Hong Kong Law Reform Commission

Chapter 6 - Disclosure requirements for completed units offered for sale by developers

• Introduction
• Floor plan
• Fittings and finishes
• Importance of fittings and finishes
• Problems faced by purchasers
• Previous recommendations
• Right of inspection
• No right of inspection
• Discrepancies between languages
• Mock-up flats
• Location and layout plans
• Misleading artistic impressions
• Management of clubhouse and communal facilities
• Date of completion
• The use of the occupation permit as an indication of building completion
• The relevance of the date of completion to completed properties
• Date of completion of sale and purchase and date of vacant possession
• Sub-sale by original purchaser to sub-purchaser
• Risk in confirmor sale
• Financing arrangements
• Interest chargeable for late payment of purchase price
• Changes in market conditions and bank lending policies
• Cooling-off period
• Preliminary agreement for sale and purchase
• Right of inspection prior to signing of preliminary agreement
• Defect liability period
• Warranties made to the developer by the contractor
• Deed of Mutual Covenant
• Purposes of a DMC
• Parties to a DMC
• Contents of the DMC
• DMC guidelines
• Salient provisions of the DMC
• Availability of bilingual copies of the DMC
• Slope maintenance
• Duty to maintain terms of the DMC unchanged
• Conditions of the Government lease
• User restrictions
• Duration of the Government lease
• Special lease conditions
• Translation of extracts of Government lease into Chinese
• Apportionment of Government rent
• Prices and number of units for sale
• Miscellaneous matters
• Enforcement of the recommendations
• Voluntary compliance
• Government encouragement of compliance, while continuing to consider the need for legislation
• Legislation
• Penalties for non-compliance

Introduction

6.1 In this chapter, we shall look at the various minimum sales particulars that should be provided by developers in sales brochures. We shall review some of the recommendations made in the First Report and try to see if they can be adapted for use in respect of completed units offered for sale by developers in the first-hand market. In the process, we shall also put forward ideas additional to those made in the First Report. As the First Report was completed several years ago, some of the ideas useful at that time may have been rendered obsolete.

Floor plan

6.2 Where prospective purchasers are not able to inspect the completed units, they may have to rely on the descriptions contained in the floor plan. This is the case even where mock-up or show flats are available for them to view. Where purchasers can inspect the actual completed units, they may still refer to the floor plans in the sales literature for a rough idea of the internal layout and measurements.

6.3 We consider that all of the First Report’s recommendations on floor plans of local uncompleted properties are equally applicable to the sale of completed units by developers.[67] However, the requirement that a note be put in sales brochures to bring purchasers' attention to the usual term in the formal ASP concerning the adjustment in purchase price in proportion to variations in saleable area (arising from amendment to the building plans) is not applicable in the context of completed units. It seems unlikely that there would be any further change in the building plans as the properties would have already been completed at the time they are offered for sale.

6.4 The First Report recommended that there should be a legal obligation on developers upon completion to inform purchasers of the saleable area as certified by an architect.[68] We consider that developers should be under a similar legal obligation in respect of completed properties, as the saleable area of a completed property is readily ascertainable. We take the view that the saleable area quoted by developers upon completion should be that supplied by the Authorised Person.

6.5 The consultation paper recommended that floor plans in sales brochures should be “presented according to conventionally accepted scales”. Some respondents considered that “presented according to conventionally accepted scales” was too vague and open to different interpretations. One submission suggested that “drawn to scale and reasonably legible” should be used instead. We agree with the suggestion and have adjusted the original recommendation accordingly.

Fittings and finishes

Importance of fittings and finishes

6.6 The quality of fittings and finishes of the individual unit and of the common parts of a building is of considerable importance to purchasers of residential properties. For people buying flats for their own occupation, good quality fittings and finishes will mean a better living environment and less money to be spent on maintenance and renovation. For those buying residential properties for investment purposes, high quality fittings and finishes in general enhance the letting and resale value of the property.

Problems faced by purchasers

6.7 It is not always the case that purchasers of completed properties can see for themselves the quality of fittings and finishes. Prospective purchasers will therefore place great reliance on the descriptions of fittings and finishes contained in the sales brochures. However, sales brochures do not always contain uniform adequate descriptions of fittings and finishes. Most sales brochures give only a general description of the fittings and finishes of the individual units and of the common areas.

Previous recommendations

6.8 In its First Report, the Commission made some recommendations in respect of fittings and finishes for local uncompleted residential properties.[69]

6.9 These recommendations were largely modelled on the list of fittings and finishes contained in the Land Office Circular Memorandum No 101 (LOCM 101). On 28 May 1999, the Legal Advisory Conveyancing Office Circular Memorandum No 40 (LACO CM 40) replaced LOCM 101[70]. LACO CM 40 contains essentially the same disclosure requirements as had been imposed by the superseded LOCM 101. LACO CM 40 is reproduced at Annex II of this report. LACO CM 40 contains a list of fittings and finishes. The items are external walls, windows, bay windows, planters, verandah/balcony, drying facilities for clothing, lobbies, internal walls and ceilings, floors, bathrooms, kitchens, doors, bedroom fittings, telephone and aerials, electricity fittings, gas/electricity supply, washing machine connection point, water supply and pipes, security facilities, lifts, letter boxes, refuse collection and water, and electricity and gas meters.

