THE LAW REFORM COMMISSION OF HONG KONG

This Consultation Paper has been prepared by the Sub-committee on Description of Flats on Sale of the Law Reform Commission. It does not represent the final views of either the sub-committee or the Commission, and is circulated for comment and criticism only.

The sub-committee would welcome submissions on the proposals contained in this Consultation Paper. You are invited to make your views known to the sub-committee, in writing, by 18 November 1996.

It may be helpful for the Commission or the sub-committee, either in discussion with others or in any subsequent report, to be able to refer to and attribute comments submitted in response to this Consultation Paper. Any request to treat all or part of a response in confidence will, of course, be respected, but if no such request is made, it will be assumed that the response is not intended to be confidential.

1. In recent years, many overseas uncompleted residential properties have been put up for sale or advertised in Hong Kong. Overseas properties in this sense include those situated in Australia, Canada, New Zealand, Macau, Malaysia, the People’s Republic of China (“PRC”), Singapore, United Kingdom, United States, Taiwan and Thailand.

2. There are a large number of overseas properties being put up for sale in Hong Kong and the value of these transactions is great. The PRC is the most significant source of overseas properties. For example, during the month of December 1995, there were a total of 1,111 units of PRC properties being put up for sale in Hong Kong and their total value exceeded HK$1,007 million.^¹

3. Hong Kong residents have shown growing interest in buying overseas uncompleted residential properties. There are a number of reasons for this phenomenon. Firstly, for those Hong Kong people who are planning to emigrate, it is usual to buy in advance uncompleted units in foreign countries some time before their scheduled date for settlement overseas.

4. Overseas properties are also bought for investment or sometimes speculative purposes. This is so particularly in the case of properties in the PRC. Nowadays, small investors find it difficult to raise enough capital to invest in the local property market because the price of local properties is relatively high. PRC properties, however, provide an investment alternative. The prices of PRC properties range from HK$100,000 to over HK$500,000, with most in the region of HK$300,000.

5. Some prudent local investors may buy overseas properties to diversify their investment portfolio. In order to avoid putting all their investment in the local property market, prudent investors naturally look to the overseas market for investment opportunities.

6. Overseas properties are sometimes bought in contemplation of retirement. Some elderly people in Hong Kong buy properties in their native places in the PRC for use after retirement. They will sell their properties in Hong Kong and use the proceeds partly for living expenses after retirement and partly for the purchase of the PRC properties which are usually much cheaper than local properties.

7. Expatriates who contemplate leaving Hong Kong in due course may also buy overseas properties which are put up for sale locally. Even those expatriates who do not have immediate plans to return to their home countries may buy overseas properties for investment purposes because they have better knowledge about the property market back in their homeland than about the local market.

8. Despite the growing importance of overseas properties to the average Hong Kong buyer, prospective purchasers are sometimes given inaccurate, insufficient or even misleading sales information. The problem is particularly acute in the sale of overseas uncompleted residential properties. In such cases, a purchaser does not have the chance to see the actual unit when he/she make the purchase. Moreover, because the building sites are situated overseas, few purchasers, if any, can afford the time and expense to monitor the progress of construction.

9. The problems of inadequate and misleading sales information in the sale of overseas uncompleted units are many-fold. Most sales brochures and advertisements do not give a definite date of the property being ready for occupation. Purchasers do not, therefore, know when they can expect to move into occupancy and live in the property. Failure to complete construction on time is, therefore, one of the most serious problems. Few advertisements and sales brochures give details of any restrictions on sale of property to foreign purchasers or purchasers who are nationals but reside outside the country. There have been cases of PRC properties being sold to Hong Kong residents when in fact the properties can be legally sold to purchasers resident in the PRC only.

10. Some advertisements for overseas properties contain sham promises of gifts or other benefits for purchasers. In many cases, the gifts are in fact subject to some conditions or lucky draws which are not mentioned anywhere in the sales brochure. The gifts in some other cases are deliberately couched in vague terms to mislead prospective purchasers. In order to boost purchasers’ confidence in the developments, some advertisements and sales brochures state that mortgage facilities are provided by banks in Hong Kong or overseas. But there have been instances in which the bank mortgage facilities claimed do not materialise. Most sales brochures do not give any descriptions of the utilities supplies such as water, electricity and gas. Many Hong Kong purchasers have taken for granted the availability of such essential utilities. There have been instances of a few overseas developments which are without water and electricity supplies when vacant possession is delivered to purchasers.

