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According to the Hong Kong Census and Statistics Department , in 2019, 35% of marriages in Hong Kong were remarriages. The pandemic also brought a spike in divorce rates as couples’ marriage soured. Divorce proceedings often involve the division of former matrimonial properties between divorcing couples, whether such properties are solely owned by one, co-owned by both parties, or through corporate vehicles. The couple may choose or the Court may decide to sell the properties and distribute the sales proceeds between themselves, but it gets more complicated when properties (or a share of the properties respectively owned by each) are to be transferred amongst themselves. It would be beneficial for the parties to consider the issues they will need to consider to make the most appropriate arrangement in the divorce settlement or to present their case in Court.
This article highlights the important issues and/or common areas of misconception relating to property transfer in a divorce proceeding that divorcing couples should pay special attention to.
1. Stamp duty liability
There is a misunderstanding that no stamp duty is chargeable on a property transfer pursuant to a divorce order granted by the Family Court of Hong Kong. In fact, even if the property transfer is ordered by the Court, the parties are liable to payment of ad valorem stamp duty for both transfer of residential properties and non-residential properties at Scale 2 rates under Head 1(1A) of the First Schedule of the Stamp Duty Ordinance (namely, the lower ad valorem stamp duty rates). How much is payable will depend on the consideration of the transfer or the properties’ market value, and whether or not any consideration is stated in the instrument effecting the transfer. It is a common practice that parties should agree on who will bear the stamp duty liability in preparing the settlement.
It is also worth noting that application for Scale 2 stamp duty rates for the property transfer between the divorcing couples would only be considered if the transfer is pursuant to a court order. For this purpose, “court” only refers to any court of Hong Kong of competent jurisdiction. A divorced party who is the owner of a residential property in Hong Kong and agrees to receive an additional residential property in Hong Kong under the terms of a divorce court order issued by the court outside Hong Kong cannot obtain the benefit of a lower stamp duty. Thus, divorcing couples will need to consider which jurisdiction to enforce divorce proceedings that will result in the most benefit in terms of stamp duty liability when the settlement involves properties in Hong Kong.
The assessment of stamp duty can be a complicated issue. The stated consideration or market value is only one of the several factors to be taken into account. Following the cases of Ngai Sau Ying v Collector of Stamp Revenue (CACV 460/2018) and Hung Ip Shing v Collector of Stamp Revenue (CACV 461/2018), the division of properties between divorcing parties can be regarded as an exchange of properties in substance, and thus for stamp duty purpose, the difference in property value, namely the “equality money” will be the basis for the computation. Under the fairness principle in a divorce proceeding, both monetary and non-monetary consideration given by one party to another pursuant to the divorce order, whether in the form of real property (no matter in Hong Kong or overseas), lump sum payments, other financial assets, abandonment of rights to ancillary relief, etc., will all have an impact on how much stamp duty shall be paid and by whom.
One should note that the transfer of multiple properties together between the same parties, especially when performed concurrently, may be caught under the “series of transactions” regime under the Stamp Duty Ordinance (Cap. 117), i.e., the Stamp Office may question whether the transfer forms “part of a larger transaction or a series of transaction”. In this situation, the aggregate of all the properties’ values will be considered in determining the stamp duty rate in the assessment.
The lengthy process of adjudication of stamp duty is also a factor for consideration. As the Stamp Office may need to collaborate with other Government bodies such as the Rating and Valuation Department, coupled with the requisition process between the Stamp Office and the lodging party of the instrument, the assessment of stamp duty can take up to a year or even more in certain cases. It is therefore prudent for the divorcing parties to take the timing of the whole stamping process into account.
