Housing Market

Legal Issues

Making the Purchase

By Angela Lee

A changed economic outlook for Hong Kong combined with rising rent is attracting more and more homebuyers to the property market. To those inexperienced, buying a flat may seem daunting. Here are some pointers to demystify the process and to ease this important decision.

Prudent enquiries

It is prudent to ask the seller or his agent to confirm the following matters:
Whether there is -

• Any notice requiring repair, improvement or other works to be done or paid for by the owner which is issued either by the building manager or the government;
• Any third party claim against the co-owners of the building / development;
• Anything untoward ( such as death or accident ) which has taken place in or affecting the property;
• Any illegal structure in the property and / or the common areas.

The provisional agreement

After you are satisfied with the property and agreeing on the purchase price, you will be asked to sign a provisional sale and purchase (S&P) agreement. Unless it is expressly “subject to contract”, this agreement obliges you to buy the flat upon signing otherwise you may lose the initial deposit paid or even be liable for breach of contract.

The usual payment terms are as follows :

3 to 5% of the purchase price is payable as initial deposit on signing.

10% of the purchase price is usually payable within 14 days after signing of the provisional agreement when the formal agreement is also to be signed.

It is in the interest of the buyer that the deposits are held by the seller’s lawyer as stakeholder and not paid directly to the seller. The seller should only receive the money after he has proved a good title and that the balance of the purchase price is enough to pay off any outstanding charges against the property.

The balance, being 90% of the purchase price, is payable on completion which is usually between 1 and 3 months after signing the formal agreement.

Who is the buyer ?

You should decide on the identity of the buyer(s) before signing the provisional agreement, otherwise you may have to incur additional stamp duty before you could get the property transferred to the new buyer. Buying with a company could in some situations give you tax advantages but this is to be considered against the additional costs involved in maintaining a limited company.

Third-party interests

When you inspect the property, check who are the occupiers and ask if they have any interest in the property. It is possible that an occupier, such as the wife who is not a registered owner, has acquired an interest in the property by having contributed in some way to the purchase price. You may have to obtain their consent before the sale can go through. Let your lawyer know if you are aware of the existence of such occupiers.

Risks pass to buyer on signing

Under the law and subject to any contrary provision, provided that the seller has taken reasonable care in the use or keeping of the property, risks to the property pass to the buyer on signing of an agreement for sale and purchase. Therefore, even if the property is burnt down or otherwise damaged before completion, the buyer is nevertheless obliged to complete the purchase without any price reduction. It is therefore advisable for the buyer to get insurance cover even for the period before completion.

Title investigation

The seller’s proof of his ownership of the property is in the set of title deeds which he holds. These include the land grant and the documentary transfers of the property title from one owner to the next until it becomes vested in the seller.

An important duty of the buyer’s solicitor is to review these title deeds and conduct various searches to ensure that the seller has a good title to the property and has full right to sell it to the buyer free from encumbrances. Unless and until the seller’s title is a registered title under the Land Titles Ordinance, the seller’s duty to prove good title can still be an onerous task.

Completing the purchase

It is important to note that for the protection of the purchaser, completion of the acquisition (that is to pay the balance of agreed price and sign all legal documents) should be scheduled to take place at least 30 days after the signing of the provisional agreement. Otherwise the purchaser could be subject to the risk of not getting a clear title on completion.

This is because a person who has acquired an interest in the property (such as a mortgagee or another buyer) needs only register the document under which he acquires the interest in the Land Office within 30 days of the creation of his interest (usually known as “the priority period”). If he does so, in case of a conflicting claim against the property, the ranking of his right will count from the date of the document instead of the date of registration of the document.

Therefore, your lawyer would only be able to confirm that you do not have to deal with any competing claims against the property if the Land Register shows no other registration during your priority period, assuming that your agreement with the seller has been registered within the priority period. Before completion, you should conduct a final inspection of the flat to ensure that the handover condition is as the parties have agreed and vacant possession can be delivered to the buyer.

As a golden rule, never sign any legal document if you do not understand its contents. You should ask your solicitor for assistance and advice to avoid expensive consequences.

Transaction Steps

• Negotiate and agree on purchase price and other basic terms.
• Sign provisional S&P agreement; buyer pays an initial deposit (3-5% of purchase price).
• Make application for a mortgage loan (if financing is required).
• Seller’s solicitor prepares draft formal S&P agreement to be approved by buyer’s solicitor.
• Buyer and seller sign formal agreement (usually within 14 days after signing of the provisional agreement); buyer pays second deposit (10% of purchase price less initial deposit).
• Seller’s solicitor sends title deeds to the buyer’s solicitor for perusal.
• Seller’s solicitor answers questions raised by buyer’s solicitor to prove the seller’s title.
• Buyer conducts final inspection of the property so as to ensure that vacant possession of the property can be delivered upon completion.
• Buyer opens account and pays deposits for the public utilities including electricity, gas and water (to ensure continuous supply of these utilities as the seller would close his account with these utility companies after the conclusion of his sale.) .(angela, can you add a few words explaining why buyer should do this?)
• Buyer executes the assignment (which is the document under which the seller transfers title to the buyer on completion) and mortgage deed (if required) 2 or 3 days before completion (so as to ensure the availability of the mortgage loan).
• Buyer settles through his solicitor the balance of purchase price and related costs including his share in management fee, rates and Government rent as shown in an apportionment account prepared by the seller’s solicitor, and pays his solicitor’s fees and disbursements.
• Buyer’s solicitor draws down the mortgage loan on the completion date and pays the balance of purchase price in return for keys to the property. Buyer can move in afterwards.
• Buyer’s solicitor arranges for payment of stamp duty and for registration of the assignment and mortgage (if any) in the Land Registry.
• Buyer’s solicitor sends all title deeds to buyer or mortgagee bank (if any).

*Angela Lee is a partner of Baker & McKenzie, a leading global law firm with offices in 38 countries. She was the first female international partner of the Hong Kong office of that firm and is now the head of the Global Real Estate Group of the entire firm and a co-head of its REIT Practice in the Asia Pacific region. Angela has repeatedly been named a leading lawyer in property law by various international and regional legal journals, publications and Who’s Who of the Law. She is also a Justice of the Peace.