11. These are but some of the many problems facing purchasers of overseas uncompleted residential properties. In view of the great number of such properties being put up for sale in Hong Kong and the great monetary value involved in the transactions, we consider that purchasers should be given better protection by getting adequate and accurate sales information, albeit at the expense of added costs and inconvenience to developers and estate agents and eventually to the purchasers themselves.

12. In June 1992, the then Acting Attorney General and the Acting Chief Justice made the following reference to the Law Reform Commission:

“Should the law governing the protection of prospective purchasers and purchasers of uncompleted residential property in relation to inadequate or misleading sales information or particulars be changed and, if so, in what way?”

13. In November 1992 the Law Reform Commission appointed a sub committee under the chairmanship of Professor Derek Roebuck to consider the above terms of reference and to make proposals to the Law Reform Commission for reform. In September 1994, the sub-committee completed their study on the first part of the reference relating to local uncompleted flats and made their proposals for reform to the Commission.

14. The sub-committee’s proposals were largely adopted by the Commission and formed the basis of the Commission report published in April 1995 on the sales descriptions of local uncompleted residential property entitled, Report on Description of Flats on Sale, The Law Reform Commission of Hong Kong (Topic 32).

15. The present report covers the second part of our study under the above terms of reference, namely, the sales descriptions of overseas uncompleted residential property.

16. On 24 April 1995, the sub-committee commenced to consider the second part of the reference relating to the sales descriptions of overseas uncompleted residential properties put up for sale or advertised in Hong Kong.

17. The membership of the sub-committee (in respect of the second part of the reference) is :

18. Mr Thomas LEUNG Moon-keung, Senior Crown Counsel, acted as the Secretary to the sub-committee.

19. The sub-committee commenced their study of the second part of the reference on 24 April 1995 and, between then and 28 May 1996, held a total of 20 meetings.

20. The problem of inadequate and misleading sales descriptions is borne out by the increasing number of complaints involving overseas properties. According to statistics provided to us by the Consumer Council, from January 1990 to December 1995, there were 891 complaints against development projects mostly relating to the sale of PRC properties. The following is the breakdown of the complaint figures:-

21. In the middle of 1994, the Consumer Council made a survey of the local newspaper advertisements of 153 overseas developments. The survey revealed many cases of misleading or inadequate information in the advertisements. The survey results were published on 15 March 1995 in the Consumer Council’s Choice Magazine (221 Edition) (the “Choice Magazine”). The survey results have provided useful factual background for this report.

Existing controls over advertisements for overseas properties on television and radio

22. There was previously a ban on advertisements of overseas properties on television and radio. However, the Broadcasting Authority decided to lift the ban with effect from 1 April 1993. When the ban was lifted, two codes of practice were introduced with regard to such advertisements. The two codes are the Television Code of Practice on Advertising Standards and the Radio Code of Practice on Advertising Standards (the “two codes”).

“No advertisement offering for sale to Hong Kong residents any flat, shop, office or other unit of accommodation in a building or proposed building or any land or any sub-division, share or interest thereof or therein situated outside Hong Kong shall be accepted unless the developer or vendor is able to produce the following:-

(i) a letter from a firm of solicitors/attorneys registered and recognized in the country where the property or land is situated confirming that

(1) all the requirements imposed by the local government relating to the development and sale of the property or land to be advertised have been properly complied with by the developer or vendor; and

(2) the developer or vendor has obtained the requisite consent (if necessary under the local laws) from the local government for the sale of the property or land to non-residents; and

(3) housing loan is available to prospective purchasers from a licensed financial institution, either locally or elsewhere, and

(ii) a letter from a firm of solicitors in Hong Kong confirming that, to the best of their knowledge and belief, the local firm of solicitors/attorneys providing the confirmation in (i) above is registered in the country where the property or land is situated for the provision of legal advice within that jurisdiction.”

