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Hong Kong Law Reform Commission |
| 4.1 | As we have seen in the preceding chapter, there is insufficient protection for private individuals buying residential units in the second-hand market. Moreover, the present law is deficient in that it provides for very few, if any, positive duties on the vendor to provide particulars of the property he offers to sell. Without such positive obligations, it is difficult to establish criminal or civil liability for false or misleading property descriptions. |
| 4.2 | We take the view that the vendor should have a positive duty to supply prospective purchasers with some basic property particulars well before a preliminary agreement is entered into. Property information provided at an early stage can assist prospective purchasers in making informed decisions. What is more, such positive disclosure requirements can assist the purchaser in any future claims against the vendor for misleading or false representations. |
| 4.3 | The lack of positive disclosure requirements upon vendors has led us to the idea of a Vendor's Information Form (VIF). VIF is a form to be filled in by the vendor containing various particulars about the unit he offers for sale in the second-hand market. A vendor should make available the VIF when his unit is put on the market for sale, whether through an estate agent or not. In other words, a VIF is prepared long before a potential purchaser is identified, and in any event before signing of any preliminary agreement. |
| 4.4 | We are aware of the concern that the introduction of VIF may over-regulate the sale of completed units in the second-hand market. We do not take the view that VIF will over-regulate the second-hand market. The Estate Agents Ordinance (Cap 511) has already contained requirements for estate agents to provide seven basic property particulars. Whilst Cap 511 puts on the estate agent the primary responsibility for providing property particulars, the proposed VIF places that responsibility on the vendor. We consider that the vendor, rather than the estate agent, should have primary positive duty to disclose property particulars. As pointed out above, without such positive obligations on the vendor, it is difficult for the purchaser to establish liability for false or misleading property descriptions made by the vendor. It should be borne in mind that the positive disclosure duty on the vendor does not in any way preclude him from completing VIF with the assistance of the estate agent. Moreover, the property particulars in the proposed VIF are not difficult to provide and they are helpful to purchasers in making informed decisions. VIF is not a new idea. VIF or its equivalent has either been proposed or is already in place in some overseas jurisdictions. The following are examples. |
| 4.5 | A working party of the Law Society of England and Wales (the Working Party) has recommended as part of its conveyancing reform called "TransAction 2000" the introduction of a Legal Information Form. The Legal Information Form is to be supplied by the seller's solicitor to the seller's agent setting out in plain English "the necessary information which an informed buyer would wish to have before making an offer for the property".[11] |
| 4.6 | The Legal Information Form is to be prepared by the seller's solicitors and contains basic information about the property, including the type of ownership, lease terms, expenses, repairs, management, planning consent and other general matters relating to disputes and notices. Prospective buyers can view the Legal Information Form (as part of the seller's information pack) either at the selling agent's office or the office of the seller's solicitors.[12] |
| 4.7 | In Idaho, the Property Condition Disclosure Act (chapter 25)[13] provides that for each transfer of residential real property, on or after 1 July 1994, the transferor must complete a "property condition disclosure form". The property disclosure form constitutes a statement of the condition of the property and of information concerning the property actually known by the transferor.[14] It is not a warranty of any kind by the transferor or his agent.[15] It is not a substitute for any inspections.[16] The transferor must deliver a signed and dated copy of the completed disclosure form to each prospective transferee or his agent within 10 days of the transferor's acceptance of the transferee's offer.[17] The Idaho property condition disclosure form covers such information as appliances and services systems included in the sale, problems with basement, foundation, roof condition, well, septic system, plumbing, drainage, electrical, heating, conditions that may affect clear title (such as encroachments, easements, zoning violations, lot line disputes), knowledge of any hazardous materials or pest infestations, and any substantial additions or alterations without a building permit. |
| 4.8 | In Virginia, the Residential Property Disclosure Act (chapter 27)[18], which came into effect from 1 July 1993, applies to sales of residential real property consisting of not less than one nor more than four dwelling units, whether or not with the assistance of a licensed real estate broker or salesperson. Under the Act, the owner is required to furnish to a purchaser either (1) a residential property disclaimer statement, stating that he makes no representations or warranties as to the condition of the property and the purchaser will be receiving the property "as is" or (2) a residential property disclosure statement. |
| 4.9 | The residential property disclosure statement contains representations by the owner and not those by the broker or salesperson. The disclosure and disclaimer forms make no representations with respect to any matters which may pertain to parcels adjacent to the subject parcel. The owner must deliver to the purchaser the disclosure or disclaimer form prior to the acceptance of a real estate purchase contract. The owner is not liable for any error in the information not within his actual knowledge or which was based on information provided by public agencies and where he was not grossly negligent in obtaining the information from a third party. At or before settlement, the owner must disclose any material change in the physical condition of the property or certify that the condition of the property is substantially the same as it was when the disclosure form was provided. |
| 4.10 | The Virginia residential property disclosure statement includes information on the basement, roof, fireplace/chimney, plumbing system, septic/sewer system, water supply, heating system, air-conditioning system, electric system, insulation, exterior drainage, wood-destroying organisms, etc. |
| 4.11 | In Ontario, Rule 11.3 of the Code of Ethics of the Real Estate Council of Ontario provides: |
| 4.12 | The Seller Property Information Statement is not a statutory form,[20] but is prescribed by the Ontario Real Estate Association for use by real estate brokers and salespersons. It cover matters such as interest in the property by other parties, plan of survey, connection to municipal sewer, water systems, problem in relation to quantity and quality of well water, septic system, zoning and rezoning, easements, restrictive covenants, local levies or unusual taxes being charged or contemplated, notice or claim affecting the property from any person or public body, public projects planned for the immediate area, approximate age of property. |
4.13 The comparative study of overseas practices earlier in this chapter shows that there can be four approaches to imposing duties of positive disclosure on vendors. The first approach is a VIF on a purely voluntary basis. An example is the Legal Information Form proposed by the English Law Society. The second is a compulsory VIF backed up by statutes. This is the approach adopted by the state of Idaho in the USA.
| 4.14 | The third approach is the one being used in the state of Virginia in the USA. Under the Virginia Residential Property Disclosure Act, the owner can furnish to a purchaser either a residential property disclaimer statement or a residential property disclosure statement. The residential property disclaimer statement states that the owner made no representations or warranties as to the condition of the property and the purchaser would be receiving the property "as is". This is a statutory flexible approach. |
| 4.15 | The fourth approach is a code of practice for estate agents, as is used in Ontario. Under rule 11 of the Code of Ethics of the Real Estate Council of Ontario, a member (ie a real estate broker or salesperson) should consider requesting the seller to complete and sign a Seller Property Information Statement. If the seller refuses to, or is unable to complete the statement, that fact should be stated in the agreement. The statement is not a statutory form but is only part of a code of practice prescribed for real estate brokers and salespersons. |
| 4.16 | A VIF will assist purchasers in making more informed decisions. The number of disputed sales will be reduced. |
| 4.17 | The VIF contains the vendor's representations on particulars about the units. Its contents will be of assistance to purchasers in future litigation arising from misleading or false property descriptions. A vendor might refuse to fill in some items in the VIF without some form of legal compulsion (an issue which we shall address later in this chapter). However, the fact that there are gaps in the VIF will put prospective purchasers on notice. |
| 4.18 | The VIF should be a user-friendly summary of the necessary information in plain language.[21] Property particulars taking the form of a summary in plain language will be of great assistance to prospective purchasers. At present, most property particulars are contained in complicated legal documents not readily intelligible to lay persons. Purchasers have to rely on their solicitors or the conveyancing clerk to explain to them their rights and obligations under the title documents. However, solicitors in Hong Kong are normally involved only when the purchaser has signed a preliminary agreement. |
| 4.19 | The preparation of a VIF may involve additional costs and an added burden to the vendor. It may also slow down transactions where estate agents come knocking at a vendor's door to advise him of a ready potential buyer. In such cases, the negotiation cannot proceed before the VIF is prepared. As it is necessary to prepare only one original of the VIF, the costs of its preparation should be but a small percentage of the overall transaction costs. The possible delay to a transaction may in any case give the vendor and purchaser more time to think clearly about the transaction. |
| 4.20 | On balance, we consider that the advantages of the VIF outweigh its disadvantages. Having decided that a VIF is desirable, the next issue is what its contents should be. |
| 4.21 | Our view is that a VIF should at least provide information on the seven property particulars to be supplied by estate agents under section 36(2)(a) to (g) of the Estate Agents Ordinance (EAO). These property particulars are the minimum information required by purchasers in reaching their decision to buy. We consider that vendors of second-hand completed units should be responsible for supplying these seven property particulars in the VIF. We also consider that the proposed VIF should include details of the saleable area and any other statutory measurement methods that may eventually be enacted by the proposed Sales Descriptions of Uncompleted Residential Properties Bill. |
| 4.22 | A VIF should contain warning clauses to the effect that, among other things:[22] |
| l | It is only a summary of the main terms. |
| l | It does not explain everything and purchasers should take legal advice. |
