Sale and purchase process
The following is a summary of the legal due diligence process that is undertaken when acquiring commercial real estate in Hong Kong:
- The purchaser’s solicitors will normally conduct legal due diligence;
- The purchaser’s solicitors will carry out a land search at the Land Registry and obtain copies of the title deeds for inspection. Search fee at the Land Registry is nominal and results can be obtained instantly. They will usually then request the vendor’s solicitors to deliver the title deeds (usually original copies) for inspection under an undertaking to return those title deeds upon demand and to keep them in safe custody. The purchaser’s solicitors will cross check those title deeds against those registered in the Land Registry;
- The purchaser’s solicitors would also request additional information to be provided by the vendor’s solicitors e.g. whether there are any unregistrable documents such as tenancy agreements or trust arrangements;
- If there are any defects in the title, such as missing documents, unregistered documents, suspected unauthorised building works or other encumbrances, the purchaser’s solicitors may raise requisitions. The vendor’s solicitors will need to respond to, or help rectify, those deficiencies in order to prove good title. If requisitions are unsatisfactorily answered or the defect(s) on title is/are not remedied, the purchaser will usually reserve a right to annul the transaction in the sale and purchase agreement;
- The purchaser’s solicitors may also engage a surveyor to inspect the physical condition of the property, identify whether there are any unauthorised building works, ensure that all of the fixtures and equipment expressed to be sold are in fact existing and functional, and obtain an opinion on the price of the property;
- The purchaser’s solicitors may also write to the management company of the property to check for any outstanding management fees, breach of terms of the deed of mutual covenants or management agreement by the vendor;
- The purchaser’s solicitors may also write to relevant Government authority for any outstanding payment of Government rent and rates payable by the vendor;
- The purchaser may inspect the property to see whether the property is subject to unregistrable interests such as any tenants, licensees or occupiers occupying in the property and/or to check the physical condition of the property and the fixtures, fittings and furniture;
- If the property transaction is to be effected via a share sale, then corporate due diligence may be also necessary;
- There is no market standard form of reporting or standard form of enquiries raised by purchasers; and
- Vendors will also customarily be asked to represent and warrant in relation to the legal title and conditions of the property.
- Legal due diligence may not make apparent all unauthorised building works, which may render the title not being good and marketable. It is also important to pay attention to unregistrable interests such as tenancies, uncrystallised floating charges and other interests arising from resulting or constructive trusts that may not be found from the land search records obtained from the Land Registry, which might not have been disclosed by the vendor.
- Statutory Outline Zoning Plans set out the designated uses of land. Some uses need permission of the Town Planning Board before building works can commence. Building works must not commence without approval of the building plan and consent for the commencement of building works being obtained from the Building Authority. A new building must not be occupied (except by no more than two caretakers) unless an occupation permit or temporary occupation permit has been issued by the Building Authority.
Sale and purchase contract
General components of a sale and purchase agreement (SPA)
There are no formal requirements regarding the content and structure of a sale and purchase contract. Typically, there are two types of SPAs in a transaction: preliminary agreements and formal agreements.
Preliminary agreements are not required but are commonly used in Hong Kong. They are also known as provisional agreements. Most often, preliminary agreements are prepared by the real estate agent, who is often a party to the preliminary agreement. This gives the real estate agent a direct contractual right under which they can recover commission. The preliminary agreement usually constitutes a binding contract if both seller and buyer sign it and it contains the following essential elements:
- Price; and
- Completion date.
It is common to include terms in relation to:
- Aiming for payment of the initial deposit (e.g 1%) and the main deposit (e.g. 9%);
- Timing for payment of the balance of the price;
- The time of signing the formal agreement;
- Payment of the costs, stamp duty and agent’s commission;
- Express provision for remedies in the event of default; and
- A right for the seller to withdraw from the sale by paying the buyer a liquidated sum.
The formal SPA is usually entered into within 14 days of the signing of the preliminary agreement. This provides stamp duty timing benefits. If the parties cannot agree on the terms of the formal agreement and the preliminary agreement is binding, the parties may decide not to enter into a formal agreement.
In addition to the above provisions, the following provisions are usually included in a real estate contract:
- Condition of property. Does the buyer take the property on an as-is basis or to some other standard?
- Possession. Is vacant possession to be given on completion or is the property sold subject to tenancies?
- Capacity of the seller. Is the seller assigned as beneficial owner, trustee or mortgagee?
- Apportionment of rents and outgoings. Rents and other outgoings are apportioned between the seller and buyer. Usually the seller pays up to and inclusive of the actual day of completion.
- Easements, rights and liabilities. The seller usually warrants that the property is not adversely affected by encumbrances which the seller is aware of or could have ascertained on reasonable enquiry, other than:
i. Those disclosed in the agreement; or
ii. Those which the buyer is aware of or could have ascertained through reasonable inspection of the property.
- Requisitions. The buyer has a right to raise requisitions on title within a specified period.
- Documents of title. The documents of title required for the purpose of giving title to the property will be delivered to the buyer.