24. In other words, with effect from 1 April 1993, where overseas properties are to be advertised for sale on television and radio, the licensees of television and radio stations must require the advertiser to comply with the requirements set out in the codes.

25. The two codes cannot, in our view, provide sufficient protection to prospective purchasers for several reasons. In the first place, the whole scheme of control puts the responsibility of verifying the authenticity of the overseas property entirely upon a foreign solicitor or attorney who is not subject to controls in Hong Kong. The involvement of the Hong Kong solicitors is limited to confirming that the foreign solicitors/attorneys are registered in the overseas country concerned. The fact that the foreign solicitors/attorneys are duly registered does not necessarily mean that they always give correct legal advice. Hong Kong lawyers are not in a position to verify the advice given by their foreign counterparts.

26. Advertisers are not required under the two codes to state in the television or radio commercials that there are only three matters which have been verified by the foreign solicitors/attorneys. Prospective purchasers may get the wrong impression that whatever is said in the television or radio commercials has already been verified. Many recent television or radio commercials on overseas properties contain a lot of “puffs” which are not subject to controls under the two codes.

27. The mere fact that the requirements of the foreign government relating to the development and sale of the property have been complied with is not sufficient to protect purchasers. There may not be any legal requirement in the foreign country for developers to disclose such essential sales information as saleable area, fittings and finishes, date of the property being ready for occupation and transport facilities. The availability of housing loans to prospective purchasers is not an absolute guarantee of reliability of the development. Finances may, for example, be provided by the developer’s own subsidiary company which may not question the developer’s reliability.

28. Finally, the licensees of television and radio stations cannot be held liable for false claims in a property advertisement. Section 3(1) of the Protection of Investors Ordinance (Cap 335) makes it an offence if a person, by fraudulent or reckless misrepresentation, induces another person to take part in an “investment arrangement” in respect of property other than securities. The licensees are not liable for an offence under section 3(1) unless they have actual knowledge of the misrepresentation contained in the advertisement. It is seldom, if ever, that the licensees would have such actual knowledge. The same principle applies to the local estate agent who handles the sale in Hong Kong. On the other hand, the developers, which are likely to be overseas companies, are not necessarily subject to the laws of Hong Kong.

Lack of controls over contents of sales brochures and newspaper advertisements

29. There are at present no controls, statutory or administrative, over the contents of sales brochures and advertisements for overseas properties in newspapers, handouts or pamphlets. The two codes apply only to those advertisements appearing on television and radio. It is therefore common to find newspaper advertisements for overseas properties which are full of puffs and misleading sales particulars. In some instances, photographs of attractive bungalows appearing in newspaper advertisements for overseas properties are, in fact, not of the actual completed properties, but are photographs of bungalows of another development elsewhere.

30. In conclusion, there are at present insufficient controls over sales descriptions of overseas properties. We therefore consider that advertisements and sales descriptions of uncompleted overseas residential properties should be subject to regulation and, accordingly, we have made recommendations to this effect in this paper.

31. Our discussion in this paper is confined to the regulation of sales descriptions of overseas uncompleted residential properties. That is to say, any uncompleted residential property situated outside the boundaries of Hong Kong is within the scope of our deliberations.

32. It is worth noting that all our recommendations in this paper are applicable to overseas uncompleted residential properties only.

33. This is a consultation paper which contains the sub-committee’s interim report. It also sets out the sub-committee’s interim recommendations.

34. The purpose of circulating this consultation paper is to invite property developers, estate agents, lawyers, members of the public and other interested parties to express their views on the matters raised and the interim recommendations made. The sub-committee shall present their final report to the Law Reform Commission after taking into account views on consultation.

CHAPTER 1

The General Approach

Difficulties of controls over sales descriptions of overseas properties

Developers overseas

1.1 Developers of overseas properties are mostly foreign companies which are not subject to Hong Kong laws. Any piece of Hong Kong legislation is unlikely to be binding on overseas developers. Moreover, it is difficult, if not impossible, to enforce any penalties against overseas developers who infringe the requirements under the new legislation.

