Background

The term “provisional agreement for sale and purchase” and its Chinese translation “臨時買賣合約” are quite misleading.  It may lead a purchaser to think that it is only provisional in nature and thus not very important and the purchaser is entitled to change the name of the purchaser and/or incorporate further terms and conditions into the formal agreement for sale and purchase later.  In fact, quite the contrary, the provisional agreement for sale and purchase once signed will be legally binding on the vendor and the purchaser unless and until it is superseded by the formal agreement for sale and purchase.  Hence, it is important for the purchaser to ensure that all the terms and conditions agreed with the vendor are set out at length in the provisional agreement for sale and purchase.  If they are not so set out, the purchaser can only incorporate new terms and conditions into the formal agreement for sale and purchase with the vendor’s consent.

The Land Search

First of all, the purchaser needs to obtain the land search records and the assignment plan of the property from the Land Registry.  The purchaser can gather a lot of information of the property from the land search records, for example, the description of the property, the names of the past and current registered owners, the purchase price at which the current owner bought the property, all the encumbrances registered against the property such as mortgages and building orders etc..

Property Description

The property description should follow strictly that as appeared in the land search records.  In certain circumstances, for instance, if the property comprises flat roof or roof or part of a shop, it is advisable to attach a coloured plan to the provisional agreement for sale and purchase showing the property in colour for identification purposes.

Deposits

In most cases, the sum of the initial and further deposits amounts to 10% of the purchase price.  The amount of the initial deposit is to be agreed between the parties and is usually in the range of 3% to 5% of the purchase price.

The purchaser should insist that the further deposit shall only be payable upon signing of the formal agreement for sale and purchase instead of on a specified date.

Where there is an existing mortgage and more importantly, if it is revealed from the purchase price at which the vendor bought the property that the property may be a negative equity asset, the purchaser should insist that the initial and further deposits be held by the vendor’s solicitors as stakeholder who shall not release the initial and further deposits to the vendor until and unless it is proved to the satisfaction of the purchaser’s solicitors that the balance of purchase price is sufficient to pay off the redemption money required to discharge the existing mortgages.

Completion Date

The completion date should not be less than one month from the date of the provisional agreement for sale and purchase.  Under the Land Registration Ordinance of the Laws of Hong Kong, all deeds, conveyances, and other instruments in writing which are registered within one month after the date of execution thereof shall have priority and shall take effect respectively by relation to the date thereof, i.e. the date of its execution.  In view thereof, and to secure priority in title, it is advisable that completion should take place at a date which is not less than one month from the date of the provisional agreement for sale and purchase so that it can be confirmed before completion that no interest has been or can be registered against the property with priority over the interests of the purchaser.

Furthermore, if the purchaser requires a mortgage loan to complete the purchase, completion should not take place on Saturdays since banks do not drawdown loans on Saturdays.

Tenancy

If the property is sold subject to an existing tenancy, the purchaser should request the vendor to produce the tenancy agreement for perusal.  The purchaser should check whether full stamp duty has been paid on the tenancy agreement.  Furthermore, the purchaser should go through the terms and conditions in the tenancy agreement to ensure that there are no onerous terms in the tenancy such as an option to renew and/or long rent free periods.

The purchaser should also set out the basic terms of the tenancy agreement in the provisional agreement for sale and purchase such as the date of the tenancy agreement, term, monthly rental, rental deposit and option to renew (if any).  It should also be stated in the provisional agreement for sale and purchase that the full rental deposit will be transferred to the purchaser on completion. 

Default of vendor/purchaser

The usual provisions regarding default of vendor and purchaser are as follows:- 

“Should the vendor after receiving the deposit paid hereunder fail to complete the sale in the manner herein contained, the vendor shall immediately compensate the purchaser with a sum equivalent to the amount of the deposit as liquidated damages together with the refund of the deposit and the purchaser shall not take any further action to claim for damages or to enforce specific performance.”

“Should the purchaser fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the vendor and the vendor shall then be entitled at his absolute discretion to sell the property to anyone the vendor thinks fit and the vendor shall not sue the purchaser for any liabilities and/or damages caused by the purchaser’s default of the provisional agreement for sale and purchase and shall not take any further action to enforce specific performance.”

However, in a volatile market, the purchaser may not want the vendor to back out from the deal simply by returning the initial deposit to the purchaser and compensating the purchaser with a sum equivalent to the amount of the initial deposit.  If that is the case, the purchaser should negotiate with the vendor to delete the two clauses regarding default of vendor and default of purchaser.  The provisional agreement for sale and purchase should specify instead that the purchaser has the right to claim for damages and/or specific performance in case of default by the vendor to carry out the terms of the provisional agreement.

Estate Agent’s Commission

Although usually the amount of commission payable to the estate agent by the purchaser is 1% of the purchase price, it is not mandatory and is always subject to negotiation. The estate agent’s commission should only be payable after completion of the sale and purchase.

Unauthorized Building Work (UBW)

The purchaser, perhaps with the assistance of experts such as an architect or a building surveyor, should compare the existing state and condition of the property with the approved building plans to verify whether there is any UBW in the property.  If UBW does exist, the purchaser should be aware that UBW may render the title to the property defective.  He should not accept any provision in the provisional agreement for sale and purchase that he accepts the existence of such UBW and waives the right to raise requisitions on or objections to the existence of the UBW because he may have difficulty in his future sale or mortgage of the property due to the existence of the UBW.  Furthermore, enforcement actions including prosecution and government re-entry may be taken by the Government or by the management company or the incorporated owners of the building against the owner pursuant to the provisions in the deed of mutual covenant of the building.

Conclusion

Because of its binding nature and the legal consequences that follow, before the purchaser signs any provisional agreement for sale and purchase, he should bear in mind the aforementioned tips and seek professional legal advice from a lawyer experienced in conveyancing practice in order to protect his rights and interests.