1. Executive Summary
2. Regulatory Objectives
3. Application of the Ordinance
4. Price List
5. Saleable Area
6. Sales Brochure
7. Show Flats for Uncompleted Development
8. Viewing of Property in Completed Development
9. Sales Arrangements
10. Conveyancing Procedures and Related Matters
11. Disclosure of Information on Transactions
12. Advertising
13. Misrepresentation and Dissemination of False or Misleading Information
14. Liability of Company Officers for Offence Committed by Company
15. The Authority
16. Other issues
17. Conclusion
1. Executive Summary
1.1 The Council welcomes the Government's initiative to launch the White Bill consultation and urges that the Bill, with necessary amendments, be passed as soon as possible. It also appreciates the willingness of the Government to legislate on consumer and trade practice issues in first-hand residential property sales, in recognition of the Council's past efforts at promoting the need to protect consumers in this most important area.
1.2 The Council has been pressing for specific legislation to protect consumers in their dealings with the residential property sector for many years. It therefore welcomes this legislation which provides a long overdue regulatory mechanism to protect potential purchasers of all first-hand residential properties, whether uncompleted or completed.
1.3 While the Council wholeheartedly supports this Bill, it has made some suggestions for amendment, set out below, and other matters suitable for future consideration. While there are some matters that require clarification, their existence should not be seen as a reason to unduly delay this important piece of legislation.
Provisions that will enhance consumer protection
1.4 The Government has devised legislation to systematically address specific areas that the Council has highlighted over the years, as serious problem areas. The Council believes that the measures will go a long way towards ensuring that potential purchasers are able to make better informed choices in their purchases and that as a consequence sales disputes can be reduced. In particular, the Council notes the following worthy initiatives:
1.5 Price lists - The Council appreciates the requirements that developers have to make price lists public at least 3 days before the commencement of sale, as well as to make hard copies of the relevant price lists available for collection by the general public at the place where the sale takes place. This should assist in ensuring potential purchasers have price information available to make informed decisions.
1.6 Saleable area - The Council supports the proposal to prescribe the presentation of saleable area in a standardized way as this serves an important and useful reference for potential buyers. The Council believes the proposed method in presenting area information is a more preferable option to subjecting consumers to a wide array of non-standardized information.
1.7 Sales brochures - The Council welcomes the provision that only the vendor may prepare any publication for a development that is entitled "Sales Brochure". The Council also fully supports introducing provisions that a developer must, at least 7 days before a date of the sale and on a date of the sale, make hard copies of the sales brochure for the development available for collection by the general public, at the place where the sale takes place.
1.8 Deeds of Mutual Covenant - The Council supports the proposed requirement that the full DMC should be uploaded onto the developers' website to provide potential purchasers with an overview of building management related issues in the development concerned.
1.9 Show flats - The Council welcomes the requirements concerning the display of unmodified and modified show flats for uncompleted developments. This should enable potential purchasers to get accurate depiction of the actual units. The Council also welcomes the provision that a developer must not restrict any person who views the show flat from taking measurements, taking photographs or making video recordings, of the unmodified show flat. The Council supports the provisions requiring developers to make a particular completed residential property available for viewing by the potential purchaser before the developer can sell that residential property to the purchaser.
1.10 Notification on sales arrangements - The Council supports the provision that developers be required to make public, at least 3 days before a date of the sale, information on sales arrangements; and that this be available for inspection on a website designated by the developer for the development. The proposed legislation should work to ensure the sales process takes place in a systematic and open manner.
1.11 Mandatory provisions in agreements - The Bill stipulates certain major provisions as mandatory provisions in both preliminary agreements for sale and purchase (PASP) and agreements for sale and purchase (ASP). The Council welcomes the certainty these provisions bring to sale agreements.
1.12 Disclosure of information on transactions - The Council supports the provisions requiring developers to compile a single register of transactions into which information on PASP and ASP have to be entered within 24 hours and 1 working day respectively, and disclosure of information on related parties involved in transactions.
1.13 Mandatory advertising requirements - In light of the creative and dubious approaches to the marketing of residential developments used in the past, the Council fully supports the proposals to tighten control over the information presented in advertisements for the sale of residential properties. The proposed requirements on the provision of certain mandatory information and specific font size requirements in printed advertisements are especially welcome.
1.14 Liability of company officers for offence committed by company - The Council fully supports the proposal in the Bill that those persons who have participated in, consented to, or connived in the criminal misconduct of the company which they manage, or those whose recklessness has allowed the company's criminal conduct to occur, should be criminally liable under the management liability concept. Given that the activities of a frontline staff are ultimately the responsibility of managers and company executives, the provision should ensure that the principle of 'management responsibility' is maintained.
1.15 An independent authority - The Council fully supports the establishment of an Authority with appropriate powers to administer the provisions of the legislation, such as dealing with malpractices in the sale of first-hand residential properties. The Council pledges to support the Authority and work closely with it to ensure an effective framework that will protect consumers and maintain an efficient and competitive marketplace.
1.16 Online property information platform - The Council welcomes the Government's acceptance of its earlier recommendation of establishing an electronic database (online centralized information platform), to provide comprehensive residential property information for public access. This platform should provide another element in the range of information consumers require to make efficient purchasing decisions.
Council suggestions for improving the Bill
1.17 Regulatory objectives - The Council believes that the legislation should specifically indicate a clear objective that highlights the imbalance of power between developers and consumers, and the need for consumer protection, rather than merely providing for various mechanisms to be employed in the marketing of property.
1.18 Application of the Ordinance - The Council has concerns with the proposed definition of first-hand residential properties and the proposed exemptions to be granted under the Bill, for example, the 'no previous agreement' provision, 'one person under one agreement' provision and 'properties sold on an en bloc basis' provision. These types of provisions could become loopholes for developers to circumvent the regulation. The Council provides some suggestions for improvement.
1.19 To ensure the protection of all potential property purchasers and procure a level playing field between public and private vendors, the Council sees no obvious reason why HA developments should be subject to different legal requirements, particularly with regard to the provision of inaccurate or misleading information to potential purchasers.
1.20 "Not for sale" units on price list - Developers are not obliged under the Bill to offer all the units on price lists for sale. The Council is concerned that if no such requirement is imposed, a developer could sell just a small number of units out of the units on the price list to test the market and then issue another (revised) price list for the remaining ones with higher prices, thereby legitimizing the practice of "releasing units in small batches", and encouraging market speculation. The Council considers that information on any "not for sale" units on a price list would be meaningless to potential purchasers and therefore should not be included.
