Chapter 1

The case for the reference
and the scope of deliberations

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The case for the additional reference for local completed residential properties

1. When the Sub-committee was appointed in November 1992, their terms of reference were confined to uncompleted residential properties. The Sub-committee was given an additional reference in 1996 to consider completed residential properties in Hong Kong. There are a number of reasons for making this additional reference relating to pre-contractual matters and sales descriptions.

Public responses

2. When the consultative document on local uncompleted residential properties was issued in April 1994, there was strong public demand in the responses for the introduction of controls over sales descriptions of completed residential properties.

Uniform standards for completed and uncompleted property

3. In its First Report published in April 1995, the Commission made a number of recommendations in respect of local uncompleted residential properties. The Government published the Sales Descriptions of Uncompleted Residential Properties Bill as a White Bill in the Government Gazette on 7 April 2000. The White Bill, on which the public's views were sought for a three-month consultation period ending on 6 July 2000, aims largely to implement the Commission's recommendation in the First Report. It will create anomalies if some of these recommendations apply only to uncompleted but not completed properties. For example, standard definitions for measuring floor area are recommended for uncompleted properties. It would create confusion if the measurement methods were not extended to completed properties offered for sale by developers.

Uncompleted flats become completed

4. There are a growing number of first-hand completed residential units being offered for sale. Although these flats have been "completed", they are offered for sale in much the same way as if they were still uncompleted. Prospective buyers may not be given the opportunity to view the particular flats themselves, but instead are usually only able to view one or more show or mock-up flats. As in the case of uncompleted properties, prospective purchasers have to rely largely on the information in the sales literature. There thus seems little reason that less protection should be given to purchasers of such completed properties than those of uncompleted properties.

Scope of deliberations

5. The present study relates to completed residential properties in Hong Kong. Unlike uncompleted flats (which are mostly sold by developers), completed residential properties are sold either by developers in the first-hand market or by private property owners in the second-hand market.

6. Many of the sales descriptions of completed flats are provided by developers in much the same way as those for uncompleted flats. There is thus an obvious reason to regulate the sales descriptions and other pre-contractual matters of local completed flats in the first-hand market. The question is whether or not that regulation should extend to the second-hand market.

Views against regulating the second-hand market

7. Reservations have been expressed in some quarters to extending the study to the second-hand market and to individual flat owners. The view taken is that a sale in the second-hand market is primarily a transaction between two individual owners. For transactions in the second-hand market, the Government has introduced a scheme to regulate estate agents. It is hoped that the scheme will improve the quality of sales information provided to purchasers. Moreover, it is doubtful whether or not individual owners will have the necessary time and resources to provide the required information. It may also be difficult for them to check the property details of some older flats.

8. Furthermore, unlike purchasers of uncompleted properties, purchasers of second-hand completed flats can view or check the properties. It is in the first-hand or primary market that purchasers need more protection. In the second-hand market, purchasers are on an equal footing with the vendors. Hence, there is little need for additional legislative measures to protect purchasers.

Views in favour of regulating the second-hand market

9. The Sub-committee take the view that their terms of reference are wide enough to cover the second-hand market. Purchasers of second-hand completed flats, just like those buying in the first-hand market, are in need of protection. The present law does not provide enough positive protection for purchasers. For example, the burden of proof of an actionable misrepresentation would be on the aggrieved party and it will be difficult and costly to discharge that heavy burden. The Sub-committee believes that there is a need to impose positive duties on private vendors to provide fuller information before the Agreement for Sale and Purchase ("ASP").

10. In the second-hand market, verbal representations are often made by vendors and estate agents. It is difficult and costly for purchasers to verify certain important property information, including the age and size of the property. The property is not always available to prospective purchasers for inspection. Investors may buy property subject to an existing tenancy without the chance of viewing the property.

11. It is noted that the Estate Agents Ordinance (Cap 511) requires estate agents to supply certain sales information to purchasers in the second-hand market. The duties of estate agents are confined to the provision of seven basic property particulars.¹ There are many other types of property information of interest to purchasers of completed second-hand flats, such as, the level of management fees. Vendors should therefore also have some responsibility for providing property information to ensure its accuracy.

