Consultation Paper on Local Completed Residential Properties

HONG KONG BAR ASSOCIATION'S COMMENTS ON

CONSULTATION PAPER ON LOCAL COMPLETED RESIDENTIAL PROPERTIES: SALES DESCRIPTIONS & PRE-CONTRACTUAL MATTERS ("THE PAPER")

First-hand Market

Comprehensive statutory protection of purchasers of completed residential properties in the first-hand market especially where there is no right of inspection before entering into a binding agreement for sale and purchase, is long overdue and the recommendations therefor contained in the Paper are, generally, to be welcomed.

The Bar has reservations on the recommendations providing for a cooling-off of 3 working days after signing the preliminary agreement during which the purchaser can cancel such agreement subject to forfeiture of 5% of the purchase price or the amount of the preliminary deposit, whichever is the lower, and even without any penalty where he has no right of inspection prior to the signing of the preliminary agreement (recommendations 25 to 27).

The Commission recommends imposing upon developers marketing completed residential units a duty of disclosure covering a very comprehensive range of data. As far as the Bar can see, subject to the developer discharging such duty, a purchaser would have all the information that he would require to make an informed decision whether to purchase or not. The Bar can see no or little merits in then allowing purchasers the luxury of questioning the wisdom of the transaction after the signing of the preliminary agreement.

The Bar also has reservations on the recommendation that if there are discrepancies between the Chinese and English versions of the specifications of fittings and finishes in the sales brochure, purchaser can choose which language version they rely on (recommendation 16). It seems to us that allowing purchasers to choose which language version to rely on, in cases where there are discrepancies between the two versions, is unworkable. It is likely that some purchasers will choose the Chinese version and some purchasers will choose the English version, and the developer could find himself being subject to different duties or liabilities on the same factual basis. The Bar considers that the better approach is for the developer to state clearly in the sales brochure which version should prevail in the event of discrepancies between the 2 versions.

Finally, the Bar considers that the recommendation that the price lists of all units offered for sale should be made available to prospective purchasers by developers or their estate agent prior to the payment of any reservation fee or the signing of any preliminary agreement (recommendation 35) should only apply where the developer is offering the units for sale publicly (i.e. by a system of registration and balloting). This is because if the developer decides to sell off the units privately or internally on a unit by unit basis, the developer should be allowed to negotiate and fix the price with the prospective purchaser on commercial terms acceptable to both parties.

Second-hand Market

Rationale For Regulation

The Bar has reservations regarding many of the recommendations aiming at the protection of purchasers who buy in the second-hand market.

One should not start with the premise that purchasers essentially require protection more than vendors. In Hong Kong, especially at times when the market is volatile, real properties are very much a commodity in which people trade or even speculate for profits in the short-term. Where we have the average property owner and a seasoned speculator as the opposite sides to a bargain, the former may arguably be the one who is in need of help.

The Bar believes that the questions whether and, if so, how the second-hand market should be regulated should be approached on the basis of what is fair and just having regard to the size of transactions for the sale and purchase of real properties.

Disclosure Of Information By Vendors

On these premises, in relation to the second-hand market for newer completed residential property market, the Bar supports the recommendations

(a)that a Vendor Information Form (“the VIF”) be made available by the vendor when his unit is put on the market;

(b)that the VIF should contain the property particulars and warnings summarised at pp.25-26 of the Paper [except details relating to the total or entire area (being one of the seven property particulars) or the saleable area as defined by reference to statutory measurement methods, because an ordinary vendor is unlikely to be able to provide accurate information on these matters without the assistance of a surveyor];

(c)that the vendor be required to update the information in the VIF if he knows of changes subsequent to its preparation.

Subject to the question of costs, the Bar also considers a centralised property information system operated by the Government to be invaluable as an independent source of information for purchasers in the second-hand market.