1.21 Changes to sales brochures - The Bill provides that if there is any change to the specified information set out in the sales brochure for the development, the vendor must, as soon as practicable after the change, revise the sales brochure to reflect the change. However, it is not clear as to whether a "revised" sales brochure would need to follow the proposed 7-day disclosure requirement.
1.22 Floor-to-ceiling height - The Bill requires the provision in the sales brochure of additional information on the thickness of the floor slab (excluding plaster) of each residential property. The Council considers that the unambiguous way to make known the relevant information is for consumers to be informed of the direct measurement taken from the floor to the ceiling of a unit ('floor-to-ceiling height').
1.23 Bilingual information - There appears to be an assumption that the two versions of an agreement in both English and Chinese will be the equivalent of each other. For the sake of clarity, the Council suggests that provision be made in the Bill to clearly specify that the version selected by the purchaser of the property should prevail for the purpose of determining the meaning and effect of certain information in a sales brochure.
1.24 Deeds of Mutual Covenant (DMC) - The consultation paper remarks that 'salient points' of the DMC should be provided, however the Bill only provides that a 'summary' of the DMC be set out. To be consistent with the intent of the legislation, the Council suggests that the Authority should stipulate a template of salient points to ensure protection of purchasers' interests and proper compliance.
1.25 Ceiling height of show flat - The Bill provides that the "floor-to-ceiling" height of a show flat should not exceed that specified in relation to the residential property in the sales brochure and the approved building plans. The Council is concerned that the information printed in the sales brochure may in fact be the "floor-to-floor" height of a unit. The Council considers it important to apply the same measurement method across the board, i.e. whether in a sales brochure or in a show flat.
1.26 Certification of size - In the Steering Committee's Report, there is a recommendation that a developer should provide a certificate certifying that the enclosing walls containing the saleable area of the show flat are in accordance with the approved building plans for deposit with the enforcement agency. This recommendation is not a new initiative but an extension of the existing requirement in the relevant REDA guidelines. However, this has not been included in the Bill, and the Council urges that current safeguards be maintained, and precedent be followed, by incorporating the existing certification requirement in the Bill.
1.27 Measurements and photographs to be taken - The requirement allowing photo taking or video making only applies to unmodified show flats but not modified show flats. The Council considers that if the developer has chosen to set up a modified show flat of a residential property, then the same provisions regarding photos and videos taking should equally apply.
1.28 Sales arrangements - The Steering Committee's Report proposed that developers should inform the Police, the Estate Agents Authority and the enforcement agency, not less than 7 working days prior to the commencement of sale, of the details of a sales arrangement, the intention being to ensure an orderly sales process. However, the Bill has not introduced this requirement and has left it to guidelines. The Council feels that this matter should be a requirement for developers to inform the Police and the entities specified in Schedule 2 of the Bill before the commencement of a sale.
1.29 Collection of money for reservation of units - The Council is concerned that collecting money for reservation purposes before flats are put on sale encourages speculative activities and entices potential purchasers into making rash purchasing decisions. In light of the lack of mechanism available to verify the accuracy of information on reservation rates, it can be expected that problems of releasing confusing and possibly misleading signals to the market will remain. The Council considers that no deposits or any consideration in connection with the reservation of units should be accepted before the sale of the respective units has formally commenced.
1.30 Forfeiture of deposit - The Bill proposes that a preliminary deposit of 5% of the purchase price be forfeited if a purchaser decides not to proceed with the buying of a property within 3 working days. The Council maintains its view that a period of 3 working days after signing of the preliminary agreement for sale and purchase is not an adequate "cooling off period". Considering the high price of properties, the forfeiture amount of 5% of the purchase price is too high for most consumers and should be lowered.
1.31 Disclosure of information on transactions - While the Council welcomes the reduction of the lead time for disclosure of transaction information to 24 hours or one working day, it queries why there should be a time lag of that duration. Given that the provision of that information simply requires a notation on the electronic register, and can be immediately effected once the transaction has taken place, it would seem that 24 hours or one working day is an unnecessary period of delay.
1.32 Definition of related party - The definition of 'related party' covers a director of the vendor, immediate family members of a director of the vendor or a manager of the vendor. The Council considers that the definition of 'related party' should be made sufficiently wide to cover sales to a vendor's associated corporations.
1.33 Advertising surrounding areas - The Council proposes that additional requirements should be set out in the Bill to provide that any forms of promotional materials provided by developers should be true as to the facts and not give a misleading impression. Therefore, the developer must have reasonable grounds to believe at the time of making the relevant presentation that, for example, a future event will occur as might be suggested in the materials. A statement to that effect should be included as to those grounds.
1.34 The Authority - While the Authority has a general function as described in the Bill to administer and supervise compliance of the new legislation, the Council considers that additional provisions should be introduced in the Bill to clearly specify its functions, namely - to handle complaints, to undertake direct investigations, and to carry out public education in respect of buying residential properties.
1.35 Power to issue rules - The Council is concerned about the effectiveness of adopting a flexible approach through guidelines, as non-compliance with administrative guidelines is a feature of the current framework. The Council proposes that in addition to guidelines, the Authority should be empowered to make rules as are necessary for the furtherance of any of its regulatory objectives and the performance of any of its functions.
1.36 Floor plans - The Bill allows a developer to provide to the general public a floor plan of any specified residential property, other than a floor plan made available in the sales brochure. The Council is concerned that allowing the provision of additional floor plans can lead to possible confusion or deception for potential purchasers. If other floor plans are to be allowed, the Council expects that the same specific requirements as found in the requirements for sales brochures should apply.
1.37 Effect of contravention of the legislation on contract - The Council considers that the Bill should have clarity on enabling a purchaser to seek an order voiding an agreement to purchase as a result of an offence under the deception provisions of the legislation. This provision would act as a strong disincentive for vendors who may consider engaging in clearly illegal activity.
Areas requiring clarification/elaboration
1.38 Changes to sales brochure - The Bill provides that the developer must, within 3 working days after the date of the revision, notify in writing a number of entities of which the Council is one. Clarification is sought as to the role of the Council in this regard.
