Hong Kong: The Sagas Of Strata-Sale Of Hotel Units In Hong Kong

Last Updated: 18 July 2013
Article by Andrew P.B. MacGeoch and Emily I.C. Wong
Most Read Contributor in Hong Kong, September 2019

Keywords: hotel units, strata-sale, Hong Kong, property developers, Securities and Futures Commission, SFC, Collective Investment Scheme, CIS, Securities and Futures Ordinance, SFO, Apex Horizon hotel,

In Asia, we have been seeing more strata-sale of hotels by property developers in recent years. This usually involves a developer selling hotel units to individual purchasers who then put the hotel units back into the hotel inventory to be rented out to third-party guests. Such individual purchasers receive the benefit of any rental profit from the operations of the hotel.

In Hong Kong, the first time a developer sold units of a hotel located in Hong Kong to individual purchasers ended up in the unwinding of the sale as the Securities and Futures Commission (SFC) asserted that the developer had not obtained the necessary approvals from the SFC. The SFC considered the sale to be a Collective Investment Scheme (CIS) as defined in the Securities and Futures Ordinance (SFO). This article discusses the recent unwinding of the sale of the Apex Horizon hotel in Hong Kong and its implications for hotel developers and operators.

Summary of the Apex Horizon sale

In February 2013, Hong Kong property giant Cheung Kong sold 360 hotel units at the Apex Horizon hotel to individual purchasers. The SFC formed the view that the offer to purchase hotel units at the Apex Horizon was an invitation to acquire an interest in or to participate in a CIS under the SFO. This requires the SFC's approval in respect of promotional materials prior to the sale. Prior approval had not been sought. The SFC accordingly took the view that the sale was unauthorised. Cheung Kong avoided legal proceedings by agreeing with the SFC to unwind the sale. This meant that Cheung Kong would refund to purchasers deposits and part payments in respect of the units together with interest at 2 percent per annum above the prime rate plus HK$10,000 to each purchaser for legal and other expenses. However, more than 27 purchasers who resold their units to a third party through confirmor transactions might suffer more losses. It remains to be seen whether these sellers of the confirmor transactions would claim more compensation from Cheung Kong.

What is a Collective Investment Scheme in Hong Kong?

The SFO provides that a CIS has the following four key elements:

  1. it is an arrangement in respect of a property, which includes land in Hong Kong or elsewhere;
  2. participants do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management;
  3. the property is managed as a whole by or on behalf of the person operating the arrangements or the contributions of the participants and the profits or income from which payments are made to them are pooled; and
  4. the purpose or effect of the arrangement is for participants to participate in or receive profits, income or other returns from the property.

The SFO contains certain exceptions to the above such as employee investment schemes and certain types of franchise arrangement.

There is an important point to note in relation to the third element above. Whether or not the rental income is pooled or unpooled does not make a difference, as long as the property is managed as a whole by the developer or an operator on behalf of the developer. Pooling of rental income usually means that the rental income from all the hotel units is pooled together and, after deducting expenses, distributed to the individual owners based on unit size and other relevant factors. Unpooled rental income means each individual owner receives rental income from his specific unit only, after deducting expenses applicable to that unit.

In the Apex Horizon sale, the rental income was unpooled and the sale and purchase agreements between the purchasers and Cheung Kong provided that the hotel units were to be sold subject to the hotel operation agreement with the hotel operator. The SFC took the view that all the essential elements of a CIS existed. In particular, the SFC pointed out that the day-to-day management of the hotel was to be in the hands of a separate operator appointed to operate the hotel and which would control key functions such as allocation of guests to rooms.

Why do developers strata-sell their hotels?

Strata-sale of branded hotels has historically been fraught with difficulties in many countries. That is why most international hotel operators have been reluctant to agree to such a structure. Some of the difficulties include having to comply with the regulatory regime in the relevant countries and operators losing control over the physical quality of the property due to certain statutory rights of individual owners, therefore putting their brand at risk. In some jurisdictions, it is hard for the developer to ensure that all individual owners of the hotel comply with their obligations to maintain the hotel at the required standard. There may also be concerns that the majority owners may seek to remove the operator.

Then why have developers and operators still been willing to adopt this structure recently? For developers, this is a good way to finance a project. It usually takes many years for a hotel developer to recoup its initial investment in a hotel, but strata-selling a hotel enables a developer to receive significant cash injection early on. Cheung Kong raised around HK$1.4 billion from the sale. In many instances, the developer may seek to retain ownership of some or a majority of the units to mitigate the risks discussed above. For operators, although it is riskier than managing a hotel solely owned by one party (i.e., the developer), sometimes they may agree to a strata-sale structure as a way to win a management contract noting that some competitors will avoid this approach.

Implications for hotel developers and operators

Although the Apex Horizon case was not tested in the Hong Kong courts, it would seem that what industry players usually call a strata-sale of a hotel would normally contain all the four elements of a CIS discussed above. Accordingly, the SFC's authorisation of the advertising and marketing materials would be required, unless the project falls within the exceptions in the SFO. The materials are required to contain sufficient details of the features of the CIS as well as the risks involved. These requirements are aimed to ensure that members of the public are properly and accurately informed about the key features of a securities product when making a decision to invest.

If you are a developer or operator planning a strata-sale structure for your hotel project, obviously you will need to obtain legal advice at an early stage regarding whether your proposed sale will likely fall within the meaning of a CIS under the SFO in Hong Kong or may be subject to similar regulatory regimes in other countries.

One important point to note is that the provisions of the SFO cover "land in Hong Kong or elsewhere". So even if your project is located outside Hong Kong, if you plan to market your sale to Hong Kong investors, you will still need to consider if it will amount to a CIS. If it does, you will have to factor in the extra time and costs involved for obtaining such approvals.

If you are not sure whether your proposed strata-sale of hotel units amounts to a CIS in Hong Kong and you do not wish to dive into the preparation of detailed advertising and marketing materials to comply with the approval requirements of a CIS, what can you do? In Hong Kong, there is no established channel available to obtain any clearance from the SFC regarding whether a proposed sale amounts to a CIS that precedes formal submission of the advertising materials for the SFC's approval. However, that does not prevent you from writing to the SFC, providing the details of the proposed sale and asking for its confirmation on whether the sale would amount to a CIS in the SFC's view. It remains to be seen whether the SFC will commit to any formal confirmation in this regard. If strata-sale of hotels becomes more popular in Hong Kong, perhaps the government can consider empowering the SFC with the ability to provide such confirmations. In the meantime, caution is required in strata-selling hotel units or other similar products to the Hong Kong market.

For more information, you can refer to the SFO and the Code on Unlisted Structured Investment Products (available on the SFC's website) which contains guidelines for the authorisation under the SFO of a CIS and other unlisted structured investment products and the issue of offering documents and advertisements to the public in Hong Kong.

Originally published 11 July 2013

Learn more about our Global Hospitality & Leisure practice.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions