediately preceding the giving of the statement, and there shall thereupon be an adjustment between the Company and the Licensee with payment to or repayment by the Company as the case may require, so that the Licensee shall have paid and the Company shall have received an amount equal to the amount covenanted to be paid by the Licensee in respect of any year or part thereof expiring on the next 30 June provided that in relation to the period commencing on the date of commencement hereof and expiring on the next 30 June or commencing on the 1 July immediately prior to the date of expiration hereof and expiring on the date of expiration hereof the amount payable by the Licensee shall be the amount calculated as aforesaid for the whole year divided by 365 and multiplied by the number of days in the period or periods referred to in this proviso as the case may be or if such period is less than a whole year the amount calculated as aforesaid divided by the number of days in that period.”
It can be seen that the appellant has the initial obligation to pay all outgoings in respect of the Estate but there is a concomitant obligation upon the Licensee, in this case the respondent, to pay a service fee which is calculated in accordance with cl8.
There is an obligation upon the appellant to furnish to the respondent, a statement setting forth the actual amount of each of the operating costs paid, incurred or provided in respect of the period mentioned in cl8.2.
Clause 9 provides that the service fee must be paid without deduction and constitutes a debt due to the appellant and shall be recoverable from the respondent in any court of competent jurisdiction.
Clause 10(a) provides that the respondent undertakes and agrees with the appellant to pay the fortnightly service fee of the amount from time to time determined by the appellant on the due date for payment.
The respondent also has the obligation to keep the unit, which the respondent occupies, in the same state of repair and condition at the date of the signing of the License Agreement.
The respondent (Licensee) is also obliged:
“10(l)........ To permit the Company the Trustee and the Estate Co-ordinator with or without workmen and others at all reasonable times during the day to have access to the unit to view the condition thereof and the Licensee shall forthwith (so far as the Licensee is liable in accordance with the undertakings and Agreements herein contained) execute all repairs and works required to be done in accordance with written notice from the Company provided that if the Licensee shall not within seven days after service of such notice commence and proceed diligently with the execution of such repairs and work it shall be lawful for the Company (but without prejudice to the right of re-entry hereinafter contained) to enter the unit and execute such repairs or works and the cost thereof shall be a debt due from the Licensee to the Company and shall forthwith be recoverable from the Licensee as a liquidated sum in any Court of competent jurisdiction.”
The Licensee has the further obligation:
“10(z)....... To permit the Company the Trustee and the Estate Co-ordinator with or without workmen and others at all reasonable times during the day to have access to the unit to carry out repairs improvements maintenance alterations painting and other work (including work of a structural nature) to the unit or any part thereof in compliance with the Company’s obligations hereunder or otherwise deemed necessary or desirable by the Company or incidental to other work on the Land provided that in doing so the Company shall endeavour to avoid unduly inconveniencing the Licensee.”
Item 5 of the Schedule to the License Agreement provides:
“ITEM 5 - Total Operating Costs
The total operating costs of and in relation to the Estate shall mean and include all outgoings payable in relation to the Land and any improvements thereon and all costs, charges, expenses, fees and other outgoings paid or payable by or on behalf of the Company in managing, supervising, operating, cleaning, painting, maintaining and keeping secure the Estate and shall mean and include in particular, but without limiting the generality of the foregoing, the following:-
(a).... All insurance premiums payable by the Company in respect of the Company’s ownership or interest in the Estate against such risks as the Company may deem necessary or desirable and without limiting the width or effect thereof including public risk and liability, relocation, fire, lightning, storm and tempest, earthquake, malicious damage, explosion, riot or civil commotion and from aircraft and articles falling from aircraft;
(b)All rates and taxes (including land tax present and future, at the rate payable by the Company), charges, assessments, duties fees of any public, municipal, governmental or semi-governmental and body authority or department levied, assessed or charged in respect of the Land or Estate (irrespective of the ownership thereof);
(c).... The cost of all services supplied to the Estate including, but without limiting the generality of the foregoing, all charges for electricity, gas, water, oil, telephone, sewerage, garbage and trade waste disposal services;
(d)The cost of all services provided by the Company for Licensees and other occupants in the Estate and visitors to the Estate including cleaning, lighting, heating and servicing the Land and the Common Areas;
(e).... All costs for or in connection with the maintenance operation renovation and upkeep of the Estate excluding the cost of any structural work;
(f)repairs, maintenance, renovation and replacements;
(g).... painting and other surface treatments;
(h)depreciation of plant and equipment, fittings and furnishings of the Estate;
(i).... provision for contingencies in replacements;
(j)provision of meals, amenities and services;
(k).... all reasonable auditing, accounting, book-keeping and secretarial expenses;
(l)all reasonable management, control, caretaking and security costs (including without limiting the generality thereof any fees or salaries payable to the resident Estate Co-ordinator and/or live in Director of Care of the Estate and all staff, employees, contractors and subcontractors) in connection with the Estate including, but without limiting the generality of the foregoing, salaries, wages, superannuation and pension payments and workers’ compensation insurance premiums;
(m).. the cost of the maintenance, repair and testing of all fire fighting and protection equipment including sprinkler installations, hydrants, fire extinguishers, smoke detectors and fire fighting equipment installed by the Company throughout the Estate together with charges rendered by any authority in the supply, maintenance, servicing and monitoring of fire alarms;
(n)all costs incurred in the control of and eradication of all pests in the Estate;
(o)... all costs incurred in the lease, hire, repair, maintenance and running of all public address and back ground music systems in the Estate (if installed);
(p)all costs incurred in the repair and maintenance of all garden areas and landscaped areas;