1.39 Scope of the online property information platform - The Bill empowers the Authority to delegate its power in respect of establishing and maintaining the electronic database to a public officer or any person whom the Authority thinks fit. The Council considers that the criteria to be used in determining "whom the Authority thinks fit" and the details of the data scope of the electronic database, should be set out in guidelines and made public for the purpose of ensuring transparency and accountability.
Matters for post-legislative review
1.40 The Council proposes that the Government should set a schedule for future review of the provisions in the legislation, for example, within five years of the passage of the legislation. The Council stresses that these are for future consideration and would not wish to cause of any delay in the passage of this important legislation.
1.41 Internal floor area - In order not to delay passage of the Bill, the Council accepts that the issue of providing internal floor area information could be addressed at a later stage. If there is any abuse of the measurement method, for example by including unnecessarily thick walls into the saleable areas to boost the assumed sizes of flats, the Government should take proactive action to deter abuse and to consider re-examining the means of measuring saleable area. The Council suggests that the Government should stipulate this be reviewed in 3 to 5 years or such earlier date as the circumstances may require.
1.42 "Cooling off period" - The Council considers that the issue of introducing a "cooling off right" in property transactions, i.e. by lowering the monetary threshold for the forfeiture, should be reviewed by the Authority.
1.43 Mandatory provisions in agreements - There are other important subject matters to be brought up for future discussion in regard to provisions in ASPs, such as providing for the extension of time for completion; a defect liability period; procedures in the event of winding up of the developer; and a means of redress.
1.44 Powers of the Authority - The Council is of the view that the powers of the Authority should be broadened along the line of other enforcement agencies. In particular, the Authority, should have powers of entry and search, if it has "reasonable cause" as defined in the legislation. The Council suggests that the Authority should have the powers to issue reprimands and to publish any of its finding of any malpractice or improper conduct by developers in its website.
Non-legislative matters for further consideration
1.45 Authority structure - To ensure that the Authority commands credibility and independence, the Council is of the view that this enforcement agency should be transformed to an independent statutory body outside the civil service at the earliest possible time.
1.46 Viewing of property in completed development - The Council considers that measures such as spot check and public education activities should be carried out by the Authority to ensure regulatory compliance, and that home purchasers do not sign off their right due to the lack of knowledge that the developers should provide on-site units for their viewing before selling the units to them.
1.47 Saleable area description - Consumer education should be carried out by the Authority, particularly at the stage of transition to the new legislation, to help members of the public become accustomed to the use of 'saleable area' and to educate potential purchasers on how to compare flat prices of different residential developments using the same basis.
Future Issues
1.48 The draft legislation presented by the Government is a welcome first step. Future issues that will need to be addressed, after the current safeguards are firmly settled, are as follows:
1.49 Statutory protection for all home purchasers could be provided at all stages of the sales process, just as there is the need to protect purchasers from unfair trade practices in the sale of goods and services generally.
1.50 A fully independent redress scheme and a user-friendly complaints handling procedure could be introduced for purchasers of all types of residential property, enabling them to obtain redress in cases of detriment and for the efficient handling of consumer complaints.
1.51 Competition in the development of property could be enhanced. There does not seem to be any strong competition at the developmental stage, in terms of product quality or innovative design features, to the point where developers are apparently in a position to "sell anything built". The Council considers that the Government should examine the means by which the underlying structural characteristics of the residential property sector can be improved to bring about a more competitive marketplace.
The specific comments that the Council wants to put forward in relation to the proposed provisions in the Bill are as follows.
2. Regulatory Objectives
2.1 The consultation paper puts considerable emphasis on enhancing information transparency, and achieving a balance between consumer protection and allowing developers flexibility to make commercial decisions based on the market situation.
2.2 The Council accepts that consumers have a responsibility to look after their own interests. However, for most consumers, it is highly unlikely that they have the ability or the resources to fully protect themselves from the various pitfalls arising in the course of purchase of a property.
2.3 The Council believes that the legislation should specifically indicate a clear objective that highlights the imbalance of power between developers and consumers, and the need for consumer protection, rather than merely provides for various mechanisms to be employed in the marketing of property, such as provision of sales brochures, price lists and show flats.
2.4 The Council therefore proposes that the following regulatory objectives should be stated in the Bill -
a) promoting fairness, efficiency, competitiveness, transparency and orderliness in the residential property market;
b) fostering market confidence;
c) providing protection to home purchasers;
d) safeguarding against market malpractices in the residential property sector; and
e) facilitating the development of a competitive market.
3. Application of the Ordinance
Definition of first-hand sale
3.1 Whilst agreeing that the Bill should cover the sale of all first-hand completed and uncompleted residential properties, the Council has concerns with the proposed definition of first-hand residential properties and the proposed exemptions to be granted under the Bill.
3.2 The Council considers that sections 4(1) and 4(7) of the Bill are likely to become loopholes for developers to circumvent the regulation.
No previous agreement provision
3.3 Section 4(1) provides that the Bill applies to any residential property in a development situated in Hong Kong in respect of which property no agreement for sale and purchase has ever been entered into. The criterion of whether an "agreement for sale and purchase has ever been entered into" is adopted in the Bill to define first-hand sale.
3.4 In the Council's view, the 'no previous agreement' approach adopted is not the best approach as it would be too narrow to cover all foreseeable scenarios. It would seem easy to avoid the application of the Bill by creating a scenario where there has been agreement(s) for sale and purchase in respect of a residential property.
One person under one agreement
3.5 Referring to the phrase "one person under one agreement for sale and purchase" in section 4(7) of the Bill, the Council considers that if the Government assumes that phrase will catch properties processed through "a number of persons or agreements", the assumption is not correct. The use of "one" here might disapply the related regulations in the Bill.
3.6 For example, developer A might sell a property to its subsidiaries B and C. In this case, the property could not be regarded as sold to "one person" or "under one agreement for sale and purchase". Another scenario is developer A selling some of the units (i.e., not "en bloc" sale) of a development to its subsidiary B and B then selling to another subsidiary C. In such a case, C could sell the units to the public without complying with the legislation.
Held under lease
3.7 With regard to section 4(3), the Council has previously pointed out that the term "held under lease" is too loose as all land is held under government land lease. There is a need to re-draft the provision to make it clear that lease in the nature of tenancy is referred to.
Sales to the general public
3.8 In order to further remove uncertainty or room for manipulation, the Council suggests that the Bill should specify that it applies to first-hand sale of residential properties to "the general public", so as to deter developers from making use of loopholes to sell properties in blocks to selected individuals or subsidiary companies in order to circumvent legislative control.