| l | Circumstances may have changed since the date of the VIF. |
| l | The purchaser should inspect the property before making an offer to buy. |
| l | The state of repair and physical condition is not given. The purchaser should inspect the property and consult his professional advisors. |
| l | Before making an offer to buy, the purchaser should make sure that the required borrowing will be readily available. |
| 4.22 | In our view, the proposed VIF should contain at least these warning clauses. All these warnings are useful in that they direct purchasers' attention to matters which they should bear in mind when referring to the particulars contained in the VIF. They also bring home to purchasers the important matters that they should consider before committing to a purchase. We consider that there should also be a warning note to the vendor that the VIF is a legal document and that he will bear responsibility for its accuracy. |
| 4.23 | The type of ownership (that is to say, whether leasehold or freehold) is not important as land in Hong Kong is always leasehold. Hence, we take the view that the type of ownership should be omitted from the proposed VIF. |
| 4.24 | Most rights of way exist over common areas and so do not affect the exclusive occupation of the flats. Moreover, the average vendor is not in a position to tell by himself whether or not there are rights of way. Accordingly, we do not think rights of way should be included in the proposed VIF. |
| 4.25 | It should not be difficult for a vendor to state the availability of services such as water (fresh/sea), drainage, gas (what kind) and electricity. We consider that the availability of services known to a vendor should be included in the proposed VIF. |
| 4.26 | We consider that it will suffice to disclose the management fees for the current month in the proposed VIF. The Legal Information Form (LIF), by contrast, requires the disclosure of the service charges (which are commonly called management fees in Hong Kong) for the last three years.[26] Purchasers are interested in the monthly figure of management fees. As the amounts of management fees do not change drastically from year to year, purchasers will get a rough idea of the management fees by reference to the amount currently paid every month. |
| 4.27 | Furniture and fittings are not essential items for disclosure. The vendor and the purchaser can always negotiate what furniture and fittings should be included in the sale. It is already the current practice to include a list of furniture and fittings in the preliminary agreement. |
| 4.28 | We consider that furniture and fittings should be left out of the proposed VIF as they will be listed in the preliminary agreement in any event. |
| 4.29 | The amount of Government rent in some cases is three percent of the rateable value of the property and can be a large sum. Vendors should have no difficulty in disclosing the amount of Government rent as its amount can easily be ascertained from the demand note. The proposed VIF should state the amount of Government rent as far as it is possible. |
| 4.30 | The LIF states that the purchaser must bear his proportion of the insurance premium covering the whole building.[29] The last annual charge for insurance has to be stated.[30] In Hong Kong, the insurance premium for the whole block is usually covered by the management fees. However, in the Home Ownership Scheme, block insurance is taken out for the owners and the owners have to pay separately for the premium. Even so, the management fees are a more relevant item for disclosure than the buyer's share of expenses. We therefore take the view that management fees but not other expenses such as insurance premiums should be included in the proposed VIF. |
| 4.31 | This item refers to any plans for major future expenditure known to the vendor. It would seem that this item has already been covered by the vendor's statement under section 36(2)(g) of EAO. A vendor can, however, refuse to fill in the vendor's statement under section 36(2)(g). The estate agent will discharge his duty by certifying that he has duly advised the vendor to complete the statement but in vain.[32] |
| 4.32 | We take the view that if a commitment has been made to pay certain expenditure, the vendor should be obliged to disclose that fact. If however the expenditure is merely a possibility, the vendor need not disclose it. We consider that any notice received by the vendor from Government, management office, neighbouring properties, or any relevant authority of expenditure requiring contribution from the owners should be disclosed in the proposed VIF. |
| 4.33 | The rights of entry for repair are normally covered by the Deed of Mutual Covenant. The existence of such rights is unlikely to have any significant effect on the price of the property. We consider that rights of entry for repair should be left out of the proposed VIF. |
| 4.34 | The LIF requires disclosure of details about the landlord/management company and of its operation.[34] Membership of the landlord/management company is not relevant in the Hong Kong context. Instead, the existence of any owners' corporation and the identity of the management company is of importance to residents. We take the view that the proposed VIF should state whether there is an owners' corporation and, if so, its name, and the name of the management company. |
| 4.35 | The LIF requires that any dispute relating to planning consent be referred to.[35] We consider that planning consent is not of great relevance in Hong Kong and should be omitted from the proposed VIF. |
| 4.36 | A vendor is required to specify in the LIF that he knows of no disputes about his or any neighbouring property other than those stated.[36] We consider that the reference to "disputes" is too vague. Instead, we are of the view that any pending litigation known to the vendor affecting the property should be disclosed in the proposed VIF. |