- Good title. The seller must give and prove title to the property in accordance with section 13A and section 13 of the CPO.
i. If the buyer defaults, the deposit will be forfeited and the seller can rescind the agreement and resell the property. Any deficiency arising from such resale and expenses relating to it will be paid by the buyer;
ii. If the seller defaults, the buyer can enforce specific performance of the agreement or claim for damages. The buyer may be able to recover any deficiency on buying another property and expenses relating to it from the seller.
- Proper assurance. On completion, the seller must execute an assignment to the buyer. As for a typical share sale agreement, the above provisions apply except there is no need for a proper assurance clause as there will be no separate assignment of the property. Furthermore, additional clauses dealing with the corporate aspects of the transaction are required.
Transfer of occupational leases and income
If the property transaction is effected by a share transfer and not an asset transfer, there is no change of registered owner holding the property and the benefit of any occupational leases and income remains the same. If the property is sold as an asset transfer subject to a lease, the sale and purchase agreement normally will specify that the purchaser will assume all the rights, obligations and liabilities under the subsisting lease. A novation agreement should also be entered into to replace the purchaser as the new lessor who shall continue to receive the rental income after completion of the purchase of the property.
Common rights, interests and burdens
Property interests include:
- Regular leaseholds;
- Legal charge over land i.e. mortgage interest;
- Equitable interest in the form of being the beneficiary of a trust, whether such a trust was intentionally created by a settlor, or arises by operation of the law in the form of a resulting or constructive trust; and
These rights are created by registering the relevant instruments at the Land Registry. Such registration operates as deemed notice to any third-party. Unregistrable interests (i.e. interests that are simply not capable of being registered), such as trusts that arise by operation of the law or leases for a term of less than three years, are protected by common law rules.
Typical representations and warranties
There are no legal or legislative requirements for a seller to give a buyer any warranties. However, a buyer will often require a seller to give it warranties in relation to the following matters:
- That the seller has not received any notices adverse to the seller’s interest in the property;
- No third-party has any right or interest whatsoever, whether legal or equitable, in the property;
- That the property is not adversely affected by any encumbrances of which the seller is aware or which the seller could have ascertained on reasonable inquiry; other than those disclosed in the agreement, or which the buyer is aware of or could have ascertained on reasonable inspection of the property;
- That the property is not subject to any litigation;
- Corporate matters;
- Seller’s capacity; and
- Other matters arising out of the due diligence enquiries.
Whether or not the seller gives the warranties will depend on the bargaining power of the parties and the commercial imperatives behind the deal. Warranties can be limited by disclosure of specific matters and imposing time limits.
Remedies against misrepresentations
The seller is liable to the buyer when he makes an untrue statement of fact, and the buyer relies on the untrue statement and enters into the sale and purchase, and suffers a loss as a result of such reliance.
Costs relating to sale and purchase of real estate
Under the Stamp Duties Ordinance (Cap.117) (SDO) the seller and/or the buyer may be liable for the payment of AVD, BSD and SSD for acquisition and disposition of residential property. Payments of AVD, BSD and SSD are not mutually exclusive. If stamp duty is paid on the agreement for sale and purchase, HK$100 stamp duty is payable on the assignment.
If a purchaser acquires a property (including both commercial or residential property) via a share transfer of a company limited, then the current stamp duty payable on each bought and sold note will be 0.1% of the higher of the purchase price or the net asset value of the shares. HK$5 is also payable on the instrument of transfer.
Key Exemptions: Intragroup transfers of Hong Kong shares between associated companies may be exempt from stamp duty.
Broker / estate agent’s fees
The broker / estate agent arranges for listing and viewing of property. He/she also helps the seller and buyer to negotiate key terms of the sale and purchase. The broker / estate agent provides a standard provisional agreement (which may be reviewed and commented by a lawyer) to be signed by the parties to record such key terms. He/she also assists buyers in matters like passing of keys, and arranging for inspection of the property if vacant possession must be delivered on completion. Broker / estate agents’ fees are usually charged at a usual rate of 1% of the purchase price but this is open to negotiation. Typically, the fees are payable by both the seller and the buyer.
Lawyers are appointed to negotiate, prepare and execute the documents necessary for the conveyance of property (e.g. provisional and/or formal sale and purchase agreement, assignment, and for share transfer, contract notes, instrument of transfer and the necessary board of directors’ resolutions). The buyer’s lawyer will conduct title review and investigation of the property, and the seller’s lawyer will answer title requisitions raised by the buyer’s lawyer (if any), and arrange to remedy any title defect(s). For share transfer, the legal and financial due diligence will be carried out by the lawyers. The seller’s lawyers are also typically involved in discharging the existing mortgage (if any) for the seller, while the buyer’s lawyers would help the buyer in the legal documentation for the financing of the purchase.
The buyer’s lawyers will typically arrange stamping and registration of the relevant instruments. There is no fixed scale of legal fees, and the parties will negotiate the applicable fees with their respective lawyers.
Stamp duty is applicable.
Updated on 1 February 2019.