3.9 Whilst it might be regarded by some that the term 'general public' might be difficult to define, the Council notes that it is in fact used in sections 15 and 20 of the Bill. Moreover, guiding principles could be provided to draw up a clear definition and delineation for easier interpretation in regard to both provisions.
Exemption for Housing Authority's (HA) developments
3.10 It has been proposed in section 4(5) of the Bill that developments constructed by HA should be exempted from the application of the Bill. The reason given is that Home Ownership Scheme (HOS) flats are subsidized flats and that HA has to follow set parameters in disposal of these flats.
3.11 To ensure the protection of all potential purchasers and procure a level playing field between public and private vendors, the Council sees no obvious reason why HA developments should be subject to different legal requirements, particularly with regard to the provision of inaccurate or misleading information to potential purchasers.
3.12 The Council considers that first-hand residential properties sold by HA should not be given a 'broad brush' exemption status, unless there are certain characteristics with regard to the HA properties that render the legislation inapplicable, or where more stringent requirements than are required under the proposed legislation have already been complied with.
3.13 The Council is of the view that HA should not be automatically granted any exemption except where and when the Government considers that it is in the public interests to do so and on a case-by-case basis. Any government authorities or quasi-government authorities should also follow the same law that promotes good practices and protects citizens and consumers.
Properties sold on an "en bloc" basis
3.14 The proposed legislation exempts vendors from requirements with regard to sales brochures, price lists and show flats, where the properties are sold 'en bloc'. The consultation paper notes at paragraph 45 that this is because the purchaser(s) in this case would not be 'general members of the public'.
3.15 As previously pointed out, the Council is of the view that the provisions as they are currently drafted are not able to address the issue of initially selling properties to a person or a company which are later sold as "second-hand" flats to individual consumers, for the sake of circumventing the application of the legislation.
3.16 Notwithstanding the fact that the developer will be required under the Bill to make the transaction information public, it is not clear as to how the policy intent (as stated in the consultation paper) of requiring the person who subsequently re-sells the properties to individual flat purchasers to observe all the requirements, would apply under the Bill. Some clarity in this regard should be made in the Bill.
4. Price List
Provision of price list
4.1 The Council appreciates the draft provisions in Division 3 of Part 2 of the Bill, setting out comprehensive, detailed and specific requirements that developers have to make price lists public at least 3 days before the commencement of sale, as well as to make hard copies of the relevant price lists available for collection by the general public at the place where the sale takes place. This should assist in ensuring potential purchasers have price information available to make informed decisions.
"Not for sale" units
4.2 Regarding the proposal in section 18 on setting a minimum number of units to be covered in a price list, the Council notes that developers are not obliged under the Bill to offer all the units on the price lists for sale. The Council is concerned that if no such requirement is imposed, a developer could sell just a small number of units out of the units on the price list to test the market and then issue another (revised) price list for the remaining ones with higher prices.
4.3 For instance, if a developer issues a price list that covers 50 units but actually only offers a far smaller number for sale (for example, 10 units), this would give consumers a confused, if not misinformed, impression of the market.
4.4 The Council considers that information on any "not for sale" units on a price list would be meaningless to potential purchasers and therefore should not be included. Although there is a requirement relating to logistical arrangements that developers make public, at least 3 days before sale, key information (including the number of units to be offered for sale) this does not necessarily serve to ensure that developers would not withhold sale of units on a price list.
4.5 According to the relevant guideline issued by the Real Estate Developers Association of Hong Kong (REDA) , the units to be included in the price list will be the number of units "put up for sale". Compared with the proposed requirement under the Bill, the requirement imposed in the REDA guideline provides more certainty to potential purchasers.
4.6 Notwithstanding that there is an additional requirement in the Bill that when a vendor sells units they have to follow the prices shown on the price lists, adjustments to the prices could be made through issuing revised price lists and the units concerned could then be sold 3 days subsequent to the issue of the revised price lists. In other words, by for waiting only 3 days, a vendor could sell the remaining units at the new prices. Such a practice would exactly replicate the existing questionable sales tactic of releasing units in small batches.
4.7 The Council is of the view that requiring developers to publish a price list without requiring them to offer all the units on the price list for sale, thereby allowing them to adjust the prices for the remaining units 3 days later would legitimize the practice of "releasing units in small batches", and therefore encourages market speculation. The Council urges the Government to consider this issue further.
4.8 The Council considers that in deciding on prices for a price list, developers will have taken into account the costs of building the units and the need for a reasonable rate of return, before setting prices for the units accordingly. By the time the units are put up for sale, most of the building costs should have been under control. The Council would not wish to see a situation where developers can selectively limit releases and increase prices where they recognize an "up market" situation. The Council considers that the issue of a price list should represent a commitment to a price, and once a price list is published, developers should honour the commitment and sell all the units at the prices as specified in the price list. Addressing this concern would not affect the ability of vendors to address changes in market condition, as they would be free to lower prices.
4.9 This would be consistent with the legislative intent that the prescribed minimum number or percentages of units should be made available for sale to the public.
5. Saleable Area
Use of standardized area definition
5.1 It is proposed in the Bill to use for presenting area information only "saleable area" the coverage of which is defined. As a result, gross floor area (GFA) information should no longer be quoted in a sales brochure or price list.
5.2 The Council supports the proposal to prescribe the presentation of saleable area in a standardized way as this serves an important and useful reference for potential buyers.
5.3 Over the past 30 years, there has not been any progress made on the standardization of a GFA definition. Given the lack of a commonly adopted definition for GFA, different developers could have different way of including common areas in describing the GFAs of individual flats, leading to a confusing or misleading situation. Unless and until a standardized GFA definition is arrived at, the Council believes use of saleable area in presenting area information is a more preferable option to subjecting consumers to a wide array of non-standardized GFA information.
5.4 In any event, the Council considers that unit price based on GFA would not be a useful tool for potential purchasers to compare unit prices of flats in different developments.
5.5 Since GFA has been used in the residential property market for some time, the Council strongly urges that safeguards be put in place to avoid market confusion arising from the change from using GFA to 'saleable area', for price quotation. Consumer education should be carried out by the proposed Authority, particularly at the stage of transition to the new legislation, to help members of the public to become accustomed to the use of 'saleable area' and to educate potential purchasers on how to compare flat prices of different residential developments using the same basis.