The Bar is, however, skeptical of the likelihood of the establishment of the VIF as a market practice on a voluntary basis. Two professional organizations namely, the Law Society and the Estate Agents Authority are identified as the bodies to be given this responsibility. Given the fact that, in Hong Kong, a binding provisional agreement for sale and purchase is almost invariably entered into before the parties thereto seek legal advice, the scope for solicitors to contribute in this regard is doubtful. As for the Estate Agents Authority, the Bar surmises that the availability of more comprehensive information about the property to be sold and purchased is likely to add to the obstacles facing the estate agent in bringing about a deal and, therefore, goes against the self-interest of the latter. And even if the Estate Agents Authority should have the goodwill of promoting the VIF, the lack of statutory compulsion would, in reality, make it very difficult for an estate agent to insist upon the completion of a VIF by a vendor customer.

If the Government should decide to make the VIF compulsory, it is urged to consider exempting vendors of units in old buildings from the VIF requirement. Such units are likely to be of relatively smaller value and their owners less resourceful.

Standard Clauses Of Preliminary Agreements

Other than the case of Yeung Siu Hong v. Chan Siu Mee Sandie [1992] 2 HKC 559, it has been held time and again by the courts of Hong Kong that the provisional agreement for sale and purchase takes effect as an immediately binding contract. See the cases cited in Betty M. Ho, Hong Kong Contract Law, 2nd Edition, pp.38-9, footnotes 179, 180 & 181.

This construction gives effect or is perceived to give effect to the intention of the parties : see, e.g., Mak Lai Man v. Lam Siu Yui Peter [1993] 1 HKC 452, per Godfrey J. (who also decided but did not follow Yeung Siu Hong v. Chan Siu Mee Sandie which he distinguished on the facts) at 459F.

In this regard, while there is much truth in the observation made by Godfrey J. in Man Sun Finance (International) Corp. v. Lee Ming Ching Stephen [1993] 1 HKC 113 at 122D-I that the provisional agreement is intended by the estate agent to secure his commission, the vendor and purchaser’s concurrent intention to obtain a contract of immediate legal effect must not be overlooked. The provisions for the payment of an initial deposit upon the signing of the Provisional Agreement and for the forfeiture of such deposit or the payment of compensation equivalent in amount to such deposit (as the case may be) in the event of default are consistent only with such an intention. The creation of an immediately binding agreement for sale and purchase would be a particularly important concern (though not necessarily to both parties) in a fluctuating market.

Parties themselves sometimes agree to a “cooling off” period at a fixed penalty by submitting to provisions excluding their common law rights to claim specific performance and/or unliquidated damages after forfeiting the initial deposit or after compensating the purchaser with an amount equivalent to the initial deposit, as the case may be. See, e.g. Man Sun Finance (International) Corp. v. Lee Ming Ching Stephen.

This is, however, a matter of choice subject to negotiations.

The compulsory insertion or implication into every preliminary agreement a 3-day cooling-off period to the purchaser would defeat what in most cases is the obvious intention of the parties. Nor does the Bar see any or any equitable basis to compel vendors to extend to purchasers an unreciprocated right to back out. This is particularly so if one bears in mind the danger of abuse by purchasers in a falling market.

In this connection, the Bar is not convinced that purchasers should be afforded the opportunity after contract to ascertain the financing position. The average home purchaser would know beforehand the relevant attributes (e.g. locality, size, views, level, etc.) of the property that he desires to acquire. He should therefore be able to find out what he can afford before committing himself to a binding agreement for sale and purchase.

A more valid reason for a cooling-off period is the fact that the preliminary agreement is usually entered into before the parties seek legal advice. However, while the lack of legal advice may result in the parties signing an agreement that is not as comprehensive as it should have been, such disadvantage does not go to the wisdom of the transaction itself. Moreover, if there is to be a cooling-off period on this ground, it should be available for the benefit of both vendors and purchasers.

It follows that the Bar is against the idea of a “subject-to-finance” clause.

The Bar agrees that the compulsory provision of survey reports by vendors are not feasible for Hong Kong.

Nor does the Bar think that the preliminary agreement should be made subject to the purchaser obtaining a satisfactory survey report. Where there is an illegal structure which goes to the title of the property, the purchaser can in any event rescind for the vendor’s failure to prove good title.

The Bar also accepts that there should not be a right of inspection in second-hand sales due to its impracticability, especially in the case of property sold subject to an existing tenancy.

3rd April 2001