Advertisements in foreign newspapers or magazines circulated in Hong Kong

1.2 Advertisements for overseas properties often appear in foreign newspapers or magazines which are circulated in Hong Kong. It is difficult to control the contents of these advertisements.

Guided tour to foreign building sites

1.3 Local estate agents sometimes organise guided tours for potential purchasers to the building sites in the foreign country. Mock-up flats are sometimes provided at the site. Such guided tours are quite common to PRC properties because of the developments’ geographical proximity to Hong Kong. It is difficult for Hong Kong authorities to control the quality of sales information provided at the site in the foreign country.

Regulation of local estate agents

1.4 Many overseas uncompleted residential properties offered for sale in Hong Kong are handled by local estate agents acting as intermediaries between the overseas developer and local purchasers. Many local estate agents merely act as sales agents. Some local estate agents, however, also participate in the development of the overseas projects. The latter group of estate agents usually own a minority interest in the overseas projects. Their role is both sales agents and co-developer.

1.5 The local estate agent is usually responsible for arranging for the sales exhibitions held in Hong Kong. Very often, the local estate agent compiles the sales brochure from information provided by the overseas developer. The estate agent is frequently the purchasers’ only source of information on the overseas project as the developer seldom has a local representative office.

The Government’s Working Group on Regulation of Estate Agents

1.6 It is therefore necessary to also consider regulation of estate agents in Hong Kong in parallel with the study on sales descriptions on overseas properties. The regulation of estate agents has already been taken up by Government. In November 1993, Government set up a Working Group on Regulation of Estate Agents (“the working group”) to study the need for a regulatory system for estate agents in Hong Kong. As a result of the working group’s recommendations, Government introduced the Estate Agents Bill into the Legislative Council on 17 November 1995. The Bill aims at legislating for the formation of an Estate Agents Authority, the licensing and regulation of estate agents. Under the Bill, the proposed Estate Agents Authority shall be empowered to, inter alia, regulate a licensed estate agent’s advertisement to ensure its accuracy and compliance with client’s instructions. The regulations under the Bill will apply to estate agents handling both local and overseas properties. The Estate Agents Bill 1995 had not been enacted at the time of preparation of this report. We have, however, taken into consideration the effects of the proposals contained in the Bill (in its original form) in formulating our recommendations.

Estate agent’s responsibility for provision of basic sales information

1.7 Since licensed estate agents will be regulated by law in future, we consider them the ideal persons to be entrusted with the task of providing basic sales information to prospective purchasers. Making licensed estate agents primarily responsible for providing sales information will overcome many of the enforcement problems involved in regulating sales descriptions of overseas property, because all estate agents handling overseas property are either situated in Hong Kong or, under the Estate Agent Bill 1995, must be licensed in Hong Kong.

1.8 Furthermore, as estate agents are often the purchasers’ only source of information on the overseas project, it is, in our view, not unreasonable to expect estate agents to ensure that the sales information provided to prospective purchasers is accurate.

Our recommendations on estate agent’s responsibility for provision of basic sales information

1.9 We recommend that any licensed estate agent in Hong Kong handling overseas uncompleted residential property must provide prospective purchasers with some basic sales information in sales brochures and price lists.

Focus on local advertisements and publicity on overseas properties

1.10 We consider it unrealistic to try to regulate all forms of publicity on overseas properties. For instance, it is impossible, to control an advertisement for overseas property contained in an internationally circulated newspaper, or magazine, journal or periodical which is not printed or produced in Hong Kong. We intend to concentrate on the regulation of sales brochures and advertisements that are done or produced or broadcast in Hong Kong.

1.11. The Government has adopted a similar approach in controlling advertisements for overseas lotteries. Under section 12 of the Gambling Ordinance (Cap 148), it is an offence to advertise in Hong Kong for overseas lotteries unless the advertisement is contained in an “internationally circulated newspaper, or magazine, journal or periodical which is not printed or produced in Hong Kong”.

1.12 This approach is, however, not entirely satisfactory. People can still see advertisements contained in international publications imported into Hong Kong. But one must accept the fact that it is impossible to control the contents of imported materials not published in Hong Kong. Moreover, Hong Kong laws do not, in general, have extraterritorial effect. That is to say, Hong Kong laws do not have binding effect on acts done outside the territory.

