A Snapshot of the “Payment Arrangements for Property Transactions (PAPT)”

September 2022

Payment of funds in real estate transactions in Hong Kong have long been done relying on a system of professional undertakings by solicitors, under which law firms are responsible for holding and disbursing funds to the relevant parties in the transactions. The potential risk of such payment arrangement has been exposed due to several unfortunate incidents of misappropriation of clients’ money involving law firms.

To mitigate the risks exposed by the saga and address the public concern of such risks, an alternative payment arrangement for closing of conveyancing transactions known as “Payment Arrangements for Property Transactions (PAPT)” is proposed for consideration by stakeholders. Following a pilot run by selected banks in early 2022, the Hong Kong Association of Banks has announced the expansion of the pilot run in July 2022. Under the expanded pilot run, the PAPT will now include refinancing mortgage of residential property in Hong Kong offered by licensed banks.

Under the current system, the drawdown of loan and remittance of loan proceeds are completed through law firms by exchanging a solicitors’ cheque or cashier order. The solicitors acting for the refinancing mortgagee have to make enquiries with the existing mortgagee about the outstanding amount of the existing mortgage loan. On the loan drawdown day, the refinancing mortgagee will disburse the refinancing loan proceeds to solicitors, who will then procure the solicitors’ cheque or cashier order to repay the existing mortgage loan. If the refinancing loan is greater than the outstanding amount of the existing loan, the remaining balance will be disbursed to the borrower through the solicitors. These conventional logistics, which put great trust on the adherence and integrity of solicitors, have been finely serving the various stakeholders like banks and individual clients for years.

Key Features of PAPT

As an alternative to the existing payment arrangement through solicitors’ accounts, the PAPT allows direct bank-to-bank transfer from the refinancing mortgage institution to the original mortgage institution through the Clearing House Automated Transfer System CHATS on the loan drawdown day. In other words, there is no longer any need to route the funds through the accounts of law firms.

Briefly, under the PAPT, on completion of the refinancing transaction, the refinancing mortgagee bank will issue a confirmation to the existing mortgagee bank that it will transfer the mortgage loan proceeds to the existing mortgage bank directly. The refinancing mortgagee bank will then transfer the loan proceeds directly to the existing mortgage bank to settle the outstanding balance of the existing mortgage loan. If the proceeds of the refinancing mortgage loan exceed the outstanding amount of the existing mortgage loan, the refinancing mortgage institution will credit the excess amount to the borrower’s account maintained with the bank. If part of the outstanding amount of the existing mortgage loan will be paid by the borrower’s own funds instead of the refinancing loan, such payment will be made by means of a cashier order to be arranged by the borrower or by debit from the borrower’s account.

The PAPT is also applicable to refinancing transactions that only involve one bank, for example, the creation of a new mortgage on a mortgage-free property.

Way Forward

The PAPT is intended to address the perceived risks of routing payments through law firms and simplify the payment process in an increasingly digital era. While the PAPT has only been tested in mortgage refinancing transactions, how it can be smoothly adopted in more complex transactions involving more parties such as sale and purchase of landed properties, remains to be seen. The novelty in the PAPT is also expected to bring along new challenges and difficulties in practice, which will need to be dealt with by the practitioners in daily practice with cogent practice directions guided by the Law Society.