What is a Provisional Sale and Purchase agreement? Is it binding?

A Sale and Purchase Agreement (SPA) is an agreement signed and agreed upon by both the seller and purchaser regarding the terms of the purchase. The provisional agreement is prepared by the estate agent and is signed by both the purchaser and seller. The agreement contains the preliminary terms of the sale of the property and is used as a basis for the formal agreement, which will be signed on a later date. The agreement is contractually binding and there may be severe consequences for breaching it.

Terms in a Provisional SPA

A provisional SPA must include the following terms:

• Particulars of the seller and purchaser
  • If the seller or purchaser is an individual, the agreement should state their name, address and Hong Kong Identity Card number.
  • If the seller or purchaser is a limited company, the name, Business Registration Number and registered office of the limited company should be stated.
• Description of property
  • The property’s postal address is usually sufficient to identify the property.  
• Price
  • The agreed price for the property is expressed in either words or figures or both.
• Completion date
  • The date on which the seller disposes of the property to the purchaser.

It may also include the following terms:

• Amount of initial and further deposit, and when it has to be paid
  • The initial deposit is usually 1% to 3% of the total purchase price, and paid by the purchaser when they sign the provisional agreement;
  • The further deposit is usually 10% of the total purchase price, inclusive of the initial deposit, and paid by the purchaser on the day the formal agreement is signed [9% or 10%]
• Balance of price to be paid upon completion of purchase
• Legal cost and stamp duty
  • Each party will pay his own legal costs to their lawyers
  • The purchaser will usually pay the stamp duty
• The consequence for seller/ purchaser in case of withdrawal from the agreement
  • An “escape clause” allows a party to withdraw from the transaction within a short period of time after signing the provisional agreement, but they must also pay compensation to the other party
• Delivery of vacant possession
  • No vacant possession will be delivered to the purchaser if the property is sold subject to tenancy, so it must be expressly stated in the provisional agreement
• Estate agent commission
  • The purchaser and seller will have to pay the estate agent an agreed and specified commission

There are a lot more terms that may be contained in a provisional SPA, and you can check them out here. You should ask your estate agent if you have any questions about your provisional agreement.

Should it be stamped and registered?

There is no need for the provisional sale and purchase agreement to be stamped and registered for sale and purchase of non-residential property. However, the formal sale and purchase agreement should be stamped and registered with the Land Registry.

Breaching the Provisional Agreement

Despite being “provisional”, a signed provisional sale and purchase agreement is a legally binding contract. The parties can rely on the provisional agreement to proceed with the deal or to sue for compensation, if the formal SPA is not yet or fails to be signed.

If the purchaser believes they would not want to buy the property anymore, because they realised the agent gave them false information, they may not be able to terminate the sale and purchase agreement. However, they may be able to sue the agent for misrepresentation. (Misrepresentation occurs if a person who had made a false statement of fact induced another person to enter into a contract, and the innocent party may receive some compensation)

Key takeaways

• The provisional sale and purchase agreement is an important contract regarding preliminary terms of the purchase of the property.
• The agreement is usually prepared by the estate agent, 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

1. Estates Agent Authority: “Provisional Agreement for Sale and Purchase” http://www.eaa.org.hk/en-us/Information-Centre/Publications/Monograph-Conveyancing/-2-Provisional-Agreement-for-Sale-and-Purchase

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