The Law Reform Commission was established by His Excellency the Governor in Council in January 1980. The Commission considers such reforms of the laws of Hong Kong as may be referred to it by the Secretary of Justice or the Chief Justice.

The Secretary of the Commission is Mr Stuart M I Stoker and its offices are at:

Fax: 2865 2902

Mr Thomas Leung, Senior Government Counsel, was principally responsible for the writing of this Commission report.

Report on

Introduction and Overview

__________________________________

Background

1. In recent years, many overseas uncompleted residential properties have been put up for sale or advertised in Hong Kong. For the purpose of this report, by “overseas properties” are meant any properties outside Hong Kong, including properties not only in Australia, Canada, New Zealand, Macau, Malaysia, Singapore, United Kingdom, United States, Taiwan and Thailand, but also those in Mainland China.

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. Despite the increasing volume of sales of overseas properties in Hong Kong in recent years, 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, purchasers do not have the chance to see the actual property prior to 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.

4. The problems of inadequate and misleading sales information in the sale of overseas uncompleted units are manifold. 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 overseas properties being sold to Hong Kong residents when in fact the properties can only be legally sold to purchasers resident in that country.

5. 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 advertisements or sales brochures. 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 utility 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.

6. 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.

Terms of Reference

7. 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?”

8. 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.

9. 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).

10. The present report covers the second part of the sub-committee’s study under the above terms of reference, namely, the sales descriptions of overseas uncompleted residential property.

Sub-committee membership

11. 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.

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

Professor Derek Roebuck (Chairman)	Formerly Professor of Comparative Law, City University of Hong Kong

Mr Tom Berry	Principal Solicitor, Lands Department

Ms Audrey EU Yuet-mee, SC	Barrister

Mr Andrew LEE King-fun	Principal Partner, Andrew LEE King-fun and Associates, Architects

Mr LIU Sing-cheong (since 27.1. 1995)	Managing Director, Hang Cheong Surveyors Ltd Surveyor

Mr Patrick Sheehan	Consultant, Clarke & Liu, Solicitors

Mr William SHIU Wai chuen (from 19.11.1993 to 30.1.1997)	Principal Assistant Secretary, Housing Branch, Government Secretariat

Ms Eva TO Hau-yin (since 30.1.1997)	Principal Assistant Secretary, Housing Bureau, Government Secretariat

Mr Kennedy WONG Ying-ho (since 27.1.1995)	Managing Partner, Philip K H Wong, Kennedy Y H Wong & Co Solicitor

Mr Martin WONG Kwai-poon (since 27.1.1995)	Chief Complaints & Advice Officer Consumer Council

Mr Marco WU Moon-hoi	Deputy Director of Housing Department

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

Meetings

14. The sub-committee commenced their study of the second part of the reference on 24 April 1995 and, between then and 21 February 1997, held a total of 21 meetings.

Consultation

15. On 12 September 1996, the sub-committee issued their interim report in the form of a consultative document (“the Consultative Document”). In it the sub-committee set out their interim recommendations relating to the sales descriptions of overseas uncompleted residential properties sold or advertised in Hong Kong. The purpose of circulating the Consultative Document was to invite property developers, agents, lawyers, members of the public and other interested parties, both in Hong Kong and overseas, to express their views on the matters raised and interim recommendations made.

16. The consultation period ended on 18 November 1996. The sub-committee however relaxed the deadline in answer to requests for extension from some respondents. A list of those who commented is at Annex II. The sub-committee considered all these comments and made a number of adjustments to their interim recommendations. The sub-committee endeavoured to balance the views of conflicting interests in arriving at its final recommendations, but its overriding objective was consumer protection. Although only some of the comments are highlighted or incorporated in this report, the sub-committee gave all comments due and thorough consideration.

Complaints relating to the sale of uncompleted overseas residential properties

17. The problem of inadequate and misleading sales descriptions is borne out by the increasing number of complaints involving overseas properties. According to statistics provided by the Consumer Council, from January 1990 to December 1995, there were 891 complaints arising from on sales of uncompleted overseas residential properties. The following is the breakdown of the complaints:-

Complaints relating to the sale of overseas property

1990

1991

1992

1993

1994

1995

Disputes over the information provided by the vendor, e.g. dimensions, materials, mortgages, etc.

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 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

18. In the middle of 1994, the Consumer Council made a survey of 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

19. 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”).

20. The two codes, which are identical in contents, provide that:

“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.”

21. 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.

Inadequacies of the television and radio codes on advertising standards

22. Whilst the two codes are some positive measures to regulate advertisements for overseas properties on television and radio, they 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.

23. 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.

24. 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.

Lack of control over contents of sales brochures and newspaper advertisements

25. 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 contain inaccuracies 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.

