In this new series, Boase Cohen & Collins Partner Alex Liu discusses a range of matters relating to property and the rights of owners, occupiers and other interested parties. He begins by examining the circumstances that can lead to forfeiture of deposit and, specifically, issues regarding bounced cheques.
Hong Kong, 5 October 2018: Purchasing a property in Hong Kong’s red-hot market can be stressful, especially if one is a first-time buyer, and if complications set in then the anxiety levels really increase. While the majority of transactions are completed relatively smoothly, there are still a significant number of cases that do not proceed due to unforeseen situations, including forfeiture of deposit.
There can be any number of reasons for forfeiture. The buyer may have trouble raising funds to complete the purchase, or they may simply have second thoughts about the property, or there could be an unexpected change in circumstances, such as loss of job.
One of the most common reasons for forfeiture of deposit is a bounced cheque. In the first of a series of TV interviews on property matters, I was asked about a hypothetical case in which a prospective buyer, Mr Lee, signs a provisional sale and purchase (S&P) agreement with a seller. But the signature on Mr Lee’s cheque does not match the bank’s record and the cheque bounces. As a result, he fails to pay the deposit as stipulated in the S&P agreement and, even though he issues a new cheque, the seller treats it as a breach of the contract.
Mr Lee’s loss is considerable. While no money has changed hands at this stage – the cheque has bounced and so the deposit has not actually been paid – the liability lies with Mr Lee and the seller can sue for forfeiture of the deposit. So the error costs Mr Lee the chance to buy the property and he loses his deposit and possibly agency commission.
If the bounced cheque occurs at the stage of the formal S&P agreement rather than the provisional S&P agreement, Mr Lee’s loss can be much greater, because a much larger deposit is involved. Not only this, but the clauses in the two agreements differ.
In a usual provisional S&P agreement, it is normal to include a liquidated damages clause – that is, damages at a pre-agreed amount stipulated in the contract in the event of a specific breach. Typically, this would be forfeiture of deposit if the purchaser is liable for the breach, or double the amount of the deposit as compensation if the seller is liable for the breach. In a usual formal S&P agreement, there is no such clause limiting the amount which can be claimed. The damages that may be awarded by the court can be much higher depending on the actual loss suffered.
Why might a cheque bounce? There could be an error in the information it contains regarding the payee, date or amount. Or, as in the hypothetical case just discussed, the signature on the cheque does not match the bank’s record. Or there may be insufficient balance in the account.
In the same TV interview, I was asked if a prospective buyer, facing litigation over a bounced cheque, could rely on unforeseeable circumstance as a defence. The answer is no, a bounced cheque is not unforeseeable, it is the purchaser’s responsibility to ensure the cheque can be cashed.
It is advisable, especially where comparatively large sums of money are involved, for the purchaser to take precautions. A formal bank draft – prepaid and issued by the bank – is a much safer option than a cheque. Or the buyer can pay the transactional amount to a lawyer, who then issues a cheque on the buyer’s behalf. Also, the buyer can seek assurances from the bank in advance that the cheque will be cleared.
As stated earlier, in property transactions, a bounced cheque is one of the most common reasons for forfeiture of deposit. It is also one of the most easily avoidable.
Alex Liu has been Chairman of the Appeal Tribunal Panel (Buildings Ordinance) since 2007 and has considerable experience in dealing with property ownership and building management issues. The above article is based on advice he has offered during regular appearances in the TVB documentary series A Property a Day.