Internal floor area
5.6 Section 3(2) of the Bill proposes that the measurement of saleable area is to be taken from the exterior of the enclosing walls of a residential property.
5.7 The Council is aware from the many dealings it has had with consumers that many potential purchasers would regard the calculation of saleable area to include walls and partitions enclosing and within the properties as inadequate. The Council firmly believes that consumers would prefer to be informed of the internal floor area of properties instead.
5.8 In order not to delay passage of the Bill, the Council accepts that the issue of providing internal floor area information could be addressed at a later stage. The Council recommends that the Government sets a timetable for review of the legislation in due course after its enactment. If there is any abuse of the measurement method, for example by including unnecessarily thick walls into the saleable areas to boost the assumed sizes of flats, the Government should take proactive action to deter abuse and to consider re-examining the means of measuring saleable area. The Council suggests that the Government should stipulate that the situation be reviewed after 3 to 5 years or such earlier date as the circumstances may require. A provision should be introduced in the legislation to stipulate that the area measurement cannot be misleading.
6. Sales Brochure
Changes made to sales brochure
6.1 The Council welcomes the provision in section 8(1) of the Bill that only the vendor may prepare any publication for a development that is entitled "Sales Brochure". It is important to bring in this control so as to ensure that potential purchasers will be able to differentiate between sales brochures prepared by vendors and promotional materials prepared by estate agents on their own or on behalf of developers.
6.2 The Bill at section 8(2)(a) provides that if there is any change to the specified information set out in the sales brochure for the development, the vendor must, as soon as practicable after the change, revise the sales brochure to reflect the change. However, it is not clear as to whether a "revised" sales brochure would need to follow the 7-day disclosure requirement as proposed in section 15. Greater clarity should be made in the Bill in this respect.
6.3 The Council is of the view that making changes promptly is an important aspect of information gathering, but making purchasers aware of those changes, and to know what changes have been made, are equally important. Additional requirements should be introduced to require developers to reflect the changes in a prominent manner so that potential purchasers can be aware of the changes.
6.4 Section 8(2)(b) of the Bill provides that the developer must, within 3 working days after the date of the revision, notify in writing each of the entities specified in Schedule 2 of the revision. The Council has been included as one of the entities specified in Schedule 2 for purposes of sections 8(2)(b), 15(4)(a) and 20(4)(a). Clarification is sought as to the role of the Council in this regard. For example, whether there is a role for the Council to report non-compliance, such as late delivery or inaccurate information to the Authority under these sections.
Provision of sales brochure
6.5 Section 15 of the Bill addresses the circumstances under which a sales brochure is to be provided to potential purchasers to enable them to have the necessary information before making purchase decisions.
6.6 The Council fully supports introducing provisions in the Bill to require that the developer must, at least 7 days before a date of the sale and on a date of the sale, make hard copies of the sales brochure for the development available for collection by the general public, at the place where the sale takes place.
Floor-to-ceiling height
6.7 Section 10(2)(b)(iv) of Part 1 of Schedule 1 requires the provision in the sales brochure of additional information on the thickness of the floor slab (excluding plaster) of each residential property. It is assumed that this information is to enable potential purchasers to assess the ceiling height of a unit. The Council is of the view that this is insufficient because the actual ceiling could, depending on the method of construction, be some distance below the bottom of the floor slab.
6.8 The Council considers that the unambiguous way to make known the relevant information is for consumers to be informed of the direct measurement taken from the floor to the ceiling of a unit ('floor-to-ceiling height'). The Council suggests that provision of such information be required in the legislation.
Bilingual information
6.9 It is noted that section 14 of the Bill requires that where a sales brochure is made available in respect of a residential property, any information contained in the sales brochure should have an English version and a Chinese version. It seems that there is an assumption the two versions will be the equivalent of each other. However, the Council is aware from experience that it is not uncommon for differences to exist between the English and Chinese versions of supposedly the same document.
6.10 There is no specific guideline in the Bill to deal with the situation where two versions, on comparison, show differences in meaning. For the sake of clarity, the Council suggests that provision be made in the Bill to clearly specify that the version selected by the purchaser of the property should prevail for the purpose of determining the meaning and effect of certain information in a sales brochure. This should not pose any problem if the English and Chinese versions are in fact equivalent to each other.
Deeds of Mutual Covenant (DMC)
6.11 The Council supports the proposed requirement in section 36 that the full DMC should be uploaded onto the developers' website to provide potential purchasers with an overview of building management related issues in the development concerned.
6.12 The Council considers that important features of the DMC should be highlighted for ease of reference by potential purchasers, and notes that paragraph 17 of the consultation paper remarks that 'salient points' of the DMC should be provided. However, the Bill only provides, at section 10(2)(n), that a 'summary' of the DMC be set out.
6.13 To be consistent with the intent of the legislation (as noted in the consultation paper) the Council suggests that the Authority should stipulate a template of salient points to ensure protection of purchasers' interests and proper compliance. Reference can be drawn from the Securities and Futures Commission in relation to investment products. There is also a requirement to use plain and simple language and in both Chinese and English.
7. Show Flats for Uncompleted Development
Setting up of show flat
7.1 The Council welcomes the requirements in Division 4 of Part 2 concerning unmodified and modified show flats for uncompleted developments. This should enable potential purchasers to get accurate depiction of the actual units.
7.2 The Council fully supports the specific provisions in the Bill requiring that if developers choose to provide any show flats, an unmodified show flat should be provided for a particular type/size of units before a modified show flat of that same type/size of units can be shown.
Ceiling height of show flat
7.3 Sections 23(1)(c) and 24(1)(c) of the Bill provide that the "floor-to-ceiling" height of a show flat should not exceed that specified in relation to the residential property in the sales brochure and the approved building plans. The Council finds such requirements acceptable but is concerned that the information printed in the sales brochure may in fact be the "floor-to-floor" height of a unit. The Council considers it important to apply the same measurement method across the board, i.e. whether in a sales brochure or in a show flat.
Certification of the size
7.4 The average purchaser relies on the provision of show flats to enable them to visualize the actual flats and it is common for purchasers to make their purchase decisions after visiting the show flats. Show flats are therefore of more immediate concern and relevance to their purchasing decisions.
7.5 Under the Bill, developers will be held accountable for ensuring that the size or dimensions of the show flats they provide should be the same as those depicted in the sales brochure. That is, developers should provide show flats of handover standards.