All sales must be handled by licensed estate agents in Hong Kong

1.13 We propose that all sales of overseas uncompleted residential property in Hong Kong must be handled by a licensed estate agent. In this connection, we propose that all advertisements for overseas uncompleted residential property must refer to a licensed estate agent in Hong Kong.

1.14 This proposal has the advantage of giving purchasers the redress channels for damage suffered as a result of inaccurate or misleading sales descriptions. Purchasers can always turn to the licensed agents for remedies as estate agents will be regulated by proposed legislation under the Estate Agents Bill 1995. By making it compulsory to require all sales to be handled by licensed estate agents in Hong Kong, they will be given the incentive to take on the task of providing sufficient and accurate sales information to purchasers. In other words, licensed estate agents in Hong Kong will, under our proposal, be given a monopoly over the sale of overseas uncompleted residential property in exchange for the responsibility for the provision of sufficient and accurate sales descriptions to purchasers.

1.15 We have taken care to ensure that our proposal does not violate Hong Kong’s international obligation for fair trading. Our proposal should apply to all vendors of overseas uncompleted residential property, whether they are from Hong Kong or overseas. Thus both Hong Kong and overseas vendors will be required to hire the services of a Hong Kong estate agent. As the same restriction will apply to both local and overseas vendors alike, Hong Kong’s international obligation for fair trading will not be violated.

1.16 We do not intend that the proposed restriction should apply to private individuals selling one single dwelling. It would be too onerous to require private individuals selling a single dwelling to do it through a Hong Kong estate agent each and every time. In any case, we do not want to unduly regulate the economic activities of individuals.

Language ambiguities

1.17 There are cases in which language ambiguities are used in the sales brochure or advertisement to mislead purchasers. We therefore take the view that any ambiguity in any term used in the sales brochure or advertisement shall be construed in favour of the purchaser.

Our recommendations on the general approach of regulating sales descriptions and advertisements

1.18 We recommend that any vendor of overseas uncompleted residential property must engage a licensed estate agent in Hong Kong. However, this requirement shall not apply to the sale of a single dwelling.

1.19 We recommend that no media in Hong Kong (including television, radio and printed media) shall publish an advertisement for sale of overseas uncompleted residential property unless it refers to a licensed estate agent in Hong Kong, together with the estate agent’s licence number. However, the requirements mentioned in this paragraph shall not apply to advertisements for the sale of a single dwelling, nor to advertisements of overseas property not put up for sale in Hong Kong.

1.20 “Sale” shall include all transactions whereby a vendor’s interest is transferred and shall also include the meaning of the term as defined in the Stamp Duty (Amendment) Ordinance (Ord No 8 of 1992).

1.21 We recommend that the estate agent who is referred to in the advertisement shall be liable for all false or misleading information in the advertisement and in all sales brochures not forming part of the advertisement.

1.22 We recommend that any ambiguity in any term used in any advertisement or sales brochure shall be construed in favour of the purchaser.

1.23 We recommend that anything in any advertisement or sales brochure which is false or misleading should constitute a breach of the proposed legislation (mentioned in chapter 11).

The availability of sales brochure

1.24 It is difficult to give prospective purchasers full and complete sales information in a typical advertisement in newspapers, radio and television. It is impossible to squeeze all necessary sales information into a radio or television commercial which may only last for a few minutes or even seconds. Likewise, it is difficult to have all the necessary information contained in a newspaper advertisement of normal size.

1.25 We therefore consider that sales brochures should be made available to purchasers. A sales brochure can contain as much necessary sales information as possible for purchasers. We also hold the view that licensed estate agents should have the responsibility to make the sales brochure available. This is in line with our general approach which puts primary responsibility for supplying sales information on licensed estate agents.

1.26 We are of the view that the sales brochure must be available in Chinese. This will ensure that the sales brochure is intelligible to the average person in Hong Kong. If there are discrepancies between the Chinese and any other version of the sales brochure, purchasers should, in our view, be able to choose which version or part thereof is applicable.

