The Contracts (Rights Of Third Parties) Ordinance (the "CRTPO") comes into force on 1 January 2016 – or in nine weeks' time. Building on our previous updates (for example, To Benefit or Not to Benefit Third Parties), we now commence a further series of bite size bulletins to help you take practical steps to get ready for this important legislation, plus announce dates of our forthcoming client workshops.

In this edition...

The CRTPO and Real Estate Transactions: Do Something or Do Nothing?

Exceptions to the CRTPO

The CRTPO lists out certain situations where it will NOT apply. There are two particular exceptions real estate transactions, namely: "covenants relating to land" and "deeds of mutual covenants". These exceptions were included as a result of lobbying from the Hong Kong Bar Association, largely to preserve existing arrangements which have adopted other means by which third parties can benefit and enforce a right:

  • Deeds of mutual covenant ("DMCs") – these typically apply to all the owners of an apartment block and their applicable shares in common areas in a particular development, and impose both "burdens" and "benefits" upon third parties. The CRTPO confers "rights" but not "burdens" on third parties, and in order not to disturb the law applicable in Hong Kong to DMCs which is working well, DMCs are excluded from the CRTPO.
  • Covenants relating to land – for example, the Conveyancing and Property Ordinance (Cap. 219) provides certain rights to third parties (e.g., s.41 and s.26) in respect of covenants relating to land. But what certainty does this phrase actually give a practitioner when considering whether or not a particular real estate transaction is already excluded by the CRTPO? Do such covenants have to be "under seal"? Probably "not". Do such covenants have to "touch and concern the land"? Probably "yes". The lack of a clear definition will raise certain concerns (unless clarified by statute or through case law), and for this reason, when dealing with a real estate contract containing covenants, we feel it is sensible to still include a clause in dealing with the CRTPO.

Pre-sale Sale And Purchase Agreement ("SPA") Forms

While the CRTPO is not yet in force, developers should consider changes (if any) which may be required under the forms of SPA applicable to pre-sale (both consent and non-consent) cases. Developers working on projects for Quarter 1, 2016 may well be applying for approval from the Legal Advisory and Conveyancing Office (LACO) now.

Purchasing Property Through Shares

If you plan to acquire real estate through the acquisition of shares, then it is also worth considering opportunities that may arise from applying (rather than excluding) the CRTPO. Depending on whether you are the purchaser or seller there may be a few clauses in the SPA where third parties should benefit. See: Contracts (Rights of Third Parties) Ordinance: How It Can Assist Your M&A Transaction

Save the Date

Throughout 2015, Mayer Brown JSM has been active in publicising the CRTPO. A cross-practice team has delivered a number of well-received interactive seminars to in-house counsel.

We are now rounding off our 2015 activities on this topic with two workshops on Wednesday, 2 and Thursday, 10 December 2015. Participants will be drawn from in-house counsel across a variety of industries, giving participants a valuable opportunity to gain useful perspectives on their contractual arrangements, as it may be affected by the CRTPO. A cross-practice team will be on hand to guide participants through practical case studies, highlighting CRTPO issues to bear in mind, when drafting or seeking to enforce contracts post 1 January 2016.

Originally published 26 October 2015

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.