7.6 In paragraph 9.15 (p) of the Steering Committee's Report , there is the recommendation of requiring developers to provide a certificate to be signed by an Authorized Person (AP) certifying that the enclosing walls containing the saleable area of the show flat are in accordance with the approved building plans for deposit with the enforcement agency. This recommendation is not a new initiative but an extension of the existing requirement in the relevant REDA guidelines. However, this has not been included in the Bill.
7.7 The Council considers it is not appropriate to leave show flats without certification, before they are shown to potential purchasers. The Council therefore urges that current safeguards be maintained, and precedent be followed, by incorporating the existing certification requirement in the Bill.
Measurements and photographs to be taken
7.8 The Council welcomes the provision in section 29 of the Bill to clearly specify that the developer must not restrict any person who views the show flat from taking measurements, taking photographs or making video recordings, of the show flat. However, the requirement allowing photo taking or video making only applies to unmodified show flats but not modified show flats.
7.9 The Council considers that if the developer has chosen to set up a modified show flat of a residential property, then the same provisions regarding photos and videos taking should equally apply. If there is a concern with intellectual property regarding the modified show flat, that the developer should reach agreements with its designated designers beforehand.
7.10 The Council is of the view that every effort should be made to eliminate any 'loopholes' which may enable developers to impose any conditions or restrictions (including but not limited to registration of personal details and photo-taking) on potential purchasers who view a show flat and wish to freely assess whether the flat can meet their needs, and to make comparisons with other flats in a convenient way.
8. Viewing of Property in Completed Development
Viewing of on-site units
8.1 The Council supports the introduction of provisions in section 31(1) of the Bill to require developers to make a particular completed residential property available for viewing by the potential purchaser before the developer can sell that residential property to the purchaser.
8.2 The Bill provides that if it is not reasonably practicable for the specified residential property to be viewed by potential purchasers, the developer can arrange a comparable unit for viewing, or if it is not possible to do so then the developer should obtain a written consent from the purchaser for a viewing to be waived before the developer can sell the unit.
8.3 Whilst allowing a certain degree of flexibility for special circumstances may be necessary, the Council considers that measures such as spot check and public education activities should be carried out by the Authority to ensure regulatory compliance, and that home purchasers do not sign off their right due to the lack of knowledge that the developers should provide on-site units for their viewing before selling the units to them.
9. Sales Arrangements
Notification on sales arrangements
9.1 The Council supports the provision in section 34 of the Bill that developers be required to make public, at least 3 days before a date of the sale, information on sales arrangements; and that this be available for inspection on the website designated by the developer for the development. The proposed legislation should therefore work to ensure the sales process to take place in a systematic and open manner.
9.2 It is proposed in paragraph 11.12(c) of the Steering Committee's Report proposed that developers should inform the Police, the Estate Agents Authority and the enforcement agency, not less than 7 working days prior to the commencement of sale, of the details of a sales arrangement, the intention being to ensure an orderly sales process. However, the Bill has not introduced this requirement.
9.3 The Council feels that this matter should not be left to guidelines. In order to ensure that orderly sales will take place, there should be a requirement for developers to inform the Police and the entities specified in Schedule 2 of the Bill before the commencement of a sale.
Collection of money for reservation of units
9.4 Paragraph 34 of the consultation paper seeks public views on whether collection of money for reservation purposes should be disallowed either
(i) before the issuance of the price list (as proposed in section 21 of the Bill) or
(ii) before the commencement of sale.
9.5 The Council is concerned that collecting money for reservation purposes before flats are put on sale encourages speculative activities and entices potential purchasers into making rash purchasing decisions. The ability to reserve purchases would also make room for the creation of rumours about how many people have shown their "intention" to buy flats in a particular development. For example, by making public announcements on the number of reservation forms received.
9.6 In light of the lack of mechanism available to verify the accuracy of information on reservation rates, it can be expected that problems of releasing confusing and possibly misleading signals to the market will remain. The collection of money as such could become a marketing tool to boost sales and prices.
9.7 Furthermore, accepting a reservation of units with promise of priority status (which has happened before) is of no effect where multiple deposits are accepted, because the multiplicity of deposits lessens any notion of exclusivity. In addition, any exclusive arrangement or priority reservation may put some potential purchasers at a disadvantaged position and make the commencement of official sales redundant, because the sales process has actually started well before the public sales process.
9.8 If some form of reservation is to be allowed, the Council considers that in order to ensure better sales order and fairness to all potential purchasers, option (ii) is preferable to (i) in terms of consumer protection. The Council considers that no deposits or any consideration in connection with the reservation of units should be accepted before the sale of the respective units has formally commenced.
10. Conveyancing Procedures and Related Matters
Forfeiture of deposit
10.1 As proposed in section 39 of the Bill, a preliminary deposit of 5% of the purchase price would be forfeited if a purchaser decides not to proceed with the buying of a property within 3 working days after the date on which the preliminary agreement for sale and purchase has been signed. The proposed arrangement allows purchasers to withdraw from the transaction at a cost.
10.2 The consultation paper states that the reason for setting 5% of the purchase price as the forfeiture amount is to address a unique Hong Kong situation in that the Hong Kong property market is relatively volatile and highly speculative. Thus, a high level of forfeiture is expected to help in preventing abuse by speculators and deter hasty purchase decisions by potential purchasers.
10.3 Notwithstanding the benefit of extending the existing cancellation arrangements under the Consent Scheme to cover all sales of first-hand residential properties, the Council maintains its view that a period of 3 working days after signing of the preliminary agreement for sale and purchase is not an adequate "cooling off period". Moreover, considering the high price of properties, the forfeiture amount of 5% of the purchase price is too high for most consumers and should be lowered. Reference can be made to Singapore and Australia where the forfeiture amount is relatively smaller.
10.4 The Council considers that the issue of introducing a "cooling off right" in property transactions, i.e. by lowering the monetary threshold for the forfeiture so as to reduce financial risk and/or extending the time period to give enough time for home purchasers to consider their course of action, should be reviewed by the Authority at a later stage, after the Bill has been enacted.
Mandatory provisions in preliminary agreements for sale and purchase (PASP) and agreements for sale and purchase (ASP)
10.5 The Bill stipulates certain major provisions as mandatory provisions in both a PASP and ASP. The Council welcomes this. Notwithstanding that these provisions are generally based on existing practices under the Consent Scheme and those mandated by the Law Society of Hong Kong, the Council considers that there are important subject matters to be brought up for discussion. These provisions should provide for:
the extension of time for completion;
a defect liability period (DLP);
procedures in the event of winding up of the developer; and
a means of redress.
