Risks in buying and selling a second-hand home, and how to guard against them

From the end of 2015 to the beginning of 2016 and since, Shanghai house prices have risen in a straight line. Figures show that in the last week of August, transactions in newly built commodity housing in Shanghai exceeded a thousand for five days running, reaching 1,123 in a single day on 31 August. In one month the price per square metre in Shanghai rose by RMB 5,000! On a flat of 100 square metres that is a rise of RMB 500,000. The second-hand market faces the same range of legal disputes: prices raised after agreement, breach of contract, one flat sold twice. How the parties to a second-hand transaction may protect their lawful rights and interests in the course of it, and avoid legal risk, is the subject of this article.

The parties to a second-hand sale

The parties involved in the whole course of a house sale generally fall into three categories:

1. The seller, commonly called the upper party.

The upper party generally holds ownership of the house, or effective control of it, and aims to transfer ownership to the lower party in exchange for money.

2. The buyer, commonly called the lower party.

The lower party generally holds money, and aims to take over ownership of the upper party's house and pay the price for it.

3. The intermediary, commonly called the agent.

The agent holds the statutory qualification to act as intermediary in second-hand transactions and has knowledge of the field; it provides services directed at both parties, with the object of bringing the transaction between upper and lower party to a successful conclusion and earning a commission at a certain rate.

The two broad categories of risk to guard against in a second-hand sale

The three kinds of party above may meet a wide variety of legal disputes in the course of a transaction; the author groups them roughly by risk rating as follows:

Risk rating: five stars

Keywords: disposal without authority; apparent authority

Where a house is owned by several people, the "upper party" who comes forward to sign the contract is only one of the owners, or a third party, while the other owners authorise the "upper party" to sign by means of a power of attorney.

Legal consequences: the object of the contract cannot be carried out; the money the lower party has paid must be returned, and the corresponding loss compensated.

Who is liable: the "upper party" and the agent.

The lawyer's analysis: where the other owners have not attended in person to sign in their own hand, a power of attorney, identity card, household register and the like cannot rule out the risk that they will later change their minds. The other owners may, by such lawful means as denying that the signature is theirs or revoking the authority, stop the transaction. If the transaction fails, liability is generally borne by the person who signed and by the agent according to the degree of their fault.

Guarding against it: to confirm whether the upper party has power to dispose of the house, besides the agent's own checks, a search may be made at the real estate exchange centre for the district where the house stands to establish the upper party's particulars (names and number of owners), and all the owners should be brought to attend in person and sign in their own hand.

Risk rating: four stars

Keywords: fundamental breach; one flat sold twice

To keep housing transactions transparent and prevent one flat being sold twice, a formal sale contract must now be registered online, a system commonly called "online signing". But where there is a policy there is a way round it: to bring the deal to a conclusion as quickly as possible and not let the bird in hand fly away, many agents sign a brokerage agreement for the sale and purchase with both parties before the "online signing", agreeing the substance — the house, the price, the time for delivery, the time for transfer of title and so on — to tie the parties down and secure their commission. This agreement is commonly called the "draft signing".

The "draft signing" has been accepted in the market precisely because it suits the state of mind of every party: the seller is anxious to have the money, the buyer anxious to move in and decorate, and the agent's commission is lawfully secured. If all goes smoothly and every party achieves the object of the contract, then the online signing after the draft is undoubtedly a way of dealing that serves the market better. But once circumstances change, and the classic case is a frantic rise in prices, the "draft contract" gives the upper party an opening, and the price raised afterwards, breach of contract and even a sale to two buyers follow one after another.

Legal consequences: if the upper party raises the price and no agreement can be reached, the court will order the upper party to bear liability for breach by paying liquidated damages, or to compensate the lower party's economic loss, or to continue performing the contract.

Who is liable: the upper party.

The lawyer's analysis: a contract is the expression of the agreement of two parties, and a sale contract is no exception; the parties must bear the corresponding legal consequences of what they have done. The upper party's demand for a higher price is a fresh offer to vary the contract, and if the lower party does not accept it, the upper party is bound to continue performing the contract or to pay the corresponding liquidated damages.

Guarding against it: civil conduct rests on party autonomy, and a clause by which one party's rights are restricted through the contract is itself invalid. To prevent the transaction failing, therefore, the lower party may often pay a large deposit or raise the liquidated damages, so increasing the seller's cost of breaking the contract by another route and protecting the security of its own purchase.