12. We have therefore come to the view that the present study should cover completed residential properties offered for sale not only by developers in the first-hand market but also those offered for sale by private vendors in the second-hand market.

Definition of "completed residential property"

13. In the First Report, the Commission recommended that "uncompleted residential property" should refer to:

"residential units for which the Occupation Permit has yet to be issued by the Building Authority under the Buildings Ordinance, or in the case of the Housing Authority's Home Ownership Scheme, the completion certificate has yet to be issued by the Director of Housing … that this definition should be suitably modified in the case of exempted houses in the New Territories." ²

14. We are of the view that the definition of "completed residential property" should also take the Occupation Permit as the demarcation point.

Recommendation 1

We recommend that "completed residential property" should refer to residential units in respect of which there is an Occupation Permit under the Buildings Ordinance or, in the case of the Housing Authority's Home Ownership Scheme, in respect of which the completion certificate has already been issued by the Director of Housing. This definition should be suitably modified in the case of exempted houses in the New Territories.

PART I – SECOND-HAND MARKET

Chapter 2

The general approach to
the second-hand market

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Completed residential units in the second-hand market

2.1 In this part, we consider the means to improve the existing protection to purchasers of completed units in the second-hand market. Here we refer to those residential units with an occupation permit sold by private vendors to purchasers. Private vendors are those who are not in business as a developer or subsidiaries or associates of a developer.

Lack of sales brochure

2.2 In the second-hand market, there rarely be a sales brochure as the vendors are mainly private individuals. Thus, we shall explore other means of imposing positive duties on private vendors to provide essential property information to prospective purchasers. In this respect, we shall look at the feasibility of introducing a vendor’s information form. We shall also study the possibility of inserting certain standard clauses into the preliminary agreement.

Chapter 3

Brief review of the existing law
governing the protection of purchasers of
completed units in the second-hand market

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Introduction

1. In this chapter, we shall take a brief look at the existing law governing the protection of purchasers in the second-hand market. We shall try to see if the existing law is adequate to protect purchasers.

Misrepresentation

2. At common law, an agreement for sale and purchase of a flat may be rescinded if it has been induced by a misrepresentation, that is to say an untrue statement of fact made by one party to the other. The statement may be deliberately untrue or made recklessly as to whether or not it is true or it may be made negligently or innocently. Most misrepresentations are of the latter type. Once a misrepresentation of the latter type has occurred the contract becomes voidable: the victim of the misrepresentation has the option of withdrawing from the contract but may choose to continue with it. Alternatively, by virtue of statute (the Misrepresentation Ordinance Cap 284) the court may award damages to the victim, in which event the sale stands but the party who is responsible for the misrepresentation must pay compensation to the other party. If the misrepresentation is fraudulent, the contract is automatically void and damages (on a more generous scale) are recoverable.

3. It may be difficult for the purchaser to whom misleading information has been given to rely upon the law of misrepresentation. First, if the false statement is not in writing, as is particularly likely to be the case in a sale between private individuals, there will be difficulties in establishing that it was made and precisely what was said or communicated. A representation may be oral, in which case there could well be a clash of evidence as to what was said, or it may be by act or implication. There are particular difficulties where the representation is by silence, ie the failure to correct a false impression gained by the purchaser. Second, even if the court is satisfied as to what was said, the purchaser may not be able to show that the statement induced him to enter into the purchase agreement: typically a variety of factors will have led to his decision to buy, including price, surroundings and convenience of location, and separating the influences of these from that of the false statement is problematic. Third, in order to be actionable, the inaccurate statement must be a statement of fact and not of opinion or of law. It can be particularly difficult to discern whether an assertion is an expression of the speaker or writer's opinion or is a statement of fact (indeed an assertion may contain a mixture of fact and opinion). An example is a general description of the internal decorations of a flat where phrases such as "high quality", "well designed" and so forth may be used. Fourth, the statement must be one of existing fact, not a promise as to future fact.

