REALWorld Law

Sale and purchase

Forms of real estate ownership

What are the categories of property right that can be acquired? Are there any interests in real estate other than exclusive ownership?

Hong Kong, SAR

Hong Kong, SAR

An interest in land/real estate can either be held under freehold or leasehold ownership. If you acquire a freehold property, you acquire the exclusive right to both the building and the land where the building is erected on. A freehold owner can use and make alterations to the building as it wishes so long as it acts lawfully. On the other hand, if the property is held under leasehold ownership, the acquirer, namely the lessee, only acquires a right to use the property excluding the land beneath it for a limited period of time known as the term. Anything done to the property is governed by the terms of the lease.

In Hong Kong, since 1997, all land has become the property of the People's Republic of China while the government of the Hong Kong Special Administrative Region is responsible for its management, use and development. In other words, every piece of land in Hong Kong (with the sole exception of St. John's Cathedral, the only freehold property in Hong Kong) is leasehold property .

When the government decides to release land for building it usually does this by selling the land (or ‘parcel’ or ‘lot’) at an auction. Legally speaking, the government does not sell the land; it sells the right to occupy it for a term of years. This system gives the Hong Kong Government as the grantor a high degree of control over the way in which land is developed and used through covenants and conditions imposed on the grantee and contained in the lease. Since 1997, the term granted to the lessee has been 50 years from the date of the grant.

In the past, the government as lessor would issue a Government Lease to the purchaser (usually a developer) (as the lessee). Nowadays, instead, the government executes Conditions of Sale/Exchange/Grant/Re-grant/Extension depending on the purpose of grant. These are contracts giving a conditional right to the purchaser which will be converted to a form of legal ownership upon compliance with all the conditions stipulated. After a successful acquisition of the land, the purchaser (who is usually a developer) will recoup his investment in the construction and make a profit before the term runs out. Once a unit is sold or if the entire building as a whole is sold to a property company, the developer ceases to be involved. The purchasers take its place and they will also be able to sell their leasehold interests later or to assign the right to use to new tenants.

In Hong Kong where supply of land is limited, real estate is usually developed in form of a multistorey building. Under this system, the entire land and building is notionally divided into a number of undivided shares which are allocated to different flats. The sale of flat to a purchaser is effected by transferring the relevant undivided shares attached to the flat. Legally speaking, as the division of land into shares is only notional, all the flat owners own the land in common. For practical reasons, exclusive possession of a flat is at the same time guaranteed by execution of a document called a ‘deed of mutual covenant’ involving the developer, the first purchaser and sometimes the management company. Therefore, each flat owner, by assignment, owns a number of undivided shares in the land together with the exclusive right to occupy his/her flat.

Apart from a leasehold interest, a purchaser also enjoys an easement, meaning the non-exclusive right to use another’s land in a particular way for the benefit of the use of one’s own land. This is a proprietary interest which can be granted expressly, impliedly or by statute. Examples are a right of way and a right to park cars on neighbouring land.

In the case of a multi-storey building, the tenants also enjoy the right to use the common parts of the building, which refer to those parts which are not delineated as being for the exclusive use of one tenant in the deed of mutual covenants. Common examples are the corridors and staircase. This right can be expressly specified in the first assignment, Deed of Mutual Covenant and Sub-Deed of Mutual Covenant (if any) or implied by the Building Management Ordinance.