Insufficient control over sales descriptions

26. In conclusion, there are at present insufficient control 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 report.

Chapter	Page

Introduction and Overview	1

Background	1
Terms of Reference	2
Sub-committee membership	3
Meetings	4
Consultation	4
Complaints relating to the sale of overseas properties	4
Existing controls over advertisements for overseas properties on television and radio	5
Inadequacies of the television and radio codes on advertising standards	6
Lack of controls over contents of sales brochures and newspaper advertisements	7
Insufficient controls over sales descriptions	7
Scope of deliberations	7


1. The General Approach	9

Difficulties of controls over sales descriptions of overseas properties	9
Regulation of local estate agents	9
The Government’s Working Group on Regulation of Estate Agents	10
Estate agent’s responsibility for provision of basic sales information	11
Recommendations on estate agent’s responsibility for provision of basic sales information	11
Focus on local advertisements and publicity on overseas properties	12
All sales must be handled by licensed estate agents in Hong Kong	12
Language ambiguities	13
Recommendations on the general approach of regulating sales descriptions and advertisements	13
The availability of sales brochure	14
Recommendations on the availability of sales brochures	15


Date of Completion and Date of being Ready for Occupation	16

Delay or total project failure	16
Reasons for delay or project failure	16
Extension of date of completion	16
Measures to ensure completion of residential development on schedule and to prevent project failure	17
Ready date for occupation	19
Recommendations on the completion date and ready date of property for occupation	19


3. Fittings and Finishes	21

Introduction	21
Problems with descriptions of fittings and finishes	21
A reasonable level of disclosure is sufficient	22
Mock-up flats	22
Recommendations on fittings and finishes	22


4. Utilities	24

Introduction	24
Properties without water and electricity supplies	24
Lack of descriptions of utilities supplies in sales brochures	24
Costs of connection of utilities	25
Recommendations on utilities	25


5. Location of Property and Transport Facilities	27

Importance of location of property and transport facilities	27
Misleading descriptions of location of property	27
Misleading descriptions of transport facilities	28
Information to be provided in sales brochure	28
Pictorial representation	29
Car-ports and car parks	29
Recommendations on location of property, transport facilities, and pictorial representation	29

6. Gifts and Benefits	30

Gifts and benefits for purchasers	30
Disclosure requirement on promises of gifts and benefits	32
Recommendations on gifts and benefits	32


7. Financing Arrangements	34

Availability of mortgage facilities	34
Misconception on mortgage facilities	34
Costs of setting up mortgage facilities borne by purchasers	34
Recommendations on financing	35


8. Price of Property	36

Misleading indication of prices	36
Full information on price necessary	36
Cooling-off period	37
Recommendations on price of property	37


9. Restrictions on Sale of Property to Foreigners	38

Restrictions on sale of property to non-residents or foreigners	38
Restrictions as to ownership	38
Problems with descriptions on restrictions as to ownership	39
Restrictions on tenure and mortgage arrangements	39
Recommendations on restrictions on sale of overseas properties to foreigners	40


10. Miscellaneous Information	41

Transaction fees	41
Recommendations on transaction fees	41
Supplementary charges upon taking possession	42
Recommendations on supplementary charges	42
Liability for taxes	42
Recommendations on liability for taxes	42
Tax implications	43
Foreign exchange control	43
Recommendations on tax implications and foreign exchange control	43
Date of printing of sales brochure	44
Recommendation on date of printing of sales brochure	44
Saleable areas	44
Recommendations on saleable area	45
Fees charged by government authorities	46
Recommendation on fees charged by government authorities	46
The tenure of the property	46
Recommendation on tenure of the property	47
Access and rights of way	47
Recommendation on access and rights of way	47
Role of solicitors appointed by developers	47
Defect Liability Period	47
Recommendation on Defect Liability Period	48


11. Enforcement of the Recommendations	49

Means of enforcement	49
Self-regulation	49
Administrative measures	49
Legislation	50
Penalties	50
Civil remedies	52
The enforcement body	53
Recommendations on enforcement	53


12. Summary of Recommendations	55

Summary of Recommendations	55
The General Approach	55
Date of Completion and Date of being Ready for Occupation	56
Fittings and Finishes	57
Utilities	57
Location of Property and Transport Facilities	58
Gifts and Benefits	58
Financing Arrangements	58
Price of Property	59
Restrictions on Sale of Property to Foreigners	59
Miscellaneous Information	60
Enforcement of the Recommendations	61


Annex I

Specimen List of Fittings and Finishes in Sales Brochure	63


Annex II

List of Persons/Bodies Making Comments on the Consultative Document	67

Report on

September 1997