Cheung Kong (Holdings) will refund deposits and cancel the sales of its hotel suites after a securities watchdog probe found the deals breached the law as unauthorised investments.
The sales drew scrutiny because the developer used a legal loophole to try to help buyers avoid paying a residential stamp duty that was aimed at cooling the property market but did not apply to hotel rooms.
However, avoiding the duty was not the reason regulators gave for blocking the deals.
The Securities and Futures Commission said an agreement had been reached with Cheung Kong to unwind the sales.
The developer will refund the deposit and any part payments together with interest at 2 per cent per annum above the prime rate from the time of the payment to the end of this month.
It will offer buyers HK$10,000 in legal and other expenses.
An SFC investigation found the sales to be a collective investment scheme (CIS) - a project involving a group of small investors. But to do this under local law, Cheung Kong must first seek SFC approval for promotional documents to make sure they disclose all investment features and risks before any sales.
The SFC ruled the hotel unit sales to be a CIS because the day-to-day management of the hotel is in the hands of a separate operator, not the individual buyers.
The SFC had earlier informed Cheung Kong that it planned to take the case to court, but that action is no longer necessary.
SFC chief executive Ashley Alder said: "The SFC considers this is a sensible outcome. The SFC will monitor the progress by the Cheung Kong parties to unwind the sale to determine if further action is required."
Cheung Kong executive director Justin Chiu Kwok-hung said: "We did nothing wrong. But we think we should support the government in their administration according to the law … society now needs harmony. We want to see this matter resolved quickly."
The company told buyers in a letter that "if the buyer does not agree to cancel the provisional sale and purchase agreement, the SFC may bring proceedings in the Court of First Instance and apply for a [court] order that the contracts be declared void."
A Cheung Kong spokesperson said the company would reconsider an option to list its hotel on the Hong Kong stock exchange.
One buyer who signed a provisional agreement for sale and paid a deposit of HK$200,000 said she had not decided whether to accept the compensation offer.
"I wanted to buy it for myself to live in, and the developer and agents had told me I could do so. They are just outrageous," she said, adding staff did not let her read the hotel operation agreement when she signed the deal.
In 2001, Cheung Kong cancelled a promotion after the SFC investigated a plan to link rebates for its Victoria Towers development in Tsim Sha Tsui to the performance of the stock market.