4. A further complication is that, whatever may have occurred during negotiations prior to the signing of the provisional agreement, the formal sale and purchase agreement frequently contains a standard clause to the effect that the agreement contains the whole agreement between the parties and that no representations or warranties other than those in the contract have been made or can be relied upon. A variant of this limits the remedies available for misrepresentation to damages and lays down how any compensation is to be calculated. These are examples of exclusion clauses which, under the provisions of the Control of Exemption Clauses Ordinance (Cap 71), generally would be effective only to the extent that they are reasonable but that ordinance specifically does not apply to contracts for the transfer of an interest in land so such clauses in a sale and purchase agreement are effective.

Breach of contract

5. If information concerning a property is incorporated into the contract of sale and is supported by an undertaking in the contract that the information is true or accurate, the purchaser will have an action for breach of contract should the information transpire to be inaccurate. Such stipulations are more frequent where the terms of the contract are influenced by an outside agency. For instance, in sales under the consent scheme, the vendor is obliged to warrant to the purchaser that the flat will be as shown on the plan and will be of the stipulated saleable area and that the sales brochure is accurate and complies with the requirements concerning such brochures laid down by the Lands Department. This approach is, however, unusual in a private sale of second-hand property: it would require the purchaser to insist upon a special clause in the contract and, where as is usual there is a provisional agreement, he can so insist only if the clause has been written into the provisional agreement.

6. The law also implies terms into contracts but the circumstances in which this will be done are limited to where the implication is necessary or is prescribed by law.

Fraudulent behaviour

7. In Hong Kong, cases involving aspects of fraudulent behaviour are dealt with either as specific offences under the Theft Ordinance (Cap 210) or, where a criminal agreement between two or more persons can be proven, by means of a charge of "conspiracy to defraud."¹

Obtaining property or pecuniary advantage by deception

3.8 Section 17(1) of the Theft Ordinance (Cap 210) provides:

"Any person who by any deception (whether or not such deception was the sole or main inducement) dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it, shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."

3.9 Section 18(1) of the Theft Ordinance (Cap 210) provides:

"Any person who by any deception (whether or not such deception was the sole or main inducement) dishonestly obtains for himself or another any pecuniary advantage shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years."

3.10 "Deception" is defined as "any deception (whether deliberate or reckless) by words or conduct as to fact or law …."² Hence, mere silence in itself cannot be a deception within the meaning of the section.³ It is therefore difficult to base liability on the mere omission (albeit deliberate) on the part of the vendor to provide property information. At present, there is no positive legal duty on the vendor to provide property information except a vendor's statement as to known structural additions or alterations and repairs or improvements to his unit under the Estate Agents Ordinance (Cap 511).⁴ Even that vendor's statement on structural alterations and repairs is not supplied to the purchaser direct by the vendor himself. The vendor makes the statement and passes it to the estate agent who will in turn pass it on to the purchaser. As the statement relates to known structural alterations or repairs, a vendor need not make any disclosure so long as he is not aware of any such matters.

Conspiracy to defraud

10. In brief, the common law offence of conspiracy to defraud consists of an agreement by two or more persons to commit fraud. It does not apply to one person acting alone. In most cases, the vendor alone supplies the property information and it is difficult to prove the existence of any agreement to defraud the purchaser. It is therefore difficult to find any liability in conspiracy to defraud in respect of the provision of property information.

Substantive offence of fraud

10. Acting upon the recommendations of the Law Reform Commission in its report entitled Report on Creation of a Substantive Offence of Fraud,⁵ a new section 16A was added to the Theft Ordinance on 16 July 1999.⁶ The new section 16A(1) provides:

"If any person by any deceit (whether or not such deceit is the sole or main inducement) and with the intent to defraud induces another person to commit an act or make an omission, which results either –

1. in benefit to any person other than the second-mentioned person; or

2. in prejudice or substantial risk of prejudice to any person other than the first-mentioned person,