| 4.37 | The LIF contains a statement to the effect that the vendor will vacate the flat and hand over vacant possession upon completion of the sale and purchase and that the flat will then be free from mortgages.[37] We take the view that such a statement should be included in the proposed VIF but should be modified. It should read: "vacant possession and free from mortgages and subsisting tenancies." However, if there are subsisting tenancies, the terms of those tenancies should be spelt out. |
| 4.39 | The Ontario Vendor Property Information Statement requires the vendor to state any problems with the septic system. Purchasers are likely to show interest in any such problems known to the vendor. We therefore consider that if a septic tank is used, this should be referred to in the proposed VIF. |
| 4.40 | The Ontario Vendor Property Information Statement requires the vendor to state whether he is acting under a Power of Attorney. As a Power of Attorney may affect the validity of the transaction, purchasers should be warned of the existence of such a power. We take the view that the proposed VIF should contain a question to the vendor as to whether or not he is operating under a Power of Attorney. |
| 4.41 | The LIF contains a number of other items such as deposit, other terms of the contract, stamp duty and list of documents held by seller's solicitors. We consider that it will be too onerous to require vendors to disclose these sundry items and take the view that they should be left out of the proposed VIF. |
| 4.41 | Under TransAction 2000, the English Law Society urged solicitors in England to adopt the LIF as part of a conveyancing protocol.[39] The English Law Society however pointed out that it is unlikely that vendors would use the LIF "unless they are required to do so by legislation".[40] We consider that a similar approach should be adopted in Hong Kong and that the first step should be for the relevant bodies in Hong Kong (such as the Law Society and the Estate Agents Authority) to endeavour to have VIF adopted as market practice on a voluntary basis. Such a course should be welcomed by solicitors and estate agents as the VIF will enable them to advise their clients fully. |
| 4.42 | We are, however, conscious that a voluntary approach may not work and we therefore suggest that the Government should review the situation at some stage later. If a market practice cannot be established by then, the Government should introduce legislation requiring the completion of a Vendor's Information Form, at least in relation to newer buildings. There is a view that if Vendor’s Information Form is to be made compulsory at a later stage, the legislation should include a provision enabling the parties to contract out of its various requirements. The merit of such a provision is that it provides a degree of flexibility to the parties who want to conclude a deal quickly. On the other hand, such a provision for contracting out will undermine the effectiveness of Vendor’s Information Form as a means of making the vendor liable for information provided to the purchaser. We, however, anticipate that once introduced, Vendor’s Information Form will come to be more accepted over time with fewer parties wanting to contract out. |
| l | It is only a summary of the main terms. |
| l | It does not explain everything and purchasers should take legal advice. |
| l | Circumstances may have changed since the date of the Vendor's Information Form. |
| l | The purchaser should inspect the property before making an offer to buy. |
| l | The state of repair and physical condition is not given. The purchaser should inspect the property and consult his professional advisors. |
| l | Before making an offer to buy, the purchaser should make sure that the required borrowing will be readily available. |
| l | It is a legal document and that the vendor will bear responsibility for its accuracy. |
| l | The seven property particulars currently to be supplied by estate agents under section 36(2)(a) to (g) of the Estate Agents Ordinance. |
| l | Details of the saleable area and any other statutory measurement methods that may eventually be enacted by the proposed Sales Descriptions of Uncompleted Residential Properties Bill. |
| l | The availability of services known to the vendor (such as water (fresh/sea), drainage, gas (what kind) and electricity). |
| l | The management fees for the current month. |
| l | State the amount of Government rent so far as it is possible. |
| l | Any notice received by the vendor from the Government, management office, neighboring properties, or any relevant authority of expenditure requiring contribution from the owners. |
| l | State whether there is an owners' corporation and, if so, its name, and the name of the management company. |
| l | Any pending litigation known to the vendor affecting the property. |
| l | A statement to the effect that the vendor will vacate the property and hand over vacant possession upon completion of the sale and purchase and that the property will then be free from mortgages and subsisting tenancies. However, if there are subsisting tenancies, the terms of those tenancies should be spelt out. |
| l | Make reference to any septic tank if it is being used. |
| l | State whether or not the vendor is operating under a Power of Attorney. |
| 4.44 | At present, different kinds of property information are provided by various Government departments such as Rating and Valuation Department, the Buildings Department and the Land Registry. We consider that there is a need for a single Government body to collate these various kinds of property information so that the public could have access at one location. This role could be filled by the Land Registry or indeed any other appropriate Government agency. We understand that it will probably take some years to implement such a centralised search system but we consider that the Administration should explore the feasibility of such an option. |