1.27 In order to be of use to prospective purchasers, sales brochures should be available as early as possible. We think that sales brochure should be available from the time the property is first advertised for sale. Moreover, any invitation to buy property, in our view, can only be made if sales brochures are available to prospective purchasers at that stage.

Our recommendations on the availability of sales brochures

1.28 We recommend that up-to-date sales brochures must be made available to prospective purchasers. It should be the licensed estate agent’s responsibility to make available the sales brochure. If the developer does not compile the sales brochure, it will be the licensed estate agent’s responsibility to prepare the sales brochure.

1.29 We recommend that the sales brochure must be available in Chinese. If there are discrepancies between the Chinese and any other version of the sales brochure, purchasers can choose which version or part thereof is applicable.

1.30 We recommend that sales brochure must be available from the time the property is first advertised for sale. Moreover, any invitation to buy property, can only be made if sales brochures are available to prospective purchasers at that stage.

CHAPTER 2

Date of Completion

and

Date of being Ready for Occupation

Delay or total project failure

2.1 A common complaint by purchasers of uncompleted overseas properties is that the development is delayed or worse still the project fails altogether.

2.2 There is currently a local term called “lan mei” properties, which literally means “broken tail”. This term refers to those developments which have failed to be completed for various reasons. The “tails” of the developments have broken and purchasers can never expect to see the property come into being.

Reasons for delay or project failure

2.3 Because of the haste to cash in on the property boom during the early 90’s, some PRC developments commenced without thorough site investigation studies. Some developments therefore were built on land not suitable for erecting houses or block of flats. The soil was, for example, too soft or there was extensive underground water. Thus, much more additional construction works were needed to stabilize the base of the building sites, resulting in additional costs and delay of the developments.

2.4 A frequent reason for the failure of some overseas projects is that the developers in such cases have tried to finance the development costs by proceeds from pre-sale of flats. When the pre-sale turns out to be unsatisfactory, the developer will have insufficient funds to proceed with the development and the project will grind to a halt.

Extension of date of completion

2.5 Many sale and purchase agreements of overseas properties contain clauses allowing the extension of the date of completion in specified situations. For example, in some agreements of overseas properties, it is provided that the developers may delay development without compensation to the purchasers if there are “special reasons” certified by the “relevant authorities”. Such special reasons, which are very much in the developer’s favour, include:

(1) Exceptionally difficult and major technological problems not amenable to immediate solutions;

(2) Need to amend the building plans for technical reasons;

(3) The authorities’ delay in approving relevant documents;

(4) Delay of local authorities in approving the development’s facilities;

(5) Changes in State planning or the executive orders of State functional departments;

(6) Delay caused by the contractors;

(7) Other matters beyond the vendors’ control.

2.6 We consider that purchasers should have the right to know beforehand in the sales brochure the grounds on which the date of completion can be extended.

Measures to ensure development on schedule and to prevent project failure

2.7 In our view, nothing can really ensure a development progressing on schedule because there are many factors affecting the progress of construction which may be outside the developer’s control.

2.8 We consider that what purchasers need are some financial measures to protect the deposits and instalments paid by them in the event of delayed completion or project failure. In this connection, we have reviewed various options including stakeholding, trust account, insurance and bonds put up by developers.

2.9 We do not consider stakeholding of the purchase deposits and instalments a viable solution in the case of overseas property. In order to give real protection to purchasers, it is important to ensure that progress payments are released to developers in accordance with the actual progress of construction. It is difficult to exercise actual control over the release of progress payments to developers if stakeheld funds are held overseas. It is necessary to appoint local solicitors as the stakeholders in order to keep the stakeheld funds in Hong Kong. However, it is difficult for local solicitors to ensure that the certificates for progress payments issued by overseas architects are in order. It is also too onerous on local solicitors to expect them to continuously monitor the progress of an overseas project which in many cases may last 3 or 4 years. Similar arguments also work against appointing estate agents as stakeholders. Moreover, it is the policy behind the Estate Agents Bill 1995 that purchaser’s money should not be left in the hands of estate agents for extended periods. The arguments against stakeholding are also applicable to trust accounts. In fact, stakeholding is a kind of trust account.

