High Risks in Overseas Property Purchase Securing Cross-border Consumer Redress Extremely Difficult
14 February 2018
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Globalisation and advanced information technology have spurred many people in Hong Kong to consider purchasing overseas property for investment or personal use. But property investment abroad invariably involves local regulatory framework and taxation, and without a thorough grasp of the local legislation consumers are taking on risks of enormous proportion. In 2017 the Consumer Council received a total of 35 cases of overseas property complaints, rising by more than double the 16 cases in the previous year. There were complaints involving failure to complete the development put on sale; agents suspected of misleading buyers as a result of non-disclosure of the risk of insufficient property valuation that could affect outcome of mortgage applications; sales and purchase contracts at variance with the agents’ descriptions for which the complainant failed to obtain refund.
Consumers are strongly advised to be wary of the considerable risks in buying property abroad. Construction work of real estate development is always subject to variables and contingencies. As the formal sales and purchase agreements are signed between the buyers and the overseas developers, the Hong Kong laws may not be applicable. Should problems arise it would be extremely difficult for consumers to obtain redress. Although the Estate Agents Authority (EAA) has issued the “Guidelines on Sale of Uncompleted Properties Situated Outside Hong Kong” (UPOH) which will come into effect on April 1, estate agency works exclusively for deals in relation to properties outside Hong Kong is not regulated. Consumers should therefore consider with prudence and be well-prepared with help from reliable professionals to understand the background of the overseas developers and the local legislation, as well as checking on the Hong Kong agents if they are licence holders under supervision.
Case One: Uncompleted property with no hope of refund
In 2015, through property agent A in Hong Kong, the complainant bought a property in the UK priced at £67,000 (about HK$740,000) which he paid half the down payment. The property was set for completion in the third quarter of 2017 but up to July the site where the property was supposed to be located remained empty and deserted. In September, it was learned that due to debt issues the developer had not proceeded with the construction of the development, and had appointed another company to follow up on client compensation issues. Deeply worried, the complainant had made many attempts to contact Agent A and the Hong Kong lawyer in the property transaction but both were unable to offer any further information. She then sought the Council for help.
Despite repeated approaches by the Council, Agent A responded that they could offer no concrete information and declined to be involved in the dispute any more, suggesting instead that the complainant pursued the matter through the lawyers in Hong Kong and in the UK representing the seller. As the transaction involved overseas developer and complicated legal issues, the Council advised the complainant to seek legal advice for the way forward.
Case Two: Agent’s failure on mortgage check resulting in over budget
At a sales exhibition of Australian property, organised by a Hong Kong Company B, the complainant expressed an interest to buy a house priced at A$390,000 (about HK$2.20m) for personal use and asked for mortgage arrangement. He was assured that as long as the buyer had a sufficient salary income or HK$1 million bank deposit, approval for a mortgage loan of up to 80% of the price would definitely be given. On the spot he paid a “reservation fee” of HK$20,000 to Company B, followed shortly by a remittance of A$30,000 to the developer. But later on he was informed by the company that the property was valued by the local mortgage firm at only A$320,000, and coupled with the non-approval of the mortgage insurance, the firm would approve a mortgage loan of only A$240,000. This was over his budget and after unsuccessful approach to Company B, he sought the help of the Council. In his opinion, the company had failed to check to ascertain the mortgage sum, and to draw client attention to the risk of insufficient valuation, he therefore demanded the contract be cancelled and the deposit be refunded.
Accordingly, the Council contacted Company B which all along adopted a delaying tactic. Until about one month afterwards, the Council learned that the complainant was partially refunded by the developer and had no need to pursue further.
Case Three: Contract at variance with agent’s descriptions but refund refused
The complainant bought a residential unit and a carpark space priced at £200,000 (about HK$2m) at a sales exhibition of UK residential property, organised by a Hong Kong Company C. He paid a “reservation fee” of HK$30,000. Half a month later, he received from the lawyer a formal sales and purchase agreement, and was shocked to find the name of the developer appearing on the contract was different from that on the reservation form and sales brochure.
Furthermore, at the exhibition he was informed that the developer would charge £300 annually as the land rent, but the contract stated that the yearly fee of £300 was only for the first 10 years and afterwards would increase proportionally every 10 years. He asked Company C for clarification and amend the contract accordingly. But the company replied the developer would accept no such a demand. The complainant refused to sign the contract and when his demand for refund was turned down, he sought the Council’s help.
Company C pointed out in the reservation form it was clearly stated that “reservation fee” was non-refundable. It reiterated that it had only received the fee on behalf of the UK developer. Therefore, it was up to the developer to decide whether refund or not. It further averred that it was common in the business that the developer would use a separate company to hold individual development. Unable to reach conciliation, the Council advised the complainant to seek legal opinion. He indicated however that he would pursue his case with the Customs and Excise Department over the trade practices of the company.
Property purchase is an important and long-term investment. Consumers contemplating overseas property should take note of the following:
- Make enquiries with reliable professionals to have a good grasp of the background information of the overseas property concerned, the developer, the construction contractor and the agent, and in addition the property sales and purchase policies and regulations including taxation, mortgage percentage and foreign currency exchange, etc. in the property location, in order to safeguard your interests;
- Never base your purchase decision solely on the information in the documents offered by the agent or seller; if you have friends or relatives living overseas in the location of the property, consult them for details of the local property market and sales and purchase procedures;
- Ascertain if the Hong Kong agent for the overseas property is a supervised licence holder.
Closing the deal
- When signing the property reservation form, read carefully the provisions about “reservation fee” terms and conditions including in the event of cancellation of the transaction whether it is refundable and whether the fee is received by the Hong Kong property agent or the overseas developer. In the case of the former, ask the Hong Kong company to issue an official receipt for safe keeping;
- Consult lawyer for professional opinion on the formal sales and purchase agreement, and pay attention to whether the contract provides for any responsibility and arrangement if the property is not ready for possession as agreed.
- In buying uncompleted property still under construction, check regularly on site the progress of the construction and the surrounding infrastructure and facilities, and stay close in touch with the agent and the developer;
- Keep yourself informed of the circumstantial factors such as policies regarding sale of property and economic environment in the area where your overseas property is situated and assess how the changes of these factors could be of risks to your property;
- If any problems occurred regarding the overseas property transactions, consumers should consult with their lawyers, and if necessary, consider asking for help from the local consumer protection authorities.
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