10.6 In particular, there is an issue of concern associated with late completion of a development. This can be distressing and may cause severe difficulties for purchasers if they are advised that the date of completion is not guaranteed and that actual completion of the development could be sooner or later than the date intimated by the vendor. Delays of up to several months are not uncommon, which can result in families needing to find temporary accommodation at short notice and at their own expense. There is also the question of whether the standards used in determining "inclement weather", which is a common ground used by vendor, are appropriately set.
10.7 Another concern is the extent of responsibilities for the warranty or guarantee of the building works, i.e. whether the 6-month defect liability would constitute adequate time for fixing persistent problems. New properties take time to bed-in, with problems that are not immediately apparent on the completion date. Sometimes even if they become known early after completion, they take months, or longer, to fully emerge.
10.8 Consideration also needs to be given to the appropriateness of applying the 6-month defect liability period across the board to all types of residential properties. At present, it is common practice for stand-alone houses to be provided with at least a 12-month defect liability period. If the 6 month period is standardized for all properties, purchasers of stand-alone houses will be disadvantaged compared to what they now have.
10.9 Yet another concern is that it is not uncommon for a developer to be subsequently wound up after completion of a building project. Latent defects may surface after the winding up of such developers. In such cases, the individual flat owners may have no recourse to the developer concerned. In order to protect the consumers, it should be part of the mandatory provision to include a guarantee by the parent company in situation where the residential development is undertaken by a special purpose vehicle (or a shelf company) which has practically no assets to meet any future claims.
10.10 The Council understands that the above subject matters are not directly relevant to the Bill under study. However, the Council would urge the Government to carry out specific review at a later stage, with a view to providing better protection for home purchasers. The Council suggests that the Government should stipulate that a specific review be carried out after 24 to 36 months or such earlier date as the circumstances may require.
11. Disclosure of Information on Transactions
Lead-time for disclosure
11.1 Information is at the centre of an efficient market. In particular the timely release of information is critical. It enables home purchasers to make informed decisions and helps maintain a level playing field among market participants.
11.2 The Bill proposes, in Division 8 of Part 2, that developers should compile a single register of transactions into which information on PASP and ASP have to be entered within 24 hours and 1 working day respectively. It is noted that the disclosure time for indication of transaction cancellation has been shortened from 7 days to 4 days.
11.3 While the Council welcomes the reduction of the lead time for disclosure of this piece of information to 24 hours or one working day, the Council queries why there should be a time lag of even that duration. Given that the provision of that information simply requires a notation on the electronic register, and can be immediately effected once the transaction has taken place, it would seem that 24 hours or one working day is an unnecessary period of delay.
Definition of related party
11.4 Section 42(1)(g) of the Bill provides that the register of transactions for the development should disclose whether a transaction would involve a person related to the vendor concerned. The definition of 'related party' covers a director of the vendor, immediate family members of a director of the vendor or a manager of the vendor.
11.5 The Council considers that the definition of 'related party' should be made sufficiently wide to cover sales to a vendor's associated corporations. The term "associate corporation" as defined in Part 1 of Schedule 1 could be considered for inclusion into the definition of a 'related party' under the Bill.
12. Advertising
Mandatory advertising requirements
12.1 In light of the creative and dubious approaches used in the marketing of residential developments, the Council fully supports the proposals to tighten control over the information presented in advertisements for the sale of residential properties. The proposed requirements on the provision of certain mandatory information and specific font size requirements in printed advertisements are especially welcome.
12.2 Requiring that the source of information contained in an advertisement be indicated would enable consumers to identify whether an advertisement is made by or on behalf of a developer, and who is responsible for the accuracy of information provided in the advertisement. Stating the district and the name of the street in which the development is situated, as specified in the outline zoning plan (OZP) or other approved plan, in an advertisement should also resolve complaints with regard to inaccurate description of the location of a development. It is to be expected that if the development is located in Tai Hang according to an approved plan, it should not be allowed to be stated as located in Jardine's Lookout, etc.
Additional advertising issues
12.3 The Council notes that Bill has not introduced any rules on the use of artistic impressions and pictures or graphics in advertisements for residential properties. If improperly used, these can sometimes be the cause of consumer complaint and allegations of deception.
12.4 If an advertisement contains a picture, image, drawing or sketch showing an artist's impression of a development or its surrounding area, the Bill provides that the advertisement must contain a prominent statement to the effect that pictures or graphics presented are only the artist's impression of the development concerned and its surrounding areas, and that the presentation may not tally exactly with the actual surrounding areas.
12.5 The Council stresses however that the statement should not be construed as a disclaimer by developers to exclude liabilities for disseminating misleading information to potential purchasers.
Advertising surrounding areas
12.6 The Council is of the view that if a developer chooses to make representations in any promotional materials regarding the surroundings of a property development, it is doing so to attract consumers by pointing to an attribute of the development. Therefore:
the presentations must be an accurate representation of the actual environment existing at the time of making the representations; and
if the matter presented relates to a future event, the developer must have reasonable grounds to believe at the time of making the relevant presentation that the future event will occur, and a statement should be included as to those grounds.
12.7 Surrounding areas including existing and future facilities or developments are of significant concern and relevance to a purchase decision. They should therefore be set out clearly by developers, regardless of whether they are in the form of sales brochures or promotional materials. These representations are capable of inducing potential purchasers into entering sale and purchase agreements and are therefore important issues to be considered under the legislation.
12.8 The Council therefore proposes that additional requirements, as noted above, should be set out in the Bill to provide that any forms of promotional materials provided by developers should be true as to the facts and not give a misleading impression.
13. Misrepresentation and Dissemination of False or Misleading Information
13.1 The Council fully supports that the proposed maximum penalty of $5 million and the term of 7 years' imprisonment are appropriate to provide a deterrent, for an offence in relation to the provision of misleading and deceptive advertising and representations.
14. Liability of Company Officers for Offence Committed by Company
14.1 The Council fully supports the proposal in section 62 of the Bill that those persons who have participated in, consented to, or connived in the criminal misconduct of the company which they manage, or those whose recklessness has allowed the company's criminal conduct to occur, should be criminally liable under the management liability concept. Given that the activities of a frontline staff are ultimately the responsibility of managers and company executives, the provision should ensure that the principle of 'management responsibility' is maintained.