Right of inspection

6.10 We take the view that if prospective purchasers are given the opportunity to inspect the completed units before entering into a preliminary sale and purchase agreement so that they can verify the make and quality of fittings and finishes on the premises, there is no need to change existing requirements as to the contents of the sales brochure with regard to fittings and finishes, save that those contents should not be misleading.

No right of inspection

6.11 We consider it appropriate to extend the First Report’s recommendations to local completed properties if there is no right of inspection before entering into a preliminary sale and purchase agreement. In addition, photographs of the fittings should be included in the sales brochure.

6.12 Clearly, the provision allowing developers to use substitute materials is not necessary for completed units, since at the time of printing of the sales brochures the intended materials should have already been used.

6.13 Though developers had reservations about stating brands and origins of fittings and finishes to be used for uncompleted properties because of possible changes in market provision, this should not be a problem in the case of completed properties.

6.14 We take the view that photographs of the fittings and finishes should be shown in the sales brochure. This will give prospective purchasers some impression of the fittings and finishes in the absence of a right to inspect the units offered for sale.

Discrepancies between languages

6.15 Problems may arise because of occasional discrepancies between the descriptions of the fittings and finishes contained in the Chinese and English versions of the sales brochure. The First Report recommended for local uncompleted residential properties that "if there are discrepancies between the Chinese and English versions of the specifications of fittings and finishes in the sales brochure, purchasers can choose which of the language versions is applicable."[71] This recommendation’s rationale was that the developer would be in a better position than the purchaser to check the accuracy of the different language versions. We consider that a similar approach should be applied to completed residential properties.

Mock-up flats

6.16 In order to avoid the inconvenience of letting a great number of prospective purchasers inspect the completed units, mock-up or sample flats are often used to show the quality of fittings and finishes. In the First Report, the Commission took the view that it was unreasonable to oblige developers to build mock-up flats. If developers chose to set up mock-up flats, however, they had to accurately reflect the materials to be used. On this basis, the Commission made the following recommendations in respect of local uncompleted residential properties:[72]

"If mock-up or sample flats are provided, the mock-up should be accurately representative of the actual unit in all aspects including quality and dimensions and the Authorised Person of the development project should certify a schedule of the specifications of the mock-up flats. The developer should have a duty to keep a record of the certified schedule."

6.17 There have been reservations expressed over this proposed requirement for certification by the Authorised Person of the schedule of specifications. The view is that it is not the practice for the Authorised Person of the development project to certify a schedule of specifications for mock-up flats. The developer specifies the fittings and finishes and the Authorised Person must follow the specifications provided by the developer.

6.18 We take the view that even with disclosure in the sales brochure, certification by the Authorised Person is necessary. If the property is completed but prospective purchasers are still not allowed to inspect it, they should have the same protection as in the case of uncompleted properties. Once the units are completed it is only necessary to certify that the mock-up units are the same as the actual units.

Location and layout plans

6.19 Purchasers of residential properties usually attach considerable importance to the availability of communal facilities, such as a clubhouse and swimming pool, and the present and future surroundings of the development. Location and layout plans in the sales brochure are the major sources of information on communal facilities and surroundings.

6.20 In the First Report, the Commission considered that LOCM 101 (now replaced by LACO CM 40 which imposes the same disclosure requirements) provided a good model for the provision of location and layout plans in sales brochures and recommended the disclosure requirements be adopted for all uncompleted units.[73] Unlike LOCM 101, however, the Commission did not think developers should be required to state the uses of land outside the boundaries of the development.

6.21 LOCM 101[74] (or LACO CM 40) requires that the sales brochure of a Consent Scheme development should include:

"(i) a location plan 'including up-dated information on prominent environmental features in the vicinity eg public park, swimming pool, refuse collection point etc, intended user of surrounding areas, if known'; and

(ii) a layout plan drawn to scale 'including communal facilities (and their completion dates if possible); undeveloped land and its intended use within the boundary of the development; the scale used.'"

6.22 We consider that the Commission's previous recommendations should be extended to local completed flats. There have been queries as to the need to disclose the intended uses of undeveloped land within the boundary of the development (as required by LACO CM 40), on the grounds that it is difficult to show the intended uses since intention can change subsequently. We take the view that there is a case for stating the present intention even if that may change later. In our view, there is a need for developers to disclose the intended and permitted uses of land within the site of the development. At the end of the day, it is important to educate the public on the need to check the land uses carefully before making a decision to buy.

Misleading artistic impressions

6.23 Sales literature and advertisements sometimes contain misleading artistic impressions. We have considered whether artistic impressions should be prohibited, or whether they should be allowed but required to be accurate. It is our view that artistic impressions of the surroundings of the building are necessary for marketing purposes. Hence, we are of the view that artistic impressions in whatever form should be allowed, but that they should give an accurate representation of the surroundings of the property development.

6.24 Two respondents to the consultation paper expressed their support for our view that artistic impressions should accurately represent the surroundings of the property development.

6.25 One respondent, however, took the view that the requirement of accurate artistic impressions could lead to many disputes in the future and developers would find it difficult to comply with the requirement. We do not anticipate that our proposal will create too many future disputes. Whether or not an artistic impression is truly representative of the surroundings is in most cases clear-cut. For instance, it cannot be disputed that an artistic impression is inaccurate if it depicts a magnificent harbour view whilst the development is in fact facing other buildings.

