Hong Kong Law Reform Commission

Preface

• Background and terms of reference
• Scope of deliberations
• Views against regulating the second-hand market
• Views in favour of regulating the second-hand market
• Sub-committee membership and method of working
• Definition of "completed residential property"

Background and terms of reference

1. In June 1992, the then Attorney General and the then Acting Chief Justice referred to the Law Reform Commission for consideration the law governing the protection of prospective purchasers of uncompleted property in relation to inadequate or misleading sales information or particulars. A sub-committee was appointed in November 1992 and considered the sales descriptions first of local uncompleted residential properties, and thereafter of overseas uncompleted residential properties.

2. The Commission published its recommendations in April 1995 in respect of the sales descriptions of local uncompleted residential properties (“the First Report”)[1], and followed this in September 1997 with its report dealing with overseas uncompleted residential properties (“the Second Report”).[2] The Commission’s original terms of reference in respect of this project were confined to uncompleted residential property. It became apparent in the course of the Commission’s deliberations, however, that there were grounds for expanding the study to include pre-contractual matters and sales descriptions relating to completed residential properties in Hong Kong. The principal reasons for expanding the terms of reference were:

h Public responses when the sub-committee issued a consultation paper on local uncompleted residential properties in April 1994, there was strong public demand that similar controls should be introduced over the sales descriptions of completed residential properties.

h Desirability of uniformity of standards for completed and uncompleted property in its first report, the commission made a number of recommendations in respect of local uncompleted residential properties. It would create anomalies if some of these recommendations were to apply to uncompleted but not to completed properties. For example, standard definitions for measuring floor area were recommended for uncompleted properties. It would create confusion if the measurement methods were not extended to completed properties offered for sale by developers.

h Increase in first-hand completed flats 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 why less protection should be given to purchasers of such completed properties than those of uncompleted properties.

3. Accordingly, in March 1996, the then Attorney General and the then Chief Justice made the following reference to the Law Reform Commission:

"Should the present laws governing the protection of prospective purchasers and purchasers of completed residential property in Hong Kong in relation to any pre-contractual matters and sales descriptions be changed and, if so, in what way?"

Scope of deliberations

4. This third part of the Commission’s study covers the sales descriptions and other pre-contractual matters relating to the sale of completed residential properties in Hong Kong. By "pre-contractual" matters is meant any sales matters before the time of contract, that is to say, the signing of the formal sale and purchase agreement. Unlike uncompleted flats (which are mostly sold by developers), completed residential properties are sold either by developers in the first-hand market or by property owners in the second-hand market.

5. 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 be extended to the second-hand market.

Views against regulating the second-hand market

6. Reservations have been expressed in some quarters to extending the study to the second-hand market and to individual flat owners. Those of this view point out the Government has introduced a scheme to regulate estate agents which should improve the quality of sales information provided to purchasers of second-hand property. A sale in the second-hand market is usually a transaction between two individual owners and individual owners might not 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.

7. It has also been suggested that there is already sufficient protection for purchasers in the second-hand market as the parties are free to negotiate the terms of the contract. A purchaser could even insist that warranties or undertakings by the vendor of the accuracy of certain property information be inserted into the preliminary or formal agreement.

8. Furthermore, unlike purchasers of uncompleted properties, purchasers of second-hand completed flats can view or check the properties for themselves. 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, it is argued that there is little need for additional legislative measures to protect purchasers.

Views in favour of regulating the second-hand market

9. We take the view that our 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. In our view, 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 is difficult and costly to discharge that heavy burden. We believe that there is a need to impose positive duties on private vendors to provide fuller information prior to the signing of the preliminary agreement for sale and purchase (PASP), which by itself is a binding agreement. The PASP is very often a pro-forma agreement prepared by the estate agent. There is little scope for the purchaser to insist that certain warranties and undertakings should be inserted into a PASP. It is usually signed by the parties without the benefit of prior legal advice.

10. In the second-hand market, verbal representations are often made by vendors and estate agents. It may be 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 certain prescribed categories of information.[3] 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 therefore concluded 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.

Sub-committee membership and method of working

13. The membership of the sub-committee (in respect of the third part of its reference) was:

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

15. The sub-committee commenced work on the third part of its reference on 26 February 1998 and between then and 25 February 2002 held a total of 52 meetings. On 8 January 2001, the sub-committee issued its interim report in the form of a consultation paper (“the consultation paper”). In it, the sub-committee set out its interim recommendations on ways to improve the sales descriptions and other pre-contractual matters relating to the sale of completed residential properties in Hong Kong. The purpose of circulating the consultation paper was to invite the public and all interested parties to express their views on the matters raised and the interim recommendations made.

16. The consultation period ended on 31 March 2001. A list of those who commented is at Annex I. In the light of the comments received, a number of adjustments were made to the interim recommendations. The sub-committee endeavoured so far as possible to balance the views of conflicting interests in arriving at its final recommendations and was guided by the overall objective of improving consumer protection. That is to say, the sub-committee considered that where there are conflicting views on particular issues these should be resolved in favour of the furthering of consumer interests. That approach is reflected in this report. Although only some of the comments made by respondents are highlighted in this report, all comments have been given due and thorough consideration and we are grateful to all those who took the time and trouble to respond to the consultation paper.

Definition of "completed residential property"

17. 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. We further recommend that this definition should be suitably modified in the case of exempted houses in the New Territories."[4]

18. The consultation paper recommended that the definition of "completed residential property" should also take the Occupation Permit as the demarcation point. Respondents on the whole agreed with this approach. Two respondents, however, suggested that the definition should be adjusted to include the Tenants Purchase Scheme (“TPS”). TPS is a scheme introduced by the Housing Authority in 1998 to assist tenants of public housing estates to buy the flats they currently rent.[5] We agree that the definition should be suitably adjusted to cater for these flats.

[1] The Law Reform Commission of Hong Kong, Report on Sales Descriptions of Flats on Sale.

[2] The Law Reform Commission of Hong Kong, Report on Sales Descriptions of Overseas Uncompleted Residential Properties.

[3] See paragraph 1.18 for details.

[4] The Law Reform Commission of Hong Kong, Report on Description of Flats on Sale (Topic 32, April 1995), paragraph 22 of introductory chapter.

[5] This information is taken from the webpage of the Housing Authority at <www.info.gov.hk/hd> (20.8.2001).