SALE AND PURCHASE

Sale and purchase contract


General components of a sale and purchase contract (SPA)

Certain specific information is required to be included in the agreement under the Stamp Duty Ordinance.

There are no formal requirements regarding the content and structure of a sale and purchase contract except that certain information is required to be included in the agreement under the Stamp Duty Ordinance (Cap.117) such as the name, address, identification of the parties, the property location, whether the property is residential or non-residential property, etc.

Typically, there are two types of SPAs in a transaction: preliminary agreements and formal agreements.

Preliminary 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:

  • Parties;
  • Property;
  • Price; and
  • Completion date.

It is common to include terms in relation to:

  • Timing for payment of the initial deposit and the further deposit and the amount of each deposit payable (e.g., typically 5% for initial deposit and 5% for further deposit, subject to the parties' negotiation);
  • Timing for payment of the balance of the purchase price;
  • The time of signing the formal agreement;
  • Payment of the costs, stamp duty and agent's commission; and
  • Express provision for remedies in the event of default.

Formal agreements

The formal SPA is usually entered into within 14 days of the preliminary agreement's signing. This provides stamp duty timing benefits as the preliminary agreement will cease to be chargeable with any stamp duty provided that the formal agreement is executed within 14 days. 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 the beneficial owner, trustee or mortgagee? If the seller is a foreign corporation, the agreement may incorporate a term requiring the seller to provide the relevant incorporation and constitutional documents together with a legal opinion issued by a practicing law firm of the place of incorporation of the foreign corporation for proving its capacity and execution of the agreement and assignment.
  • 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 and thereafter such payment shall be made by the purchaser.
  • 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 original and/or certified copy of 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.
  • Default. (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 and demand for a return of all deposits paid. 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 for transferring the legal title of the property 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 change in legal ownership of the property thus no separate assignment of the property is required. Furthermore, additional clauses dealing with the corporate aspects of the transaction are required.

the preliminary agreement will cease to be chargeable with any stamp duty provided that the formal agreement is executed within 14 days

Transfer of occupational leases and income

If the property transaction is affected 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 and the purchaser is normally required to sign an indemnity to the vendor to indemnify the vendor for any claims made by the tenant in respect of the purchaser's failure to return the rental deposit to the tenant. 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 purchase of the property is completed.

Common rights, interests and burdens

Property interests include:

  • Regular leaseholds;
  • Licenses;
  • 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
  • Easements.

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 law or leases for a term not exceeding 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.

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;
  • That 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;
  • For purchase subject to tenancies, that there are no changes in the terms and conditions of the tenancy; that the rental deposit (less any lawful deduction according to the terms of the tenancy agreement) shall be transferred to the purchaser upon completion, etc.;
  • That the property is not subject to any litigation;
  • Corporate matters (for share sale) relating to the incorporation status, proper filing of documents, payment of applicable taxes, etc.;
  • 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 agreement, and suffering a loss as a result of such reliance.

If you have any questions or comments about this report, please get in touch.

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LEGAL AND REGULATORY