In recent years, various measures have been introduced in the development plan of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) to facilitate Hong Kong citizens to purchase properties in the Mainland cities of the GBA.
For example, loan procedures have been simplified, and Hong Kong residents will be treated as local residents when purchasing properties. This means that, in most cases, they will no longer be required to provide evidence of their duration of residence, study or employment, or meet conditions on the payment of individual income tax and social security.
While the new policies have encouraged more Hong Kong residents to purchase properties in the GBA, more property scam cases have also been reported. These include high “guaranteed rental returns” later found to be unachievable, incorrect descriptions of the properties, or even the non-existence of the so-called property project.
This article discusses some legal issues, to ensure Hong Kong investors are aware of the procedures and potential risks of buying property in the GBA.
Property certificates and permits
Purchase of first-hand properties
When investors plan to purchase first-hand properties in the Mainland cities of the GBA, they are advised to invest in property projects from reputable developers and agents. Proper enquiries should be made to ensure that the developers have obtained:
(i) State owned land use certificate;
(ii) Construction land planning permit;
(iii) Construction project planning permit;
(iv) Construction permit; and
(v) Permit of Advance Sales of commercial houses in respect of the properties in accordance with the Urban Real Estate Administration Law of the People’s Republic of China.
Article 55 of the Urban Real Estate Administration Law and Articles 5-8 of Procedures for the Administration of Advance Sale of Commodity Houses in Urban Areas require a developer to provide copies of the first four permits mentioned above, prove that it has invested funds exceeding 25% of the total construction project budget, and determine the construction schedule and date of completion when applying for the Permit of Advance Sales. Any pre-sale agreements entered into with developers with no Permit of Advance Sales may be held as void.
Therefore, it is essential for investors in first-hand property to inspect the Permit of Advance Sales to ensure that the developers are legally authorised to conduct the pre-sale of properties, confirm that the property is a first-hand property and matches with the descriptions stated in the marketing materials.
Purchase of second-hand properties
Potential purchasers of second-hand properties are advised to inspect the property ownership certificate as well as conduct a land search at the property registration centre to ascertain if the seller is the legal owner of the property, and if any mortgage is registered against the property. Purchasers should also conduct a physical inspection to confirm that no one currently occupies the property and no tenancy agreement has been entered into.
As inspection of the properties and relevant certificates and permits may involve checking legal and government documents, purchasers are advised to seek professional legal advice and conduct due diligence in advance.
Precautions when signing documents
Terms and conditions
In general, purchasers will need to sign a sale and purchase agreement (SPA), and sometimes a preliminary agreement. The terms and conditions in these agreements may be beneficial to the developer and the management company.
Some purchasers are not aware of the fact that sales terms are sometimes negotiable in first-hand property sales on the Mainland. Although it is difficult for purchasers to negotiate or modify the terms and conditions as set out in the template agreements, the purchasers may still negotiate for a lower initial deposit, extended deadline for completion, flexible payment methods, or discounts.
When signing agreements, purchasers should check the terms concerning the relevant parties, to make sure it is clear who is the party they pay for the property, who is the developer, who is the guarantor for the developer, and who will be responsible if any problems occur in the future. Moreover, purchasers should be on the alert for any “earnest money” or other payments of a similar nature.
Such a payment is not mandatory under the law. However, some unscrupulous developers or management companies may draft a clause to the effect that funds will not be returned if the transaction fails to complete, even if there is no breach on the purchasers’ side. Therefore, it would be prudent to carefully review the terms and conditions before signing the SPA or preliminary agreement. It is advised to seek legal advice for such a review, especially when the documents are for major investment.
Misleading marketing material
Some developers may promise that their properties have a good rental return and may exaggerate occupancy rates. When signing the SPA, it is normally the management company rather than the developer that is liable for realising the “promise” of the rental return rate. In such cases, the management company does not own the assets, but is only used as a vehicle to arrange payments and transactions. This means that the purchasers will not be able to sue the developer for any losses relating to the return rate not fulfilling expectations.
As such, it is advised to check the background of the developer and agency in advance, and check other properties near the property as reference before making a decision.
Moreover, purchasers may find that the property is not consistent with the original description provided. This can include significant inconsistencies such as being totally different from the sample apartment as displayed, to minor issues such as cracks in the wall or indentations in the floor.
To avoid this issue, when signing the SPA, the purchasers should make sure that the descriptions of the property have been incorporated in the SPA, and who will be liable for any breaches. It should be reiterated that if the responsible party is not the developer, but some kind of management company, such companies normally do not have any assets, meaning taking legal action against them is of no use.
As the saying goes, “there’s no such thing as a free lunch”. When purchasing property in the GBA, investors should not put too much trust in online sales advertisements and should be wary of unscrupulous agencies. It is recommended to purchase from reputable developers that have all certificates and permits, as they provide more security in terms of legitimacy, price, property quality and property management.
At the same time, it must be reiterated to focus on the property itself and conduct a thorough due diligence check before entering into any agreements. In some circumstances, especially when the SPA is for a major investment, purchasers are advised to consult lawyers to better protect their interest and benefits.
Dr Dennis Tang, Director of China Business, ONC Lawyers