6.26 Furthermore, with the aid of modern computer technology, it is not difficult nowadays to create an artistic impression close to reality. We have therefore decided to maintain the original recommendation.

Management of clubhouse and communal facilities

6.27 Nowadays, in order to enhance their image as luxury apartments, many developments, including those with only small and medium-sized flats, will include a clubhouse and other communal facilities such as swimming pools, tennis courts and children's playgrounds.

6.28 Whilst sales brochures usually contain a general description of the clubhouse and the communal facilities, they seldom mention with whom lies the responsibility for managing the day-to-day affairs of these facilities. The result is that most purchasers will assume that the developer or its subsidiary will manage the clubhouse and other communal facilities in the long term. However, there are cases in which the developer or its subsidiary assumes the management for the initial few years and then hands over the managerial role to the owners themselves. Unless the owners are well organised (such as by forming themselves into an owners' corporation), they may not be prepared to take up the management of these facilities.

Date of completion

The use of the occupation permit as an indication of building completion

6.29 A completed unit is one with an occupation permit and, as such, is only structurally in place but may not be fully fitted out with all the fittings and finishes. An occupation permit can be issued upon the completion of construction of the units and on general compliance with the requirements relating to lifts, fire service installations and connection to the water supply.[75] Buildings with an occupation permit may not be ready for immediate occupation.

The relevance of the date of completion to completed properties

6.30 The date of completion can refer to any one of the following dates:

(1) the construction completion date as stated in the formal ASP;

(2) the date of completion of sale and purchase; or

(3) the date of vacant possession.

6.31 The construction completion date as stated in the formal ASP obviously has no relevance here as we are dealing with properties for which the occupation permit has been issued. The completion of the construction of the units is a pre-condition for the issue of the occupation permit.

Date of completion of sale and purchase and date of vacant possession

6.32 The date of completion of sale and purchase and the date of vacant possession are of considerable importance to purchasers of completed properties. The importance of these two dates is that they give purchasers an idea as to when they are required to pay the balance of the purchase price and when they can take possession of the property. Purchasers can then make their accommodation and financial plans by reference to these two dates.

6.33 When dealing with completed properties, the date of completion of sale and purchase and the date of vacant possession are known with certainty. It is therefore not difficult for developers to put these dates in the sales brochure (or the price list). We understand that this is the existing practice. However, in order to allow some flexibility the dates need not be actual dates in the calendar. They can be a time frame, such as a certain period of time from the signing of the formal ASP.

Sub-sale by original purchaser to sub-purchaser

6.34 For first-hand completed properties, the date of legal completion is usually within five weeks of the preliminary agreement.

6.35 The industry-wide practice is that where the original purchaser sells the property on to a sub-purchaser, the developer and the original purchaser would cancel their original agreement. The developer charges an administration fee for the cancellation equivalent to one percent of the consideration. The developer then signs a new agreement with the sub-purchaser. The original agreement is cancelled. All additional costs so incurred will be borne by the original purchaser or sub-purchaser. The required procedures and administration fees charged by the developer for the cancellation of the agreement are not always indicated clearly in sales brochures.

Risk in confirmor sale

6.36 We take the view that the public should be alerted to the inherent risk in a confirmor sale. If a completed unit is re-sold to sub-purchasers before the legal completion of the original sale, all sub-purchasers will sign in the capacity as "confirmors" in the assignment. The legal interests in the unit will pass from the developer direct to the sub-purchaser at the end of the chain.

6.37 There is a risk that the sub-purchaser at the end of the chain of sub-sales cannot get good title to the property because of defaults of confirmors further up the chain. We are of the view that in order to minimise the risk involved in sub-sales, all money should be held by the solicitors as stakeholders.

6.38 We believe that, in order to protect sub-purchasers, the Law Society should consider the stakeholding of purchase monies in sub-sales and issue practice directions requiring solicitors to warn purchasers of the risks inherent in confirmor sales.

6.39 We also consider that the Estate Agents Authority should require estate agents to remind purchasers of the risks involved in confirmor sales.

Financing arrangements

6.40 In the case of local completed residential properties, developers usually require the transaction to be completed within five weeks of signing the preliminary agreement. Purchasers are therefore under some pressure to arrange mortgage facilities. It is thus in purchasers' best interests that sales brochures give them sufficient information as to the terms of the mortgage loans that are offered by banks and other financial institutions.

6.41 We have considered the recommendations in the First Report and are of the view that they can be extended to local completed residential properties, subject to some modifications.[76]

Interest chargeable for late payment of purchase price

6.42 There are invariably provisions in the formal ASP which give the developer the right to charge interest on any part of the purchase price not paid by the purchaser on its due date as set out in the agreement. The First Report recommended that the rate of interest chargeable in those circumstances should be included in the sales brochure.[77] We take the view that this recommendation should be extended to local completed residential properties.

