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

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

The Law Reform Commission

of Hong Kong

Report

	Page
Preface	1

Background and terms of reference	1
Scope of deliberations	2
Views against regulating the second-hand market	3
Views in favour of regulating the second-hand market	3
Sub-committee membership and method of working	4
Definition of "completed residential property"	6


Part I – Second-hand Market

1. The general approach to the second-hand market and existing legal protection for purchasers of completed units in the second-hand market	8

The general approach to the second-hand market	8
A brief review of the existing law governing the protection of Purchasers in the second-hand market	8

2. Disclosure of information by vendors	15

Existing law provides insufficient protection for purchasers of second-hand units	15
The Vendor's Information Form	15
Public views on the introduction of a VIF	18
The advantages of a VIF	19
The disadvantages of a VIF	20
Contents of VIF	21
Should the VIF be voluntary or compulsory?	26
Centralised property information system	30
3. Standard clauses in preliminary agreements	32

Introduction	32
Standard clauses for protection of homebuyers	32
Cooling-off period	33
Contract subject to finance	36
Survey report	38
Right of inspection	39
How should a standard clause be inserted into the preliminary agreement?	40


Part II – First-hand Market

4. The general approach to the first-hand market and the provision of sales brochures	42

Meaning of completed properties in the first-hand market	42
The general approach to the first-hand market	42
Availability of sales brochures for first-hand completed flats	43
Advertisements other than sales brochures	47

5. Methods of measurement of floor area to be used by developers	48

Introduction	48
Saleable area（出售面積）	48
Gross floor area（建築面積）	51
Quoting of lowest price	51

6. Disclosure requirements for completed units offered for sale by developers	53

Introduction	53
Floor plan	53
Fittings and finishes	55
Location and layout plans	59
Misleading artistic impressions	61
Management of clubhouse and communal facilities	62
Date of completion	62
Sub-sale by original purchaser to sub purchaser	64
Financing arrangements	65
Interest chargeable for late payment of purchase price	66
Changes in market conditions and bank lending policies	66
Cooling-off period	66
Preliminary agreement for sale and purchase	67
Right of inspection prior to signing of preliminary agreement	68
Defect liability period	69
Deed of Mutual Covenant	71
Conditions of the Government lease	75
Prices and number of units for sale	78
Miscellaneous matters	78
Enforcement of the recommendations	80

7. The importance of public education	85

8. Summary of recommendations	87

Recommendations applicable to completed units sold in the second-hand market	87
Recommendations applicable to completed units sold in the first-hand market	89
Recommendations applicable to all completed units, both in the first-hand and second-hand markets	98

Glossary of terms	100


Annex I List of those who made submissions on the Consultation Paper on Local Completed Residential Properties	105

Annex II Relevant text of Legal Advisory Conveyancing Office Circular Memorandum No 40	107

Annex III Text of the Legal Information Form published by the Law Society of England and Wales	117

Annex IV Text of the Ontario Seller Property Information Statement	122

Preface

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:

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.

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.

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.

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.

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.

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

PART I – SECOND-HAND MARKET

Chapter 1 The general approach to the second-hand

market and existing legal protection

for purchasers of completed units

in the second-hand market

_____________________________________________________

The general approach to the second-hand market

Completed residential units in the second-hand market

1.1 In Part I of this report, we consider how to improve the existing protection given to purchasers of completed units in the second-hand market. Here we refer to those residential units with an occupation permit sold by private vendors to purchasers. We define private vendors for our purposes as those who are not in business as developers or subsidiaries or associates of developers.

Lack of sales brochure

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

A brief review of the existing law governing the protection of purchasers in the second-hand market

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

Misrepresentation

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

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

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

Breach of contract

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

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

Fraudulent behaviour

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

(a) Obtaining property or pecuniary advantage by deception

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

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

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

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

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

(b) Conspiracy to defraud

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

(c) Substantive offence of fraud

1.14 Acting upon the recommendations of the Law Reform Commission in its report entitled Report on Creation of a Substantive Offence of Fraud,^⁵ a new section 16A was added to the Theft Ordinance (Cap 210) on 16 July 1999.^⁶ The new section 16A(1) provides:

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

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

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

the first-mentioned person commits the offence of fraud and is liable on conviction upon indictment to imprisonment for 14 years."

1.15 This new statutory offence of fraud applies to one person acting alone. However, it would be hard to prove beyond reasonable doubt deceit and the intention to defraud in the case of vendors providing wrong property information. For instance, the owners of units in old buildings may not know whether there are illegal structures or alterations as the building plans may be missing or may not be readily accessible at reasonable cost. The owners may make an honest mistake in providing wrong or misleading information as to illegal structures or alterations. It would be difficult to establish the necessary deceit and intention to defraud on the basis of such a mistake.

Trade Descriptions Ordinance

1.16 Section 7(1)(a)(i) of the Trade Descriptions Ordinance (Cap 362) provides that it is an offence to apply a false trade description to any goods in the course of any trade or business. Section 2(1) defines "goods" as including "vessel and aircraft, things attached to land and growing crops" which arguably includes the fittings and finishes of flats and even the building itself. However, a private individual selling his unit is usually not doing it "in the course of any trade or business". It is therefore difficult to establish liability for false trade descriptions in respect of misleading or false property information supplied by a private vendor in the second-hand market.

