Background

The property market of Hong Kong has been booming recently.  There is a significant increase in the number of sub-sale transactions.

However, most people are not fully aware of the risks involved in such sub-sale transactions.  The risk becomes even greater when there is more than one sub-sale of the property.

The Confirmor

In order to maximize the chance of finding potential sub-purchasers, a purchaser who intends to sub-sell (known as “a confirmor”) the property to a sub-purchaser before completion should request the head vendor for a long completion period, say three months to one year.

The confirmor should ensure that the terms and conditions of the principal agreement between the head vendor and the confirmor do not restrict the confirmor from sub-selling the property.  Hence, the confirmor should not buy properties from a mortgagee who sells pursuant to its power of sale under a mortgage because normally in a mortgagee sale, the mortgagee invariably prohibits sub-sale of the property.

It is worth-noting that if the confirmor sub-sells the property before completion, the confirmor is required to pay up immediately all the stamp duties chargeable on the principal agreement within 7 days after the date of the sub-sale.  No deferment of payment of stamp duties is permissible under such circumstances.

The major risk that the confirmor in a sub-sale transaction runs is that if the sub-purchaser fails to complete the purchase of the property in accordance with the terms of the sub-sale agreement, the confirmor is legally bound to complete the purchase of the property with the head vendor in accordance with the terms of the principal agreement.  The confirmor must have sufficient funds to complete the purchase.  If a mortgage loan is required, the confirmor should apply for the mortgage loan well in advance to ensure that the mortgage loan will be available on the scheduled date of completion.  However, mortgage loan usually requires a minimum of one or two working days for the loan drawdown documents to be processed.  If the sub-purchaser fails to complete at the last minute without pre warning to the confirmor, the confirmor may not be able to have sufficient time for the mortgage loan to be drawn down to complete the purchase.

In order to minimize the losses and/or damages that may be suffered by the confirmor arising from a legal action by the head vendor for breach of the principal agreement if the sale and purchase fails to be completed, it is advisable for the confirmor to use a limited company with nil or nominal assets to sign the principal agreement.

The Sub-purchaser

The sub-purchaser in a sub-sale transaction will inevitably enter into the sub-sale agreement subject to and with the benefit of the principal agreement.  Therefore, the sub-purchaser should read the principal agreement carefully to ascertain whether there are any provisions in the principal agreement which restrict the confirmor from sub-selling the property and whether there are any onerous provisions imposed on the confirmor.

Under the Land Registration Ordinance, 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 order to secure priority in registration, the sub-purchaser should check that the principal agreement has been duly registered at the Land Registry before he signs the provisional sub-sale agreement to ensure no interests have been or will be registered against the property having priority over the confirmor’s interests.

In most sub-sale transactions, the sub-purchaser does not have the opportunity to inspect the property before entering into the provisional sub-sale agreement.  There is a possibility that there may be some unauthorized structures and/or alterations in the property which may render the title to the property defective. 

After payment of the initial and further deposits by the sub-purchaser to the confirmor, there is a risk that the confirmor will not complete the sale and purchase especially in a situation where the confirmor will not receive any further payment of the purchase price on completion.  In order to minimize this risk, the sub-purchaser should require both the initial and further deposits to be stakeheld by the confirmor’s solicitors pending completion.  In addition or alternatively, the sub-purchaser should request the confirmor to execute an irrevocable power of attorney in favour of the sub-purchaser to authorize the sub-purchaser, in the event of default of the confirmor, to execute the relevant assignment on behalf of the confirmor upon completion.

If the confirmor is in default, the sub-purchaser can only sue the confirmor but not the head vendor since the purchaser is not a party to the principal agreement.  The purchaser may not be able to recover anything from the confirmor either because the confirmor has disappeared or has nil or nominal assets to satisfy the claim of the sub-purchaser.

The Head Vendor

The position of the head vendor may be seriously affected following a breach of the principal agreement or the sub-sale agreement resulting in the abortion of the sale and purchase.  The various principal agreement and sub-sale agreements have been registered in the Land Registry against the head vendor’s property and the head vendor must terminate the principal agreement before he could sell or mortgage the property again.  Sometimes this could take years because the confirmor might have challenged the right of the head vendor to terminate and might even file and register a writ against the property.

Conclusion

Sub-sales carry substantial risks which the parties might not even think of when they entered into such transaction.  One should think carefully and consult an experienced property lawyer to give professional advice before entering into any sub-sale agreement whether as a confirmor or a sub-purchaser.  A vendor may also consider inserting a provision in the sale and purchase agreement to prohibit sub-sale of the property by the purchaser in order to protect his own interests.