Changes in market conditions and bank lending policies

6.43 For completed properties, completion may not take place immediately after signing of the preliminary agreement. There may still be a time gap between the signing of the preliminary agreement and completion. In a fluctuating market, banks may change their lending policies and refuse to grant mortgage loans to the full extent they originally promised to the developer. Purchasers will as a result fail to obtain the necessary amount of mortgage loan to complete the transaction and their deposits will be forfeited. There is a view that if a developer makes representations in the sales brochure or during the promotion exercise as to the availability of mortgage facilities, the developer should be liable if purchasers cannot subsequently obtain the facilities. We do not share that view, as the developer has no control over any subsequent change in bank lending policies.

Cooling-off period

6.44 Under the existing LACO rule, a purchaser of a Consent Scheme flat is required to sign the formal ASP within three working days of signing the preliminary agreement. He can withdraw from the preliminary agreement subject to the forfeiture of five percent of the purchase price or the amount of the preliminary deposit, whichever is the lower. The preliminary agreement is only binding on the purchaser in respect of the forfeiture provision. It is otherwise non-binding on the purchaser. The preliminary agreement is binding on the vendor (ie the developer), however. We understand that this LACO rule functions well and believe it can be applied to completed flats in the first-hand market.

6.45 There is a view that developers should also be entitled to the cooling-off period in the case of completed first-hand flats. The reasoning is that after the units in a completed building are sold to the public, the developer may occasionally receive an offer to buy the building, either en-block or the majority of the completed units as an investment. It is therefore not uncommon for developers selling first-hand completed properties to make provision for cancellation of the agreement for purchase before completion. We do not think it desirable that developers should also be entitled to the cooling-off period. There are two reasons for this. Firstly, it is a departure from the existing LACO rule, which stipulates that the preliminary agreement is binding on the developer. The completed flats dealt with in this report are largely uncompleted flats which have become completed with the issue of the Occupation Permit. Hence, the LACO rule (which governs uncompleted flats) should be followed in order to achieve consistency of treatment. Secondly, nowadays most purchasers of completed flats are end-users rather than investors. It would create too much uncertainty for end-users who have to make definite accommodation plans if developers were allowed to cancel the preliminary agreement after signing.

Preliminary agreement for sale and purchase

6.46 In Hong Kong, the usual procedure for the purchase of a completed unit commences with the developer and the purchaser entering into a preliminary agreement for sale and purchase (or a "Memorandum for Sale" as it is more frequently called) at the site office or the developer's office. The purchaser pays a deposit or reservation fee upon signing the preliminary agreement. A formal ASP will later replace the preliminary agreement if the purchaser decides to go ahead with the deal.

6.47 It is often difficult to construe the terms in a preliminary agreement to determine whether it is intended to be binding. It is therefore in consumers' interests that the sales literature spell out whether or not the preliminary agreement is intended to be binding.

6.48 If the preliminary agreement is not intended to be binding, purchasers can walk out of the deal simply by not signing the formal agreement within the stipulated period (usually within three working days of the preliminary agreement). But there will, invariably, be legal consequences following the purchaser's cancellation. It is desirable that sales brochures should spell out these legal consequences, such as the amount of preliminary deposits that would be forfeited. The procedures for rescinding the preliminary agreement should also be stated in sales brochures. If the preliminary agreement is to be rescinded by a formal cancellation agreement, there will be legal costs such as the relevant solicitors' charges and Land Registry registration fees. Purchasers should be informed of these costs in any sales brochures.

6.49 We consider that the recommendations in the First Report on this issue can be extended to local completed flats.[78] A specimen copy of the preliminary agreement should be displayed at the sales office.

Right of inspection prior to signing of preliminary agreement

6.50 Purchasers of first-hand completed flats from developers may not be able to inspect the property until completion of the transaction. The question is whether it should be mandatory for developers to allow prospective purchasers to view the completed units before signing the preliminary agreement. In our view, this question can be tied to the cooling-off period. Where a purchaser has a right of inspection before signing the preliminary agreement and he elects to cancel the transaction during the cooling-off period, the preliminary deposits should be liable to forfeiture as mentioned above. If, however, a purchaser does not have the right to inspect the unit before signing the preliminary agreement, the preliminary deposit should not be liable to forfeiture in the event of cancellation of the transaction during the cooling-off period. Such arrangements have the advantage of encouraging developers to allow purchasers to view the units before purchasers commit themselves to a binding preliminary agreement. For the avoidance of doubt, a purchaser who elects not to view the unit when offered the opportunity to do so by the developer should be treated as if he has viewed the unit.

Defect liability period

6.51 There are two Defect Liability Periods, namely, (i) that which applies between the developer and the purchaser, and (ii) that between the developer and his contractor. Our concern is with the first of these periods. Within the Defect Liability Period between the developer and the purchaser, the purchaser may request the developer to make good any defects in the property and its installations.

6.52 The current Defect Liability Period between the developer and purchaser is in most cases six to 12 months from the date of completion of the sale and purchase.[79] Developers usually require the purchaser to report, within 12 months of handing over possession, any defects not ascertainable when the units are handed over. Any such requirement, if stated in the formal ASP, can only limit the developer's contractual duty to remedy defects but does not affect the developer's separate liability in negligence to make good the defects. We consider that the Defect Liability Period of completed units should run from the date of the Assignment. By executing the Assignment, the purchaser becomes the legal owner of the unit he has bought. It is therefore fair that the Defect Liability Period starts to run from the date of the Assignment.