(q).... at the election of the Company an amount (not exceeding in any year five per centum (5%) of Total Operating Costs, other than this Operating Cost, of the Estate in that year) which in the reasonable opinion of the Company should be set aside for or paid into a fund established to cover infrequent and irregular repairs, renovations, replacements and maintenance of the Estate; and
(r)any remuneration paid to the Trustee, any amounts payable by the Company to the Trustee under the Deed and any other expenditure incurred by the Company which is reasonably and properly incurred in connection with the operation and conduct of the Estate.”
The total operating cost referred to in Item 5 include all of the day to day costs associated with the occupation and upkeep of the Estate, including all insurances, statutory charges, payments to utilities, repairs, maintenance, renovation, replacements, painting and all matters associated with the day to day occupancy of a unit. Specifically, however, item 5 excludes structural work from those operating costs.
The important paragraph in Item 5 is paragraph (q).
That allows but does not oblige the company to establish a fund into which it pays 5 per cent of total operating costs which can be charged to the residents to cover “infrequent and irregular repairs, renovations, replacement and maintenance of the Estate”.
In my opinion, the fund which is so established, which the parties have called the ‘Sinking Fund’, is for the purpose of defraying any of the operating costs in Item 5 itself. It is not raised for the purpose of meeting capital payments.
The two funds were established for two quite separate reasons. The Capital Replacement Fund which has, as its source the residents’ own capital, has been established for the purpose of providing sufficient capital to replace or renew improvements, plant, fixtures of fittings of the Estate. It is a fund derived from capital to provide capital to replace capital items.
The Sinking Fund, on the other hand, has been established for the purpose of meeting operating costs, that is the day to day expenses in connection with the operation of the Estate, generally. It is not intended to apply to capital items. So much is made clear, in my opinion, by the exclusion, for example, of structural work. Moreover, if one looks at the purposes for which operating costs are defrayed, one can see that they relate to ongoing items, not of a capital nature. In my opinion, the Sinking Fund has established for the purpose of meeting those operating costs.
Of course, in the day to day operation of the Estate, operating costs will be partly directed to the replacement of capital items but they will be capital items of a minor nature. For example, if a plumbing problem developed on the Estate that would be met out of the operating costs. The operating costs would meet the cost of the tradesmen’s labour but also meet the cost of minor items such as piping and perhaps taps. However, the intent of the Sinking Fund is only to meet operating costs. Of course, they are the operating costs of the whole Estate. I think, in the end, the appellant conceded that the Sinking Fund was to be applied to the operating costs of the whole of the Estate.
The learned Judge made the following orders:
“1..... That the order of the Residential Tenancies Tribunal dated the 3rd day of February 1997 upon the determination of certain issues raised between the parties be varied by striking out the third order made by the Tribunal and inserting the following in lieu thereof:-
‘3(a)The Sinking Fund may be applied towards defraying operating costs of the Estate (either in respect of individual units or the common areas) in the nature of repairs, renovations, replacements and maintenance which are of an infrequent and irregular nature and not of a structural nature.
(b)The Capital Replacement Fund may be applied, and should be applied when funds are available in preference to any other source of funds, in defraying the cost of the Estate (either in respect of individual units or the common areas) in making total replacements or repairs of such a substantial nature as to make a thing as good as new in respect of the improvements, plant, fixtures and fittings of the Estate.
(c)For the purposes of clause (b) all moneys in the Capital Replacement Fund shall be deemed to be available unless:-
(i)they have been appropriated in a statement of estimates of income and expenditure to a specific project;
(ii)the project is one in which moneys in the Capital Replacement Fund may properly be applied in terms of clause (b); and
(iii)the statement of estimates of income and expenditure has been placed before the residents in the manner required by section 10 of the Act.’”
In my opinion, the learned Judge was correct in his conclusion in respect of para 3(a) of his orders. However, I disagree with part of the expression provided for in para 3(b) of his orders.
The learned Judge has rather suggested that both funds could be used for the purpose of replacing capital items. That is not my view. An item which is of a capital nature has to be replaced out of the capital raised from the residents’ loans.
In my view, the Capital Replacement Fund may be applied in defraying the cost of the Estate (either in respect of individual units or the common areas) in replacing or renewing any improvements, plant, fixtures or fittings of the Estate.
I would set aside the order of the learned Judge in respect of para 3(c).
Prior J has pointed to the difficulties of dealing with this matter without the parties precisely defining the dispute between them. I have taken the dispute to be as set out in para 33 and 34 of the Statement of Agreed Facts.
Paragraphs 33 and 34 read:
“33... In recent years the Estate has had an increase in the incidence of breakdown of air conditioners, hot water services, ovens and other such items in individual units (“major items”). The appellant has conducted a maintenance program to extend the life of such items but it is becoming apparent that the effective cost of continually maintaining and repairing these major items exceeds the cost of replacing them on a "like with like" ”basis: In addition, whilst until recently it has been the policy of the appellant to only replace carpets in individual units when a residential unit changes hands, the cost of which has been borne partially by the outgoing resident ( refer clause 6.3.3 of the Loan Agreement - Annexure 3) and partially by the SF, as a consequence of an increasing average duration of occupancy of each unit, it has become apparent that carpet in some units will need to be replaced prior to those units changing hands. The annual cost of replacing major items and carpets will be considerable. The appellant has determined to meet the cost of replacement of major items and carpets, where necessary, from the SF.
34.The respondent has objected to the payment of expenses in respect of the replacement of major items and carpets from the SF and the respondent maintains that such expenses should be met from the CRF.”

