BACKGROUND

Recently, there is a substantial increase in property litigation cases which involve purchaser trying to rescind agreement for sale and purchase due to failure on the vendor’s part to prove good title to the property because of the existence of unauthorized building works (“UBW”). UBW are building works which are not made in compliance with the approved building plans and include alteration, addition and removal works which have not been approved by the Building Authority.  In most of these cases, the purchaser alleged that due to the existence of UBW, the vendor’s title was defective and the purchaser was entitled to rescind the agreement for sale and purchase and get back the deposits.  The problem of UBW is especially serious in the “house” market as compared with the “flat” market.  The existence of UBW is quite common in the “house” market.

WHAT CAN A VENDOR DO

How can a vendor prevent a purchaser from rescinding the agreement for sale and purchase due to the existence of UBW?

INSTRUCTING EXPERTS

Before entering into a provisional agreement for sale and purchase, which once signed will be legally binding on both the vendor and the purchaser, the vendor should “know” the property.  The vendor, being a lay-person, usually does not have the necessary expertise to locate and identify UBW.  The vendor should instruct experts such as an architect or a building surveyor to inspect the property and prepare a report setting out specifically all the items of UBW found in the property.

RECTIFICATION OR REINSTATEMENT

The vendor may, if he chooses to, rectify or reinstate all the UBW in accordance with the approved building plans before the vendor puts the property up for sale in the market.

DISCLOSURE TO ESTATE AGENT

If the vendor decides not to rectify or reinstate the UBW, the vendor may still put the property up for sale through the estate agent.  However, the vendor must disclose all the UBW to the estate agent in full in writing.

DISCLOSURE TO INTENDING PURCHASER

The vendor should also disclose the UBW to the intending purchaser when the intending purchaser inspects the property.

ACKNOWLEDGEMENT AND WAIVER BY PURCHASER

The vendor has to set out all the UBW found in the property specifically in the provisional agreement for sale and purchase.  The vendor should also request the purchaser to acknowledge in the provisional agreement for sale and purchase that the purchaser has inspected the property and is fully aware of the existence of the UBW.  The purchaser should also acknowledge in the provisional agreement for sale and purchase that the purchaser is fully aware of the legal consequences of the existence of the UBW, i.e. rendering the title to the property defective, and the purchaser agrees to waive his right to raise any requisition or objection relating to the UBW.

In some cases, the purchaser may be reluctant to insert the above-mentioned clause regarding the UBW in the provisional agreement for sale and purchase for fear that if the intending mortgagee bank becomes aware of the existence of the UBW, the intending mortgagee bank may not approve the mortgage loan applied for by the purchaser.

SIDE LETTER / SUPPLEMENTAL AGREEMENT

In order to get around the aforesaid problem, the estate agent or the purchaser usually propose a side letter / supplemental agreement to be entered into by the vendor and the purchaser setting out the aforesaid clause regarding the UBW.

The vendor must make sure it is clearly stated in the side letter / supplemental agreement that the side letter / supplemental agreement will not be superseded by the formal agreement for sale and purchase.  Furthermore, the Vendor should also ensure that the “Full Agreement” clause which states that “This Agreement sets out the full agreement between the parties hereto and supersedes and replaces any prior agreement (including but not limited to any preliminary or provisional agreement) in writing or otherwise in respect of the sale and purchase of the property, such prior agreement, if any, shall be deemed to have been cancelled immediately on signing of this Agreement” is deleted from the formal agreement for sale and purchase.

DISCLOSURE TO VENDOR’S SOLICITORS

The vendor should disclose to the vendor’s solicitors the existence of the UBW and the side letter / supplemental agreement and pass a copy of the side letter / supplemental agreement to the vendor’s solicitors for their preparation of the formal agreement for sale and purchase.

NEW SUPPLEMENTAL AGREEMENT

If the vendor’s solicitors find that it is not stated in the side letter / supplemental agreement that the side letter / supplemental agreement will not be superseded by the formal agreement for sale and purchase, the vendor’s solicitors should advise the vendor to enter into a new supplemental agreement with the purchaser which incorporates the clause regarding the UBW and supplements the formal agreement for sale and purchase immediately after the vendor and the purchaser sign the formal agreement for sale and purchase.

CONCLUSION

Last but not least, in order to protect his own interests, the vendor should consult a lawyer experienced in conveyancing practice for professional advice before he enters into any binding agreement with the purchaser.