2.10 We consider insurance is a possible alternative. However, the value involved in property transactions is enormous. It will require a substantial insurer to take on the insurance. Owing to the reasons mentioned in the last paragraph, the premium can be very high. In any event, not too many Hong Kong insurers will be prepared to take on the risk of ensuring the success of overseas developments.

2.11 Bonds put up by the developer appears, in our view, to be a more favourable option than the others. However, we do not anticipate that too many local banks will be keen on providing bonds to cover the risk of overseas developments which are not subject to controls from Hong Kong. The bond should, in our view, be available to meet purchasers’ claim in the event of delay or project failure. The amount of the bond should therefore cover all deposits and instalments paid by purchasers plus interests thereon at reasonable rates.

2.12 Although each of above options has some shortcomings of its own, it is our view that one or more of these options should be adopted to meet purchasers’ claims in the event of delayed vacant possession or project failure. However it is not within our terms of reference to recommend a particular option.

2.13 We would make the observation that Government should undertake study to find out the appropriate financial measures (including stakeholding, trust account, insurance, bonds put up by developers) to protect all deposits and instalments paid by purchasers in the event of delayed completion or project failure.

2.14 We consider that the sales brochure should state whether there are any mechanisms to protect all deposits and instalments paid by purchasers in the event of delayed completion or project failure.

Date of being ready for occupation

2.15 In our view, what really matters to the purchaser is the date by which the property will be ready for occupation. We take the view that such a date should be stated in the sales brochure.

2.16 We consider that the property is ready for occupation only when all fittings and finishes applicable to the property have been installed (unless they are stated to be excluded in the sales brochure); there is reasonable access to the property; the utilities stated to be available in the sales brochure have been connected; and all local permission needed for occupation has been obtained.

Our recommendations on the date of completion and the date of property being ready for occupation

2.17 We recommend that the sales brochure must state the date of the property being ready for occupation. The term “ready for occupation” shall mean:

(i)	all fittings and finishes which are specified in the list in paragraph 3.13 and which are applicable to the property concerned have been installed, unless they are stated to be excluded in the sales brochure; and
(ii)	there is reasonable access to the property; and
(iii)	the utilities stated to be available in the sales brochure have been connected; and
(iv)	all local permission needed for occupation has been obtained.

2.18 We recommend that the sales brochure must state the grounds on which the date of completion can be extended.

2.19 We recommend that the sales brochure must state whether there are any mechanisms for protecting all deposits and instalments paid by purchasers in the event of delayed completion or project failure.

CHAPTER 3

Fittings and Finishes

Introduction

3.1 The quality of fittings and finishes of the property is of vital importance to purchasers of overseas properties. Many people in Hong Kong purchase overseas properties for investment purposes. Low quality fittings and finishes reduce the resale value of the property. For those who purchase for self use, they mean considerable money has to be spent on maintenance and renovation.

3.2 Purchasers of uncompleted overseas properties cannot see for themselves the quality of fittings and finishes. A few developers of overseas property put up mock-up flats in Hong Kong. These mock-up flats are of little use to purchasers because it is difficult to ascertain the difference in standard between the mock-up units and the actual units in the foreign country. Other developers would put up mock-up flats at the building sites in the foreign country. Few Hong Kong purchasers can afford the time and trouble to visit these mock-up flats in the foreign country. Some local estate agents organise tours for potential Hong Kong purchasers to see the mock-up flats at the building sites. But these tours are usually organised for developments situated in the nearby Guangdong province only, in view of their relatively short distance from Hong Kong.

3.3 Prospective purchasers therefore rely on the descriptions of fittings and finishes contained in the sales brochures. However, sales brochures do not contain uniform descriptions of fittings and finishes. Some sales brochures even fail to give any description of the fittings and finishes.

Problems with descriptions of fittings and finishes

3.4 Vague descriptions are often used in sales brochures. The exact types of fittings and finishes used are seldom specified. There are, for example, such vague descriptions as “in accordance with government standards”, “good quality”, “pretty”, “deluxe”, “high class” and “imported”.

3.5 The word “imported” can be quite misleading, especially in the case of PRC properties. In the PRC, imported materials can mean those imported into China from Hong Kong. This concept of imported materials is different from that usually held by Hong Kong purchasers. In Hong Kong, people tend to think of imported goods in terms of those from Europe, United States, Japan, etc.

