Recent reports have revealed cases where property owners, after selling their units, faced bankruptcy petitions in Hong Kong due to debts incurred in mainland China. These proceedings allowed creditors to secure claims against the seller's property, leading to complications for the new buyer in obtaining a mortgage. This phenomenon, commonly referred to as Mortgage Pending Registration, has become a growing concern for property buyers. But what exactly does it mean, and how can buyers avoid such risks?
Mortgage Pending Registration, refers to a situation where a property loan is deliberately withheld from being registered at the Land Registry. After the borrower signs the loan documents, the lender delays submitting the mortgage deed for registration.
This creates a window of opportunity in which the borrower can use the same property as collateral to obtain additional loans from other finance companies. Because the mortgage contract is not officially registered during this period, a potential buyer or other third-party conducting a title search on the property will not see that it has been mortgaged.
While such an arrangement may benefit the borrower by providing quicker access to cash and allowing borrowed funds to remain hidden from the primary mortgage lender, it also creates significant risks. Using such loans, borrowers can evade clauses that might trigger the bank’s "call loan" mechanism if a secondary or tertiary mortgage is taken out. However, these benefits come at a cost.
Since only finance companies are willing to offer “Mortgage Pending Registration” loans, their terms are often predatory. Interest rates are typically upwards of 20% annually, accompanied by costly late fees and administrative charges, exposing borrowers to significant financial risks.
Furthermore, such loans often include clauses allowing the finance company to register the mortgage retroactively under specific circumstances. For example, if the borrower defaults on payments, fails to repay on time, or if the property's value drops significantly, the lender may immediately file the loan documents with the Land Registry to secure their claim.
When this happens, the primary mortgage lender is alerted to new encumbrances on the property, which typically breaches the original loan agreement. In such cases, the lender may reevaluate the outstanding loan balance or even demand immediate repayment.
For buyers, this can be especially problematic. Even if buyers conduct a comprehensive title search before purchasing a property, hidden loans of this nature are exceedingly difficult to detect. As a result, unsuspecting buyers might acquire a property with unresolved debt, jeopardising their own mortgage applications and the overall transaction.
To mitigate these risks, one viable strategy is to deposit all payments, including deposits and final settlements, into a law firm’s escrow account. Funds should only be released on the completion date of the transaction. This helps protect the buyer's financial interests in case the transaction cannot be finalised, allowing the buyer to recover the funds more securely. However, this arrangement provides less assurance to sellers, as they may struggle to claim compensation if the buyer cancels the deal. Therefore, not all sellers are willing to agree to such terms.
Another method of reducing risk involves adding protective clauses to the Sales and Purchase Agreement. For example, the agreement could specify that if the property is later discovered to have third-party claims, unresolved debts, or other legal disputes impeding the sale, the buyer has the right to terminate the transaction and seek compensation for any resulting losses. This additional layer of legal protection helps minimise the buyer's exposure to risks associated with similar scenarios.