15. The Authority
Setup of an independent body
15.1 The Council fully supports the establishment of an Authority set out under section 64 of the Bill to administer the provisions of the legislation, such as dealing with malpractices in the sale of first-hand residential properties. The Authority is proposed to be established within the Government structure to facilitate the early implementation of the legislation.
15.2 To ensure that the Authority commands credibility and independence, the Council is of the view that this enforcement agency should be transformed to an independent statutory body outside the civil service at the earliest possible time.
Specific functions
15.3 The Council believes that effective regulation begins with a clear understanding, on the part of those being regulated, of the purpose of regulation and the role of the Authority.
15.4 While the Authority has a general function as described in the Bill to administer and supervise compliance of the new legislation, the Council considers that additional provisions should be introduced in the Bill to clearly specify its functions, namely -
(i) to handle complaints,
(ii) to undertake direct investigations, and
(iii) to carry out public education in respect of buying residential properties.
15.5 It is noted that the above-proposed functions are recommended in the Steering Committee's Report.
15.6 To achieve effective supervision, the Council urges the Government to regularly police the sales of residential developments to ensure compliance with the legislation and more importantly, to maintain public confidence in the Government's willingness and determination to protect the home purchasers' interests.
Power to issue rules
15.7 As stated in the Bill, any guideline to be published by the Authority is not subsidiary legislation. While this will enable the Authority to react quickly to market changes, with respect to procedural and logistical arrangements, the Council is concerned about the effectiveness of adopting a flexible approach through guidelines, as non-compliance with administrative guidelines is a feature of the current framework.
15.8 The Council proposes that in addition to guidelines, the Authority should be empowered to make rules as are necessary for the furtherance of any of its regulatory objectives and the performance of any of its functions.
15.9 For example, the Council believes that the maintenance of order at sales offices would be an important area where specific rules may need to be set by the Authority and would be appropriate in order to ensure a fair and orderly sales environment. Regulations should be made in the Bill to provide that a contravention of any such rule would constitute an offence.
Scope of the online property information platform
15.10 The Council welcomes the Government's acceptance of its earlier recommendation of establishing an electronic database (online centralized information platform), to provide comprehensive residential property information for public access.
15.11 Section 67 of the Bill empowers the Authority to delegate its power in respect of establishing and maintaining the electronic database to a public officer or any person whom the Authority thinks fit. The Council considers that the criteria to be used in determining "whom the Authority thinks fit" and the details of the data scope of the electronic database, should be set out in guidelines and made public for the purpose of ensuring transparency and accountability.
Proactive investigation powers
15.12 The current drafting of section 68 of the Bill provides that the Authority may exercise its investigation powers if it has "reasonable cause to believe that a person may have contravened a provision", in which case it can take action to require a person
to produce a record or document;
to give answers to questions; or
to respond to any written question.
15.13 These powers of the Authority are welcomed. However, the Council is of the view that the powers of the Authority should be broadened along the line of other enforcement agencies. In particular, the Authority, which is in effect an "enforcement authority" as referred to in the consultation paper, should have powers of entry and search, if it has "reasonable cause" as defined in the legislation.
15.14 Providing this power would enable the Authority to quickly react to any situation where a serious offence is believed to have been committed, and there is a concern that evidence related to the offence might be destroyed if the person concerned is made aware of the Authority's impending investigation.
15.15 To effectively enforce the new legislation, the Authority needs to be equipped with a full range of investigatory powers befitting an enforcement authority, to enable it to effectively deal with malpractices in the sale of first-hand residential properties. In addition to existing powers, the Council suggests that the Authority should be vested with appropriate disciplinary powers such as the power to issue reprimands, require the publication of corrective advertising and suspend property sales to address improper conduct by developers.
15.16 Other than the proposed power to issue reprimands, the Council suggests that for post-legislative review, the Authority should also have:
the power to publish any of its finding of any malpractice or improper conduct by developers and/or to publish any of its investigation reports in respect of the practice and conduct of the developers in its website; and
the disciplinary powers similar to the disciplinary powers of the professional bodies.
16. Other issues
Other miscellaneous provisions
16.1 It is noted that section 71 of the Bill allows a developer to provide to the general public a floor plan of any specified residential properties, other than a floor plan made available in the sales brochure.
16.2 The requirements to be complied with are that the floor plan must be drawn to the scale on that plan and any furniture shown on the floor plan must be drawn to the scale, and with dimensions of the furniture marked on the floor plan. However, there is no requirement as to whether any partition wall within a unit is allowed to be removed from the floor plan (whether or not the approval of the Building Authority is required for its removal). The Icon case is one example.
16.3 The Council is concerned that allowing the provision of additional floor plans would create a loophole for market manipulation and lead to possible confusion or deception for potential purchasers. If other floor plans are to be allowed, the Council expects that the same specific requirements as found in the requirements for sales brochures should be made.
Effect of contravention of the legislation on contract
16.4 While a purchaser might have certain common law rights under contract in regard of voiding an agreement for sale due to misrepresentation, the Council considers that the Bill should have clarity on such an important aspect.
16.5 A specific provision, enabling a purchaser to seek an order voiding an agreement to purchase as a result of an offence under the deception provisions of the legislation, would assist purchasers to obtain appropriate redress. The provision would also act as a strong disincentive for vendors who may consider engaging in clearly illegal activity.
17. Conclusion
17.1 The Council urges that the Bill, with necessary amendments, be passed as soon as possible. The Council believes an appropriate regulatory mechanism for this area of consumer protection has been long overdue.
17.2 There are some issues that remain unresolved, for example, representations as to 'gross floor area' and internal floor area, which are major subjects of public concern. However the Council accepts that no easy resolution can be reached at this time and they should not be used to delay the progress of the current legislation.
17.3 Moreover, there are issues, such as the adequacy of penalty and the adequacy of the investigation power of the Authority (including how it is set-up), which remain a concern. The extent to which these may become a major problem will become apparent after the legislation has come into effect for a period of time.
17.4 The Council therefore proposes that the Government should set a schedule for future review of the provisions, for example, within five years of the passage of the legislation. The Council would not wish to pose a cause of any further delay in the passage of this important legislation which attempts to protect consumers in making what is likely to be the single most expensive purchase in their lives.