1.17 Moreover, a "trade description" requires a direct or indirect indication under section 2(1). Mere silence on the part of the vendor is therefore not a trade description. The Trade Descriptions Ordinance cannot catch vendors who deliberately withhold material facts.

Existing disclosure requirements under the Estate Agents Ordinance (Cap 511)

1.18 Under section 36(1) of the Estate Agents Ordinance, estate agents are required to provide purchasers with certain information about the property. The nature of that information is prescribed by regulation. Section 36(2) provides that the information to be prescribed may include:

particulars of current ownership and subsisting encumbrances,
the total or entire area of the property,
year or period in which construction of the property was completed,
user restrictions,
unexpired term of the Government or other lease and any right of renewal,
if a lease is to be granted, the term of the proposed lease,
a vendor’s statement on known structural additions or alterations and repairs or improvements.

Regulation 3(1) and the Schedule to the Estate Agents Practice (General Duties and Hong Kong Residential Properties) Regulation have accordingly prescribed that the following information must be provided by estate agents:

particulars of current ownership and subsisting encumbrances registered in the Land Registry,
floor area of the property (where available, the saleable area provided by the Rating and Valuation Department or the Land Registry),
year of completion of the property,
user restrictions,
unexpired term of Government lease and any right of renewal,
if a Government lease is to be granted, the term of the new lease,
a vendor’s statement on known structural additions or alterations and reinstatements, rectifications, repairs or improvements.

1.19 The estate agent is responsible for collecting these property particulars, except for the vendor statement on structural alterations and repairs. The vendor himself is under no obligation to complete the vendor statement. He may choose not to do so, and even if he does complete the statement this covers only any information "within the vendor's knowledge".^¹ If the vendor is not aware that there have been structural alterations or repairs, he will obviously complete the vendor statement on the basis of such knowledge as he has.

1.20 If the property particulars supplied by an estate agent are wrong, the estate agent may be able to rely upon the defence of due diligence.^² The Estate Agents Ordinance increases the transparency of transactions and provides more sales information to purchasers but falls short of giving them ultimate satisfactory protection.

Lack of vendor's duties of disclosure

1.21 It is clear from the foregoing review of the existing law that there are few positive duties, if any, on a vendor of second-hand property to disclose particulars of the property for sale. In second-hand sales, there is no sales brochure compiled by the vendor. A vendor is, of course, obliged to provide basic information about the property in the preliminary agreement, but the contents of the preliminary agreement are not uniform. Most preliminary agreements contain only the address of the property, the purchase price, payment terms, and the date of completion of sale and purchase. It is of little assistance to the purchaser if he obtains adequate property information only after the preliminary agreement has been signed.

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

Mr Tom Berry, JP (Represented by Mr John Edge, JP, Acting Deputy Director (Legal) of Lands Department from 21 January 1999 to 26 August 1999)	Deputy Director (Legal) Lands Department

Ms Audrey EU, SC (up to 22 April 1998)	Senior Counsel

Mr Kenneth KWOK Wing-hon (from 16 July 1999)	Senior Manager - Adviser to Managing Director Swire Properties Ltd

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

Mr LIU Sing-cheong	Managing Director Hang Cheong Surveyors Ltd Surveyor

Mr Malcolm Merry (from 30 June 1998)	Counsel

Mr Martin WONG Kwai-Poon	Chief Complaints & Advice Officer Consumer Council

Mr Marco WU Moon-hoi, JP	Deputy Director Housing Department

Mr WAI Siu-yu (up to 31 July 1998)	General Secretary Real Estate Developers Association of Hong Kong

Ms June TENG (from 5 October 1998 to 3 June 1999)	General Secretary Real Estate Developers Association of Hong Kong

Ms Eva TO Hau-yin (up to 28 July 1999)	Principal Assistant Secretary Housing Bureau Government Secretariat

Ms Rebecca PUN Ting-ting (from 28 July 1999 to 31 March 2000)	Principal Assistant Secretary Housing Bureau Government Secretariat

Ms Lorna WONG Lung-shi (from 31 March 2000 to 18 June 2001)	Principal Assistant Secretary Housing Bureau Government Secretariat

Miss WONG Mei-lin (from 18 June 2001 to 5 November 2001)	Principal Assistant Secretary Housing Bureau Government Secretariat

Ms Ophelia TSANG Oi-lin (from 5 November 2001)	Principal Assistant Secretary Housing Bureau Government Secretariat

The Law Reform Commission of Hong Kong

REPORT

Local Completed Residential Properties:

The Law Reform Commission

of Hong Kong

Report

CONTENTS

Page

Preface

Part I – Second-hand Market

Part II – First-hand Market

Preface

Background and terms of reference

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.

Scope of deliberations

Views against regulating the second-hand market

Views in favour of regulating the second-hand market

PART I – SECOND-HAND MARKET

Chapter 1

The general approach to the second-hand

market and existing legal protection

for purchasers of completed units

in the second-hand market

The general approach to the second-hand market

Completed residential units in the second-hand market

Lack of sales brochure

Misrepresentation

Fraudulent behaviour

(a) Obtaining property or pecuniary advantage by deception

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

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

(b) Conspiracy to defraud

(c) Substantive offence of fraud

Trade Descriptions Ordinance

Lack of vendor's duties of disclosure