3.6 The brands and countries of origin of the fittings and finishes are seldom specified in the sales brochures. There have been cases in which developers have substituted materials of inferior quality because of unforeseen rises in the prices of the intended materials. Purchasers could not complain in such cases as the brands and countries of origin of the intended materials were not mentioned in the sales brochures or in the purchase agreements.

A reasonable level of disclosure is sufficient

3.7 We do not consider it desirable to pitch the level of disclosure too high in the case of overseas property. It will create practical problems if too detailed specifications of fittings and finishes are required to be disclosed. Firstly, it will be difficult to ascertain the quality and standard of certain brands of fittings and finishes if they are not commonly used in Hong Kong. Secondly, it will be difficult to take any action against the Authorized Person who erroneously certifies the substitute materials. As the Authorized Person may be in say, USA or Canada, any action taken in Hong Kong against him may be difficult.

3.8 We therefore take the view that a reasonable level of disclosure or description of the quality of fittings and finishes will suffice. The sales brochure should contain a list of fittings and finishes and state the types of materials intended for the fittings and finishes. If the intended materials become unavailable, developers should be allowed to substitute other materials provided that the substitute materials are of comparable quality and standard to the intended materials.

3.9 The developer may of course and often will provide more than the minimum disclosure required. Any descriptions of the fittings and finishes in the sales brochure must be accurate.

3.10 We have drawn up at Annex I a specimen description of fittings and finishes.

Mock-up flats

3.11 Mock-up or sample flats are sometimes put up to show the quality of the fittings and finishes. The main problem with mock-up flats is that they are often pulled down before completion of the actual units. It is therefore difficult to ascertain any differences in the standard between mock-up flats and actual units.

3.12 We consider that the standard of fittings and finishes in the mock-up flats, if any, must be consistent with that stated in the sales brochure and that of the actual units.

Our recommendations on fittings and finishes

3.13 We recommend that if the sales brochure states that certain fittings and finishes will be provided, it must also state the types of materials intended for the fittings and finishes. Moreover, the sales brochure must at least contain details of the following list of fittings and finishes:

Exterior finishes

External walls, windows, verandah/balcony.

Interior finishes

Main entrance lobby, typical lift lobby, internal walls and ceilings, floors, bathroom, kitchen.

Interior fittings

Doors, bathroom, kitchen, bedrooms, telephone and aerials, electricity, gas/electricity supply, water supply and pipes.

Miscellaneous

Lifts, letter box, refuse collection, water/electricity/gas meters.

3.14 We recommend that if the intended materials become unavailable, developers should be allowed to use substitute materials provided that the substitute materials are of comparable quality and standard to the intended materials.

3.15 We recommend that any description of the fittings and finishes in the sales brochure must be accurate.

		1990	1991	1992	1993	1994	1995
1.	Disputes over the information provided by the vendor, e.g. dimensions, materials, mortgages, etc.	6	3	15	17	23	25
2.	Disputes arising out of conveyancing, e.g. the terms of the Agreement for Sale and Purchase, miscellaneous charges by the developer, etc.	2	1	3	3	6	21
3.	Disputes arising out of the performance of the Agreement for Sale and Purchase, e.g. delayed completion	1	0	2	66	238	334
4.	Disputes arising out of the quality of finish and defects	1	0	1	2	4	12
5.	Complaints against solicitors in relation to the conveyancing	0	0	1	4	8	12
6.	Complaints against building management	0	0	2	1	12	15
7.	Miscellaneous	2 ______	1 ______	5 ______	10 ______	15 ______	17 ______
		12	5	29	103	306	436

September 1996

12. In June 1992, the then Acting Attorney General and the Acting Chief Justice made the following reference to the Law Reform Commission:

17. The membership of the sub-committee (in respect of the second part of the reference) is :

18. Mr Thomas LEUNG Moon-keung, Senior Crown Counsel, acted as the Secretary to the sub-committee.

19. The sub-committee commenced their study of the second part of the reference on 24 April 1995 and, between then and 28 May 1996, held a total of 20 meetings.