Introduction

Buying flats in an uncompleted development carries certain risks. The most apparent of which is that the developer may not have the financial ability to fund the construction work to the completion of the development. Although this risk has now been minimised by the introduction of the Consent Scheme by the Lands Department and the Non-Consent Scheme by the Law Society, a recent case has shown that whether the development of the Property has been completed can be a source of controversy between the developer and the purchasers.

The law

In a typical sale and purchase agreement under the Consent Scheme, it provides that:-

“The sale and purchase shall be completed at the offices of the vendor’s solicitors during office hours within 14 days of the date of the purchaser being notified in writing:-

a.that the Occupation Permit has been issued and the vendor is in a position validly to assign the Property to the purchaser; or

b.that the Occupation Permit and the Certificate of Compliance have been issued;

whichever shall first happen.”

Likewise in a typical sale and purchase agreement under the Non-Consent Scheme, it provides that:-

“The sale and purchase shall be completed at the office of the vendor’s solicitors during office hours within 14 days of the purchaser being notified in writing that the Occupation Permit has been issued and the vendor is in a position validly to assign the Property to the purchaser.”

Thus a purchaser of a flat in an uncompleted development in Hong Kong, whether under the Consent or the Non-Consent Scheme, will be legally obliged to complete the sale and purchase and pay the balance of purchase price according to the provisions in the sale and purchase agreement mentioned above. Otherwise the purchaser will be in breach of the sale and purchase Agreement.

The provisions in standard sale and purchase Agreements equating the issuance of the Occupation Permit and Certificate of Compliance (where applicable) to Completion may cause significant detriment to purchasers. This risk has been vividly illustrated by the recent case of Sun Crown Trading Ltd v Holyrood Ltd (HCA 1158/2007 and HCA 1159/2007 (Consolidated)).

The unfortunate story

The case involved two purchasers who purchased flats in an uncompleted development in 2004 which was advertised to be a block of low-rise luxury flats located on Peak Road.However, soon after the two purchasers and the developer have signed the two sale and purchase agreements and each paid 10% of the purchase price as deposit, the developer ran into significant financial difficulties and had insufficient funding to pay its contractors to complete the building works of the development. As a result, the developer decided to erect the buildings only to the minimum level required to obtain the Occupation Permit and Certificate of Compliance. At which point the purchasers will be compelled to complete the sale and purchase and pay the remaining 90% of the purchase price. The developer would utilise the purchase price received to continue the rest of the building works.

As a result of this plan, the development was only built to a bare concrete finish with no cladding when the Occupation Permit and the Certificate of Compliance were issued in March 2005 and June 2005 respectively. The clubhouse and the swimming pool as designed were not finished. All the buildings in the development were covered in scaffolding as the cladding work on the exterior walls remained to be done. The recreational areas in the development were used by the developer to store construction materials and debris and were unavailable to the owners. There was even a derrick crane truck which was used at the development to hoist building materials to the upper floors of the residential block. In essence, the development was still a construction site when the keys were handed over to the purchasers in mid-2005 and remained as one for more than 3 years after the completion of the sale and purchase of their flats. Furthermore, the interior fittings of the flats were of a very low standard and a lot of rectification work was required to remedy the problems in the two flats.

The nuisance and noise caused by the extensive construction works rendered the two flats uninhabitable for more than 3 years. The two purchasers had tried to find tenants for their flat during and after the renovation of their own flats by engaging a number of estate agents. However, the estate agents were fully aware of the condition of the development as a construction site and did not actively find tenants for the two flats until mid-2008, when the construction work at the development was finished. As a result one of the purchasers only successfully found a tenant for the property in September 2008 while the other purchaser failed to find a tenant and eventually moved into the development with her family in November 2008.

The purchasers thus sued the developer for breach of an implied term in the sale and purchase Agreement that the purchasers’ unit would be fit for luxurious living, and also for breach of the Deed of Mutual Covenant for causing nuisance to the purchasers as co-owners and also under the tort of nuisance.

At the trial, the developer raised an ingenious argument that as the sale and purchase Agreements have provided that the issue of the Certificate of Compliance or Consent to Assign by the Director of Lands shall be “conclusive evidence” that the development has been completed, the issue of the Certificate of Compliance is an agreed mechanism between the developer and the purchasers for the developer to show that the development has been physically completed. Further, the developer also argued that the very extensive construction works which continued after the completion of the conveyance were merely improvement and upgrading works to the development.

The court rejected this argument of the developer. The court found that the clause in the sale and purchase Agreement only provides for a condition precedent which must be satisfied before completion of sale and purchase can take place and does not determine the contractual obligation of the developer to physically complete the development. Further, the clause does not determine the standard of workmanship and fittings to be provided by the developer on completion. As a result, the court has found the developer to be liable to the purchasers for breach of the sale and purchase Agreement for the substandard fittings and the nuisances caused to the purchasers under the Deed of Mutual Covenant and also under the tort of nuisance.The court determined that the developer has to reimburse the purchasers for the amount of lost rental during the time the flats were not fit for occupation and also for the cost of the rectification work done to remedy the defects in the internal fittings of the two units.

Conclusion

The current standard terms in the sale and purchase Agreement for uncompleted residential property do not afford adequate protection to the purchasers. As has been clearly illustrated in the case example explored above, the purchaser, even if he has complete knowledgethat the Property has not been completed and is still a construction site, has no right to demand deferral of completion of the sale and purchase. He is obliged to pay the remainder of the purchase price and take possession of a flat in a development which is far from completion.

The only remedy the purchaser has against the developer is for breach of the sale and purchaser Agreement and nuisance which will take years in court before the purchaser can obtain compensation. This state of affairs is unsatisfactory and all potential buyers of uncompleted properties should be aware of this risk before entering into the sale and purchase Agreement. In particular potential buyers of an uncompleted development should be satisfied as to the past history, financial ability, experience and reputation of the developer before entering into a contract for the sale and purchase of units in an uncompleted development.