A.        Nature of Provisional Agreement

The term “provisional agreement” 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 later.  In fact, quite the contrary, the provisional agreement once signed will be legally binding on the vendor and the purchaser unless and until it is superseded by the formal agreement.  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.  If they are not so set out, the purchaser can only incorporate new terms and conditions into the formal agreement with the vendor’s consent.

For instance, if the vendor agreed to comply with a building order registered against the property at the vendor’s costs and expenses, it is of utmost importance for the purchaser to set out such term in the provisional agreement.  It is because if such term is not included in the provisional agreement, the vendor is legally entitled to object to such term being incorporated into the formal agreement. 

B.         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.  The legal consequences of UBW on title to the property are fatal, because the existence of UBW will render title to the property defective, meaning that future purchasers are legally entitled to rescind the agreement and get back all the deposits.  Furthermore, potential mortgagee banks may not accept properties with UBW as security.

In view of the serious consequences, the purchaser must inspect the property carefully before signing provisional agreement to ensure that there are no UBW.  However, the purchaser, being a lay-person, usually does not have the necessary expertise to locate and identify UBW.  The purchaser 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.  If there are UBW found in the property, the purchaser should insert a term in the provisional agreement to the effect that the vendor shall be responsible to dismantle and reinstate the UBW at the vendor’s own costs before completion.

C.         Ominous Property

Apart from conducting land search of the property, it is always equally important to check whether the property and the building of which the property forms part (“the Building”) have been involved in homicide or suicide of its previous occupants or other “unlucky” events, especially in cases where the purchase price is far below market price.  The purchaser may conduct a valuation of the property through potential mortgagee banks to confirm whether the property is blacklisted by the mortgagee banks.  The purchaser may also make an enquiry with the management office of the Building.  Last but not least, the purchaser may also go to websites such as www.whoms.net which list out the properties which involve in homicide or suicide.  However, such checking may not be conclusive.

D.        Third Party Rights

Apart from the registered owner of the property, there may be some third parties, usually the occupiers of the property, who may have acquired an interest in the property. The interest might arise either by way of a resulting trust and, not generally being supported by written documentation, will be unregistrable.  A purchaser will take free of such unregistered unregistrable interest provided that the purchaser has no actual or constructive notice of them.

Where, for example, a spouse of the registered owner has contributed to the purchase price of the property or repaid the mortgage loan of the property, it has long been established that he or she may acquire an equitable interest in the property by way of a resulting trust.

Alternatively, the interest might arise by virtue of a short-term tenancy.

Tenancies at a rack rent for any term not exceeding three years are excluded from the requirement of registration by section 3(2) of the Land Registration Ordinance (Cap.128).  A tenant holding under such an unregistered tenancy for less than three years will clearly have an interest in the property.  To avoid the third party interests problems from arising, the purchaser should require the vendor to clarify the relationships of all the occupiers of the property with the vendor when the purchaser inspects the property.  If in doubt, it is always advisable for the purchaser to add a term in the provisional agreement to the effect that the vendor agrees to furnish to the purchaser on or before completion consent letters signed by all the occupiers of the property, apart from the registered owner, who are over 18 years old, consenting to the sale of the property to the purchaser and relinquishing all their rights (if any) in the property.  Furthermore, it is common that a term will be incorporated into the formal agreement to the effect that if there is any third party claiming an interest in the property on or before completion, the purchaser shall have the right to rescind the agreement and get back all the deposits.  In addition, the purchaser is also entitled to claim damages from the vendor for all losses the purchaser suffers arising from the vendor’s failure to complete the sale of the property in accordance with the terms and conditions of the formal agreement.

E.         Negative Equity Property

If the purchaser discovers from the purchase price at which the vendor bought the property that the property is likely a negative equity property, i.e. the balance of purchase price is not sufficient to discharge or release the existing legal charge or mortgage, the purchaser should insist on the initial and further deposits being stakeheld by the vendor’s solicitors as stakeholders and the vendor’s solicitors shall not release the initial and further deposits to the vendor unless and until it is proved to the satisfaction of the purchaser’s solicitors that the balance of purchase price is sufficient to discharge or release the existing legal charge or mortgage.

F.         Subject to Tenancy

If the purchaser is purchasing the property subject to tenancy, the purchaser should request the vendor to provide a copy of the tenancy agreement to check : (i) whether there are any onerous terms imposed on the landlord; (ii) whether the tenancy agreement has been duly stamped; and (iii) (if the property is a residential property) whether there is Form CR109 duly endorsed by the Commissioner of Rating and Valuation.

As the property is occupied by the tenant, the purchaser in most of these cases will not be able to inspect the property before signing the provisional agreement.

In addition, the purchaser may also request the vendor to confirm in the provisional agreement whether there is any arrears of rent and the amount of rental deposit held by the vendor under the tenancy agreement as at the date of the provisional agreement.

G.        Building Order

Building orders are orders issued by the Building Authority under the provisions of the Buildings Ordinance (Cap.123) (“BO”). Examples of building orders are as follows:-

(a)        a demolition order made under section 24 of BO;

(b)       a repairing order made under section 26 of BO;

(c)        a closure order made under section 27 of BO; and

(d)       a remedial order made under section 27A of BO.

A building order against one particular flat would clearly render the title of that particular flat  owner defeasible.  A building order relating to all the co-owners would render all their titles defeasible.  If the vendor fails to carry out the building works required under the building order before the due date stated therein, the Building Authority is entitled to carry out the said required building works and the costs thereof shall be recoverable from the owner of the property.  In addition, the Building Authority is empowered by Section 33 (9) of BO to register a Certificate in the Land Registry against the property and upon such registration, the costs and any interest accrued or thereafter accruing shall constitute a first charge on the property and an encumbrance over the property.

It is note-worthy that a building order can only be discharged by a letter of compliance issued by the Building Authority and hence, a letter of withdrawal is not sufficient.

H.     Action Pending Against the Incorporated Owners of a Multi-storey Building

Clearly where a lis pendens, i.e. a pending legal proceedings, has been properly registered against an owner’s title, that title will be encumbered.  For a lis pendens to be properly registered against a title, however, that lis must affect the land against which it is registered.  Where, therefore, an action has been commenced against an owner of land, but that action is unrelated to that land, no lis can properly be registered and the owner’s title is unaffected.  The owner has no obligation to bring the action to the attention of any intending purchaser since the action does not constitute a latent defect or encumbrance on the property.

However, according to section 17(1)(b) of the Building Management Ordinance (Cap.344), the judgment creditor can now apply to the Lands Tribunal to enforce any judgment so obtained against the incorporated owners or against any individual owner.  Hence, if an action unrelated to land has been commenced against an owners’ corporation of a multi-storey building, the effect would be that a purchaser from the owner might be faced with the prospect of having execution levied against him for the full amount of the judgment debt.

It was held by the Court of Final Appeal that such action would be a blot on the vendor’s title, especially when the judgment debt is of a substantial size.

In view of the above, it is of great importance for the purchaser to write to the management office and/or the owners’ corporation to confirm whether there are any actions which have been commenced against the owners’ corporation well before completion.

I.          Conclusion

There are indeed a lot of traps in purchase of properties in Hong Kong. The above list is not meant to be exhaustive.  If a purchaser is caught by one of the abovementioned traps, serious consequences will follow, including but not limited to the purchaser’s title being rejected by future potential purchasers and mortgagee banks.  Thus, it is of utmost importance for a purchaser to appoint competent and experienced conveyancing lawyers to handle his purchase as early as possible, preferably well before signing the provisional agreement.