LETTER OF THE LAW

Beware of pitfalls in buying property

Both buyer and solicitor need to be aware of potential nasty surprises during a transaction

PUBLISHED : Tuesday, 21 May, 2013, 12:00am
UPDATED : Tuesday, 21 May, 2013, 3:32am

Signing a contract to buy a property (a flat, an office block or whatever) marks a point of no return. You have passed from the zone of negotiations to that of binding commitment. At least that is the idea.

Once you sign the contract it should be all over bar the shouting. In principle, it only remains for the seller to execute and deliver the deed conveying title to the property to the buyer, hand over the keys and collect the money.

There remains, however, one important matter to attend to. The seller has to prove that he actually owns the property that he has agreed to sell. In technical terms, he has to show and give good title. The buyer does not want to hand over millions of dollars only to find that the property was not the seller's to sell or that what he can sell is very different from what he contracted to sell.

What could go wrong? The very worst thing, of course, would be to find that the seller did not own the property at all.

This could happen in a variety of ways. For example, the title could have been extinguished by virtue of a squatter's adverse possession or there could be an unwritten trust under which the property belongs in its entirety to a third party who has not agreed to sell to the buyer.

There could be other problems which are not so drastic in their effect but which still mean that the buyer is deprived of the peace of mind he expects.

There could be defects which mean the title is open to a challenge which will drain it of some of its value or at least expose the buyer to the expense, worry and uncertainty of litigation.

The presence of unauthorised building works (or illegal structures) provides an example of this kind of problem. These are works at the property which contravene the terms of the government lease or which constitute a breach of the Building Ordinance. They might involve the erection of new structures or the removal of existing structures.

The risk is that the government might be entitled to terminate the lease as a result of the works or that the buildings authority might require work to be done to bring the property into compliance with the Building Ordinance. These works might be costly or might result in loss of some amenity (living space, for example) that was important to the buyer.

It is the buyer's solicitor's job to protect his client from any of these nasty surprises. If he suspects a problem he will ask questions (requisitions in the jargon) to make sure that all is well.

If he does not get necessary assurance about matters that constitute a real risk then he may have to advise his client not to complete the purchase.

There is a difficult balance to be struck. The buyer's solicitor should only dig in his heels if the risk is real and material.

Disagreement as to whether or not a requisition has been properly answered, so that it is safe to complete the purchase, can lead to an impasse. Litigation provides the exit route but this is rarely a satisfactory outcome.

Professor Michael Lower of the Faculty of Law at Chinese University teaches and researches land law