I agree with the respondent’s contention in para 34 of the Statement of Agreed Facts.
In my opinion, air conditioners, hot water services and ovens are items of a kind that their replacement or renewal must be met out of the Capital Replacement Fund. If it is the intention of the appellant to replace carpet in the units then, in my opinion, the cost of replacement of that carpet is also a capital item which must, in my opinion, be met out of the Capital Replacement Fund.
In so far therefore as the dispute has identified items of a capital nature which were referred to in para 33, in my opinion, those items must be met out of the Capital Replacement Fund.
I would allow the appeal but only in so far as it is necessary to amend the orders made by the learned Judge to delete para 3(c) and to amend para 3(b) in the terms which I have mentioned.
The Tribunal’s orders should be varied by striking out the third orders made by the Tribunal and inserting in lieu thereof:
“3(a)The Sinking Fund may be applied towards defraying operating costs of the Estate (either in respect of individual units or the common areas) in the nature of repairs, renovations, replacements and maintenance which are of an infrequent and irregular nature and not of a structural nature.
(b)The Capital Replacement Fund may be applied in defraying the cost of the Estate (either in respect of individual units or the common areas) in replacing or renewing any improvements, plant, fixtures or fittings of the Estate.”
WICKS J. I agree with the order proposed by Prior J for the reasons he gives.

JUDGMENT CITATIONS
LISTED IN ORDER OF APPEARANCE IN JUDGMENT

Retirement Villages Act 1987 s14(1), (2)(a)(i)
cp s14(6)
cp s14(1)(c)

[1998] SASC 7003

23 December 1998