A Formal Sale and Purchase Agreement (SPA) is a legally binding contract that outlines the terms and conditions agreed by the parties to the agreement i.e. the purchaser and seller of the property.
The Conveyancing and Property Ordinance requires all contracts for sale of land (including house/property/building) to be made in writing to be enforced by the Court. Therefore, you cannot sell or buy a property through an oral agreement, as it will not be recognised by the court. The agreement is contractually binding and there may be severe consequences for breaching it.
Terms of a formal SPA
Based on the provisional agreement, and subsequent negotiations, usually the seller’s lawyer will draft a formal Sale and Purchase Agreement. It contains terms that are more detailed and is intended to replace the provisional agreement.
A Formal SPA will have terms that are based on the agreed provisional SPA, including:
- Particulars of the seller and the purchaser
- Agreement to sell and purchase
- The seller agrees to transfer the title of the property to the buyer
- Particulars of the property
- The description of the property should be identical to the one on the Land Registry
- Purchase price and manner of payment
Formal SPA terms will also contain additional terms from the provisional SPA, including:
- Condition of property
- Usually, the purchaser would take the property on an as-is basis, but there may be other conditions too, like delivery of machinery
- The purchaser will usually have inspected the property
- Furniture and fixtures
- If the price includes furniture and fittings, such items should be listed in the formal agreement. However the seller will likely not warrant the condition of the furniture or fixtures.
- Good title
- The seller agrees to prove and give good title to the property, and they are willing to provide title deeds of the property to the purchaser
- Consequence of breaching the formal agreement
- If a party fails to complete the agreement, the other party can claim specific performance of the formal agreement
- Stamp duty
- The stamp duty will usually be paid by the purchaser.
- Time of essence
- Both parties must strictly comply with the time limits mentioned in the agreement. Even if the purchaser was only a few minutes late in paying the seller the balance of the purchase price on the completion date, they would be considered to be in breach of the agreement.
- Apportionment of outgoings
- Outgoings of a property include the management fee deposit, management fee, rates and government rent. Outgoings will usually be apportioned to be paid by the seller until the day of completion, and by the purchaser after the day of completion
Other terms that would be included in a formal agreement could be found here. You should consult your lawyer for any queries, as the formal SPA is a complicated legal document.
Should it be stamped and registered?
The formal sale and purchase agreement should be registered with the Land Registry to protect its priority. This will usually be completed by the purchaser’s lawyer, and there will be a small registration fee ($210 as of June 2021) charged by the Land Registry.
The purchaser’s lawyer will stamp the formal agreement within 30 days of signing it. Stamp duty will usually be paid by the purchaser.
Breaching the Formal Sale and Purchase Agreement
The consequences of breaching the terms of the formal sale and purchase agreement will depend on the type of breach and the terms written on the agreement. The following table highlights the possible consequences of such a breach of contract:
| Who breaches the Formal SPA | Responsibility or legal consequences |
| The seller refuses to sell. | The agreement is terminated. The seller will have to refund the initial and further deposits to the purchaser. Seller may be sued by the purchaser for compensation. The amount of compensation depends on the actual loss suffered by the purchaser who will need to purchase a similar property elsewhere (e.g. rise in market price of the property after the seller’s back out). |
| Purchaser refuses to buy. | The agreement is terminated. Purchasers may lose all the initial and further deposits. In the usual case, the seller may not be able to claim all the deposits as forfeiture if they exceed 10% of the purchase price, unless the actual loss has justified such forfeiture. Purchaser may be sued by the seller for further compensation. The amount of compensation depends on the actual loss suffered by the seller (e.g. price reduction arising from the resale of that property). |
Additionally, if the formal SPA is breached, the innocent party may apply to the Court for “specific performance”, which compels the party in breach to complete the sale and purchase instead of terminating the agreement. The Court will consider whether the seller or the purchaser is still willing, able and ready to complete the sale and purchase after the breach.
Key takeaway
- The formal sale and purchase agreement is an important contract finalising the terms of the purchase of the property.
- The agreement is based on the provisional agreement, and negotiations between the parties and their lawyers.
- The agreement is usually prepared by the seller’s lawyer, and must be signed by the seller and purchaser.
- It is a contractually binding agreement, so there will be serious consequences for breaching it.
Bibliography
- Estates Agent Authority: “Formal Agreement for Sale and Purchase” http://www.eaa.org.hk/en-us/Information-Centre/Publications/Monograph-Conveyancing/-3-Formal-Agreement-for-Sale-and-Purchase