Beware of the pitfalls of buying properties with unauthorised building work or illegal alterations

2021-07-06

• Unauthorised building work may render the property title defective, while potentially saddling buyers with repair or remedial costs
• Estate agents should remind both parties to seek legal advice before arranging for them to enter into a transaction

There was a recent media report about a purchaser’s mortgage application being rejected by local banks as the property had unauthorised building work. While some properties might look attractive due to a redesign or modification of their original layout plan, purchasers should be wary of the risks if they involve illegal alterations. They could be in breach of the city’s Buildings Ordinance.

To protect their clients’ interests, estate agents have a duty to check whether there is any undischarged building order registered against the property. Upon learning about such illegal work or building order, estate agents should inform their clients of the government’s right of re-entry to the property.

This may render the title of the property defective, while their clients may still need to bear the cost of removing the infringing conditions, or any repair work required by the building order.

Thus, estate agents should remind both parties to seek legal advice before arranging for them to enter into a provisional agreement for sale and purchase.

I would like to share a case to remind property purchasers to seek professional and legal advice on the issue of unauthorised building work or building order before they commit to any provisional agreement.

A salesperson of an estate agency company was appointed by both the purchaser and the vendor in a residential property transaction. The property forms part of a building that had an undischarged building order lodged in the Land Register.

Before entering into the provisional agreement for sale and purchase, the vendor asked the salesperson which party would be responsible for paying the repair cost stipulated in the building order.

The salesperson replied that the cost would be borne by the vendor if the amount payable by each flat could be confirmed before the transaction completion date. Otherwise, the purchaser would be responsible.

After the vendor entered into a provisional agreement for sale and purchase, their lawyer realised that no clause or term related to the responsibility had been included in the agreement.

The lawyer suggested asking the salesperson to procure a supplementary document, to be signed by the purchaser, to clarify the cost responsibility. To the vendor’s disappointment, the purchaser rejected it.

The vendor paid HK$55,000 (US$7,080) as the repair cost so as to complete the transaction. Feeling dissatisfied with the salesperson’s handling of the transaction, the vendor lodged a complaint with the Estate Agents Authority (EAA).

The EAA Disciplinary Committee found that the salesperson failed to advise the vendor about paying attention to the liability for the repair cost. The salesperson also failed to take any steps to protect the interests of the vendor before entering into the agreement.

The salesperson was in breach of paragraph 3.4.1 of the Code of Ethics issued by the EAA. It stipulates that “estate agents and salespersons should protect and promote the interests of their clients, carry out the instructions of their clients in accordance with the estate agency agreement and act in an impartial and just manner to all parties involved in the transaction”.

The committee decided to reprimand the salesperson and impose a fine of HK$3,000. The salesperson was also required to obtain 12 points under the Continuous Professional Development Scheme within 12 months.

According to the EAA’s guidelines, estate agents are required to conduct land searches against the properties they handle and check carefully for any outstanding building orders and compliance issues.

In addition, they should note any building orders issued by the Building Authority requiring demolition or alteration of unauthorised work. These particulars should be specified in Part 1 of the Property Information Form used in the sale and purchase of residential properties in Hong Kong.

If estate agents have actual knowledge of the existence of unauthorised building work, they should also remind their clients of the risk involved in transacting the property and advise them to obtain independent legal advice before entering into any agreement.

On the other hand, purchasers are strongly advised to separately seek advice from banks or individual financial institutions to evaluate mortgage applications before making any down payments. The transaction may fail if the loan financing is rejected because of unauthorised building work.