2. Potential risk of voidable transaction at an undervalue
Very often the transfers of properties between divorced couples are at “nil” consideration. Parties should be mindful of the potential risks associated with such arrangement because pursuant to sections 49, 51 and 51A of the Bankruptcy Ordinance (Cap. 6), section 265E and 266B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and section 60 of the Conveyancing and Property Ordinance (Cap. 219), a transaction shall be voidable if it is undervalued or is considered as a disposition made with intent to defraud creditors. The “relevant time” for a transaction at an undervalue is any time within the period of 5 years, ending with the commencement of the bankruptcy/winding-up. Therefore, most banks in Hong Kong incline to refuse a mortgage application by a property owner if he/she was assigned the property under any transaction at nil consideration within the last 5 years. Equal hardship will be faced by the property owner if he/she intends to sell the property within 5 years subsequent to a nil-consideration transaction due to the difficulty in proving good title. Thus, whether the divorced parties intend to mortgage or sell the properties within 5 years after the transfer, this needs to be taken into consideration when making divorce settlement arrangement.
3. Effecting transfer of properties with existing mortgage
It is another misconception that the existing mortgage of a property and all the rights and obligations thereunder will automatically be assumed by the new owner after the divorced couple has completed their property transfer. A change in ownership of the property is prohibited under the standard terms of a mortgage. The existing mortgage of the property should therefore be discharged or released before or upon completion of the transfer, even though the property assignee is already one of the co-owners and mortgagors. Some important considerations and topics that divorcing couples should bear in mind are:-
- Who shall be responsible for the repayment of the outstanding loan to the bank
- Who shall bear the costs of the discharge and redemption of the existing mortgage
- Whether any new mortgage loan is required right after the completion of the transfer in order to finance the repayment of the existing loan
- Whether any consent is required from the bank or other third party in taking out a new mortgage (for example, consent from the Hong Kong Housing Authority when the property is subject to alienation restriction prohibiting such transfer and mortgage without the HKHA’s consent)
- Whether there is any premium payable when the property is transferred
- Whether the divorcing party to whom the property is transferred is financially capable of applying for a new mortgage loan (i.e., fulfilment of banks’ stress test)
- The possibility of having additional borrowers and/or guarantors for securing the new mortgage loan
- The sequence of the transfers for different properties, if the fund for redemption comes from sale proceeds of other property(ies)*
Banks tend to be more conservative when considering a mortgage application when the property transfer to the new mortgage loan applicant is at nil consideration. It is most crucial for the divorcing parties to enquire with the intended mortgagee bank about the requirement and possibility to grant the new mortgage loan in the circumstances prior to making any settlement arrangement.
4. Dealing with rights relating to the property
The transfer of real property does not only deal with ownership of property but may come with a “basket” of other rights. For example, if the property is transferred subject to an existing tenancy, the divorcing couple will need to agree on the responsibility in managing the tenancy issues such as entering into, amending, terminating, renewing of the tenancy agreement, maintaining the property, liability of landlord’s obligations, collecting of rentals, distributing of rental proceeds and returning of rental deposit etc.
Occasionally, the divorced couple may settle on the property transfer decision on the condition that sufficient protection is given to secure the right of occupation in the matrimonial property of one party or their children or other family members for a period of time after the divorce order is granted. Alternatively, the parties may agree to sever the joint tenancy of a property into tenancy in common for ease of property management and distribution, whilst they equally wish to secure such occupation right of their children or family members. When negotiating for the occupation arrangement, the divorcing couple shall ensure that a high level of consensus is attained especially regarding the period of occupation, the termination of such occupation right, the timing and arrangement relating to the sale of the property, so as to avoid any doubts on title and encumbrances of the property upon a future disposal of the property.
For further protection of any third party right (such as the occupants’ right) in the property, parties may consider obtaining and registration of a truncated Court Order setting out the arrangements of such rights at the Land Registry.
The above only sets forth a few of the considerations that divorcing couples should take into account when considering settlement or how to present their case in Court. From our experience, there are often other complicated issues that may evolve during the divorce process which may involve the divorced couples’ companies shareholdings and trust and equitable interests.
Should you have any enquiry, our teams of matrimonial and conveyancing lawyers are ready to share more details on this topic. Seeking proper legal advice is recommended before planning the petition for divorce.