6.53 As the duration of the Defect Liability Period is of great importance to purchasers, we consider that sales brochures of local completed residential properties should state the Defect Liability Period.

6.54 There is a view that in order to provide better protection for purchasers, the current Defect Liability Period of 12 months should be lengthened to, say, 24 months as in the case of the Home Ownership Scheme. We see no compelling reason to lengthen the current Defect Liability Period of 12 months. Most defects in the property will be detectable during the early months of occupation. A common defect is blockage of pipes caused by decorators dumping rubbish into the pipes. Such blockages are readily detectable. Another common defect is water leakage, but this will normally be detectable during the first complete annual cycle of seasons.

Warranties made to the developer by the contractor

6.55 Most grantees of Government leases tend to be subsidiary shell companies of developers. Some developers may evade their liability to make good defects in the property by winding up the subsidiary shell company after completion of the development. To address this problem, we consider that recommendations should be made along the lines of observations made in the First Report.[80]

6.56 The consultation paper considered the option of requiring developers to provide bank bonds to cover defects. The bank bond might be, say, one per cent of the construction costs. The consultation paper pointed out that the disadvantage of a bank bond was that it would discourage small developers, even though large developers might be willing to provide some sort of bond. On the other hand, a bond was considered fair and worked well for projects in the Housing Authority's Private Sector Participation Scheme.

6.57 Two respondents to the consultation paper were in favour of the idea of requiring developers to provide bank bonds to cover defects in the property. However, another respondent expressed reservations at such an idea because of the practical difficulties of its implementation, though the respondent did not elaborate on the nature of these difficulties. It was suggested that, instead of the provision of bank bonds, developers could be required to arrange for insurance coverage for up to one year to cover the costs of rectifying defects found after the liquidation of the developers and/or the contractors.

6.58 As the provision of bank bonds by developers is a complex subject and there are divided views on its feasibility, we have decided to leave this issue to the Government for further exploration.

Deed of Mutual Covenant

Purposes of a DMC

6.59 To prospective purchasers of local completed residential properties, the Deed of Mutual Covenant (DMC) is an important document. A DMC serves three main purposes. First, it has a technical purpose: the allocation of shares in land. In Hong Kong, when a person buys a unit he buys the notional shares, (called undivided shares) of the land. The DMC allocates units to the undivided shares. The method of allocation can usually be found at the end of the DMC. Whilst a purchaser buys the undivided shares allocated to his unit, he also buys the exclusive use of his unit together with an equal share of the use of the common parts.

6.60 The second purpose of a DMC is the definition and regulation of rights between owners. The local laws and rules of the development are achieved mainly through covenants binding all owners among themselves and their successors. The covenants in relation to the common areas and facilities are of particular importance.

6.61 The third purpose of a DMC is to provide for management of the development. Usually, the management rules are in the DMC, rather than a separate management agreement.

Parties to a DMC

6.62 The parties to a DMC are normally the developer/vendor, the first purchaser of a unit and the management company. As there is typically no separate legal representation for the first purchaser, there is no negotiation on the terms of the DMC.

Contents of the DMC

6.63 The primary responsibility for settling the contents of the DMC lies with the developer's solicitors. DMCs are similar in terms because of Government's input and control. The Government, as grantor of land, imposes certain conditions to protect purchasers of units. The LACO, for example, lays down certain terms for DMCs relating to properties under the Consent Scheme. In addition, the Building Management Ordinance (Cap 344) contains in two of its schedules certain implied terms for DMCs. Most of these implied terms concern management budgets, appointment and removal of the manager and meetings of owners.

DMC guidelines

6.64 At present, detailed provisions on the management of multi-storey buildings are contained in the two schedules to the Building Management Ordinance (Cap 344). Cap 344, however, does not contain provisions setting guidelines for the DMC. Instead, Government enforces DMC guidelines by administrative means through the Consent Scheme. We are of the view that the DMC guidelines require statutory backing because they are currently applicable to Consent Scheme properties only. We consider that the Government should set up a Building Management Working Group with a view to providing a statutory basis for the DMC guidelines. One respondent expressed support for this idea and considered that such a move would better protect property owners, both as among themselves and in relation to developers.

Salient provisions of the DMC

6.65 The First Report recommended that certain specified provisions in the DMC should be disclosed in the sales brochures of local uncompleted flats.[81] These were regarded as the salient provisions.

6.66 What provisions of the DMC are salient, however, may vary from development to development, and may change over time. For example, modern technology has brought split-type air-conditioners which are installed on the external wall. That may be in breach of the DMC, but was never anticipated when the original DMC was drafted. The features of individual developments are so varied that it would be difficult to draw up a universally applicable list of salient features in the DMC.

6.67 We take the view, however, that certain categories of provisions should be included in the list. In the first place, clauses in the DMC imposing financial obligations are generally of importance, as are those clauses touching upon everyday usage of the property, such as recreational facilities, use of common areas, illegal alterations and structures, prohibition on keeping of pets and car-parking.

6.68 We consider that the salient provisions should be disclosed in the sales brochures, and think that the Administration is best placed to draw up a detailed list of the salient provisions of the DMC. In doing so, we believe that the salient provisions in the Consent Scheme should be used as a reference point.

