Circular No. 05-07 (CR)
Stakeholding of Deposits

It is current conveyancing practice that upon the signing of a Provisional Agreement for Sale and Purchase (PASP), an initial deposit is invariably payable. Such initial deposit ranges from 3% to 5% of the purchase price and is usually paid directly to the vendor.

From time to time the Authority receives complaints that estate agency practitioners have not properly brought to the attention of the purchasers the risk of paying deposits directly to vendors. In some cases, purchasers have alleged that the deposit stakeholding provisions pre-printed on the PASP were deleted by the licensees without informing them of the potential consequences of the deletion. Also, some vendors have alleged that the deposits were stakeheld without their awareness of the implications of the stakeholding provision.

Given that some vendors may for various reasons fail to discharge the mortgage or abscond after receiving the deposit, it is important for the licensee, whether acting as a dual agent for the parties or as a single agent for the purchaser, to advise the purchaser of any possible risks in payment of deposits directly to the vendor and of the desirability of arranging for the stakeholding of all deposits (both the initial and further deposits) by a firm of solicitors, before arranging for the parties to sign the PASP of properties where there is an undischarged mortgage. The licensee should also explain to the vendor and the purchaser the implications of the stakeholding arrangement and the conditions to be fulfilled before the release of the deposits by stakeholders. As it is often difficult to ascertain whether the property is in negative equity and/or whether the vendor is able to discharge the mortgage, the licensee's above duty should apply to all cases of sale and purchase whenever there is an undischarged mortgage.

According to section 13(1) (a) of the Estate Agents Practice (General Duties and Hong Kong Residential Properties) Regulation, a licensee shall, before a client of the licensee who is not legally represented enters into an agreement for sale and purchase of a residential property, explain to the client the meaning of each clause of the agreement and draw to his attention the meaning of any essential terms and provisions thereof. A deposit stakeholding provision contained in a pre-printed PASP is an essential term. Thus, if a licensee fails to explain to the client who is not legally represented, before entering into a PASP of property where there is an undischarged mortgage, the meaning of any deposit stakeholding provision and/or the implications and risks of deleting the deposit stakeholding provision contained in a pre-printed PASP, the licensee may be in breach of the said regulation.

In the sale and purchase of property where there is an undischarged mortgage, practitioners are advised to obtain a written acknowledgementfrom the parties acknowledging that they have been advised of the deposit stakeholding arrangement and the risks involved in not including such arrangement in the PASP. Such written acknowledgement will assist the practitioner in proving that he has complied with the above guidelines and regulation.

Failure of practitioners to comply with the above guidelines and regulation may give rise to possible disciplinary actions by the Authority.

This circular is in addition and without prejudice to Circulars No.99-01(CR) and 01-10(CR).

December 2005


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