Class Action of 86 Hong Kong Property Owners vs. Fresh Water HK City Group Company (1994)
Basic facts:
86 Hong Kong residents respectively purchased commercial properties of a real estate project named “Fresh Water HK City” (“real estate project”) located in Fresh Water Town, Huiyang City during 1990-1993 and subsequently brought a class action against the developer due to untimely delivery and deviations from delivery condition. ZHU Zhengfu and ZHANG Chunyao, two lawyers of our firm represented 86 property owners in the class action and won the case. For the first time the courts of Mainland China recognized real estate sales brochure as an appendix to real estate contract in its judgment and confirmed that representations made by a real estate developer concerning decoration standard of commercial properties in its sales brochure are legally binding. The decoration standard of commercial properties, particularly of public locations such as plaza, hallway and lobby are normally not agreed on in a specific real property purchase contract, and therefore are normally determined based on representations made in relevant sales brochure. It should constitute a breach on the part of developer if the decoration standard agreed to by the developer in the real estate sales brochure is not met. Nowadays, this rule has been incorporated in Article 3 of the Interpretation of Several Issues Concerning the Application of Law to Real Property Purchase Contract Dispute (F.S. (2003) No. 7) promulgated by the Supreme People’s Court in 2003, which stipulates that, “…promotional advertisement and materials…if having a significant effect on…the signing of a real property purchase contract and property price…shall form part of relevant contract”, which is now applicable countrywide .
Opinions and judgment of court:
In the second instance, the Higher People’s Court of Guangdong Province held that, “the representations made by the developer in the real estate sales brochures distributed to the appellants concerning the materials used for decoration and facilities provided in the properties shall be deemed an additional obligation incurred by the appellee. From the standpoint of consumers who will purchase the properties, the decoration and facilities of commercial properties directly influence the use value of properties”. In the verdict rendered, citing the provisions of Article 22 of the Consumer Interest Protection Law, the court held that “the commitment made by the developer in its sales brochure concerning decoration and facilities of commercial properties is legally binding on it”. As regards the statement printed on the back of the sales brochure which reads “The specifications of the property indicated herein shall not constitute any commitment of the developer nor shall form a part of any contract, and are subject to changes without further notice, the owner of the Fresh Water HK City and its agents hereby disclaim any responsibility thereof”, was found by the court as “in contravention of Article 22 of the Consumer Interest Protection Law and to the prejudice of consumers’ legitimate interest and therefore should be voided”.
Lawyers’ statement and remarks:
A real estate sales brochure contains images and text concerning the conditions of a presale property, which is prepared by the marketing partner of a real estate developer or its agent and distributed to non-specific audiences. The problem consists in the legal nature of sales brochure and the question whether or not it should serve as a legal basis for determining the rights and obligations of parties concerned in the case of a real property quality dispute.
It is generally considered that a real estate sales brochure serves as an advertisement which can not constitute a legally binding offer and may only be regarded as a solicitation, and accordingly, representations made in a solicitation are not legally binding on the parties concerned. Nevertheless, a different understanding of the legal effect of real estate sales brochure can be obtained by taking into account the property presale process and actual situation.
Property presale is a special legal act which is not a spot transaction and is different from ordinary futures transaction. It involves the transfer of rights and title to a real property which will be completed and made ready for sale in the future. There are neither uniform specifications nor specific standards governing the real property, which may serve as reference for the developer and the buyer of property in performing their respective obligations. Moreover, due to the uncertainty in public utilities and facilities and the uncertainty in construction and decoration, a real estate sales brochure, if not legally binding to a certain extent, will facilitate real estate developer’s fraudulent business practices and therefore will be extremely unfair for property buyers.
This is because: 1. a real estate sales brochure can inspire a reasonable expectation of the property being purchased by the buyer. Without a completed unit or model unit which can be used as a reference for property buyers to make buying decision, a sales brochure is the only means by which property buyers understand the location, structure, layout, decoration and facilities of the property being purchased and a sales brochure can stimulate the buyer’s intent to purchase.
2. A real estate sales brochure forms the basis of property presale contract. Property buyers accept the prices of properties in reliance upon their understanding of the information provided in the sales brochure. In the case of property presale where a purchase agreement is signed by the buyers, the purchase agreement normally does not contain a quality clause, which is normally set out in a formal purchase contract, consequently, the sales brochure becomes the only basis for the buyers to sign a purchase agreement and pay the purchase deposit.
3. A sales brochure is a supplement to the presale contract which normally set outs the area, decoration standard and price of the property being purchased, without defining the quality of public utilities and ancillary facilities. However, the construction and installation costs of utilities and ancillary facilities are actually shared by all purchasers, that is to say, the price paid by a property buyer has included the costs of public utilities and ancillary facilities, and therefore, the developer’s partner company should perform relevant obligations. As no stipulation in this regard is made in relevant contract, its performance may only be subject to the sales brochure.
4. A similar provision can be found in the Consumer Interest Protection Law, for example, Article 22 stipulates that, “a seller who demonstrates the quality of the goods or services offered by it for sale by means of advertisement, product description, sample or otherwise shall guarantee the conformity between the actual quality of goods or services and the quality so demonstrated”.
5. the Advertising Law stipulates specific requirement for the genuineness of information contained in an advertisement such as a real estate sales brochure, for example, Article 3 stipulates that an advertisement should be genuine and lawful, and Article 38 stipulates that an advertiser shall be civilly liable for damage caused to the lawful interest of consumers who purchased goods or accepted services due to the false and misleading information contained in an advertisement. Accordingly, a real estate sales brochure, even when it does not constitute an offer, it should be regarded as a part of relevant contract or its supplementary provision which shall be binding on the real estate developer.
Certainly, this doesn’t mean that all contents in a sales brochure are binding, contents which are not relevant to developer’s direct acts and which lack objective criteria(for example, advertising content suggesting the distance between a real estate and a railway station or airport, the beautiful environment or the potential of future appreciation in value) cannot be binding. Moreover, in case the developer modified its sales brochure before collecting purchase deposit from the buyer or the presale contract stipulates otherwise concerning relevant matters (such as decoration standard), the legal effect of sales brochure should be viewed differently.
In the class action against the developer of the real estate project of Fresh Water HK City Group, the developer’s sales brochure states that, “the property will be decorated with glass curtain walls and mirror stainless steel on its exterior walls, the central courtyard of the property will be decorated with high quality marbles, imported escalators will be installed”. In the bottom right part on the back side of the brochure, with a smaller font, a statement is printed saying “the information contained in this sales brochure is prepared based on reliable information and has been verified for correctness. The specifications of the property indicated herein shall not constitute any commitment or a part of any contract, and are subject to changes without further notice. The owner of the property and its agents hereby expressly disclaim any responsibility therefore. The images indicated herein are for reference only and the owner of the Fresh Water HK City shall reserve the right to make any change thereto. The layout of the property shall be subject to government approval”, which is prejudicial to consumers’ legitimate interest, should be void.