Availability of bilingual copies of the DMC

6.69 The First Report recommended that sales brochures should state that English and Chinese versions of the DMC are available at the sales office or solicitor's office for inspection.[82] That recommendation would oblige the developer to arrange for Chinese translation of the DMC. We take the view that it is desirable to have a Chinese version of the DMC.

Slope maintenance

6.70 The slope adjacent to a building is often owned by individual owners of the building under the terms of the Government Lease. The maintenance of these slopes is the responsibility of the individual owners. The DMC often sets out the individual owners' liability for potential expenses for maintenance of slopes or other areas. The consent letter issued by the LACO will build such a provision into the DMC (called a Slope Maintenance clause) to ensure that money can be collected in future from owners to undertake the repairs or maintenance.

6.71 The cost of maintaining and repairing slopes or other areas can be great and the burden on individual owners heavy. As heavy rains are common every summer, slopes are liable to erosion and damage. It is important that purchasers know of that potential liability for maintenance of slopes or other areas.

Duty to maintain terms of the DMC unchanged

6.72 We take the view that if an uncompleted development has a DMC, developers should have an obligation to keep its terms unchanged when it later becomes completed with the issue of the occupation permit. The contents of the DMC should not change because it defines the rights and obligations of the owners in the same development. Whether or not there is an occupation permit should not have any bearing on those rights and obligations.

Conditions of the Government lease

6.73 There are three main areas of concern in relation to the conditions of the Government lease: (i) user restrictions; (ii) duration; and (iii) special lease conditions. User restrictions are the most important conditions of the Government lease.

User restrictions

6.74 Government leases and Conditions of Grant contain provisions which restrict the land to certain uses, the common ones being "commercial/residential", "non-industrial" and "industrial/godown". Compliance with the user restrictions is important as the Government may re-enter and take back possession of the land if a condition governing the land use is breached. Moreover, if the land is put to more valuable use than that specified, a premium has to be paid to the Government. If, for example, an industrial use is converted to residential, a premium equal to the difference between the market value of the two uses will be payable.

Duration of the Government lease

6.75 The duration of the Government lease and the unexpired term of the lease are of interest to purchasers because renewal of a Government lease requires a substantial increase in the annual rent payable to the Government. The amount of Government rent in some cases could be three per cent of the rateable value of the property[83] and that can be a substantial sum. It is the responsibility of the individual owners to pay their share of Government rent of the lot where the building is situated.

6.76 Apart from the potential liability for Government rent, the duration of the Government lease and its unexpired term are of interest to purchasers because it may affect banks' mortgage policies for the development.

Special lease conditions

6.77 There are various special lease conditions which impose on a flat-buyer continuing financial obligations, including:

(1) The construction and maintenance of pedestrian subways and footbridges;

(2) The construction and maintenance of escalators, stairways and lifts for the disabled;

(3) The maintenance of slopes, toe-walls and retaining walls;

(4) The maintenance of private open spaces and toilets; and

(5) The maintenance of internal roads.

6.78 The First Report made certain recommendations in relation to the conditions of the Government Lease.[84] We consider that those recommendations can be extended to local completed residential properties.

Translation of extracts of Government lease into Chinese

6.79 Whilst we consider it desirable that the Government lease should be translated into Chinese, we are aware that there are few available resources for the translation work and problems can arise as to who should be responsible for the costs of translation. Bearing in mind these practical difficulties, we consider that it would be desirable for the Government to prepare a summary of extracts of the Government lease in plain language, in both English and Chinese.

Apportionment of Government rent

6.80 Some property owners have complained that some solicitors when acting for a purchaser do not check whether Government rent is paid up to date before completing a sale and purchase.[85] As the new Government rent may involve greater sums of money, it is important that property owners are not exposed to additional charges which should have been the responsibility of the previous owners. There is the possibility of re-entry by Government in the event of non-payment of Government rent, even if the amount is small. We consider that the Law Society should encourage solicitors to properly apportion the respective liabilities of vendor and purchaser to pay Government rent at the time of conveyancing.

Prices and number of units for sale

6.81 The First Report made several recommendations to ensure prospective purchasers of uncompleted properties obtain an accurate impression of the prices of the units offered for sale and their number.[86] Those recommendations were made on the basis that prospective purchasers had to go through the process of balloting in all public sales. Nowadays, balloting is seldom used in the sale of completed units in view of prevalent market conditions. Depending upon market conditions, discounts from the prices quoted in the price lists are sometimes offered. When estate agents are employed by the developer to negotiate with prospective purchasers, price lists sometimes are not released to the public. In such situations, purchasers are not aware of the true prices being offered by the developer.

Miscellaneous matters

6.82 The First Report made a number of miscellaneous recommendations as to information which should be included in sales brochures for local uncompleted flats.[87] These included the names of the contractors and Authorised Persons, responsibility for transaction fees, the date of printing of the sales brochure, supplementary charges payable by purchasers on taking possession, licence fees payable to Government, charges for rights of way, and details of car park spaces. We consider similar recommendations should be made in respect of local completed units. In addition, we take the view that the name of the firm of the Authorised Person should be stated. Prospective purchasers may show more interest in the name of the firm than the identity of the individual Authorised Person.

Enforcement of the recommendations

6.83 The Sub-committee identified three alternative ways of applying their recommendations to local completed flats offered for sale by developers in the first-hand market. These were:

(1) voluntary compliance by developers;
(2) Government encouraging good market practices, while actively continuing to look into the need for legislation; and
(3) legislation.

