New property laws offer investors security – Macau Focus

Carlos D. Simoës and Pedro Manero Lemos

Macau, the Las Vegas of Asia, like most gems, is small and valuable. The attractiveness of this region also appears in the property market, where prices have been on the rise for the last few years (the annual increase in 2013 was of 43% per m²). In order to control speculation and the inflationary trends seen in the property market, the Macau government and the Legislative Assembly (Legco) enacted a number of laws in 2012 and 2013, bringing substantial regulation into the market.

The two biggest recent changes in legislation affecting the property market are the law on promissory agreements regarding buildings under construction, or the Pre-Sale Law (PSL), and the amendments to the Stamp Duty Law (SDL).

Promissory agreements

Promissory agreements are a main staple of Macau law and practice due to its closeness to Portuguese law. These contracts are “promises to enter into a transaction”. Depending on the nature of the promised transaction and the contents of the promissory agreement itself, they may be subject to specific performance (i.e. a court decision, in which the claimant can obtain the promised transaction) and, for property, may be subject to registration, which renders its rights and obligations enforceable against third parties (erga omnes).

Further, these contracts normally entail a down payment or advance payment, which is the main criterion to trigger the penalties payable in case of default. If a party who made a down payment does not complete the promised transaction, in the absence of any justification or force majeure event, the other party has the right to retain the down payment as a penalty or compensation for default; if the contract breach is instead due to the other party, the party who paid has the right to demand twice of what he has paid (that is, the refund of the down payment, plus an amount equal to the down payment, as statutory penalty).

Pre-Sale Law

The previous lack of regulation on buildings under construction led to a number of problems, in particular the deficient identification of the property, the lack of guarantees to the buyer, and, above all, economic issues such as the sudden influx to the market of numerous projects (in times of great speculation).

The PSL (Law 7/2013), which entered into force on June 1 2013, establishes a new legal framework on the Promissory Purchase and Sale Agreement of buildings under construction (PP&S Agreement) and its subsequent assignments as well as the Promissory Security Interest Agreement (PSI Agreement) over such buildings (promises to create a mortgage once the unit is completed and transferred to the buyer).

The purpose is to enhance the transparency of the transactions and to guarantee the legitimate rights and interests of the parties, namely the buyers, being the unprotected party. The scope of the law comprises: any future property at project stage, in construction, or at a stage where construction has already been concluded, but for which no valid licence of use has been issued; and future units (e.g. apartments), without definitive registration at the Property Registry.

This law is a response to the numerous transactions occurred in Macau on property under construction, aiming to give certainty to these transactions and to the property market in general. This market is where most transactions take place and which reflects major speculation at certain times, given the possible leverage in terms of invested capital.

Prior authorisation

The PSL created a set of new procedures, both material and formal, to be adopted for the sale of units in buildings under or planned for construction.

Firstly, a prior authorisation from the Public Works Department is now required for the developer to be able to enter into this kind of agreement. From the requirements for issuance (construction licence, completion of foundation works and registration of a provisional strata title) we can conclude that the construction works have to be partially completed. A total of 34 prior authorisations have been issued so far.

Secondly, all PP&S Agreements must be confirmed by a lawyer and the signatures of the parties certified by a notary. The referred confirmation by a lawyer of the PP&S Agreement basically consists of a declaration that its contents are in compliance with the law, which has introduced mandatory content for such agreements for the first time. The sanction for not complying with any of the requirements above is that the contracts are void. This can be invoked by any interested party at any time.

Mandatory registration

Within 30 days of the agreements' signature, a registration request has to be filed; otherwise, the applicant is subject to pay three times the registration fees. Once registration is in favour of the promissory-purchaser or the assignee is effective, any other transactions or agreements over the same unit are deemed legally void. And once registration of the security interest in favour of the creditor is effective, any other transactions or agreements over the same unit are also deemed legally void, unless the creditor grants a written waiver. In case of foreclosure of a building under construction, the registered parties on a PP&S Agreement or its assignment enjoy priority and are ranked immediately above common creditors. The registered creditor with a security enjoys the same privilege, with his credit being ranked above the credit of the promissory-purchaser or assignee.

In short, this law created three major requirements that were not applicable to these contracts before: confirmation by a lawyer, signature certification by a notary and registration. Two further substantial requirements were also introduced: prior authorisation from the government and mandatory contents for the contract.

Consequences

From a legal point of view, the PSL anticipated a number of procedures that normally would only take place at the stage of execution of the transfer deed.

It is not possible to evaluate this law's full impact at this stage, although in the short term it has resulted in a substantial reduction of the number of units on sale in the market. Most developers need time to adjust and seek compliance with the PSL as well as to obtain prior authorisation from the Public Works Department. Nonetheless the PSL has brought a legal and also an economic revolution to the pre-sale of units in Macau.

All developers should be therefore aware of the new legal requirements in order to ensure compliance.

Stamp Duty Law

Law 15/2012, which became effective on October 30 2012, widened the taxable transactions under the special stamp duty introduced during the previous year (under Law 6/2011). The special stamp duty was initially limited to residential property and aimed at curbing the chain-transfers of pre-sale properties (flipping) in a short period of time. Since its effect, the transfer of properties for commercial, office or parking purposes (whether under construction or still in project phase) occurring within two years since the last regular stamp duty payment for its acquisition has been subject to the special stamp duty. If the transaction occurs within one year, the tax rate for the sale is 20%. If the transaction occurs in the second year after the last liquidation, the tax rate is 10%. In both cases the special stamp duty is payable by the seller.

The Stamp Duty Law (Law 17/88/M) amendment also created an additional tax on the acquisition of property for residential purposes – to be levied on companies, entrepreneurs or non-residents. The rate of this additional tax is 10% and must be paid within 30 days of the execution of the acquisition agreement.

Other laws and regulations

A number of other laws, part of the broad reform of the property market in Macau, came into effect in the last few years.

One of the most significant was the Property Brokerage Law (Law 16/2012), which came into force on July 1 2013. For the first time in Macau, property brokerage activity (for assisting in the purchase, lease or assignment of property) was regulated. The law aimed to introduce mandatory training to all qualified professionals in the area; regulate a set of duties and procedures to be followed by all brokers when operating their business; and provide a better protection to the end-users when using the professional services of brokers.

The law establishes a new certification of professionals in this area, amongst property brokers and agents. The former can be companies or entrepreneurs, which must hold a valid licence to operate. Companies, among other requirements, must have their headquarters in Macau or a representative with permanent residency in Macau and comply with the legal requirements for permanent activity in Macau. Brokers have several obligations, such as to promote their clients' full awareness, to verify properties' characteristics and to assure the properties are free of charges or encumbrances.

Other laws and regulations which recently came into force include the Land Law (Law 20/2013), Urban Planning Law (Law 12/2013) and Heritage Preservation Law (Law 11/2013).

Recent directives from the Banking Supervision Entity also limited the access to property acquisition by individuals through bank loans. Regulation no 022/B/2012-DSB/AMCM updated the limits of bank mortgage loans, which now varies from 40% to 90% of the property value (depending on the value and whether the buyer is a resident of Macau).

Securing sustainability

The various laws recently enacted contribute to a higher certainty for the buyers and developers while conferring more credibility and reliability on the property market. Operators in this industry are now required to cope with more regulations and to address the new legal challenges posed by this booming market. All in all, although not perfect, these measures have led to a cooling effect on the market, fostering sustainability for its impressive growth.