6. If a purchaser intends to buy a flat over which there is a negative equity (the purchase price to be paid cannot fully offset the outstanding mortgage loan), how can the purchaser deal with the risk?

6. If a purchaser intends to buy a flat over which there is a negative equity (the purchase price to be paid cannot fully offset the outstanding mortgage loan), how can the purchaser deal with the risk?

Due to the downturn of the property market after 1997, the purchaser must ask the estate agent and the vendor whether or not the flat is subject to a negative equity.

If the answer to the above is "yes", the purchaser should negotiate with the vendor for the inclusion of a term in the provisional sale and purchase agreement that the deposits should be kept by the vendor's solicitor as stakeholder until and unless the vendor can show that the outstanding mortgage loan is not greater than the balance of the purchase price (full purchase price minus the deposits). This term can minimize the purchaser's loss in case the vendor fails to discharge the existing mortgage before the completion of the sale of the flat.

This term should be clearly stated on the provisional agreement otherwise it might not be inserted into the subsequent formal agreement. There was a High Court case in 1992 (Chu Wing Ning v Ngan Hing Cheung) in which it was explained that during the negotiation of terms for the formal agreement, a party is not obliged to accept a new term which goes "entirely beyond" what had been agreed in the previous provisional agreement.

The situation will be different if the vendor refuses to insert such a term into the provisional agreement and/or the purchaser is willing to accept the risk. It is recommended that a purchaser facing a negative equity situation should seek legal advice on this matter.