The Sub-committee was unable to reach an agreed view as to which of these alternatives should be pursued and left this question for the Commission to decide. We have unanimously concluded that the recommendations in this report in respect of the first-hand market should be implemented by legislation. We consider below the case for and against each of the three options.

Voluntary compliance

6.84 The principal advantage of a scheme of voluntary compliance is that it could, if the industry agreed, be implemented more speedily than formal legislation. The likely mechanism to achieve compliance would be for the Real Estate Developers Association (REDA) to draw up guidelines based on this report’s recommendations. Developers’ compliance with the guidelines could be encouraged by establishing a system for recording and resolving complaints, and by programmes of consumer education. Those who favour this approach argue that a developer who did not comply with the guidelines would be viewed negatively in the market, and this would be damaging in present market conditions.

6.85 We do not find this alternative attractive, nor the arguments in its favour persuasive. The most obvious shortcoming is that it provides no effective sanction against those who fail to comply with the guidelines. Not all developers are REDA members, and even for those which are, REDA’s only sanction would be expulsion of the errant developer from membership. That is an option which it is unlikely REDA would wish to pursue. More importantly, our recommendations are designed to offer greater protection to purchasers of completed residential properties, yet a voluntary scheme based on guidelines established by developers provides no assurance that consumers’ interests will prevail. The guidelines could be amended at any time by the industry without taking account of consumer input.

6.86 It is true that we are proposing that there should be voluntary compliance in the second-hand market, but that can be readily distinguished from the position in the first-hand market where the vendor and purchaser are not generally on an equal footing. Voluntary compliance was rejected in both the First and Second Reports. It was pointed out in the First Report that “it would be difficult to control developers who chose to ignore the code”[88] and in the Second Report that, “as a code of practice does not have the force of law, it cannot be expected to be an effective tool of regulation”.[89] We adhere to that reasoning, and reject voluntary compliance as an effective option in respect of completed residential properties in the first-hand market. We note that there has been movement towards self-regulation by the industry in respect of the recommendations contained in our First Report, but are cognizant of the fact that those developments were prompted by the Administration’s publication of draft legislation. Finally, it is difficult to see why developers should be expected to adopt voluntary guidelines if they object to the same standards being applied by legislation.

Government encouragement of compliance, while continuing to consider the need for legislation

6.87 Under this option, the Government should take immediate steps to promote good market practices based on the recommendations in this report. The Government should continue to consider the legislative option and move to implement this if compliance proves unsatisfactory. The only features which distinguish this from the first option are that it would be the Government rather than the industry itself encouraging compliance, and the option of legislation would remain a viable alternative. The principal argument in favour of this option is that, like the option of voluntary compliance, it could be implemented more speedily than legislation. The possibility of legislation at some future date might prove effective in persuading the industry to comply voluntarily.

6.88 Again, we find this option unconvincing. While Government persuasion may garner some success, it is difficult to see how the Government could hope to promote good market practices among developers of Non-Consent Scheme developments as they do not need to obtain the Government’s consent before selling their flats. Even in Consent Scheme cases, the consent conditions will no longer apply once the developers have obtained the Consent to Assign or the Certificate of Compliance. The imminent threat of legislation may be effective in achieving self-regulation, but we do not think it likely that the possibility of legislation at an unspecified future date would achieve much. We accordingly reject this alternative.

Legislation

6.89 The introduction of legislation to implement the recommendations in this report has the disadvantage that it will inevitably take time to achieve. However, in our view this option presents the most effective way of ensuring compliance. It enables realistic sanctions to be applied to those who fail to observe the terms of the scheme and offers proper protection to consumers. The standards applied will be uniform across the industry, and not merely among REDA members, or those who choose to comply.

6.90 It has been asserted by some that legislation in this area presents insurmountable technical difficulties, or will be unduly inflexible. We do not believe either of these objections is valid. While the drafting of the legislation will undoubtedly require care and consideration, there is no reason to suppose that the particular circumstances of the property industry are so unique as to defy the expertise of the draftsman and the legislature. Equally, flexibility can be built into the legislation by confining the principal Ordinance to the basic ambit of the scheme, while incorporating the detailed provisions in subsidiary legislation. The subsidiary legislation can be amended relatively easily should changes prove necessary at a later stage in the light of experience.

6.91 We accordingly conclude that our recommendations in respect of the first-hand market should be implemented by legislation.

Penalties for non-compliance

6.92 The First and Second Reports concluded that there should be both criminal and civil sanctions against those who failed to comply with the proposed legislation. We think that a similar approach is appropriate in respect of the legislation which implements the recommendations in this report. We note that the White Bill published by the Housing Bureau in April 2000 to implement the recommendations in our First Report proposed that failure to provide a sales brochure containing the information specified in the legislation should result in a fine of $5 million on conviction on indictment, or $100,000 on summary conviction. Where the dimension of any part of a sample property differs from the information stated in the notice displayed in the sample property, a fine of $1 million on conviction on indictment, or $100,000 on summary conviction, was proposed.[90] The White Bill also prescribed penalties for a number of other breaches. We think that the determination of an appropriate level of penalty is one more appropriately left to the Administration, but we would reiterate the view expressed in the First Report that the maximum fine for an offence under the proposed legislation must be substantial enough to achieve the necessary deterrent effect.

6.93 As far as civil remedies are concerned, we confirm the approach favoured in the First Report[91] and recommend the creation of a statutory tort for breach of the legislation. The purchaser should be able to claim damages for loss suffered as a result of a breach of the proposed legislation. The remedies available under the new tort should be confined to damages, however, and rescission should not be available. In making this recommendation, we echo the First Report’s view that purchasers would not normally wish to rescind the purchase agreement, except in a falling market. In such a market, rescission would give purchasers the chance to rescind the transaction for minor breaches which may not go to the heart of the contract.

6.94 As with the recommendation for the creation of a statutory tort contained in the First Report, we do not intend that the existing remedies available under the formal ASP should be diminished in any way.[92] The intention is that purchasers would be given additional remedies for breach of the proposed legislation. There will be overlap, but we consider that there should be clear provisions in the new legislation that nothing in that legislation will detract from the rights of the purchaser under the formal ASP, and that no clauses in the ASP will detract from the statutory remedies in the legislation. This approach was followed in the White Bill, which provided that the relevant provisions in the legislation “shall not prejudice any right of, or remedy available to, a purchaser of an uncompleted property arising otherwise” than under those provisions.[93]

[67] See paragraph 2.19 of the First Report for the previous recommendations on floor plans.
[68] The First Report, at paragraph 2.20.
[69] The First Report, at paragraphs 3.14 to 3.17.

[70] Subsequently on 21 July 1999, the Legal Advisory and Conveyancing Office Circular Memorandum No 40A (LACO CM 40A) was issued. LACO CM 40 remains valid and in place except so far as modified by LACO CM 40A (paragraph 4 of LACO CM 40A refers). LACO CM 40A deals with balloting and exemption from registration and has no substantial effect on the proposals in this report.
[71] The First Report, at paragraph 3.19.
[72] The First Report, at paragraph 3.24.
[73] The First Report, at paragraphs 4.19 to 4.25.

[74] See Appendix 1 of Land Office Circular Memorandum No 101, at paragraphs A 2 & 3. The same requirements are contained in paragraphs 2 and 3 of Appendix XII of Land Advisory Conveyancing Office Circular Memorandum No 40 which came into force on 28 May 1999.

[75] See section 21(6) of Buildings Ordinance (Cap 123) which spells out the circumstances in which an application for an occupation permit will be refused by the Building Authority.
[76] See the First Report, at paragraphs 7.6 to 7.8 for the previous recommendations.
[77] The First Report, at paragraph 7.10.
[78] The First Report, at paragraphs 8.5, 8.6 and 8.13.

[79] In the Housing Authority's Private Sector Participation Scheme, the Defect Liability Period is 12 months from the date of the Assignment. Starting from Phase 17A in 1995, the Defect Liability Period of Home Ownership Scheme units has changed to 12 months from the date of the completion certificate.
[80] The First Report, at paragraphs 17.5 and 17.7.

[81] These were: (1) The definition of common parts; (2) the number of undivided shares allocated to each unit and the method of apportionment of management charges; (3) the fact that the number of undivided shares is subject to change; (4) the sum payable by the owners as deposit for the first year budgeted management expenses (to be expressed in terms of a specific number of months of management fee if the exact amount has not yet been worked out); (5) any restrictions imposed on owners in the use of the common parts; (6) interest and charges on owners who default in paying sums due under the DMC; and (7) the name of the first manager (if already decided) and the minimum period of its management. See paragraph 10.13 of First Report.
[82] The First Report, at paragraph 10.15.

[83] Non-renewable Government Leases which expire before 30 June 1997 are automatically extended up to 30 June 2046 without payment of additional premium but a new Government rent is payable (see Annex III of the Sino-British Joint Declaration on the Question of Hong Kong). All Government Leases whether in Hong Kong Island, Kowloon or the New Territories which have been granted since 27 May 1985 are also subject to this new Government rent from 1 July 1997 (see paragraph 1 of explanatory notes to Preliminary Advices on Government Rent issued by the Rating and Valuation Department to individual owners in April 1997.) The result is that many new developments are subject to the new Government rent, as they are built on lots of land granted after 27 May 1985. The new Government rent is at three percent of the rateable value of the property and so can be a substantial sum. This being the case, the Rating and Valuation Department has since 1 July 1997 issued demands for Government rent to the individual owners who are so liable.

[84] The First Report, at paragraphs 11.12 to 11.13.

[85] See Legal Advisory and Conveyancing Office Circular Memorandum No 22 dated 30 September 1996.
[86] First Report, at paragraphs 12.6, 12.15 and 12.16.
[87] First Report, at paragraphs 13.7, 13.13, 13.14, 13.18, 13.22, 13.24, 13.29.
[88] The First Report, at paragraph 15.3
[89] The Second Report, at paragraph 11.2

[90] Consultation Paper on the Sales Descriptions of Uncompleted Residential Properties Bill, at page 6.
[91] The First Report, at paragraph 15.16
[92] The First Report, at paragraph 15.21

[93] Consultation Paper on the Sales Descriptions of Uncompleted Residential Properties Bill, at clause 6(4) of the Bill.